Subsidy Reform - TEEB insights - by Patrick ten Brink of IEEP 11 January 2010

The real cost of subsidies: outlook from TEEB – aligning today’s costs to tomorrow’s priorities Patrick ten Brink TEEB for Policy Makers Co-ordinator Head of Brussels Office Institute for European Environmental Policy (IEEP) Environmentally harmful subsidies – a real threat to biodiversity Policy Dialogue Brussels 11th January 2010 Representation of the State of North Rhine-Westphalia to the European Union Building on and borrowing from the work & insights of the wider TEEB team and contributors of supporting studies, call for evidence and other contributions 3/18/2010 1

Presentation overview 1. Introduction 1. TEEB ambitions and process and approach 2. Subsidies – types and issues 3. Overview of size of subsidies 2. Subsidies, their impacts & costs 3. Policy response needs & tools for a way forward

TEEB’s Genesis and progress “Potsdam Initiative – Biological Diversity 2010” 1) The economic significance of the global loss of biological diversity TEEB Interim Report CBD COP-9, Bonn, May 2008 TEEB Climate Issues Update Strömstadt September 2009. TEEB for Policy Makers Brussels 13 Nov. 2009

TEEB’s goals 1. Demonstrate the value to the economy, to society/individuals and wider environment – what we have & what we risk losing. 2. Underline the urgency of action, benefits of action (opportunities), analyse costs of action 3. Show how the value of ecosystem services and biodiversity can be assessed and where it can be useful 4. Show how we (can) take into account the value of ecosystem services and biodiversity in our decisions and choices, 5. Identify / support solutions 6. Address the needs of policy-makers, local administrators, business and citizens (the “end-users”) Source: adapted from Pavan Sukhdev

TEEB D1: TEEB for International and National Policy-Makers Part I: The Global Biodiversity Crisis and Framework for Policy Response Ch1 The global biodiversity crisis and related policy challenge Ch2 Framework and guiding principles for the policy response Part II: Measuring what we Manage: Information & Tools for Decision-Making Ch3 Measuring to Manage our Natural Capital Ch4 Recognised the Value of Biodiversity Part III: Solutions: Instruments and measures Ch5 Rewarding benefits of Ecosystems and Biodiversity Ch6 Reforming Subsidies Ch7 Incorporating the costs of ecosystem and biodiversity loss Ch8 The Value of Protected Areas Ch9 Direct Investments in natural capital and ecosystem restoration Part IV: Synthesis Ch10 Conclusions and recommendations Available on http://www.teebweb.org/

The context

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)

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

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)

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

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

Aggregate subsidy estimates for selected economic sectors Over $ 1 trillion per year in Subsidies Most sensible use of funds? Or potential for reform?

Presentation overview 1. Introduction 1. TEEB ambitions and process and approach 2. Subsidies – types and issues 3. Overview of size of subsidies 2. Subsidies, their impacts & costs - some examples 3. Policy response needs & tools for a way forward

Fisheries Subsidies Fisheries subsidies ~ US$30-34 bn/yr: only ~7bn “good”, 20bn “bad” “Small” compared to other subsidies – Agriculture, transport, energy Large relative to sector (~ US$ 90bn/yr landed value) and Major impacts (stock collapse, species composition, damage to ecosystems) Figure: State of exploitation of selected stock / species groups, 2004 28% over-exploited, 52% fully exploited, remaining 20% moderately exploited or underexploited (some low margin/uneconomic) (FAO 2006 and FAO 2008)

Subsidies & “Sunken Billions” Contribution of fisheries harvest sector to the global economy ~US$ 50billion/ year less than it could be (World Bank and FAO 2008) Non optimal resource management, driven, in part, by subsidies leading to “too many fishers chasing too few fish”

Global Loss of Fisheries… …Human Welfare Impact Half of wild marine fisheries are fully exploited, with a further quarter already over- exploited – limits of substitutability at risk : $ 80-100 billion income from the sector at risk : est. 27 million jobs but most important of all….. We are fishing down the food web 1 bn people rely on fish as their to ever smaller species… main source of animal protein, especially in developing countries. Reduce and/or reform/redirect subsidies as part of portfolio of instruments. One opportunity: redirect funds to support marine protected areas (MPAs) Source: Ben ten Brink presentation, Workshop: The Economics of the Global Loss of Biological Diversity 5-6 March ‘08, Brussels. Original source: Pauly (UBC)

Agricultural subsidy impacts 1. Agricultural subsidies are among the largest and merit special attention given sector’s critical role in food security and development. 2. Wide range of impacts: - eg from intensification: 1. Loss of non-target species (eg pollinators) 2. Reduced habitat diversity 3. Loss of biodiversity-rich extensive farmlands 4. Hydrological changes due to draining/irrigation 5. Water pollution (surface waters, groundwaters) 6. Eutrophication of freshwater and marine ecosystems 7. Soil degradation and erosion 3. Biodiversity impacts and also loss of ecosystem services 4. Costs to public purse + losses to range of parties from ESS losses + complications for other policies (Eg climate change)

Since ‘60s - Europhication caused “dead- zones”: Regularly ~405 coastal dead-zones

Reforming agricultural subsidies – long complex road Reduce / shift of funds away from production based allocations - “decoupling” / move from 1st to 2nd pillar funding Better targeting: “cross compliance” - linking payments to range of standards Reduce payments to those that don’t “need” them : “modulation” Payments for provision of ecosystem services (PES) for high nature value ag. Progress is being made, but too slow / not enough. Wide range of additional costs to others due to ag practice – encourage progress? increased water pre-treatment needs for water companies payments by water companies (eg Vittel) to preserve mineral water quality eutrophication – fish loss, tourism impacts et al increased costs for pollination given loss of natural pollinators. loss of public goods (biodiversity, clean water, landscape) Need move to public payments for public goods Need to strengthen application of polluter pays principle

Biofuels An example of complex relationship between renewable energy subsidies and environmentally damaging impacts US$ 11/yr (‘06: US+EU+Canada) (GSI 2007, OECD 2008) Cost of reducing CO2 ~ US$ 960 to 1700/tCO2 equiv. (OECD 2008) Not cost effective cf EU-ETS: ~ US $ 30-50 / t Where biofuels fom converted forrest lands – there may be net increase of emissions Effect opposite to stated objective. Urgent need to review biofuels policies / instruments

Presentation overview 1. Introduction 1. TEEB ambitions and process and approach 2. Subsidies – types and issues 3. Overview of size of subsidies 2. Subsidies, their impacts & costs - some examples 3. Policy response needs & tools for a way forward

TEEB and subsidies general observations • 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 • Opportunities other areas: energy, water (full cost recovery), transport • 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

Reforming EHS • A lot of rhetorical and even policy support for EHS Reform - in practice progress is generally slow (with exceptions). • Subsidies are launched for a reason (eg food or energy security, economic sector survival) – in some cases the reason is no longer valid. • Subsidies create activity and people can be dependant on that activity.. Also vested interests / “culture of entitlement” • The level of subsidies, their impacts and the potential benefits from reform are not always (easily) clarified – some subsidies are hidden and impacts not immediate or direct, complexities of interactions, impacts mitigated by policies or complementary measures. • There is also often too little commitment to transparency and insufficient assessment of where policy attention is needed, possible and would offer benefits.

Yet 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, poverty, PES, energy saving),

Organising reform The design of the reform process is a critical success factor. It needs to take the political economy and other barriers into consideration, and often hinges on the following important conditions: • The policy objectives must be defined transparently and rigorously; • The distribution of benefits and costs must be transparently identified; • Government must engage broadly with stakeholders + often need “whole of government approach”; • Government should set ambitious endpoints, but, depending on circumstances, timetables for reform may be cautious; • Windows of opportunity should be seized, and • Fiscal transfers are often required to facilitate the transition process (OECD 2007) – and other flanking measures (eg retraining)

Enabling Factors for EHS reform some first lessons…. • Improving the quality and comprehensiveness of available subsidy data and analytical information is important for successful subsidy reform. • Transparency is a key precondition for a well-informed public debate on current subsidy programmes, and can provide a powerful motivating force for change • 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 / transition management: consider staging the reform & taking advantage of economically beneficial circumstances – take into account “affordability”

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, • Develop prioritized plans of action for subsidy removal or reform (inc. transition mg’t), for implementation at medium term (to 2020). • Windows of opportunity proactively and systematically seized. • Windows of opportunity should be created too - eg via road maps. >> Make good use of any funds liberated - both from reform itself, and from effect of the reform as a more level playing field may also reduce need for pro-environmental subsidies. A reform can save in two places…

Thank you 1. What do you see as critical issues to progress subsidy reform? 2. What practical insights have you on “enabling conditions” and “making it happen”? & What from your experience do you see as powerful and credible stories to illustrate successful reform? Patrick ten`Brink ptenbrink@ieep.eu IEEP is an independent, not-for-profit institute dedicated to the analysis, understanding and promotion of policies for a sustainable environment in Europe 3/18/2010 28

Subsidy Reform - TEEB insights - by Patrick ten Brink of IEEP 11 January 2010

by Patrick ten Brink of the Institute for European Environmental Policy

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