www.ieep.eu

Environmentally Harmful Subsidies (EHS):

priorities and quantification

Patrick ten BrinkSenior Fellow and Head of IEEP Brussels Office

ptenbrink@ieep.eu

with contributions from Samuela Bassi, Policy Analyst, IEEP

& building on IEEP et al (2007) Reforming Environmentally Harmful Subsidies

MBIs for the Environment – Prospects for Progress in the EU

Green Budget Europe launching Conference , Brussels 25 September 2008

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Content of the presentation

� Definition: What are subsidies and EHS ?

�What are the impacts of EHS ?

�Quantification of subsidies - how much do they cost?

� Examples: energy, transport, fishery, agriculture, resource pricing

�What are Priority areas for attention ?

� Reforming EHS: benefits, arguments against it, lessons

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Definition: what is a subsidy?

Many definitions, often linked to a specific purpose – e.g.:

• For policy context:

‘… government action that confers an advantage on consumers or producers in order to supplement their income or lower their cost’(OECD 2005)

• For accounting and trade purposes (narrower definitions as easier to quantify):

‘… current unrequited payments from governments to producers with the objective of influencing their levels of production, their prices or the remuneration of the factors of production’

(European System of Accounts - ESA)

4

Definition: what is an EHS?

Possible definition of EHS:

‘a result of a government action that confers an advantage on consumers or producers, in order to supplement their income or lower their costs, but in doing so, discriminates against sound

environmental practices’

Adapted from OECD, 1998 and 2005

• Note: broad but it does not include ‘non-action’ (eg lack of incorporation of externalities in pricing)

Hence, useful definition is:

a result of a government action or inaction that confers an advantage on consumers or producers, in order to supplement their income or

lower their costs, but in doing so, discriminates against sound environmental practices.

Adapted by IEEP from OECD (1998 and 2005)’

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What are subsidies – in practice ?

Two broad categories (OECD):

On budget: clearly visible in countries’budgets or estimated from budget accounts

Off budget: not accounted for in budgets

XImplicit income transfers resulting

from a lack of full cost pricing

XXRegulatory support mechanisms, e.g.

feed-in tariffs, demand quotas

XXTax exemptions and rebates

XXXGovernment revenues due are

foregone or not collected, e.g. tax

credits

XXXIncome or price support

Off-budget subsidies

XXXPotential direct transfers of funds,

e.g. covering liabilities

XXXXDirect transfer of funds, e.g. grants

On-budget subsidies

PietersOECDWTOESA

Definitions of a subsidyType of Subsidy

Source: based on OECD, 1998

6

Examples of EHS

Energy: Coal mining

direct transfers

Aviation

tax exemptionsWater use

Non resource pricing

Fishing

tax exemptions + no

liability for damage to

sea bed)

Energy: oil spills

Only partial liability /

compensation for

damage

Agriculture

Direct 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

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EHS impacts

All – less money available for other usesBudget

Agriculture subsidies, biofuels, fishing subsidies >> loss /damage to

biodiversity and ecosystems, loss of ESSBiodiversity

Inefficient use of natural resources (over use), non-optimal use of

budgets, market distortions, inappropriate price signals for long term

evolution of economy/markets.

Economy

Transport subsidies > congestion, loss of social fabric

Health, climate impacts on wellbeing;

Loss of biodiversity >> loss of cultural /social value

Social

Subsidies to fossil fuels (eg coal), road transport and aviation >> GHG

emissions & global warmingClimate

Transport infrastructure, company cars >> air pollution subsidies to

fossil fuels (eg coal) >> air pollutionHealth

Lack of full water pricing >> water overexploitation/stress – damage to

aquifers, less availability to other uses

Fishery subsidies >> fish stock depletion, damage to marine env.

Resource

use / quality

EHSImpacts

8

Quantification of subsidiesFew systematic attempts to quantify subsidies across sectors & countries

(care needed in interpretation as these build on different assumptions/definitions)

OECD: €33.6 bn (Myers and Kent)

– incl. irrigation

EU-10: €2.5 bn/year (IEEP et al, 2007)Water

OECD: €33.5 bn in 1993 (OECD)EU-25: €36.3 bn in 2004 (EC) –

espec. steel and shipbuilding

Manufacturing

World:€19 bn of which €11 bn ‘bad

subsidies’ (Sumaila 2007)

OECD: €6bn in 1999 (OECD 2000)

EU-25: €0.5 bn (SAS)

EU-25: ~ €2.2 bn (Sumalia 2007);

EFF:€3.8bn for 2007-2013

Fisheries

OECD: €340 bn in 1999 (OECD

2000)

Biofuels OECD: €10-12 bn in 2006

(OECD 2008)

EU-15: €106 bn (OECD)

EU-25: €14 bn (SAS)

Biofuels EU: ~ €3.2 bn in 2006 (OECD

2008)

Agriculture

World: €179-230 bn/year – of

which EHS €130-175 bn (EEA)

EU-15: €240 bn in 2005– including

on/off budget & infrastructures (EEA)

Transport

OECD: €60.6 bn/year (van Beers

and de Moor)

EU-15: VAT reduction for households:

€7.3 bn (IEEP et al, 2007)

OECD: €15 bn/year (IEA)EU-15: €29.3 bn in 2001 (EEA) –

excluding externalities

Energy

OECD/ worldEU

SAS = State Aid Scoreboard

These generally do NOT includ

e im

plicit subsidies from

environm

ental and

health

impacts or from

resource depletion

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Examples of EHS reform: energy

Public support to coal mining in Germany

• What: direct subsidy to support coal

• Scale: biggest subsidies within DE

– eg € 4.7 bn in 1998, €2.7 bn in 2005

• Rationale: support domestic energy resource by decreasing price to improve competitiveness, less valid now as viable alternatives, heavy economic burden and climate concerns

• Env impacts: air pollution, climate change – alternative use of funds to support cleaner energy (eg RES) to reduce CO2

• Reform: gradual reduction of subsidies as from 1997. Phase out by 2018

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

10

Examples of EHS reform: transport

Aviation fuel taxes exemptions in the Netherlands

• What: indirect subsidy - kerosene for commercial aviation exempt

from excise duties/energy taxes (in most EU MS)

• Scale: missed revenues before reform €14 m (in NL)

• Rationale: stimulate aviation when at its infancy (50’s), now

competitiveness advocated to avoid unilateral action

• Env impacts: air pollution, noise, climate change (more than 500 mt

CO2/year from commercial aviation worldwide, i.e approx 2.5% of

global GHG and 12.4% of transport CO2 emissions - OECD).

• Reform: kerosene tax for domestic flights

introduced in 2005: €206.28/1,000 l

Source: www.wisebread.com

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Examples of EHS reform: agriculture

Afforestation measures in

Extremadura & Andalucia, Spain

• What: Payments under the Rural Development Regulation (1257/99) in

the regions include (artificial) afforestation, roads and scrub clearance

• Rationale: objectives in terms of public benefits are not clear. Measures

mostly finance set of standard management activities – Calls usually ad

hoc. Lack of continuity and of apparent purpose. (Beaufoy et al, 2005)

• Env impacts: biodiversity loss - eg black stork, Iberian links due to land

clearing and other forestry activities

• Reform: Proposals for new more integrated agri-forest-environment

scheme. At EU level: for 2007-2013 MS to ensure that afforestation is

suited to local conditions and env. requirements, particularly biodiversity

Source: www.mlahanas.de

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Examples of EHS reform: fisheries

Subsidies to high seas bottom trawl (HSBT) fleets

• What: subsidies paid to bottom trawl fleets operating in the high

seas, ie outside the Exclusive Economic Zones of maritime

countries

• Scale:World: ~ €110 m/year (fuel & non-fuel)

EU (FR, ES, LV, LT): ~ €15 m/year

• Rationale: economic - sustain fish industry; but HSBT only a small

contribution to global marine fish catch

• Env impacts: biodiversity loss - deep-sea demersal fish species

particularly vulnerable to exploitation (long life span, low growth rate)

• Reform: under discussion: WTO negotiations on (among others)

fisheries global subsidies; U.N. proposal to establish a moratorium on

HSBT due to habitats damage

Source: www.treehugger.com

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EHS reform: fisheries (cont.)

Other issues

• What: Within the CFP a major area of concern is the public expenditure for fleet renewal/modernisation >> increased EU fishing capacity/a higher efficiency of the vessels

• Scale: EU-27: CFP: €3.8 billion (2007-2013)

• Rationale: economic - sustain fish industry

• Env impacts: The higher efficiency/capacity leads to an increased pressure on already overexploited stocks.

• Reform: under discussion: reorientate funding – eg towards “Natura 2000” network of protected areas

• More support to monitoring and enforcement

• Exclude from aid - those engaged in illegal fishing or non-compliant with other EU environmental laws.

• The abolishment of subsidies, with respect to fuel tax

D. Pauly (UBC, Canada)

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Examples of EHS reform: resource pricing

Water pricing in Czech Republic

• What: indirect subsidy - pricing of water only covered a

fraction of its cost

• Scale: missed revenues – after reform drinking water charges were ~

€50/households/year (2004)

• Rationale: General policy in the provision of basic goods /services

during pre-market economy – no more valid in today’s market economy

• Env impacts: water overexploitation

• Reform: After 1990 water pricing moved towards full cost recovery

(€0.71/l in 2004). Between 1990 and 1999 water withdrawals decreased

by 88% in agriculture, 47% in industry and 34% in public water mains.

Source: Guardian

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Priority areas for attention

Energy:

• Coal – Support has declined (€8.6 bn in 1990 >> €4 bn in 2000), but

no major reductions in subsidies/tonne >> leading to air pollution,

climate change. Further decrease expected (phase out). Care

needed on CCS

• Nuclear power – non-own cost recovery of waste storage and

nuclear accidents. Nuclear is back on the agenda – an analysis of

appropriate levels needs to take full costs into account.

• Biofuels – tax exemption >> biodiversity loss, affect carbon cycle.

Very complex, subsidies less appropriate for many first generation

biofuels.

Transport:

• Road transport – eg company car tax regimes: remove incentives;

non inclusion of costs / externalities – these costs should be

included to make the prices right

• Aviation – eg no VAT, no excise taxes on kerosene - prices right?

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Priority areas for attention (2)

• Agriculture – Careful reform important in context:

• Pillar 1 (direct payments) now subject to cross compliance (min.

env. standards), mostly decoupled, but not targeted at public goods

(+/- impacts).

• Pillar 2 (rural development programmes, RDP) higher potential for

env. benefits (e.g. agri-environment) but limited by available funding.

• Some examples of EHS in individual RDPs >> e.g. irrigation leading

to water overuse, some forestry programmes damaging

habitats/biodiversity etc.

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Priority areas for attention (3)

• Fisheries - eg non excise tax (greater capacity), non

liability for damage (eg bottom trawling) >>

unsustainable fishing

We are fishing down the foodweb – D. Pauly (UBC,

Canada)

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Priority areas for attention (3)

• Water – prices do not reflect

resource/production costs (eg low cost of water

for irrigation) >> water depletion/wrong crops.

>> waste of financial resources

• Food – price not reflecting soil and resource

depletion and water and carbon footprint and

other resource damage.

• Oil pollution - non coverage of costs of

pollution/clean up and damage to ecosystems

>> incentive to avoid damage less than it

should be

Source: www.oilism.com

Source: Guardian

Source: Henrik Larsen, DHI

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Reforming EHS: potential benefits

http://ec.europa.eu/environment/nature/biodiversity/economics/index_en.htm

• 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, PES, energy saving & RES),

“reform today’s subsidies to ensure that they addresstomorrow’s priorities”

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Reforming EHS: overcoming arguments against it

Removing subsidies will…(or will not?)

• … harm competitiveness – But keeping subsidies is bad for long-term

competitiveness of the sector; sector becomes dependent on subsidy and puts

strains on public finances and can reduce national competitiveness

• … result in job losses – In the short-term, can be the case, for the specific

sector, but compensatory measures can address some adverse short-term

impacts and incentives can be put in pace to attract investment; also possible

employment gains from use of monies elsewhere – net effect depends on

relative labour intensities

• … have implications for social equity – But poorer households spend less on

energy than middle income households, so better ways of helping the former

than subsidies

• … adversely impact on energy security – There is unlikely to be any ‘insecurity of

supply’ for coal – one of the most subsidised energy sources – in the EU for the

foreseeable future. Also if funds used for renewables it actually can increase

security.

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Reforming EHS: lessons

• There is a need for good quality information and transparency – to

inform the decision-making process, the design of policies and

ensure expected outcomes are widely understood

• 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 – consider staging the reform

and taking advantage of economically beneficial circumstances

There is a need for reform –

On environmental, social & economic grounds.

Tomorrow’s subsidies should not reflect yesterday’s priorities

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Thank you

Patrick ten Brink

ptenbrink@ieep.eu www.ieep.eu

IEEP is an independent not for profit institute dedicated to advancing an

environmentally sustainable Europe through policy analysis, development and

dissemination.

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