www.ieep.eu

GBE ANNUAL CONFERENCE – Budapest, 8-9 July 2010

Environmentally Harmful Subsidies:

Identification and Assessment

Patrick ten Brink

Senior Fellow & Head of Brussels Office, IEEP and thanks also to Samuela Bassi, IEEP

Ecological tax reform and Phasing out environmental

harmful subsidies

How a budget reform can contribute to climate protection

Vienna 9 November 2010

2

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 - BD

• Energy & transport – climate & energy security & other impacts

• Water (full cost recovery) – re resource availability/efficiency

• 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

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Content of the presentation

Studies supporting this presentation

Subsidies – what they are, where they are used, scale

Tools for identifying & assessing subsidies: OECD tools

Assessing the tools – case example

Integrating the tools – EHS reform tool

The benefits of subsidy reform

Lessons learned & recommendations

EHS Identification and Assessment

‘Environmentally Harmful Subsidies: Identification and

Assessment’ (Nov 2009) – for DG Env, CEC

Authors: IEEP, Ecologic, IVM + Claudia Dias Soares

Aim:

Test OECD methodologies for EHS identification

and assessment

Identify shortcoming and improvements

Provide indicators for measurements &

benchmarking

Outputs:

6 case studies testing the tools

An integrated methodology + methodological

recommendations for policy makers on the use of the

tools + practical guidelines for EHS reform

A ‘recipe book‟ for the calculation of the size of subsidy

A communication tool for widespread communication–

‘subsidy identity card‟. Full report + case studies available at

http://www.ieep.eu/publications/pdfs/2010/EHS-Full-Report-12-01-10.pdf 4

Presentation overviewThe Economics of Ecosystems and

Biodiversity in Policy MakingThe Global Biodiversity Crisis• Coral reef emergency• Deforestation • Loss of public goods…

Responding to the value of nature

Solutions: Policy Instruments

• Rewarding benefits: PES, IPES: REDD+,

ABS, tax relief & fiscal transfers, Markets, GPP

• Subsidy reform

• Addressing losses : Regulation legislation,

liability, taxes & charges, offsets, banking

• Protected Areas (PAs, MPAs)

• Investment in natural capital

http://www.teebweb.org/

Measuring what we manage

• BD & ecosystem service indicators

• Beyond GDP indicators et al

• Natural capital accounts

• Assessment and Valuation

The context

In the policy jungle – 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 of subsidies; what are

considered subsidies may also depend on context (eg state aid, WTO etc)

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

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

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Deforestation – no resource costs, no

compensation for damage

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 build), 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 – “it

depends”);

• 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. renewable

energy subsidies)

• 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 – eg for food provision (CAP and CFP),

– for energy security (coal subsidies),

– to support industries/technologies (eg nuclear, renewables),

– for competitiveness (eg exemptions to taxes for energy intense industries),

– for poverty alleviation and social concerns (eg food, water, fuel, electricity subsidies),

– to address climate change (eg biofuels; renewables, energy conservation) and

– for the environment (PES HVN)

• Objectives can become outdated (eg food provision, energy security and coal).

• There can be a major difference between stated objectives and actual effects (eg 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

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

A simple classification!

Source: building on Sumaiia and Pauly 2007

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....?

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The „quick scan‟ model (OECD, 1998)

The „checklist‟ (Pieters, 2003)

Integrated Assessment

1. Features Scan

2. Incidental Impacts

3. Long-Term Effectiveness

4. Policy Reform:impacts of various reform scenarios?

The OECD tools…

…the Quickscan

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

…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

environment

al 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

environment

al benefit.

yes yes

no no

no

yes

Subsidy removal might benefit the environment

nono

no

yes

yes

yes

Checklist

(Pieters, 2003)

…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)

Assessing the tools: case studies

Energy

• VAT reduction for domestic energy consumption (UK)

• Fuel tax exemptions for biofuels (DE)

• Nuclear energy: decommissioning subsidies (DE)

Transport

• Fuel taxes: diesel vs petrol (AT, NL, UK)

• Company car taxation (NL)

Water use

• Irrigation water subsidies (ES)

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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 leads to

higher resource use? YES

More benign alternatives exist? YES

improved technology & monitoring

price signals/ volumetric rates

programmes for crop changes

compulsory 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 effectiveness

Social aspects: Subsidy benefits all

farmers (short term), no distinction on

wealth/needs

Affordability: Water demand can be

inelastic – impact on farmers income

Incidental impacts

Environmental impacts

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Assessing the tools (2)

• Effectiveness - do they do the job ?

• User friendliness - are they easy to use ?

• Data intensity – are they practical / resource intensive

/ possible ?

• Gaps and links – do they cover everything important ?

YES!

Although: some overlaps & complements

>> Scope for integrated tool

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Integrating the tools: EHS reform tool

6) Are data available?

2) Does the subsidy lead to a

significant environmental

impact?

3) What is the sectoral policy

context?

4) What is the economic and

social relevance of the

subsidy?

5) Are there insurmountable

obstacles to reform?

1) Is there a subsidy?

1. Screening

2) Policy filter limits

environmental damage

3) More benign alternatives

available or emerging

1) Do the size and

conditionality of the

subsidy lead to higher

volumes?

Subsidy

removal is

not likely to

have

significant

environme

ntal

benefits

YES

YES

YES

NO

NO

Subsidy removal likely to

benefit the environment

·List of potentially

environmentally harmful

subsidies for assessment

·Insights on political feasibility

of subsidy reform

2. Checklist for assessing

the environmental

benefits of EHS removal 3.Broader assessment

1) What are the subsidy

objectives?

2) Are they met?

(Effectiveness)

NO

3) Cost effectiveness

4) Social, economic

and other impacts

5) Long term

effectiveness

YES

Recipe book on

the calculation of

size of subsidy

1) What are the possible

reform options?

2) What are the cost and

benefits of each option?

4) What are the

facilitating factors for

success?

3) What are the potential

econ. and soc.

hardships?NO

·Insights on validity of subsidy

rationale

·Outline of trade offs between

environmental, social and

economic impacts of subsidy

4. Analysis of reform

options

·Outline of alternative policies

·Analysis of impacts of

alternative policies

·List of compensatory

measures

Developing a road map for subsidy reform: a checklist

Is there a subsidy causing damage to ecosystems and biodiversity?1 Is there harm to the environment?

2 Is there a subsidy in place that contributes to environmental damage (e.g. by influencing

consumption, production levels) and if so, what is it?

3 Does it lead to significant or potentially excessive resource use (e.g. water use leading to

loss from aquifers; thresholds crossed; social impacts from reduced resource availability)?

4 Does it actually harm the environment or do policy filters avoid such pressure / damage? (consider wider policy scenarios, regulations, quotas & enforcement / legality of activities).

Should the subsidy be the target of reform? 5 Does the subsidy fulfil its objectives (social/economic/environmental)? If not, it needs reform.

6 Does the subsidy lack an in-built review process and has it been in place for a long time? If so, it is likely to need reform (i.e. it has already locked in inefficient practices).

7 Are there public calls for reform or removal or calls to use the funds for other purposes? This is often an indicator for Points 8 and 9.

8 How does the subsidy distribute social welfare? If there are equity issues, consider reform.

9 Do any of the subsidy impacts lead to social or other economic losses?

10 Are there alternative less damaging technologies available which are hindered by the subsidy’s existence? If so, it might be slowing innovation and creating technological ‘lock in’.

11 Does it offer value for money? Where there is still a valid rationale for the subsidy, could the same or

less money be used to achieve the same objectives with lesser environmental impacts?

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

Reform scenarios (if subsidy reform has been identified as bringing potential benefits):

12 Would the reform be understandable for policy-makers and the public?

13 What would the reform entail (measure changed + compensatory measures)? It is rarely a simple case of ‘getting rid of the subsidy altogether’.

14 Assess the costs and benefits of potential reform in more detail:

• potential environmental benefits: include thinking on benefits in other countries and secondary effects, which can be perverse;

• potential economic costs: e.g. national (tax, GDP, etc), sector-wide, for winners and losers within the sector (inc. new entrants/future industry), for consumers/citizens (affordability);

• potential social impacts: e.g. jobs, skills, availability of goods/services, health;

• potential competitiveness and innovation benefits;

• potential ethical benefits e.g. as regard fairness of income, appropriateness of support, links to future generations;

• is the reform practical and enforceable?

To identify the likelihood of success and whether it is worthwhile using political capital for reform, the following questions can be useful to set priorities for the road map.

Is there a policy/political opportunity for action? 15 Is there a window of opportunity? e.g. policy review process, evaluation, public demand

16 Is there a potential policy champion?

17 Will there be sufficient political capital for success?

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

Communicating results: EHS ID card

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Indicator Assessment

Short description Provide a brief narrative description (i.e. short paragraph). Please incorporate

the following technical aspects:

Budget type: On-budget ([type detail]); Off-budget ([type detail])

Conditionality: Production subsidy; Consumption subsidy; Non-conditional

support

Point(s) of impact: Input ([detail]); Output ([detail]); Income ([detail]); Profit

([detail]), Demand ([detail])

Objectives and design

Subsidy objectives (original rationale). Is the

original rationale still valid?

[list environmental, economic and social objectives])

Key problems with subsidy design [max 1 sentence description]

Key social impacts

Who are the intended recipients of the subsidy?

Does it reach them?

What are the unintended social effects, if any?

Key environmental impacts

Nature and degree of environmental harm None/Small/Medium/Significant; AND when quantification is possible insert

value/range

Key economic impacts (e.g. size, impact on budget, trade, competition)

What are the intended economic outcomes? Are

they achieved?

What are the unintended economic impacts (e.g.

secondary indirect impacts?)

Estimated size of subsidy [unknown OR estimated value /range in EUR]

Reform scenarios

Is subsidy reform/removal likely to benefit the

environment? To what degree?Are there available alternative policies and/or

alternative technologies to achieve the same Are there possible compensatory measures

available to mitigate hardship on social groups Are there calls for reform/removal?

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‟ whereby more environmentally-friendly

technologies/practices are unable to compete on an equal basis with the

subsidised sector

• 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)?

– Mechanism for (most cost-effective) climate mitigation ?

– Mechanism for resource efficient Europe / EU 2020 context ?

• Opportunities – national debt cuts (eg UK?)

• National efforts – FR making use of tool

• Last month: new commitment also at the CBD COP 10

Nagoya in the Aichi Accord

30What new opportunities/plans in Austria and by Austria (eg in context of EU budgets discussion / future of CP, CAP, CFP) ?

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 at medium term (to 2020)

• Design the reform process carefully: clear targets, transparent costs and benefits,

engagement with stakeholders, coordination among gov’t bodies, etc

• 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!

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Thank you.

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