When Removing Subsidies Benefits the
Environment
DEVELOPING A CHECKLIST BASED ON
THE CONDITIONALITY OF SUBSIDIES
OECD, 7,8 NOVEMBER 2002, Jan Pieters
07-11-2002
When Removing Subsidies Benefits the
Environment
1
Warning
All subsidies are unique
!
Generalisations seldom apply
to all individual subsidies
The challenge to developing a checklist
To identify those items that indicate subsidies for
which removal is beneficial for the environment.
07-11-2002
When Removing Subsidies Benefits the
Environment
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Why a Checklist
1. Ranking options for removal according to their
possible beneficial environmental effects
•
Need to focus, since subsidies are hard to remove
2. Avoiding unjustifiable claims as much as possible
•
•
07-11-2002
Subsidy removal is worthwhile for efficiency reasons
The environment motive may be better served by
environmental policy
When Removing Subsidies Benefits the
Environment
3
Environment – Subsidy Removal linkages
Subsidy
removal
Changes in
competitiveness
Policy Filter
Autonomous
change
Environmental management
Infrastructure
Economic
Technological
Pollution;
rates of
exploitation
Use of the
checklist
Site specific: Env. Impact
Analysis
Long list of subsidies
to be removed on
environmental
grounds
07-11-2002
Environmental
values
When Removing Subsidies Benefits the
Environment
Assimilative capacity
Environmental
effects
4
Important factors (1)
• Policy filters
– Environmental management regimes (environmental
requirements, zoning, quota)
– Restrictions because of infrastructure
• The lock-in effect
– Dependent on their conditionality, subsidies cast technology
in stone, especially if granted to capital intensive industries
– Benign can become malign, depending on ‘autonomous’
technical change outside the subsidised firms
Permanent flux
07-11-2002
When Removing Subsidies Benefits the
Environment
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Important factors (2)
• Effects on the choice of:
–
–
–
–
Products
Volumes of production
Modes of production
Input uses
• Environmental profiles of clusters of technologies
– Favoured technology compared to its alternatives
– Forward and backward linkages
Permanent Flux
07-11-2002
When Removing Subsidies Benefits the
Environment
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The basic template: initial points of impact
Variable
inputs
Natural
resources
Energy
Materials
Fixed
inputs
Machinery,
buildings,
land
Emissions
Economic activity
Profit,
income
Mode of
production
Product
Output
Demand
= initial point of impact
Waste
Policy filters
07-11-2002
When Removing Subsidies Benefits the
Environment
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The basic template: resource productivity
Decrease (E+W) / P
• End-of-pipe
• Inputs / P
Conditionality
impacts these
ratios differently
Natural
resources
Energy
Materials
Machinery,
buildings,
land
07-11-2002
Emissions
Economic activity
Mode of
production
Product
Waste
When Removing Subsidies Benefits the
Environment
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Initial points of impact and degrees of freedom
!
Point of impact
“degrees of freedom”, left
Output
Modes of production
Profit, income
Production volume, Modes of production,
Other products,
X
X X
Variable inputs
X
Fixed inputs
Choice of inputs (unless...)
Demand
Production volume, Modes of production
X
07-11-2002
Strong link between subsidy (removal) and the environment
When Removing Subsidies Benefits the
Environment
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Differences between removing subsidies to
variable inputs compared to fixed ones
!
Variable inputs
Fixed inputs
• Immediate effect on
production volumes
• Effects on new investments
• Continuous effects on
resource productivity
• Discontinuous effects on
resource productivity
• Always “right”
• Sometimes “wrong”
• Direct link with substance
flows; backward linkages
• Indirect link with substance
flows; backward linkages
07-11-2002
When Removing Subsidies Benefits the
Environment
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To be expected effects of subsidy removal
!
Point of impact
Output
Variable inputs
Short term effects
Lower production
Exit
Lower production
Exit
Fixed inputs
Profit and income
Demand
07-11-2002
Long term effects
Lower production
Exit
Removal of lock-in
Exit
Removal of lock-in
Exit
Exit, less innovation (?)
Lower production
Exit
When Removing Subsidies Benefits the
Environment
Lower production
Exit
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Flow chart behind the checklist
Description of the subsidy
Policy filter effective
yes
no
Benign alternatives available
no
yes
Conditionality leads to higher
volumes
no
yes
Concentration of market power
Subsidy
removal not
likely to be
environmentally
beneficial
yes
Effects are
indeterminate
no
Subsidy removal likely to
benefit the environment
07-11-2002
When Removing Subsidies Benefits the
Environment
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Structure of the checklist (1)
Policy filter effective
Effectiveness
Enforcement
Removal with the subsidy
07-11-2002
When Removing Subsidies Benefits the
Environment
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Structure of the checklist (2)
Benign alternatives available
What alternatives
Forward and backward linkages
Environmental profiles
Present and future
07-11-2002
When Removing Subsidies Benefits the
Environment
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Structure of the checklist (3)
Conditionality leads to higher
volumes
Size of the subsidy
Duration of the subsidy
Elasticities of demand
and supply
Backward and forward
linkages
•
•
•
•
•
Conditionality
Output
Variable costs
Fixed costs
Profit and income
Demand
Environmental profiles
Long term, short term,
exit and entry
07-11-2002
Present and future
When Removing Subsidies Benefits the
Environment
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Structure of the checklist (4)
Concentration of market power
07-11-2002
Degree of concentraion
When Removing Subsidies Benefits the
Environment
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Concluding remarks
1. It is political economy; economic analysis is just a tool
2. The checklist only yields a preliminary ranking
It cannot replace more detailed analyses
3. Hopefully the reasoning behind the checklist helps to structure
our thinking on the environmental effects of subsidy removal
4. Why don’t we try the checklist, the proof of the pudding is in the
eating
07-11-2002
When Removing Subsidies Benefits the
Environment
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