This DAC Reference Paper outlines key issues faced when designing Environmental Fiscal Reform (EFR). EFR refers to a range of taxation and pricing measures which can raise fiscal revenues while furthering environmental goals. The objective is to provide insights and “good practice” on how development co-operation agencies can help developing countries take advantage of EFR approaches in both their development and poverty reduction strategies.

Following a review of the instruments of EFR and related technical issues, Environmental Fiscal Reform for Poverty Reduction focuses on the political economy and governance aspects of EFR. This includes an examination of the precondition for successful design and implementation, the various steps involved through the EFR Policy Cycle, the challenges faced at each stage, and the main stakeholders involved. The role of donors in supporting EFR processes is also outlined.

Subsequently, these issues are reviewed in relation to sectors of particular relevance for developing countries: forestry, fisheries, fossil fuel, electricity, drinking water and industrial pollution control.