Handbook of Sustainable Development
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Handbook of Sustainable Development

Second Edition

Edited by Giles Atkinson, Simon Dietz, Eric Neumayer and Matthew Agarwala

This timely and important Handbook takes stock of progress made in our understanding of what sustainable development actually is and how it can be measured and achieved.
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Chapter 28: Financing for sustainable development

Samuel Fankhauser and David Pearce


Does the pursuit of sustainable development require special financing? The answer is not obvious. Achieving sustainable development is about policy measures that alter human behaviour towards the environment and towards society in general. Such behavioural change can be achieved in various ways. Some of those involve financial flows, others do not. At the national level, the traditional way for environmental policy to change human behaviour is through a combination of price incentives, regulation and moral suasion. Of these only the first is associated with financial flows, from private entities to governments (in the case of taxes) or vice versa (in the case of subsidies). Fiscal incentives, both taxes and subsidies, are used widely around the world to address environmental externalities, for example in the form of pollution levies, effluent charges, carbon taxes or renewable energy subsidies. We have known since Pigou (1920) that this is an effective way to correct market failures and incentivize behaviour change. Environmental regulation is even more popular. Environmental, health and safety rules, performance standards and other coercive laws to ban adverse behaviour by-and-large define the standard approach to environmental and social policy. They work fairly well in many cases, although economists have warned of the often higher cost of a direct regulatory approach.

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