CARI Policy Brief: Greening ASEAN – Paper 2: Review and Recommendations for Fiscal Measures and Taxation

By CARI | 13 January 2021

Author: Aznita Ahmad Pharmy | Research Editor: Eleen Ooi Yi Ling | Webmasters: Nor Amirah Mohd Aminuddin; Nuratiqha Razumi | Supervisor: Hong Jukhee
With special thanks to Nithi Nesadurai, Regional Coordinator, Climate Action Network Southeast Asia; and Chris Humphreys, Executive Director, EU-ASEAN Business Council, for providing input.

CARI is pleased to release a new series of policy papers focusing on the sustainability agenda impacting ASEAN. The CARI Policy Brief: Greening ASEAN Series presents our recommendations towards a climate-focused and sustainable post-pandemic economic recovery for the region. This series of four papers covers (i) stimulus measures; (ii) fiscal measures and taxation; (iii) future of work, equality and social justice; and (iv) overseas investment.

This Paper 2 looks at other related fiscal measures implemented as well as taxation measures not included in the stimulus packages but are related to climate change and the environment. From our analysis, we then identify areas of opportunity for policies that could contribute towards a green post-pandemic recovery.

KEY FINDINGS

1) National budgets provide the next step following the fiscal measures introduced in COVID-19 stimulus packages

Increased government spending was prevalent in all the stimulus packages as ASEAN countries imposed expansionary fiscal policy to drive economic recovery. As the next step, many ASEAN countries have come up with national budgets that provide continuity to the measures in the stimulus packages while ensuring long-term economic resilience and sustainability.

In the medium term, each country’s national budget will play a prominent role in generating a green post-pandemic economic recovery. One national budget stood out due to its inclusion of sustainability. Malaysia tabled its national budget for the year 2021 in early November with key highlights as follows:

  • An allocation of US$79.8 billion (RM322.5 billion) for Budget 2021, which is 20.6% of the country’s GDP and higher than the previous year’s allocation of US$73.5 billion.
  • It is the country’s first budget to be aligned with the Sustainable Development Goals (SDGs) 2030

Other countries in the region have announced their 2021 budget or plans to prepare for it:

  • Indonesia: On 29 September 2020, the parliament approved a US$185 billion budget for 2021, which is 0.4% bigger than the 2020 budget. Healthcare is allotted US$11.9 billion while a total of US$29.2 billion has been allocated for infrastructure in order to catch up on projects that have been neglected due to COVID-19.
  • Myanmar: The government approved a budget of US$25.2 billion for its fiscal year 2020/2021 in August 2020, after cutting 1.5% from the initial budget amount proposed. Government spending has been reduced by US$355 million while a few ministries saw their budgets cut with the Ministry of Construction seeing the steepest cut of 21%.
  • Singapore: In November, the government commenced work on preparing the 2021 budget which is typically presented in February. President Halimah Yacob noted that apart from the near-term uncertainties, a key question is whether COVID-19 has fundamentally changed the investment landscape and how it, along with other factors, would impact the country’s long-term investment returns.

To see a glimpse of what other countries have announced with regard to their 2021 budgets, please read the PDF below.

Including climate and sustainability in a near term budget may be delayed to subsequent budgets depending on their fiscal position  post-COVID-19. The Malaysian national budget and Singapore’s upcoming budget may provide an example for other countries planning to include sustainability in their next or subsequent national budget. 

2) A mixture of taxation measures were introduced in ASEAN countries’ stimulus packages to mitigate the COVID-19 crisis

In ASEAN countries’ COVID-19 related stimulus packages, taxation was one of the policy tools used and most of the taxes implemented were tax relief for companies in hard-hit sectors like tourism, deferment of tax deadlines, tax credits for wage increase, and reduction in corporate income tax. 

The taxation measures in the stimulus packages are primarily focused on alleviating the direct economic hardships faced by businesses and the people due to the economic slowdown caused by the pandemic and therefore do not include measures that would encourage sustainability and reduction in carbon emissions.

3) Taxation as a policy tool to drive the low-carbon transition

Due to the absence of climate-aligned taxation in the COVID-19 measures, in the longer term, ASEAN countries need to enhance existing environment-related taxes and consider new tax avenues such as a carbon tax to help mitigate the effects of climate change.

The ASEAN region is among the regions in the world most vulnerable to climate change, with long and heavily populated coastlines and heavy reliance on agriculture for livelihood, especially for a large segment of the population living below the poverty line. The Global Climate Risk Index 2020 shows that four ASEAN countries were among the top 10 most affected by climate-related loss events from 1999 to 2018.Rethinking tax and related policies such as fossil fuel subsidy reforms are necessary to drive a green post pandemic recovery

  • Market-based policy tools such as environmental taxes can be an effective way to introduce economic, social and environmental costs into pricing and create incentives for sustainable practices that would lead to a low-carbon economy. Environmental taxes include taxes on energy, transport, pollution and resources
  • A carbon tax should be one of the policy tools to be considered in mitigating the effects of climate change
    • The International Monetary Fund (IMF) states that a carbon tax is the single most powerful way to combat climate change.
    • A study has shown that a carbon tax would have a positive impact on the economies of Indonesia and Malaysia but may cause economic contractions in the Philippines, Singapore, Thailand and Vietnam. This should not, however, deter the countries from considering a carbon tax. Any possible implementation of a carbon tax should take into account the political economy and impact of the carbon tax on certain segments of the society and job losses in certain sectors.

4) Recommendations for ASEAN’s other fiscal measures and taxation to ensure a green post-pandemic recovery

This section provides a selection of recommendations that are related to climate action and sustainability based on the insights gathered from ASEAN countries’ fiscal and taxation measures besides those in the COVID-19 stimulus packages.

  1. The inclusion of more climate focused initiatives and sustainability measures in national budgets – ASEAN countries’ budget for 2021 should focus on providing continuity to these stimulus measures but also include measures that would address the climate crisis. Priority areas to be considered in the current or subsequent budgets include climate change mitigation, green technologies, sustainable farming, the production and projects that promote the green and circular economy and create green jobs.
  2. Tax relief for green businesses should be made available – A higher number of tax relief such as tax credits and a special deduction on taxable income should be offered to companies involved in green businesses such as renewable energy. 
  3. Imposition of a carbon tax – Countries that have yet to adopt a carbon tax should study the feasibility of having one while considering the political economy and how to gain public support for it. Carbon taxes are one of the policy tools crucial for the level of reduction in carbon emissions required to limit the world’s temperature increase to 1.5°C to 2.0°C. 
  4. Work towards a common minimum tax standard for corporate income tax (CIT) in the ASEAN region to increase fiscal space for the climate agenda – The race to the bottom across ASEAN needs to stop, particularly in a time where countries are vying to attract more investments to drive their post-pandemic economic recovery. ASEAN member states should work towards an approach tailored to the region. This approach could increase ASEAN’s regional CIT revenues, which can then be channelled towards sustainable and climate-related low carbon projects.