Subsidies and the Environment
An Overview of the State of
Knowledge
Gareth Porter
OECD Workshop on Environmentally Harmful
Subsidies
November 7-8, 2002
Purposes of the Study
Identify different ways in which subsidies
are defined and measured in each sector
 Document the availability of data on
subsidies at the country level
 Identify significant gaps in the data on
subsidies and needed research
 Identify methodologies for measuring the
environmental impacts of subsidies

Sectoral Scope of the Study
Agriculture
 Irrigation Water
 Fisheries
 Forests
 Energy
 Transport

Types of Subsidies Included
Budgetary transfers
 Market price support
 Subsidised and concessional credit
 Underpriced materials, water and energy
 Forgone tax revenues
 Foregone resource rents
 Uninternalised externalities

Definition and Measurement:
Agriculture

Producer Support Estimate (PSE):
All budgetary transfers + Market Price
Support (based on price gap)

Aggregate Measure of Support (AMS): only
programs under WTO disciplines included
Definition and Measurement:
Irrigation Water

“Cost Recovery”: Public expenditures that
benefit irrigators net of revenues from water
charges.

“Resource rent”: Difference between
subsidised water’s net economic benefit to
the irrigator and charged price for water per
unit.
Definition and Measurement:
Fisheries

Aggregate of all financial transfers
benefiting fishing industries, including
estimated MPS

PSEs can be calculated for sector as a whole
but not for specific species, as it is for
specific crops.
Definition and Measurement:
Forests

“Cost recovery”: Budgetary outlays for services
benefiting forest companies net of revenues from
those companies.

“Resource rent”: Commercial value of timber
minus costs of bringing it to market, including
forest charges and cost of attracting investment

“Price wedge”: Gap between domestic prices and
world prices for raw logs used by domestic
processors
Definition and Measurement:
Energy

Aggregate of all budgetary transfers, price
support and tax subsidies: totals provide a
rough idea of government support for both
producers and consumers.

“Price wedge”: Differences between actual
prices and reference prices that would
obtain in an undistorted market can be
aggregated across energy products.
Definition and Measurement:
Transport

Unit of analysis is a mode of transport (car, train,
bus).

“Cost recovery”: The government expenditures
(construction or maintenance or both) on a
transportation system net of revenues from that
system.

“Marginal social cost internalisation”: Failure by a
government-supported transport system to
internalise marginal social costs (congestion,
accidents, environmental impacts).
Data Availability and Gaps:
Agriculture

Data on budgetary support by type of payment and
MPS available for OECD countries

Data on domestic support in non-OECD countries
not disaggregated by type of support.

WTO Trade Policy Reviews provide scattered
additional data for disaggregation of domestic
support.
Data Availability and Gaps:
Irrigation Water

Cost Recovery Data:
– No systematic data collection;
– very rough OECD estimates for recovery of operations
and maintenance and capital costs for 15 OECD
countries;
– World Bank estimates for 3 non-OECD countries.

Resource Rent Data: Calculated for only a few
non-OECD countries, using different methods.
Data Availability and Gaps:
Fisheries

OECD: annual estimates of seven types of
financial transfers to OECD countries, 1996-1999,
but no price support and some holes.

APEC: country-by-country estimates for all APEC
member economies, with detailed inventory of all
identifiable programs, but many without cost data.
Includes aquaculture.

WTO notifications: small proportion of subsidies
reported, many without cost or benefit data.
Data Availability and Gaps:
Forests

“Cost recovery”: No systematic data
collection, very few estimates.

“Resource rent”: Relatively large number
of estimates, mainly for tropical countries,
using different methods of calculation.

“Price wedge” : Estimates for seven
countries
Data Availability and Gaps:
Energy

Budgetary, price and tax subsidies: No
systematic collection of data for OECD or
non-OECD countries—except for coal.

“Price Wedge”: IEA, OECD and World
Bank have estimated subsidies for specific
energy products for all OECD countries and
9 non-OECD countries.
Data Availability and Gaps:
Transport

“Cost recovery”
– No systematic data collection
– EEA has published figures for all 12 members of
European Community as of 1991.

“Marginal social cost internalisation”:
– EU is adopting unified national transport accounts
based on common methodologies
– UK, Germany and Switzerland accounts completed
Measuring Environmental
Impacts: Agriculture

Statistical correlation between PSEs and
environmental indicators across countries and over
time

Simulations of trade liberalization’s impacts on
environmental indictors using mathematical
models

Use of demand curves for fertilizer use to predict
demand reduction from different subsidy levels
Measuring Environmental
Impacts: Irrigation Water

Mathematical Programming Models can
simulate the results of different pricing
scenarios aimed at achieving water use
reduction targets.

Calculation of net benefit (marginal value
product) as basis for setting prices that are
highly elastic.
Measuring Environmental
Impacts: Fisheries

No methodology to predict impact in change of
levels or types of subsidies on fish stocks or
capacity levels.

Dynamic mathematical modeling or econometric
estimation methods could be used.

In overcapitalised fisheries, subsidy reduction may
not result in actual effort reduction.
Measuring Environmental
Impacts: Forests

No cross-country research on budgetary transfers
or resource rent impact on harvesting.

One empirical study on linkage between royalty
levels and cutting suggests harvesting rates of
high-value species are royalty-sensitive.

Case studies suggest underpricing of logs leads to
inefficient processing and overcapacity, but no
cross-country quantitative studies.
Measuring Environmental
Impacts: Energy

When price wedge subsidises consumers, impact
can be estimated from price elasticity of energy

Modeling international agreements can estimate
impacts of subsidy removal if they take into
account
– Redistribution of production
– World price effects
– Long term effects of fuel substitution
Measuring Environmental
Impacts: Transport

Price elasticities of transport demand can be used
to model short- and long-term responses to price
changes.

European studies use “impact pathway” approach
to construct simplified air pollution functions.

U.S. studies simulate impacts of efficient pricing
on mode choice, total passenger travel and
pollutant emissions for a given regional transport
system.