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IEEP PtB Presentation on Environmental Harmful Subisidies at FOS EEB Workshop 25 Sept 2008 Brussels
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IEEP PtB Presentation on Environmental Harmful Subisidies at FOS EEB Workshop 25 Sept 2008 Brussels


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IEEP PtB Presentation on Environmental Harmful Subisidies at FOS EEB Workshop 25 Sept 2008 Brussels

IEEP PtB Presentation on Environmental Harmful Subisidies at FOS EEB Workshop 25 Sept 2008 Brussels

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  • 1. Environmentally Harmful Subsidies (EHS): priorities and quantification Patrick ten Brink Senior Fellow and Head of IEEP Brussels Office 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
  • 2. 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 2
  • 3. 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) 3
  • 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)’ 4
  • 5. What are subsidies – in practice ? Type of Subsidy Definitions of a subsidy ESA WTO OECD Pieters On-budget subsidies Direct transfer of funds, e.g. grants X X X X Two broad categories Potential direct transfers of funds, X X X (OECD): e.g. covering liabilities Off-budget subsidies On budget: clearly visible in countries’ Income or price support X X X budgets or estimated from budget Government revenues due are X X X accounts foregone or not collected, e.g. tax credits Off budget: not accounted for in Tax exemptions and rebates X X budgets Regulatory support mechanisms, e.g. X X feed-in tariffs, demand quotas Implicit income transfers resulting X from a lack of full cost pricing 5 Source: based on OECD, 1998
  • 6. Examples of EHS Energy: Coal mining Aviation Water use direct transfers tax exemptions Non resource pricing Source: Guardian Source: Source: Fishing Energy: oil spills Agriculture tax exemptions + no Only partial liability / Direct payments + no liability for damage to compensation for liability for eutrophication sea bed) damage damage et al Source: Source: 6
  • 7. EHS impacts Impacts EHS Resource Lack of full water pricing >> water overexploitation/stress – damage to aquifers, less availability to other uses use / quality Fishery subsidies >> fish stock depletion, damage to marine env. Health Transport infrastructure, company cars >> air pollution subsidies to fossil fuels (eg coal) >> air pollution Climate Subsidies to fossil fuels (eg coal), road transport and aviation >> GHG emissions & global warming Biodiversity Agriculture subsidies, biofuels, fishing subsidies >> loss /damage to biodiversity and ecosystems, loss of ESS Social Transport subsidies > congestion, loss of social fabric Health, climate impacts on wellbeing; Loss of biodiversity >> loss of cultural /social value Budget All – less money available for other uses Economy Inefficient use of natural resources (over use), non-optimal use of budgets, market distortions, inappropriate price signals for long term 7 evolution of economy/markets.
  • 8. Quantification of subsidies n Few systematic attempts to quantify subsidies across sectors & countries io de om et (care needed in interpretation as these build on different assumptions/definitions) pl ce fr EU OECD/ world ur es so idi Energy EU-15: €29.3 bn in 2001 (EEA) – OECD: €15 bn/year (IEA) re bs excluding externalities m su ro it EU-15: VAT reduction for households: OECD: €60.6 bn/year (van Beers r f lic so p €7.3 bn (IEEP et al, 2007) and de Moor) ct im Transport EU-15: €240 bn in 2005– including World: €179-230 bn/year – of pa de im clu on/off budget & infrastructures (EEA) which EHS €130-175 bn (EEA) th in Agriculture EU-15: €106 bn (OECD) OECD: €340 bn in 1999 (OECD al T he NO EU-25: €14 bn (SAS) 2000) Biofuels EU: ~ €3.2 bn in 2006 (OECD Biofuels OECD: €10-12 bn in 2006 nd o la yd 2008) (OECD 2008) ta ll en era Fisheries EU-25: €0.5 bn (SAS) World:€19 bn of which €11 bn ‘bad nm en EU-25: ~ €2.2 bn (Sumalia 2007); subsidies’ (Sumaila 2007) ro e g EFF:€3.8bn for 2007-2013 OECD: €6bn in 1999 (OECD 2000) vi e s en Th Manufacturing EU-25: €36.3 bn in 2004 (EC) – OECD: €33.5 bn in 1993 (OECD) espec. steel and shipbuilding Water EU-10: €2.5 bn/year (IEEP et al, 2007) OECD: €33.6 bn (Myers and Kent) 8 – incl. irrigation SAS = State Aid Scoreboard
  • 9. Examples of EHS reform: energy Public support to coal mining in Germany • What: direct subsidy to support coal • Scale: biggest subsidies within DE Source: – 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 9
  • 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 10 Source:
  • 11. Examples of EHS reform: agriculture Afforestation measures in Extremadura & Andalucia, Spain Source: • 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 11
  • 12. Examples of EHS reform: fisheries Subsidies to high seas bottom trawl (HSBT) fleets Source: • 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 12
  • 13. 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 D. Pauly (UBC, Canada) • 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 13
  • 14. Examples of EHS reform: resource pricing Water pricing in Czech Republic Source: Guardian • 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. 14
  • 15. 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 15 • Aviation – eg no VAT, no excise taxes on kerosene - prices right?
  • 16. 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. 16
  • 17. 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) 17
  • 18. Priority areas for attention (3) • Water – prices do not reflect resource/production costs (eg low cost of water Source: Guardian for irrigation) >> water depletion/wrong crops. >> waste of financial resources Source: Henrik Larsen, DHI • Food – price not reflecting soil and resource depletion and water and carbon footprint and other resource damage. • Oil pollution - non coverage of costs of Source: pollution/clean up and damage to ecosystems >> incentive to avoid damage less than it should be 18
  • 19. Reforming EHS: potential benefits • 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 address 19 tomorrow’s priorities”
  • 20. 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. 20
  • 21. 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. 21 Tomorrow’s subsidies should not reflect yesterday’s priorities
  • 22. Thank you Patrick ten Brink IEEP is an independent not for profit institute dedicated to advancing an environmentally sustainable Europe through policy analysis, development and dissemination. Brussels Office London Office 55 Quai au Foin/Hooikaai 15 Queen Anne's Gate, B-1000 Brussels London SW1H 9BU Belgium UK Tel: +32 (0) 2738 7482 Tel: +44 (0)207 799 2244 Fax: +32 (0) 2732 4004 Fax: +44 (0)207 799 2600 22