Identification of Environmentally Harmful Subsidies: OECD methods and subsidy reform flowchart

Patrick ten Brink

Senior Fellow and Head of Brussels Office, IEEP

ptenbrink@ieep.eu

Politiques contre nature ?

Vers une réforme des subventions néfastes pour la biodiversité Paris,

Théâtre de la Cité internationale universitaire, salle Galerie

17, bd Jourdan 75014 Paris

Vendredi 1er juin 2012, de 9h30 à 18h00

Introduction: state of play on EHS

Policy demands for EHS reform

Assessing the OECD tools

Flowchart for EHS reform road map

Lessons and moving forward

Presentation Structure

Environmentally Harmful Subsidies (EHS):

Identification and Assessment Study contract 07.0307/2008/514349/ETU/G1

EXECUTIVE SUMMARY

Institute for European Environmental Policy (IEEP)

C Valsecchi, P ten Brink, S Bassi, S Withana, M Lewis

Together with

Ecologic

A Best, H Rogers-Ganter, T Kaphengst

IVM

F Oosterhuis

& supporting expert

C Dias Soares

16 November 2009

Introduction: state of play on EHS

Subsidies general introduction

The last decade has witnessed increasing efforts for phasing out or reforming subsidies in various countries & commitments mount. Yet, the overall level of subsidies remains remarkable

Agricultural & fisheries subsidies of particular concern – for biodiversity

Water (full cost recovery) –for resource availability/efficiency, water stress

Globally, energy & transport subsidies of concern – climate & energy security, technological lock in & other impacts

Not all subsidies are bad for the environment.

Not all subsidies with social objectives, reach those objectives – design is critical

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

Critical to identify subsidies that merit reform, create evidence base & road map

Subsidies size - a snapshot

Over $ 1 trillion per year in Subsidies

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

Most sensible use of funds? Reform win-wins ? eg budget, climate, energy security, water,

biodiversity & social? 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)

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

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

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)

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)

Potential benefits of EHS reform

• Reduce the use of resource intensive inputs /activities (extraction, production,

distribution, transformation, use), saving resources (eg water, energy), causing less pollution (hence saving on policy measures), lesser impacts on the environment

• 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

• Improve (cost)-effectiveness of meeting objectives, including social objectives

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

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

Need to understand which subsidies are which.

Where benefits of reform might lie.

Develop a road map for EHS Reform.

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Policy calls for Subsidy Reform

International Commitments to Subsidy Reform

Global - CBD Aichi Accord. CBD Strategic Plan 2011-2020

Dec. X/44 on Incentive Measures / CBD Strategic Plan 2011-2020: Target 3

‘By 2020, at the latest, incentives, including subsidies, harmful to biodiversity are eliminated, phased out or reformed in order to minimize or avoid negative impacts, and positive incentives for the conservation and sustainable use of biodiversity are developed and applied, consistent and in harmony with the convention and other relevant international obligations, taking into account national socio-economic conditions.

G20 commitment (Pittsburgh 2009 & Toronto 2010) phase out inefficient fossil fuel subsidies

EU - ‘Roadmap for a resource efficient Europe’. • ‘by 2020 EHS will be phased out, with due regard to the impact on people in need’ +

Member States should:

• Identify the most significant EHS pursuant to established methodologies (by 2012);

• Prepare plans and timetables to phase out EHS and report on these as part of their National Reform Programmes (by 2012/2013).

EC (2011) Roadmap to a Resource Efficient Europe (COM(2011)571), http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0571:FIN:EN:PDF

But

On subsidy reform…..

People who love soft methods and hate inequity, forget this – that reform consists in taking a bone from a dog. Philosophy will not do it.

John Jay Chapman, 1862–1933, See OECD, 2007

Need transparency, evidence, analysis, communication to have a chance of success

OECD Tools

Relevant questions for policy makers

• Is the subsidy likely to have a significant impact

on the environment?

• Will the EHS reform bring environmental benefits?

• Which EHS would bring the most benefit from reform and so should be prioritised?

• What EHS reform will make people better off?

QUICK SCAN

CHECKLIST

Integrated assessment framework

RELEVANT QUESTIONS IN POLICY MAKING OECD TOOLS

What do policy makers need to know to address the EHS issue?

…the Quick scan

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“Is the support likely to have a negative impact on the

environment?”

Impact on economy Policy filter Assimilative capacity of env

Proportionality: Quick quick scan first, then more in-depth if additional effort merited. Use of Elasticities, econometrics, modelling can be valuable

...example: Spanish water pricing

Water pricing : ~0.01€/m3 Pisuerga Valley (2003), ave. ~0.05 €/m3 Spain (2007)

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 (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

Economic activity linked to deteriorating

environmental values.

Sectoral Analysis reveals strong forward or backward linkages.

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

yes yes

no

yes

Subsidy removal might benefit the environment

no

yes

yes

Checklist

(Pieters, 2003)

…Selected findings from Integrated Assessment

Effectiveness

Justification: support farmers’ income; not targeted

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

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 (as earlier)

EHS merits reform attention; care needed to identify better options to support farmers.

Transition management key

OECD tools: conclusions & recommendations

Conclusions re OECD tools

• Effective initial screening tools

• Avoid resource intensiveness / rigidities of general equilibrium models or CBA

• The tools can be applied at different level of detail – proportionality / phasing

• Help highlight areas where further detailed empirical analysis is required

• Prioritise EHS reform on the basis of benefits of removal

• Applicable to all sectors and to all subsidy types

Recommendations

• Integration of the OECD tools into 1 overall process

• Develop into step-by-step guidelines

Building on OECD Tools

Flowcharts for development of EHS reform road map

Phase 0: Screening of sectors / impacts

1) What are the threats to

biodiversity, and how do these relate

to key economic activities / sectors?

Can sectors / activities by identified which are

harmful to biodiversity?

Phase 1: Screening of incentives

2) Are there incentives related to

these sectors / activities?

3) Does the incentive lead to potential direct / indirect

biodiversity impacts? (if positive inform Q10)

Has an incentive been identified which may be harmful to biodiversity?

4) Are these potential impacts limited by existing

‘policy filters’?

Phase 2: Potential for reform

6) Does the incentive lead to socio-

economic issues?

7) Are there more benign alternatives?

5) Does the incentive fulfil its objectives and are these still

valid?

Is the removal or reform of the incentive

needed?

8) Are there pressures to reform?

Phase 3: Reform scenarios

10) What are the expected costs and benefits (economic,

environmental, social)?

12) Is the reform understandable,

practical and enforceable?

9) Are there suitable reform option(s)?

Can options for reform or removal be

identified, and are they advisable?

Phase 4: Opportunities for action

14) Is there a (potential) policy

champion to drive reform?

15) Is there public/ political support to reform or can it be

developed?

13) Is there a window of opportunity for

reform or can one be created?

Is the removal or reform of the incentive timely

& should it be prioritised?

Prioritise reform / removal of the incentive harmful to biodiversity

No Yes

No need to currently take further action – regular review is however advised

No Yes No Yes No Yes No Yes

Yes: negative impacts

Yes +

+

+

+ +

+

Yes

Yes 11) Are there

obstacles to reform?

No

Develop conditions for success and plan for future reform

Subsidy reform flowchart – linked to CBD Str. Plan 2011-20 Target 3

Being applied/piloted in the UK

Source: ten Brink et al 2012

Recommendations and Way

forward

Lessons & recommendations

In the short run, OECD tools and similar tools can help countries:

• Establish transparent and comprehensive subsidy inventories,

• Assess their effectiveness against stated objectives, their cost-efficiency, and their environmental impacts - using proportionality principle for effort

• Assess benefits / costs of reform for EHS – environmental, money saved/freed up, social impacts, innovation and facilitation for the transition to a green economy

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 tools (proportionality, fit for purpose) and of funds liberated!

Thank you

ptenbrink@ieep.eu

www.ieep.eu

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