One characteristic of globalisation has been the increased mobility of capital, resulting in larger flows of private investment, especially into the global south. With much of this investment focused into natural resource use and extraction, particularly agriculture, mineral and fuel production, it has often been linked to environmental degradation. For better protection of biodiversity, and to combat climate change it is therefore critical to understand the environmental effects of private investment and identify appropriate responses.
The Royal Government of Cambodia has taken action to promote sustainable investments. One of the initiatives has seen the government providing incentives by setting up a tax rebate on investments that are expected to have zero negative social and environmental impacts.
Within this scheme investment projects undergo assessments to ascertain their expected social and environmental impact. Investments that satisfy the sustainability criteria are then recognised and registered by the Council for the Development of Cambodia as being ‘Qualified Investment Projects’ (QIP) and are eligible for tax exemptions. QIPs fall into three categories: 1) Domestic Qualified Investment Projects, 2) Export Qualified Investment Projects, and 3) Supporting Industry Qualified Investment Projects.
The tax holiday takes the form of a complete exemption from tax on profit for up to six years. This compares with a standard tax on profit rate of 20%, going up to 30% for oil and gas and mineral exploitation activities.[i] In addition, qualified investment projects are exempted from import duties on construction materials, production equipment, and input materials.
Fiscal measures can be very effective as they transfer the cost of environmental degradation onto the offending party. By adopted a version of the ‘polluter pays’ principle, the policy is able to incentivise investors, who are assumed to be motivated by profit, towards more sustainable investment opportunities.
One reservation related to the measure is the limited capacity for the authorities to monitor and assess the actual, and longer term, impact of the projects granted QIP status. Without this compliance mechanism, such measures risk being open to manipulation.
Introducing a tax instrument such as the current measure can be a simple solution to incentivise investors and has a high potential for transferability. It is estimated to be at GML 8.
OECD Green Growth Papers - Making Growth Green and Inclusive: The Case of Cambodia www.oecd.org/greengrowth