Patrick ten brink of IEEP on Environmental Harmful Subsidies (EHS) Identification and Assessment 9 Nov 2010 Vienna

1. GBE ANNUAL CONFERENCE – Budapest, 8-9 July 2010
Environmentally Harmful Subsidies:
Identification and Assessment
Patrick ten Brink
Senior Fellow & Head of Brussels Office, IEEP
and thanks also to Samuela Bassi, IEEP
Ecological tax reform and Phasing out environmental
harmful subsidies
How a budget reform can contribute to climate protection
www.ieep.eu
Vienna 9 November 2010

2. 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 - BD
• Energy & transport – climate & energy security & other impacts
• Water (full cost recovery) – re resource availability/efficiency
• 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
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3. Content of the presentation
 Studies supporting this presentation
 Subsidies – what they are, where they are used, scale
 Tools for identifying & assessing subsidies: OECD tools
 Assessing the tools – case example
 Integrating the tools – EHS reform tool
 The benefits of subsidy reform
 Lessons learned & recommendations
3

4. EHS Identification and Assessment
‘Environmentally Harmful Subsidies: Identification and
Assessment’ (Nov 2009) – for DG Env, CEC
Authors: IEEP, Ecologic, IVM + Claudia Dias Soares
Aim:
 Test OECD methodologies for EHS identification
and assessment
 Identify shortcoming and improvements
 Provide indicators for measurements &
benchmarking
Outputs:
 6 case studies testing the tools
 An integrated methodology + methodological
recommendations for policy makers on the use of the
tools + practical guidelines for EHS reform
 A ‘recipe book‟ for the calculation of the size of subsidy
 A communication tool for widespread communication–
‘subsidy identity card‟.
 Full report + case studies available at
http://www.ieep.eu/publications/pdfs/2010/EHS-Full-Report-12-01-10.pdf 4

5. Presentation overview
The Economics of Ecosystems and
Biodiversity in Policy Making
The Global Biodiversity Crisis
• Coral reef emergency
• Deforestation
• Loss of public goods…
Measuring what we manage
• BD & ecosystem service indicators
• Beyond GDP indicators et al
• Natural capital accounts
• Assessment and Valuation
Solutions: Policy Instruments
• Rewarding benefits: PES, IPES: REDD+,
ABS, tax relief & fiscal transfers, Markets, GPP
• Subsidy reform
• Addressing losses : Regulation legislation,
liability, taxes & charges, offsets, banking
• Protected Areas (PAs, MPAs)
• Investment in natural capital
http://www.teebweb.org/
Responding to the value of nature

6. The context

7. In the policy jungle – 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 of subsidies; what are
considered subsidies may also depend on context (eg state aid, WTO etc)

8. Examples of EHS
Coal mining Fishing
direct transfers, Grants, guarantees, tax Water use
little liability for damage exemptions + no liability for damage Non resource pricing
to sea bed et al
Source: www.treehugger.com
Source: Guardian
Source: www.wisebread.com
Source: http://srforums.prosoundweb.com/
Agriculture Deforestation Energy: oil spills
Direct payments + no liability – no resource costs, no Only partial liability /
for eutrophication damage et al compensation for damage compensation for damage
Source: www.oilism.com

9. 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 build), 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 – “it
depends”);
• 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 (e.g. renewable
energy subsidies)
• Even subsidies apparently benign but may have negative effects, depending (e.g.
subsidies for modernisation of fleet + decommissioning)

10. Subsidies, intention and design
• Subsidies generally launched with “good” intentions
– eg for food provision (CAP and CFP),
– for energy security (coal subsidies),
– to support industries/technologies (eg nuclear, renewables),
– for competitiveness (eg exemptions to taxes for energy intense industries),
– for poverty alleviation and social concerns (eg food, water, fuel, electricity subsidies),
– to address climate change (eg biofuels; renewables, energy conservation) and
– for the environment (PES HVN)
• Objectives can become outdated (eg food provision, energy security and coal).
• There can be a major difference between stated objectives and actual
effects (eg 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

11. A simple classification!
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
Source: building on Sumaiia and Pauly 2007

12. 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

13. “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....?

14. The OECD tools…
The „quick scan‟ model (OECD, 1998)
The „checklist‟ (Pieters, 2003)
1. Features Scan
2. Incidental Impacts
Integrated Assessment
3. Long-Term
Effectiveness
4. Policy Reform:
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impacts of various
reform scenarios?

15. …the Quickscan
“Is the support likely to have a negative impact on the
environment?”
Impact on economy Policy filter Assimilative capacity of env
OECD, 1998 Source: OECD, 2005

16. …the Checklist
Economic activity linked Sectoral Analysis
no no
to deteriorating reveals strong forward Do not
environmental values. or backward linkages. consider
“Is the subsidy yes yes removing
subsidies on
Sectoral Analysis reveals:
removal likely to • The economic activity or its linkages are subsidised.
no environment
al grounds.
• Other policy measures in place (policy filters)
have significant
yes
environmental Subsidy removal might benefit the environment
benefits?” Checklist
Description of all relevant subsidies
yes
Policy filter limits environmental damage Subsidy
removal is
no not likely to
no
More benign alternatives are available or emerging have a
significant
yes environment
no
Conditionally lead to higher production al benefit.
yes
Subsidy removal might benefit the environment
(Pieters, 2003)

17. …and the Integrated Assessment
1. Features Scan
Analysis of the • Objectives of the subsidy
(economic/social/environmental)?
economic, social and • Effectiveness analysis: Are objectives
environmental achieved?
impacts of the • Cost-effectiveness: More cost-effective
alternatives to meet objectives?
subsidy
(incl. design and 2. Incidental Impacts
social impacts) 3. Long-Term Effectiveness
4. Policy Reform: impacts of various reform
scenarios?

18. Assessing the tools: case studies
Energy
• VAT reduction for domestic energy consumption (UK)
• Fuel tax exemptions for biofuels (DE)
• Nuclear energy: decommissioning subsidies (DE)
Transport
• Fuel taxes: diesel vs petrol (AT, NL, UK)
• Company car taxation (NL)
Water use
• Irrigation water subsidies (ES)
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19. 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 (m 3)
 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
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20. 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

21. ...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

22. … 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 leads to
higher resource use? YES

23. …Selected findings from Integrated
Assessment
 Effectiveness
 Justification: support farmers’ income
1. Features Scan
 Effect on budget: reduced public
• Objectives of the subsidy
(economic/social/environme revenues (~ 165 M€ in Spain)
ntal)?
• Effectiveness analysis:
Are objectives achieved?
Incidental impacts
• Cost-effectiveness: More
cost-effective alternatives to Environmental impacts
meet objectives?
2. Incidental Impacts
Long term effectiveness
3. Long-Term Effectiveness Social aspects: Subsidy benefits all
farmers (short term), no distinction on
4. Policy Reform: impacts of wealth/needs
various reform scenarios?
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

24. Assessing the tools (2)
• Effectiveness - do they do the job ?
• User friendliness - are they easy to use ?
• Data intensity – are they practical / resource intensive
/ possible ?
• Gaps and links – do they cover everything important ?
YES!
Although: some overlaps & complements
>> Scope for integrated tool
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25. Integrating the tools: EHS reform tool
2. Checklist for assessing
the environmental
1. Screening benefits of EHS removal 3.Broader assessment 4. Analysis of reform
Recipe book on
the calculation of options
size of subsidy
1) Is there a subsidy?
1) Do the size and NO
conditionality of the 1) What are the subsidy 1) What are the possible
subsidy lead to higher Subsidy objectives? reform options?
2) Does the subsidy lead to a removal is
volumes?
significant environmental not likely to
impact? YES have NO
YES significant 2) Are they met? 2) What are the cost and
2) Policy filter limits environme (Effectiveness) benefits of each option?
environmental damage ntal
3) What is the sectoral policy
context? benefits
YES
NO
3) What are the potential
3) Cost effectiveness econ. and soc.
4) What is the economic and 3) More benign alternatives NO hardships?
social relevance of the available or emerging
subsidy?
4) Social, economic 4) What are the
and other impacts facilitating factors for
5) Are there insurmountable YES success?
obstacles to reform?
Subsidy removal likely to 5) Long term
benefit the environment effectiveness
6) Are data available?
·List of potentially ·Insights on validity of subsidy ·Outline of alternative policies
environmentally harmful rationale ·Analysis of impacts of
subsidies for assessment ·Outline of trade offs between alternative policies
·Insights on political feasibility environmental, social and ·List of compensatory
of subsidy reform economic impacts of subsidy measures 25

26. Developing a road map for subsidy reform: a checklist
Is there a subsidy causing damage to ecosystems and biodiversity?
1 Is there harm to the environment?
2 Is there a subsidy in place that contributes to environmental damage (e.g. by influencing
consumption, production levels) and if so, what is it?
3 Does it lead to significant or potentially excessive resource use (e.g. water use leading to
loss from aquifers; thresholds crossed; social impacts from reduced resource availability)?
4 Does it actually harm the environment or do policy filters avoid such pressure /
damage? (consider wider policy scenarios, regulations, quotas & enforcement / legality of activities).
Should the subsidy be the target of reform?
5 Does the subsidy fulfil its objectives (social/economic/environmental)? If not, it needs reform.
6 Does the subsidy lack an in-built review process and has it been in place for a long
time? If so, it is likely to need reform (i.e. it has already locked in inefficient practices).
7 Are there public calls for reform or removal or calls to use the funds for other
purposes? This is often an indicator for Points 8 and 9.
8 How does the subsidy distribute social welfare? If there are equity issues, consider reform.
9 Do any of the subsidy impacts lead to social or other economic losses?
10 Are there alternative less damaging technologies available which are hindered by
the subsidy’s existence? If so, it might be slowing innovation and creating technological ‘lock in’.
11 Does it offer value for money? Where there is still a valid rationale for the subsidy, could the same or
less money be used to achieve the same objectives with lesser environmental impacts?
Source TEEB for policy Makers - Chapter 6 www.teebweb.org

27. Reform scenarios (if subsidy reform has been identified as bringing potential benefits):
12 Would the reform be understandable for policy-makers and the public?
13 What would the reform entail (measure changed + compensatory measures)? It is
rarely a simple case of ‘getting rid of the subsidy altogether’.
14 Assess the costs and benefits of potential reform in more detail:
• potential environmental benefits: include thinking on benefits in other countries and
secondary effects, which can be perverse;
• potential economic costs: e.g. national (tax, GDP, etc), sector-wide, for winners and losers
within the sector (inc. new entrants/future industry), for consumers/citizens (affordability);
• potential social impacts: e.g. jobs, skills, availability of goods/services, health;
• potential competitiveness and innovation benefits;
• potential ethical benefits e.g. as regard fairness of income, appropriateness of support,
links to future generations;
• is the reform practical and enforceable?
To identify the likelihood of success and whether it is worthwhile using political capital for reform,
the following questions can be useful to set priorities for the road map.
Is there a policy/political opportunity for action?
15 Is there a window of opportunity? e.g. policy review process, evaluation, public demand
16 Is there a potential policy champion?
17 Will there be sufficient political capital for success?
Source TEEB for policy Makers - Chapter 6 www.teebweb.org

28. Communicating results: EHS ID card
Indicator Assessment
Short description Provide a brief narrative description (i.e. short paragraph). Please incorporate
the following technical aspects:
Budget type: On-budget ([type detail]); Off-budget ([type detail])
Conditionality: Production subsidy; Consumption subsidy; Non-conditional
support
Point(s) of impact: Input ([detail]); Output ([detail]); Income ([detail]); Profit
([detail]), Demand ([detail])
Objectives and design
Subsidy objectives (original rationale). Is the [list environmental, economic and social objectives])
original rationale still valid?
Key problems with subsidy design [max 1 sentence description]
Key social impacts
Who are the intended recipients of the subsidy?
Does it reach them?
What are the unintended social effects, if any?
Key environmental impacts
Nature and degree of environmental harm None/Small/Medium/Significant; AND when quantification is possible insert
value/range
Key economic impacts (e.g. size, impact on budget, trade, competition)
What are the intended economic outcomes? Are
they achieved?
What are the unintended economic impacts (e.g.
secondary indirect impacts?)
Estimated size of subsidy [unknown OR estimated value /range in EUR]
Reform scenarios
Is subsidy reform/removal likely to benefit the
environment? To what degree?
Are there available alternative policies and/or
alternative technologies to achieve the same
Are there possible compensatory measures
available to mitigate hardship on social groups
Are there calls for reform/removal? 28

29. 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‟ whereby more environmentally-friendly
technologies/practices are unable to compete on an equal basis with the
subsidised sector
• Release public funding, enabling governments to divert budget to other
areas - e.g. education, energy saving and/ or reducing debt

30. 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)?
– Mechanism for (most cost-effective) climate mitigation ?
– Mechanism for resource efficient Europe / EU 2020 context ?
• Opportunities – national debt cuts (eg UK?)
• National efforts – FR making use of tool
• Last month: new commitment also at the CBD COP 10
Nagoya in the Aichi Accord
What new opportunities/plans in Austria and by Austria (eg in context of EU
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budgets discussion / future of CP, CAP, CFP) ?

31. 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 at medium term (to 2020)
• Design the reform process carefully: clear targets, transparent costs and benefits,
engagement with stakeholders, coordination among gov’t bodies, etc
• 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!

32. Thank you.
For further information please contact:
ptenbrink@ieep.eu or sbassi@ieep.eu
‘IEEP is an independent not for profit institute dedicated to advancing an
environmentally sustainable Europe through policy analysis, development and
dissemination.’
www.ieep.eu 32