Subsidies and the EnvironmentSubsidies and the Environment

An Overview of the State of An Overview of the State of KnowledgeKnowledge

Gareth PorterGareth Porter

OECD Workshop on Environmentally Harmful OECD Workshop on Environmentally Harmful SubsidiesSubsidies

November 7-8, 2002November 7-8, 2002

Purposes of the StudyPurposes of the Study

Identify different ways in which subsidies Identify different ways in which subsidies are defined and measured in each sectorare defined and measured in each sector

Document the availability of data on Document the availability of data on subsidies at the country levelsubsidies at the country level

Identify significant gaps in the data on Identify significant gaps in the data on subsidies and needed researchsubsidies and needed research

Identify methodologies for measuring the Identify methodologies for measuring the environmental impacts of subsidies environmental impacts of subsidies

Sectoral Scope of the StudySectoral Scope of the Study

AgricultureAgriculture Irrigation WaterIrrigation Water

FisheriesFisheries ForestsForests EnergyEnergy

TransportTransport

Types of Subsidies IncludedTypes of Subsidies Included

Budgetary transfersBudgetary transfers Market price supportMarket price support Subsidised and concessional creditSubsidised and concessional credit Underpriced materials, water and energyUnderpriced materials, water and energy Forgone tax revenuesForgone tax revenues Foregone resource rentsForegone resource rents Uninternalised externalitiesUninternalised externalities

Definition and Measurement: Definition and Measurement: AgricultureAgriculture

Producer Support Estimate (PSE):Producer Support Estimate (PSE):All budgetary transfers + Market Price All budgetary transfers + Market Price Support (based on price gap)Support (based on price gap)

Aggregate Measure of Support (AMS): only Aggregate Measure of Support (AMS): only programs under WTO disciplines includedprograms under WTO disciplines included

Definition and Measurement: Definition and Measurement: Irrigation WaterIrrigation Water

““Cost Recovery”: Public expenditures that Cost Recovery”: Public expenditures that benefit irrigators net of revenues from water benefit irrigators net of revenues from water charges.charges.

““Resource rent”: Difference between Resource rent”: Difference between subsidised water’s net economic benefit to subsidised water’s net economic benefit to the irrigator and charged price for water per the irrigator and charged price for water per unit.unit.

Definition and Measurement:Definition and Measurement:FisheriesFisheries

Aggregate of all financial transfers Aggregate of all financial transfers benefiting fishing industries, including benefiting fishing industries, including estimated MPS estimated MPS

PSEs can be calculated for sector as a whole PSEs can be calculated for sector as a whole but not for specific species, as it is for but not for specific species, as it is for specific crops.specific crops.

Definition and Measurement: Definition and Measurement: ForestsForests

““Cost recovery”: Budgetary outlays for services Cost recovery”: Budgetary outlays for services benefiting forest companies net of revenues from benefiting forest companies net of revenues from those companies.those companies.

““Resource rent”: Commercial value of timber Resource rent”: Commercial value of timber minus costs of bringing it to market, including minus costs of bringing it to market, including forest charges and cost of attracting investment forest charges and cost of attracting investment

““Price wedge”: Gap between domestic prices and Price wedge”: Gap between domestic prices and world prices for raw logs used by domestic world prices for raw logs used by domestic processorsprocessors

Definition and Measurement:Definition and Measurement:EnergyEnergy

Aggregate of all budgetary transfers, price Aggregate of all budgetary transfers, price support and tax subsidies: totals provide a support and tax subsidies: totals provide a rough idea of government support for both rough idea of government support for both producers and consumers.producers and consumers.

“ “Price wedge”: Differences between actual Price wedge”: Differences between actual

prices and reference prices that would prices and reference prices that would obtain in an undistorted market can be obtain in an undistorted market can be aggregated across energy products.aggregated across energy products.

Definition and Measurement:Definition and Measurement:TransportTransport

Unit of analysis is a Unit of analysis is a mode of transportmode of transport (car, train, bus). (car, train, bus).

““Cost recovery”: The government expenditures Cost recovery”: The government expenditures (construction or maintenance or both) on a (construction or maintenance or both) on a transportation system net of revenues from that system.transportation system net of revenues from that system.

““Marginal social cost internalisation”: Failure by a Marginal social cost internalisation”: Failure by a government-supported transport system to internalise government-supported transport system to internalise marginal social costs (congestion, accidents, marginal social costs (congestion, accidents, environmental impacts).environmental impacts).

Data Availability and Gaps: Data Availability and Gaps: AgricultureAgriculture

Data on budgetary support by type of payment and Data on budgetary support by type of payment and MPS available for OECD countriesMPS available for OECD countries

Data on domestic support in non-OECD countries Data on domestic support in non-OECD countries not disaggregated by type of support.not disaggregated by type of support.

WTO Trade Policy Reviews provide scattered WTO Trade Policy Reviews provide scattered additional data for disaggregation of domestic additional data for disaggregation of domestic support.support.

Data Availability and Gaps:Data Availability and Gaps:Irrigation WaterIrrigation Water

Cost Recovery Data: Cost Recovery Data: – No systematic data collection; No systematic data collection;

– very rough OECD estimates for recovery of operations very rough OECD estimates for recovery of operations and maintenance and capital costs for 15 OECD and maintenance and capital costs for 15 OECD countries; countries;

– World Bank estimates for 3 non-OECD countries.World Bank estimates for 3 non-OECD countries.

Resource Rent Data: Calculated for only a few Resource Rent Data: Calculated for only a few non-OECD countries, using different methods.non-OECD countries, using different methods.

Data Availability and Gaps:Data Availability and Gaps:FisheriesFisheries

OECD: annual estimates of seven types of financial OECD: annual estimates of seven types of financial transfers to OECD countries, 1996-1999, but no transfers to OECD countries, 1996-1999, but no price support and some holes.price support and some holes.

APEC: country-by-country estimates for all APEC APEC: country-by-country estimates for all APEC member economies, with detailed inventory of all member economies, with detailed inventory of all identifiable programs, but many without cost data. identifiable programs, but many without cost data. Includes aquaculture.Includes aquaculture.

WTO notifications: small proportion of subsidies WTO notifications: small proportion of subsidies reported, many without cost or benefit data.reported, many without cost or benefit data.

Data Availability and Gaps:Data Availability and Gaps:ForestsForests

“ “Cost recovery”: No systematic data Cost recovery”: No systematic data collection, very few estimates.collection, very few estimates.

“ “Resource rent”: Relatively large number Resource rent”: Relatively large number of estimates, mainly for tropical countries, of estimates, mainly for tropical countries, using different methods of calculation.using different methods of calculation.

““Price wedge” : Estimates for seven Price wedge” : Estimates for seven countries countries

Data Availability and Gaps:Data Availability and Gaps:EnergyEnergy

Budgetary, price and tax subsidies: No Budgetary, price and tax subsidies: No systematic collection of data for OECD or systematic collection of data for OECD or non-OECD countries—except for coal.non-OECD countries—except for coal.

““Price Wedge”: IEA, OECD and World Price Wedge”: IEA, OECD and World Bank have estimated subsidies for specific Bank have estimated subsidies for specific energy products for all OECD countries and energy products for all OECD countries and 9 non-OECD countries.9 non-OECD countries.

Data Availability and Gaps:Data Availability and Gaps:TransportTransport

““Cost recovery” Cost recovery” – No systematic data collectionNo systematic data collection

– EEA has published figures for all 12 members of EEA has published figures for all 12 members of European Community as of 1991. European Community as of 1991.

““Marginal social cost internalisation”:Marginal social cost internalisation”:– EU is adopting unified national transport accounts EU is adopting unified national transport accounts

based on common methodologiesbased on common methodologies

– UK, Germany and Switzerland accounts completedUK, Germany and Switzerland accounts completed

Measuring Environmental Measuring Environmental Impacts: AgricultureImpacts: Agriculture

Statistical correlation between PSEs and Statistical correlation between PSEs and environmental indicators across countries and over environmental indicators across countries and over timetime

Simulations of trade liberalization’s impacts on Simulations of trade liberalization’s impacts on environmental indictors using mathematical environmental indictors using mathematical modelsmodels

Use of demand curves for fertilizer use to predict Use of demand curves for fertilizer use to predict demand reduction from different subsidy levelsdemand reduction from different subsidy levels

Measuring Environmental Measuring Environmental Impacts: Irrigation WaterImpacts: Irrigation Water

Mathematical Programming Models can Mathematical Programming Models can simulate the results of different pricing simulate the results of different pricing scenarios aimed at achieving water use scenarios aimed at achieving water use reduction targets.reduction targets.

Calculation of net benefit (marginal value Calculation of net benefit (marginal value product) as basis for setting prices that are product) as basis for setting prices that are highly elastic.highly elastic.

Measuring Environmental Measuring Environmental Impacts: FisheriesImpacts: Fisheries

No methodology to predict impact in change of No methodology to predict impact in change of levels or types of subsidies on fish stocks or levels or types of subsidies on fish stocks or capacity levels.capacity levels.

Dynamic mathematical modeling or econometric Dynamic mathematical modeling or econometric estimation methods could be used.estimation methods could be used.

In overcapitalised fisheries, subsidy reduction may In overcapitalised fisheries, subsidy reduction may not result in actual effort reduction. not result in actual effort reduction.

Measuring Environmental Measuring Environmental Impacts: ForestsImpacts: Forests

No cross-country research on budgetary transfers No cross-country research on budgetary transfers or resource rent impact on harvesting.or resource rent impact on harvesting.

One empirical study on linkage between royalty One empirical study on linkage between royalty levels and cutting suggests harvesting rates of levels and cutting suggests harvesting rates of high-value species are royalty-sensitive.high-value species are royalty-sensitive.

Case studies suggest underpricing of logs leads to Case studies suggest underpricing of logs leads to inefficient processing and overcapacity, but no inefficient processing and overcapacity, but no cross-country quantitative studies.cross-country quantitative studies.

Measuring Environmental Measuring Environmental Impacts: EnergyImpacts: Energy

When price wedge subsidises consumers, impact When price wedge subsidises consumers, impact can be estimated from price elasticity of energycan be estimated from price elasticity of energy

Modeling international agreements can estimate Modeling international agreements can estimate impacts of subsidy removal if they take into impacts of subsidy removal if they take into accountaccount– Redistribution of production Redistribution of production

– World price effectsWorld price effects

– Long term effects of fuel substitutionLong term effects of fuel substitution

Measuring Environmental Measuring Environmental Impacts: TransportImpacts: Transport

Price elasticities of transport demand can be used to Price elasticities of transport demand can be used to model short- and long-term responses to price model short- and long-term responses to price changes.changes.

European studies use “impact pathway” approach to European studies use “impact pathway” approach to construct simplified air pollution functions.construct simplified air pollution functions.

U.S. studies simulate impacts of efficient pricing on U.S. studies simulate impacts of efficient pricing on mode choice, total passenger travel and pollutant mode choice, total passenger travel and pollutant emissions for a given regional transport system.emissions for a given regional transport system.