Developing a roadmap for subsidy reform: Methodological steps and policy

challengesPatrick ten Brink (IEEP)

Discussion session: Environmentally Harmful Subsidies (EHS)

EEEN-forum, Feb 9, 2012 (14.00h-15.30h)

Leuven

`

Introduction: state of play & what are seen as EHSs ? Developing the road map: the steps EHS Assessment: an example Lessons, recommendations and way forward

Presentation Structure

Introduction: state of play & what are seen as EHSs ?

Subsidies general introduction

The last decade has witnessed increasing, and in some cases considerable, efforts for the phasing out or reform of subsidies in various countries

Yet, the overall level of subsidies remains remarkable

Globally, agricultural & fisheries subsidies of particular concern - biodiversity

Energy & transport – climate & energy security & technological lock in, budgets

Water (full cost recovery) – resource availability/efficiency/innovation

Not all subsidies are bad for the environment

Even ‘green’ subsidies can still distort economies and markets, and may not be well-targeted or cost-effective

Phasing out ineffective subsidies frees up funds which can be re-directed to areas with more pressing funding needs

Examples of EHS

Coal mining direct transfers,little liability for damage

Water useNon resource pricing

FishingGrants, guarantees, tax exemptions + no liability for damage to sea bed et al

Energy: oil spillsOnly partial liability / compensation for damage

AgricultureDirect payments + no liability for eutrophication damage et al

Source: www.wisebread.com

Sou

rce

: G

ua

rdia

n

Source: http://srforums.prosoundweb.com/

Sou

rce

: w

ww

.tre

eh

ugg

er.

com

Sou

rce

: w

ww

.oili

sm.c

om

Deforestation – no resource costs, no compensation for damage

Subsidies come in different shapes and forms

• Direct transfers of funds (e.g. fossil fuels, roads, ship capacity) or potential direct transfers (e.g. nuclear energy and liability)

• Income or price support (e.g. agricultural goods and water)

• Tax credits (e.g. land donation/use restrictions)

• Exemptions and rebates (e.g. fuels)

• Low interest loans and guarantees (e.g. fish fleet expansion/modernisation)

• Preferential treatment and use of regulatory support mechanisms (e.g. demand quotas; feed in tariffs)

• Implicit income transfers by not pricing goods or services at full provisioning cost (e.g. water, energy) or value (e.g. access to fisheries)

• Arguably also, implicit income transfer by not paying for pollution damage (e.g. oil spills) and other impacts (e.g. IAS, damage to ecosystems)

People may mean different things when talking about subsidies; what are considered subsidies may also depend on context (eg state aid, WTO etc)

Categorising EHS: different economic types

# Economic type Specific subsidy type coveredOn-budget subsidies

1

Direct transfer of funds Direct transfer of funds

Potential direct transfers of funds, e.g. covering liabilities

2 Provision of goods or services (other than infrastructure)

Government provides goods or services other than general infrastructure

Government directs other bodies to do any of the above

Off-budget subsidies

3 Income or price support Income or price support

4 Foregone government revenues

Government revenues due are foregone or not collected, e.g. tax credits

Tax exemptions and rebates

Accelerated depreciation allowances

5 Preferential treatment Preferential market access

Regulatory support mechanisms

Selective exemptions from government standards

6 Provision of infrastructure

Implicit subsidies, e.g. resulting from the provision of infrastructure

7 Lack of full cost pricing Implicit income transfers resulting from a lack of full cost pricing

Implicit income transfers resulting from non-internalisation of externalities

Resource rent for foregone natural resources

Subsidies

• Some are “on-budget” (visible in government budgets) others “off-budget” (not accounted in national budgets) – transparency varies

• (Negative) Impacts on the environment can be direct (e.g. subsidies to convert forest to biofuels, road building in biodiversity rich areas) or indirect (e.g. tax breaks; climate change effects)

• Impacts can be immediate (convert land, road build, oil spill) , later / spread over many years (eg fisher capacity support, fossil fuel subsidies)

• Impacts can occur locally (subsidy for road building), nationally (eg subsidy for hydro), internationally (eg resource extraction impacts ), globally (eg climate change)

• Other impacts less clearly negative (e.g. hydro power; or subsidies with policy filters);

• Some generate environmental benefits (e.g. payments to farmers for ecosystem services)

• Some redress market failures (e.g. rail) or level the economic playing field (e.g. RES)

• Even subsidies apparently benign but may have negative effects, depending (e.g. subsidies for modernisation of fleet + decommissioning)

Subsidies, intention and design

• Subsidies generally launched with “good” intentions – for food provision (e.g. CAP and CFP),

– for energy security (e.g. coal subsidies),

– to support industries/technologies (e.g. nuclear, renewables),

– for competitiveness (e.g. exemptions to taxes for energy intense industries),

– for poverty alleviation and social concerns (e.g. food, water, fuel, electricity subsidies),

– to address climate change (e g. biofuels; renewables, energy conservation) and

– for the environment (e.g. PES HVN)

• Objectives can become out-dated (e.g. food provision, energy security and coal).

• There can be a major difference between stated objectives and actual effects (e.g. biofuels).

• Some subsidies are “blunt” instruments for the objective – either wrong instrument or badly designed

• They can have many (unforeseen at the time) impacts on the environment

Subsidies size - a snapshot

Over $ 1 trillion per year in Subsidies

Source TEEB for policy Makers - Chapter 6 www.teebweb.org

Aggregate subsidy estimates for selected economic sectors

Most sensible use of funds? Reform win-wins ? eg budget, climate, biodiversity? Need identification of subsidies, assessment of potential

benefits of reform

Sector Region

Agriculture OECD: US$261 billion/year (2006-8) (OECD 2009)

Biofuels US, EU and Canada: US$11 billion in 2006 (GSI 2007; OECD 2008b)

Fisheries World: US$15-35 billion/year (UNEP 2008a)

Energy World: US$557 billion/year in 2008 (IEA 2010)

Transport World: US$238-306 bn/yr, of which EHS ~ US$173–233 bn/yr (Kjellingbro and Skotte 2005)

Water World: US$67 bn/year, of which EHS estimated at US$50 bn/year (Myers & Kent 2002)

“Imaginary public goods of avoided public bads” - Biofuels

Early stated ambitions: helping avoid climate change – avoiding a public bad.

Subsidies in many forms launched

US$ 11bn/yr (‘06: US+EU+Canada) (GSI 2007, OECD 2008)

Cost of reducing CO2 ~ US$ 960 to 1700/tCO2 equiv. (OECD 2008)

Not cost effective Where biofuels fom converted forrest lands – there may be net increase of emissions

Effect opposite to stated objective.

Could a careful assessment earlier have avoided this....?

the “good”

still relevant, targeted, effective, positive impacts, few negative effects

the “bad”

no longer relevant, waste of money, important negative effects

the “ugly”

badly designed – eg inefficient, badly targeted, potential for negative effects

We need an inventory and assessment of EHS to identify

Source: building on Sumaiia and Pauly 2007

Develop a road map for EHS Reform

Developing the Road map

2) Is there a subsidy?

3) Does the subsidy lead to potential direct/ indirect biodiversity impacts?

4) Are these potential impacts limited by existing ‘policy filters’?

1) Is there a threat to biodiversity?

1. Screening of subsidies

7) Are there more benign alternatives?

5) Does the subsidy fulfil its objectives?

Subsidy removal or reform is needed

Identification of potentially biodiversity harmful subsidies

 

2. Potential for reform 3. Reform scenarios

9) Are there suitable reform option(s)?

10) What are its/their expected costs and benefits (economic, environmental, social)?

11) Is the reform understandable, practical and enforceable?

12) Is there a window of opportunity for reform?

13) Is there a policy champion to drive reform?

14) Is there public/ political support to reform?

4. Opportunities for action

Analysis of alternative policies & compensatory measures

 

6) Does the subsidy lead to socio-economic issues?

8) Are there obstacles or pressures to reform?

Subsidy removal or reform can be timely & successful

It merits inclusion on roadmap for reform

Source Bassi and ten Brink 2012 forthcoming building on TEEB 2011 and Valsecchi et al 2009

Subsidy reform flowchart

Select one of the three options (delete others)

1) Is there a threat to biodiversity?

No

Yes, although relatively small

Yes, significant threat

2) Is there a subsidy?

No

Yes, although relatively small

Yes, substantial subsidy

3) Does the subsidy lead to a potential significant negative impact on biodiversity?

No or very limited impact

Some potential impacts

Significant potential impacts

4) Do existing ‘policy filters’ avoid/mitigate its impacts?

Yes, so the overall impact is limited or very limited

Some mitigation, but not sufficient to fully offset the subsidy impact(s)

No or ineffective policy filters

Therefore: Is there a subsidy that is harmful for biodiversity?

No

Yes although limited effect

Yes

Subsidy reform: quick scan & traffic lights

The above result is a communication tool. Depth of analysis behind answers depends on need – proportionality principle.

1. The ‘quick scan’ model (OECD, 1998)

2. The ‘checklist’ (Pieters, 2003)

3. Integrated Assessment

1. Features Scan

2. Incidental Impacts

3. Long-Term Effectiveness

4. Policy Reform: impacts of various reform scenarios?

Building on the OECD tools…

1. …the Quick-scan

Source: OECD, 2005

“Is the support likely to have a negative impact on the environment?”

OECD, 1998

Impact on economy Policy filter Assimilative capacity of env

Use elasticities, econometrics, modelling

2. …the Checklist

“Is the subsidy removal likely to have significant environmental benefits?”

Economic activity linked to deteriorating

environmental values.

Sectoral Analysis reveals strong forward or backward linkages.

Do not consider removing subsidies on environmental grounds.

Sectoral Analysis reveals:• The economic activity or its linkages are subsidised.• Other policy measures in place (policy filters)

Subsidy removal might benefit the environment

Description of all relevant subsidies

Policy filter limits environmental damage

More benign alternatives are available or emerging

Conditionally lead to higher production

Subsidy removal is not likely to have a significant environmental benefit.

yes yes

no no

no

yes

Subsidy removal might benefit the environment

nono

no

yes

yes

yes

Checklist

(Pieters, 2003)

3. …and the Integrated Assessment

1. Features Scan• Objectives of the subsidy

(economic/social/environmental)?• Effectiveness analysis: Are objectives

achieved? • Cost-effectiveness: More cost-effective

alternatives to meet objectives?

2. Incidental Impacts

3. Long-Term Effectiveness

4. Policy Reform: impacts of various reform scenarios?

Analysis of the economic, social and environmental impacts of the subsidy

(incl. design and social impacts)

Similar to impact assessment; in cases modelling approach adopted

2) Is there a subsidy?

3) Does the subsidy lead to potential direct/ indirect biodiversity impacts?

4) Are these potential impacts limited by existing ‘policy filters’?

1) Is there a threat to biodiversity?

1. Screening of subsidies

7) Are there more benign alternatives?

5) Does the subsidy fulfil its objectives?

Subsidy removal or reform is needed

Identification of potentially biodiversity harmful subsidies

 

2. Potential for reform 3. Reform scenarios

9) Are there suitable reform option(s)?

10) What are its/their expected costs and benefits (economic, environmental, social)?

11) Is the reform understandable, practical and enforceable?

12) Is there a window of opportunity for reform?

13) Is there a policy champion to drive reform?

14) Is there public/ political support to reform?

4. Opportunities for action

Analysis of alternative policies & compensatory measures

 

6) Does the subsidy lead to socio-economic issues?

8) Are there obstacles or pressures to reform?

Subsidy removal or reform can be timely & successful

It merits inclusion on roadmap for reform

Source Bassi and ten Brink 2012 forthcoming

Subsidy reform flowchart – integrates OECD tools

Doing the assessment

Can start looking either at environmental problems, or at subsidies

Can do a quick scan assessment to develop an inventory of EHS that could be contenders for being on the road map.

•Someone with fair knowledge of the subsidy/sector/environmental problem and/or with access to good data/reports can develop a first cut assessment - eg traffic light assessment in a period of days per subsidy

•This would be to create a first cut map, as an working tool

To move towards a formal roadmap would require careful quantitative and stakeholder analysis

•of the current effects of the subsidy (economic, social, environmental)

•what the options for reform could usefully be (in light of potential effectiveness, practicability, enforceability, understandability), and

•what the likely benefits are. The latter is like doing an impact assessment, and in cases may use models (though models don’t answer all questions).

Assessments – an example

23

e.g. Irrigation EHS in Spain

What is the subsidy about? Low water prices for farmers in EU >> contributed to increased water use in

agriculture in past 2 decades (EEA, 2009)

In Spain - low irrigation water pricing in many areas: ie below full cost

recovery, sometimes below financial costs

Price often based on plot size (ha) rather than water volume (m3)

Type: Off budget subsidy to input (water)

Conditionality: water consumption for agriculture

Objective: stimulate agriculture, support farmers income

Case study area: Pisuerga Valley + some conclusions on whole of Spain

Spain: Main findings of EHS report

Water scarcity a major issue in Spain (& in Med countries in

general) – expected to worsen in the medium-long term

Infrastructures: Irrigation techniques inefficient, old water

infrastructures, substantial leakage and wastage

Sector: Irrigation responsible for about 70-80% water use

Water pricing : ~0.01€/m3 Pisuerga Valley (2003), average ~0.05

€/m3 Spain (2007)

No link to consumption, low price >> no incentive to use water

efficiently >> overuse of scarce resource

...example: Spanish water pricing

Size: Pisuerga Valley: between 2.1 and 3.5 M €/yr.

Spain ~ 165 M€/yr

Demand elasticity: generally low but depends on local conditions (eg climate, soil) & water price change in crops requires time different effects on farmers’ income and water consumption

Env impacts of irrigation: water overuse (between

20-70%), pollution (eg fertilizer use

20-50%), soil salination, biodiversity loss

… Selected findings from Checklist

Policy filter limits damage? NO/little License/water trading >> some efficiency but

limited # of transactions; issues of transparency and

enforcement

Some subsidies to drip irrigation/modernisation

>> increased consumption (eg due to crop changes)

– technology alone not enough!

CAP cross-compliance: some signals of reduced

water use

Does the subsidy lead to higher resource use? YES

More benign alternatives exist? YESimproved technology & monitoringprice signals/ volumetric ratesprogrammes for crop changescompulsory water use (good) practices

…Selected findings from Integrated Assessment

Effectiveness Justification: support farmers’ income

Effect on budget: reduced public revenues (~ 165 M€ in Spain)

1. Features Scan• Objectives of the subsidy

(economic/social/environmental)?

• Effectiveness analysis: Are objectives achieved?

• Cost-effectiveness: More cost-effective alternatives to meet objectives?

2. Incidental Impacts

3. Long-Term Effectiveness

4. Policy Reform: impacts of various reform scenarios?

Example of successful reform: Guadalquivir area – higher fixed + variable charge >> 30% water reduction; longer term resource availability

Long term effectivenessSocial aspects: Subsidy benefits all farmers (short term), no distinction on wealth/needs

Affordability: Water demand can be inelastic – impact on farmers income

Incidental impactsEnvironmental impacts

Recommendations and Way forward

Potential benefits of EHS reform

Reduce the use of resource intensive inputs, thus saving resources (eg water, energy) & causing less pollution (hence savings on policy measures)

Increase competitiveness by exposing subsidised sectors to competition and supporting future competitiveness by resource availability

Level the playing fields / fix market distortions by making resource prices reflect resource value, and making polluters pay for their pollution

Overcome technological ‘lock-in’ where environmentally-friendly technologies / practices face a non-level playing field vis-à-vis subsidised practice

Release public funding, enabling governments to divert budget to other areas - e.g. education, energy saving and/ or reducing debt

New Momentum for Reforms(?)

New commitment to subsidy reform (Pittsburgh – G20)

Increasing call for subsidy reform in EU Renewed effort on promised EHS roadmap

Contributions to discussions on the financial perspective (budget)

Systematic look within CP, CAP, CFP/EFF

National efforts – FR, UK making use of tool (Others?)

Global: 2010 commitment at CBD COP 10 Nagoya

UNEP Green Economy Report. Expectations for Rio+20

Opportunities: national debt cuts (eg Ireland, Portugal, others?)

Mechanism for (most cost-effective) climate mitigation

Mechanism for resource efficient Europe / EU 2020 context (Resource efficiency road map et al)

30

Lessons & recommendations

In the short run, Countries should:

• Establish transparent and comprehensive subsidy inventories,

• Assess their effectiveness against stated objectives, their cost-efficiency, and their environmental impacts

and, based on these assessments:

• Create & seize windows of opportunity (eg financial crisis, need to curb public spending)

• Develop prioritized plans of action for subsidy removal/reform for medium term (to 2014)

• Design the reform process carefully: clear targets, transparent costs and benefits, engagement with stakeholders, coordination among government bodies.

• Implement transition management: stage the reform, take into account “affordability”

• Subsidy reform does not happen in isolation. Make reform part of a broader package of instruments (EFR+), including policies to mitigate adverse impacts of subsidy removal.

>> Make a good use of funds liberated!

Questions

1. What do you see as EHS in your countries that merit consideration for a road map?

2. Which ones would your experience suggest merit urgent attention?

3. What lessons have you seen as regards identification and assessment of EHS?

4. What methods have you applied?

5. How do you see a balance between quick scan and in-depth analysis?

6. What example of EHS reform have you come across and what enabled them to take place?

7. Who could drive EHS Roadmap for reform in your countries?

+ of course the session questions

Thank you

www.ieep.eu

The Institute for European Environmental Policy is an independent institute with its own research programmes. The Institute also undertakes work for external clients

and sponsors in a range of policy areas. http://www.ieep.eu.

Keep pace with environmental policy developments in Europe. The new Manual of European Environmental Policy released:

http://www.europeanenvironmentalpolicy.eu/