Developing a roadmap for subsidy
reform: Methodological steps and policy
challenges
Patrick ten Brink (IEEP)
Discussion session: Environmentally Harmful Subsidies (EHS)
EEEN-forum, Feb 9, 2012 (14.00h-15.30h)
Leuven
`
Presentation Structure




Introduction: state of play & what are seen as EHSs ?
Developing the road map: the steps
EHS Assessment: an example
Lessons, recommendations and way forward
Introduction: state of play & what
are seen as EHSs ?
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 - biodiversity
 Energy & transport – climate & energy security & technological lock in, budgets
 Water (full cost recovery) – resource availability/efficiency/innovation
 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
Examples of EHS
Coal mining
direct transfers,
little liability for damage
Fishing
Grants, guarantees, tax
exemptions + no liability for damage
Water use
Non resource pricing
Source: Guardian
Source: www.treehugger.com
to sea bed et al
Source: www.wisebread.com
Agriculture
Direct payments + no liability
for eutrophication damage et al
Deforestation
– no resource costs, no
compensation for damage
Energy: oil spills
Only partial liability /
compensation for damage
Source: www.oilism.com
Source: http://srforums.prosoundweb.com/
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 about subsidies; what are
considered subsidies may also depend on context (eg state aid, WTO etc)
Categorising EHS: different economic types
#
Economic type
On-budget subsidies
1
Direct transfer of funds
Specific subsidy type covered
Direct transfer of funds
Potential direct transfers of funds, e.g. covering liabilities
2
Provision of goods or
services (other than
infrastructure)
Government provides goods or services other than general infrastructure
Government directs other bodies to do any of the above
Off-budget subsidies
3
Income or price support
Income or price support
4
Foregone government
revenues
Government revenues due are foregone or not collected, e.g. tax credits
Tax exemptions and rebates
Accelerated depreciation allowances
5
Preferential treatment
Preferential market access
Regulatory support mechanisms
Selective exemptions from government standards
6
Provision of
infrastructure
Implicit subsidies, e.g. resulting from the provision of infrastructure
7
Lack of full cost pricing
Implicit income transfers resulting from a lack of full cost pricing
Implicit income transfers resulting from non-internalisation of externalities
Resource rent for foregone natural resources
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 building), 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);
•
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
•
Even subsidies apparently benign but may have negative effects, depending (e.g.
subsidies for modernisation of fleet + decommissioning)
(e.g. RES)
Subsidies, intention and design
• Subsidies generally launched with “good” intentions
–
for food provision (e.g. CAP and CFP),
–
for energy security (e.g. coal subsidies),
–
to support industries/technologies (e.g. nuclear, renewables),
–
for competitiveness (e.g. exemptions to taxes for energy intense industries),
–
for poverty alleviation and social concerns (e.g. food, water, fuel, electricity subsidies),
–
to address climate change (e g. biofuels; renewables, energy conservation) and
–
for the environment (e.g. PES HVN)
•
Objectives can become out-dated (e.g. food provision, energy security and coal).
•
There can be a major difference between stated objectives and actual
effects (e.g. 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
Subsidies size - a snapshot
Aggregate subsidy estimates for selected economic sectors
Over $ 1 trillion per year in Subsidies
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$50 bn/year (Myers & Kent 2002)
Source TEEB for policy Makers - Chapter 6 www.teebweb.org
Most sensible use of funds? Reform win-wins ? eg budget, climate, biodiversity?
Need identification of subsidies, assessment of potential benefits of reform
“Imaginary public goods of avoided public bads” Biofuels
 Early stated ambitions: helping avoid climate
change – avoiding a public bad.
 Subsidies in many forms launched
 US$ 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....?
We need an inventory and
assessment of EHS to identify
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
Develop a road map for EHS Reform
Source: building on Sumaiia and Pauly 2007
Developing the Road map
Subsidy reform flowchart
1. Screening of subsidies
2. Potential for reform
1) Is there a threat to
biodiversity?
5) Does the subsidy fulfil its
objectives?
2) Is there a subsidy?
6) Does the subsidy lead to
socio-economic issues?
3) Does the subsidy lead to
potential direct/ indirect
biodiversity impacts?
3. Reform scenarios
4. Opportunities for action
9) Are there suitable reform
option(s)?
12) Is there a window of
opportunity for reform?
10) What are its/their
expected costs and benefits
(economic, environmental,
social)?
13) Is there a policy
champion to drive reform?
7) Are there more benign
alternatives?
14) Is there public/ political
support to reform?
4) Are these potential
impacts limited by existing
‘policy filters’?
8) Are there obstacles or
pressures to reform?
11) Is the reform
understandable, practical
and enforceable?
Subsidy removal or reform
can be timely & successful
Identification of
potentially biodiversity
harmful subsidies
Subsidy removal or reform
is needed
Analysis
of
alternative
policies
&
compensatory
measures
It merits inclusion on
roadmap for reform
Source Bassi and ten Brink 2012 forthcoming building on TEEB 2011 and Valsecchi et al 2009
Subsidy reform: quick scan & traffic lights
Select one of the three options (delete others)
No
1) Is there a threat to biodiversity?
Yes, although relatively small
Yes, significant threat
No
2) Is there a subsidy?
Yes, although relatively small
Yes, substantial subsidy
No or very limited impact
3) Does the subsidy lead to a
potential significant negative
impact on biodiversity?
Some potential impacts
4) Do existing ‘policy filters’
avoid/mitigate its impacts?
Yes, so the overall impact is limited or very
limited
Some mitigation, but not sufficient to fully
offset the subsidy impact(s)
No or ineffective policy filters
Significant potential impacts
No
Therefore: Is there a subsidy that is
harmful for biodiversity?
Yes although limited effect
Yes
The above result is a communication tool. Depth of analysis behind
answers depends on need – proportionality principle.
Building on the OECD tools…
1. The ‘quick scan’ model (OECD, 1998)
2. The ‘checklist’ (Pieters, 2003)
1.
Features Scan
2. Incidental Impacts
3. Integrated Assessment
3. Long-Term
Effectiveness
4. Policy Reform:
impacts of various
reform scenarios?
1. …the Quick-scan
“Is the support likely to have a negative impact on the
environment?”
Impact on economy
Policy filter
Assimilative capacity of env
Use elasticities, econometrics, modelling
Source: OECD, 2005 OECD, 1998
2. …the Checklist
“Is the subsidy
removal likely to
have significant
environmental
benefits?”
Economic activity linked
to deteriorating
environmental values.
no
Sectoral Analysis
reveals strong forward
or backward linkages.
yes
no
yes
Sectoral Analysis reveals:
• The economic activity or its linkages are subsidised.
• Other policy measures in place (policy filters)
no
Do not
consider
removing
subsidies on
environment
al grounds.
yes
Subsidy removal might benefit the environment
Checklist
Description of all relevant subsidies
yes
Policy filter limits environmental damage
no
no
More benign alternatives are available or emerging
yes
no
Conditionally lead to higher production
Subsidy
removal is
not likely to
have a
significant
environment
al benefit.
yes
Subsidy removal might benefit the environment
(Pieters, 2003)
3. …and the Integrated Assessment
Analysis of the
economic, social and
environmental
impacts of the
subsidy
(incl. design and
social impacts)
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?
Similar to impact assessment; in cases modelling
approach adopted
Subsidy reform flowchart – integrates OECD tools
1. Screening of subsidies
2. Potential for reform
1) Is there a threat to
biodiversity?
5) Does the subsidy fulfil its
objectives?
2) Is there a subsidy?
6) Does the subsidy lead to
socio-economic issues?
3) Does the subsidy lead to
potential direct/ indirect
biodiversity impacts?
3. Reform scenarios
4. Opportunities for action
9) Are there suitable reform
option(s)?
12) Is there a window of
opportunity for reform?
10) What are its/their
expected costs and benefits
(economic, environmental,
social)?
13) Is there a policy
champion to drive reform?
7) Are there more benign
alternatives?
14) Is there public/ political
support to reform?
4) Are these potential
impacts limited by existing
‘policy filters’?
8) Are there obstacles or
pressures to reform?
11) Is the reform
understandable, practical
and enforceable?
Subsidy removal or reform
can be timely & successful
Identification of
potentially biodiversity
harmful subsidies
Subsidy removal or reform
is needed
Analysis
of
alternative
policies
&
compensatory
measures
It merits inclusion on
roadmap for reform
Source Bassi and ten Brink 2012 forthcoming
Doing the assessment
Can start looking either at environmental problems, or at subsidies
Can do a quick scan assessment to develop an inventory of EHS that
could be contenders for being on the road map.
•
Someone with fair knowledge of the subsidy/sector/environmental problem
and/or with access to good data/reports can develop a first cut assessment
- eg traffic light assessment in a period of days per subsidy
•
This would be to create a first cut map, as an working tool
To move towards a formal roadmap would require careful quantitative
and stakeholder analysis
•
of the current effects of the subsidy (economic, social, environmental)
•
what the options for reform could usefully be (in light of potential
effectiveness, practicability, enforceability, understandability), and
•
what the likely benefits are. The latter is like doing an impact assessment,
and in cases may use models (though models don’t answer all questions).
Assessments – an example
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
23
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
Env impacts of irrigation:
 water overuse (between
20-70%),
 pollution (eg fertilizer use
20-50%),
 soil salination,
 biodiversity loss
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
… 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
More benign alternatives exist? YES
improved technology & monitoring
price signals/ volumetric rates
programmes for crop changes
compulsory water use (good) practices
Does the subsidy lead to higher
resource use? YES
…Selected findings from Integrated
Assessment
 Effectiveness
 Justification: support farmers’ income
1. Features Scan
•
Objectives of the subsidy
(economic/social/environme
ntal)?
•
Effectiveness analysis:
Are objectives achieved?
•
Cost-effectiveness: More
cost-effective alternatives to
meet objectives?
 Effect on budget: reduced public
revenues (~ 165 M€ in Spain)
2. Incidental Impacts
Long term effectiveness
3. Long-Term Effectiveness
4. Policy Reform: impacts of
various reform scenarios?
Incidental impacts
Environmental impacts
Social aspects: Subsidy benefits all
farmers (short term), no distinction on
wealth/needs
Affordability: Water demand can be
inelastic – impact on farmers income
Example of successful reform:
Guadalquivir area – higher fixed + variable
charge >> 30% water reduction; longer term
resource availability
Recommendations and Way
forward
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’ where environmentally-friendly
technologies / practices face a non-level playing field vis-à-vis subsidised
practice
 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)
 Systematic look within CP, CAP, CFP/EFF
 National efforts – FR, UK making use of tool (Others?)
 Global: 2010 commitment at CBD COP 10 Nagoya
 UNEP Green Economy Report. Expectations for Rio+20
 Opportunities: national debt cuts (eg Ireland, Portugal, others?)
 Mechanism for (most cost-effective) climate mitigation
 Mechanism for resource efficient Europe / EU 2020 context
(Resource efficiency road map et al)
30
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 for medium term (to 2014)
•
Design the reform process carefully: clear targets, transparent costs and benefits,
engagement with stakeholders, coordination among government bodies.
•
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!
Questions
1. What do you see as EHS in your countries that merit consideration for a
road map?
2. Which ones would your experience suggest merit urgent attention?
3. What lessons have you seen as regards identification and assessment of
EHS?
4. What methods have you applied?
5. How do you see a balance between quick scan and in-depth analysis?
6. What example of EHS reform have you come across and what enabled them
to take place?
7. Who could drive EHS Roadmap for reform in your countries?
+ of course the session questions
Thank you
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