The Biscay Model: innovation in taxation could advance the SDGs. An expert explains

Taxation plays a fundamental role in the advancement of the Sustainable Development Goals (SDGs). Modernized and progressive tax systems, stable tax policy and administration, and more efficient tax collection procedures – especially in a digitalized and globalized world – could support economies in fostering trade and investment, promoting gender equality, biodiversity conservation, and alleviate poverty while mobilizing domestic revenues.

Fiscal policies can contribute to the reduction of inequalities and the broader objective of leaving no one behind. For example, fiscal incentives to economic sectors where women are prominent actors, such as small and medium-sized enterprises, could lead to more gender responsive outcomes. By incentivizing domestic and foreign investment in the production of renewable energy, it could lead to more affordable, clean energy and regeneration of the local environment. Fiscal policies could, therefore, simultaneously achieve both a resource mobilization objective, and promote sustainable production and consumption patterns in an economy.

Improving taxation requires the political will to adopt the right mix of tax policies, and to develop the administrative capacity to implement them. Policymakers are being encouraged to assess and design tax policies to support specific economic objectives and to enable modern economies to improve competitiveness and productivity. The Addis Tax Initiative (ATI) Declaration 2025 is bringing together 65 partner countries, development partners and organizations to foster tax systems that advance the SDGs and declare their strong political commitment to implement the Addis Ababa Action Agenda (AAAA) which seeks to align financing flows and policies with economic, social, and environmental priorities.

Tax authorities need to enhance disclosure and transparency regulations and commit to reducing and eventually eliminating illicit financial flows, and to reduce opportunities for tax avoidance. It is important to recognize the interconnectedness of taxation with the goals outlined in the United Nations 2030 Agenda. Since such reforms have implications on the value of goods and services, usually with regressive effects, taxation cannot spur inclusive and sustainable development without purposeful engagement and consultation of the private sector in realizing these goals. The sustained pace of technology innovation could also pose greater challenges for existing tax systems because of the difficulties associated with defining and measuring the value of intangibles and the location of value creation.

The tax powers of the Biscay province in the Basque region of Spain enable it to do something revolutionary: to become the first local or regional authority to implement fiscal policies that are aligned with the SDGs. Through its work with UCL Institute for Innovation and Public Purpose (IIPP), the Biscay region has become a "living lab" for a new way of thinking about taxation and sustainability. This aspiration is consistent with the region’s role at the forefront of efforts for sustainable, equitable growth and well-being for its inhabitants, which is made possible through its high levels of autonomy, unique history, capacity to collect all taxes and establish tax laws, and strong regional commitment to innovation and equality.

However, the region faces a series of specific challenges, and the Government of Biscay has identified three priority areas which form the focus of and motivate the Biscay Model for aligning SDGs and taxation. These include:

The model rewards contributions to the SDGs – rather than penalising behaviour, and are designed to be simple and inclusive, specifically recognizing the importance of micro and small enterprises, not only large corporate actors. We gained more insight into this model from Dr. Kate Roll, Assistant Professor in Innovation, Development and Value, UCL Institute for Innovation and Public Purpose, who shares how this model focuses on the interaction between the public and private sectors towards wider considerations of "public value" and how this model was enabled by broader shifts across government and society towards sustainable development.

What does a SDGs-oriented tax system look like? How does it advance the United Nations 2030 Agenda?

Dr. Kate Roll: We have been working closely with the tax authorities in Spain’s Biscay region to both consider the role of taxation in building a greener and fairer economy and to build the tools necessary to assess SDG performance.

To date, scholars and policymakers interested in taxation and SDGs have focused on two main areas. Firstly, in low-income countries, the focus is whether tax revenues are sufficient to support critical state functions tied to the SDGs. This includes investment in health (SDG3) and education (SDG4), as well as links to strong institutions (SDG16) and the state capacity to invest in innovation and sustainable industries (SDG9). This links the SDGs to critical work on base erosion and profit shifting (BEPS).

Others have connected disincentives and "sin taxes" to the SDGs; for example, taxing tobacco may be understood as SDG-aligned. And, accordingly, there is an opportunity to look across a tax system and assess the extent to which both tax incentives and disincentives are SDG-aligned. This raises questions such as: Are income taxes progressive (SDG1)? What can be changed to reduce inequalities (SDG10)?

While recognizing this work, IIPP has taken a different approach, instead focusing on how taxation and other fiscal policy can build markets that are greener and fairer. This is in line with Professor Mariana Mazucatto’s pathbreaking work on directionality: the state has a vital role in not only fixing markets, but also building markets and setting the direction for growth and innovation.

The Biscay Model provides an approach to aligning taxation and the SDGs as well as draft frameworks for the measurement of corporate SDG performance. Our vision of a tax system that is aligned with the SDGs marries the three perspectives listed above: taxes are sufficient to support state functions; incentives and disincentives reinforce SDG principles; and taxes and other fiscal policy levers are used to direct investment and growth in a greener, fairer direction.

How does fiscal policy shape markets? How can an SDG-oriented tax system incentivize market activities towards creating "public value" while maintaining innovation and stable revenue?

As Miedzinski, Mazzucato, and Ekins argue: “There is a need to re-align and streamline public policies and investments to harness the benefits of Science, Technology and Innovation (STI) for the SDGs more effectively”. Fiscal policy tools range from indirect financial support, as with corporate tax relief, to direct financial support through public procurement or state investment; governments also support innovation and market building through tools such as advisory services, governance and regulatory frameworks, and collaborative platforms.

Policymakers have long been understood as "market-fixers". By contrast, we focus on recognizing their active role as market-builders, reminding us of the critical importance of the state in the creation of bedrock technologies and highlighting the importance of tools like procurement, taxation, patient public investment, and conditionalities for public value creation. These tools are vital for connecting investment in innovation and public value creation.

How could a system like the Biscay Model lead to a more "just transition" for workers and communities?

We see work that aligns corporate tax incentive to SDG performance as one of the many fiscal policy tools that will be important for states to build greener, more just economies, and signal their commitment to just transitions. States can support the development of a robust renewable energy ecosystem, for example, through tax tools that recognize shifts towards the use of renewables.

Yet this may also be supported by introducing patient finance, rethinking state procurement, and setting conditions on state contracts or investments. These initiatives need to work together to build new jobs and industries that can support workers and communities. Taxation also remains a largely top-down tool; such tools need to be complimented by substantive engagement with those affected by climate change and the phasing out of carbon-intensive industries. What does a just transition mean to them?

Given investor strategies are looking to incorporate the full range of ESG dimensions of responsible investment, what are the incentives you propose for increasing participation of the private sector in such a model?

Regional and national tax authorities are uniquely positioned to both require disclosures and to provide financial incentives and disincentives. They have at their disposal a powerful set of both carrots and sticks to encourage participation. There are numerous examples of tax incentive programmes that corporations can opt into, such as green R&D incentives.

However, in addition to a direct incentive, the reliable measurement of corporate SDG performance may have other positive spill-overs. As noted above, the Biscay Model provides a framework for the state to measure and gauge progress on the SDGs. Companies found to have strong SDG performance may be attractive to those looking for responsible investments. Corporate SDG performance may also be used as a screening tool for procurement and state investment. In this manner, the creation of a credible standard enables greater certainty and enables new ecosystems to form.

The Biscay model showcases what a region could achieve when mutualistic interactions between the public and private sectors are strategically designed. How can governments worldwide be more proactive and think more expansively about the tools they have to drive sustainable development?

Across our research, policy work, and teaching – we repeatedly emphasise the pivotal role of the public sector in innovation and the creation of public value. For governments to take a more proactive and comprehensive approach to the SDGs, it begins with a re-examination of the role of the government itself and their investment in associated capabilities. This perspective is captured in the figure below: this change demands a shift from fixing markets to building them, from picking winners to picking the willing, from de-risking to welcoming uncertainty, and from levelling opportunities to tilting the playing field and providing direction. The Biscay Model speaks to this new way of thinking.