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The real cost of subsidies: outlook from TEEB –aligning today’s costs to tomorrow’s priorities

Patrick ten BrinkTEEB for Policy Makers Co-ordinator

Head of Brussels Office

Institute for European Environmental Policy (IEEP)

Environmentally harmful subsidies – a real threat to biodiversityPolicy Dialogue

Brussels

11th January 2010Representation of the State of North Rhine-Westphalia to the European Union

Building on and borrowing from the work & insights of the wider TEEB team

and contributors of supporting studies, call for evidence and other contributions

Presentation overview

1. Introduction

1. TEEB ambitions and process and approach

2. Subsidies – types and issues

3. Overview of size of subsidies

2. Subsidies, their impacts & costs

3. Policy response needs & tools for a way forward

TEEB’s Genesis and progress

“Potsdam Initiative – Biological Diversity 2010”

1) The economic significance of the global loss of biological diversity

TEEB Interim Report CBD COP-9, Bonn, May 2008

TEEB for Policy Makers Brussels 13 Nov. 2009

TEEB Climate Issues Update Strömstadt September 2009.

TEEB’s goals

1. Demonstrate the value to the economy, to society/individuals and wider environment – what we have & what we risk losing.

2. Underline the urgency of action, benefits of action (opportunities), analyse costs of action

3. Show how the value of ecosystem services and biodiversity can be assessed and where it can be useful

4. Show how we (can) take into account the value of ecosystem services and biodiversity in our decisions and choices,

5. Identify / support solutions

6. Address the needs of policy-makers, local administrators, business and citizens (the “end-users”)

Source: adapted from Pavan Sukhdev

TEEB D1: TEEB for International and National Policy-Makers

Part I: The Global Biodiversity Crisis and Framework for Policy Response

Ch1 The global biodiversity crisis and related policy challenge

Ch2 Framework and guiding principles for the policy response

Part II: Measuring what we Manage: Information & Tools for Decision-Making

Ch3 Measuring to Manage our Natural Capital

Ch4 Recognised the Value of Biodiversity

Part III: Solutions: Instruments and measures

Ch5 Rewarding benefits of Ecosystems and Biodiversity

Ch6 Reforming Subsidies

Ch7 Incorporating the costs of ecosystem and biodiversity loss

Ch8 The Value of Protected Areas

Ch9 Direct Investments in natural capital and ecosystem restoration

Part IV: Synthesis

Ch10 Conclusions and recommendations

Available on http://www.teebweb.org/

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

Source: Guardian

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

Source: www.treehugger.com

Source: www.oilism.com

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

Aggregate subsidy estimates for selected economic sectors

Over $ 1 trillion per year in Subsidies

Most sensible use of funds? Or potential for reform?

Presentation overview

1. Introduction

1. TEEB ambitions and process and approach

2. Subsidies – types and issues

3. Overview of size of subsidies

2. Subsidies, their impacts & costs

- some examples

3. Policy response needs & tools for a way forward

Fisheries Subsidies

Fisheries subsidies ~ US$30-34 bn/yr: only ~7bn “good”, 20bn “bad”

“Small” compared to other subsidies – Agriculture, transport, energy

Large relative to sector (~ US$ 90bn/yr landed value) and

Major impacts (stock collapse, species composition, damage to ecosystems)

Figure: State of exploitation of selected stock / species groups, 2004

28% over-exploited, 52% fully exploited, remaining 20% moderately exploited or underexploited (some low margin/uneconomic) (FAO 2006 and FAO 2008)

Subsidies & “Sunken Billions”

Contribution of fisheries harvest sector to the global economy ~US$ 50billion/ year less than it could be (World Bank and FAO 2008)

Non optimal resource management, driven, in part, by subsidies leading to “too many fishers chasing too few fish”

Source: Ben ten Brink presentation, Workshop: The Economics of the Global Loss of Biological Diversity 5-6 March ‘08, Brussels. Original source: Pauly (UBC)

� Half of wild marine fisheries are fully exploited, with a further quarter already over-exploited – limits of substitutability

� at risk : $ 80-100 billion income from the sector

� at risk : est. 27 million jobs

� but most important of all…..

1 bn people rely on fish as their main source of animal protein,

especially in developing countries.

Global Loss of Fisheries……Human Welfare Impact

We are fishing down the food web

to ever smaller species…

Reduce and/or reform/redirect subsidies as part of portfolio of instruments. One opportunity: redirect funds to support marine protected areas (MPAs)

Agricultural subsidy impacts

1. Agricultural subsidies are among the largest and merit special attention given sector’s critical role in food security and development.

2. Wide range of impacts: - eg from intensification:

1. Loss of non-target species (eg pollinators)

2. Reduced habitat diversity

3. Loss of biodiversity-rich extensive farmlands

4. Hydrological changes due to draining/irrigation

5. Water pollution (surface waters, groundwaters)

6. Eutrophication of freshwater and marine ecosystems

7. Soil degradation and erosion

3. Biodiversity impacts and also loss of ecosystem services

4. Costs to public purse + losses to range of parties from ESS losses + complications for other policies (Eg climate change)

Since ‘60s - Europhication caused “dead-zones”: Regularly ~405 coastal dead-zones

Reduce / shift of funds away from production based allocations - “decoupling” / move from 1st to 2nd pillar funding

Better targeting:

� “cross compliance” - linking payments to range of standards

� Reduce payments to those that don’t “need” them : “modulation”

� Payments for provision of ecosystem services (PES) for high nature value ag.

� Progress is being made, but too slow / not enough.

� Wide range of additional costs to others due to ag practice – encourage progress?

� increased water pre-treatment needs for water companies

� payments by water companies (eg Vittel) to preserve mineral water quality

� eutrophication – fish loss, tourism impacts et al

� increased costs for pollination given loss of natural pollinators.

� loss of public goods (biodiversity, clean water, landscape)

Reforming agricultural subsidies – long complex road

Need move to public payments for public goodsNeed to strengthen application of polluter pays principle

Biofuels

� An example of complex relationship between renewable energy subsidies and environmentally damaging impacts

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

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

Not cost effective cf EU-ETS: ~ US $ 30-50 / t

�Where biofuels fom converted forrest lands –there may be net increase of emissions

Effect opposite to stated objective.

Urgent need to review biofuels policies / instruments

Presentation overview

1. Introduction

1. TEEB ambitions and process and approach

2. Subsidies – types and issues

3. Overview of size of subsidies

2. Subsidies, their impacts & costs

- some examples

3. Policy response needs & tools for a way forward

TEEB and subsidiesgeneral observations

• 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

• Opportunities other areas: energy, water (full cost recovery), transport

• 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 bere-directed to areas with more pressing funding needs

Reforming EHS

• A lot of rhetorical and even policy support for EHS Reform - in practice progress is generally slow (with exceptions).

• Subsidies are launched for a reason (eg food or energy security, economic sector survival) – in some cases the reason is no longer valid.

• Subsidies create activity and people can be dependant on that activity.. Also vested interests / “culture of entitlement”

• The level of subsidies, their impacts and the potential benefitsfrom reform are not always (easily) clarified – some subsidies are

hidden and impacts not immediate or direct, complexities of interactions, impacts

mitigated by policies or complementary measures.

• There is also often too little commitment to transparency and insufficient assessment of where policy attention is needed, possible and would offer benefits.

Yet reforming EHS > potential benefits

• Reduce the use of resource intensive inputs, thus saving resources (for society/the economy now and for future generations), including energy, and causing less pollution

• 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 alternative, less established, and possibly more environmentally-friendly, technologies and practices are

unable to compete on an equal basis with the subsidised sector

• Enable governments to divert budget to other areas (e.g. education,

poverty, PES, energy saving),

Organising reform

The design of the reform process is a critical success factor. It needs to take the political economy and other barriers into consideration, and often hinges on the following important conditions:

• The policy objectives must be defined transparently and rigorously;

• The distribution of benefits and costs must be transparently identified;

• Government must engage broadly with stakeholders + often need “whole of government approach”;

• Government should set ambitious endpoints, but, depending on circumstances, timetables for reform may be cautious;

• Windows of opportunity should be seized, and

• Fiscal transfers are often required to facilitate the transition process(OECD 2007) – and other flanking measures (eg retraining)

Enabling Factors for EHS reform some first lessons….

• Improving the quality and comprehensiveness of available subsidy data and analytical information is important for successful subsidy reform.

• Transparency is a key precondition for a well-informed public debate on current subsidy programmes, and can provide a powerful motivating force for change

• Subsidy reform does not happen in isolation – reform should be part

of a broader reform package including, e.g., policies to mitigate adverse impacts of subsidy removal

• There is a need for strong leadership and a broad coalition - a

champion of reform to galvanise support and communicate with stakeholders

• The need for a well-managed process / transition management:consider staging the reform & taking advantage of economically beneficial circumstances – take into account “affordability”

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,

• Develop prioritized plans of action for subsidy removal or reform (inc. transition mg’t), for implementation at medium term (to 2020).

• Windows of opportunity proactively and systematically seized.

• Windows of opportunity should be created too - eg via road maps.

>> Make good use of any funds liberated - both from reform itself, and from effect of the reform as a more level playing field may also reduce need for pro-environmental subsidies. A reform can save in two places…

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Thank you

1. What do you see as critical issues to progress subsidy reform?

2. What practical insights have you on “enabling conditions” and “making it happen”?

& What from your experience do you see as powerful and credible stories to illustrate successful reform?

`Patrick ten Brink ptenbrink@ieep.eu

IEEP is an independent, not-for-profit institute dedicated to the analysis, understanding and promotion of policies for a sustainable environment in Europe