Taxing Tomorrow: Eco-Fiscal Dynamics for Sustainable Development

Introduction

As the world navigates the complexities of sustainable development, the United Nations’ Sustainable Development Goals (SDGs) have emerged as a guiding agenda for global efforts. Adopted in 2015, the SDGs outline a comprehensive agenda aimed at addressing critical challenges such as environmental degradation, climate change, poverty, and inequality. In line with these goals, the exploration of innovative policy tools has gained momentum, with taxation emerging as a key instrument in this endeavor. In this context, the necessity of examining how fiscal policies, and taxation in particular, can play a significant role in shaping a sustainable future and how they can be utilized to support the SDGs has become imperative. This exploration underscores the importance of taxation beyond its immediate revenue-generating function for countries, highlighting its significance in creating a long-term sustainable future. Accordingly, this section is constructed around the concept of “taxing tomorrow,” a term coined to summarize the idea of actively and effectively using fiscal policies to preempt and mitigate the challenges of sustainable development.

The urgent need to fundamentally restructure economic and social systems towards sustainability has become one of the main focal points of the 21st century. Traditional fiscal policies, largely designed without considering environmental externalities, have often proven inadequate in addressing the increasing pressures on planetary boundaries and have sometimes had counterproductive effects (Rockström et al., 2009). In this regard, taxation, traditionally the primary tool for generating revenue, possesses promising potential as a fundamental instrument of state intervention to reorient economic incentives and direct behaviors towards more sustainable objectives. This potential impact is supported by the recognition that fiscal policies can significantly influence behaviors, investment decisions, and ultimately the trajectory of economic development (Mintrom, 2019). Within this context, eco-fiscal policies, encompassing various environmental and ecological taxes, have emerged as a dynamic approach to aligning fiscal systems with sustainability principles.

The concept of eco-fiscal policies is based on the principle of internalizing externalities. Both negative and positive externalities are known as the impacts of economic activities on third parties, which are not reflected in market prices. Environmental externalities, such as pollution and resource depletion, are particularly significant in the discourse of sustainable development. Eco-fiscal policies aim to incorporate the social and environmental costs of economic activities into the price mechanism, thereby correcting the resulting market failures and guiding consumers and producers towards more sustainable choices.

Carbon taxes, one of the foremost forms of environmental taxation, exemplify this approach. By levying a tax on the carbon content of fossil fuels, carbon taxes create an economic incentive to reduce greenhouse gas emissions, thereby contributing to climate action (SDG-13). The effectiveness of carbon taxes in reducing emissions has been demonstrated in numerous countries through studies indicating that they can lead to significant reductions in carbon dioxide emissions (Ali & Kirikkaleli, 2023; Haites, 2018; Timilsina, 2009). Beyond carbon taxes, the spectrum of environmental taxes includes various other measures designed to address specific environmental challenges. For instance, the plastic bag tax aims to deter the use of single-use plastic bags, targeting the issue of plastic pollution and thereby contributing to the goal of responsible consumption and production (SDG-12) (Hussain et al., 2020; Nielsen et al., 2019; Ritch et al., 2009). Similarly, congestion charges aim to reduce urban traffic congestion and related emissions, aligning with the goal of sustainable cities and communities (SDG-11) (González-Aliste et al., 2023; Gu et al., 2018; Ye, 2012).