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Transcript of Patrick ten brink of IEEP EHS Identification Assessment 9 Nov 2010 Vienna
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
3
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
Sourc
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ian
Source: http://srforums.prosoundweb.com/
Sourc
e: w
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Sourc
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om
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....?
14
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)
18
19
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
24
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
25
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
28
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!
32
Thank you.
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