Public Expenditure Policy and the Environment: A Review and Synthesis


WP/93/27-EA

Public Expenditure Policy and the Environment:
A Review and Synthesis by Ian Parry,
Sanjeev Gupta, and Kenneth Miranda

The most commonly cited environmental instruments are intended
primarily to address market failures by ensuring that economic agents
take into account the social costs that arise as they pursue their goals.
However, the underlying causes of environmental degradation are often rooted
in policy failures rather than in market failures. In many countries, the
policy failures that often lead to environmental degradation are linked to
public expenditure policies.

This paper focuses on the implications of public expenditure policy
for the environment and illustrates how countries can reform environmentally
harmful subsidies, increase operations and maintenance expenditures for
public investment projects, and incorporate the environmental aspects of
projects into their cost-benefit analyses. Subsidy reduction that leads
to expenditure savings would also allow a country to raise social expendi-
tures and to establish or strengthen an appropriate safety net for the
vulnerable population groups. In addressing environmental concerns,
countries need to recognize that expenditure policies have a broad and
important role to play.