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 expenditures 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.