Patrick ten brink of IEEP EHS Identification Assessment 9 Nov 2010 Vienna
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 protectionwww.ieep.eu Vienna 9 November 2010
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 2
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
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
Presentation overviewThe 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
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 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 spillsDirect 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
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 effectsSource: building on Sumaiia and Pauly 2007
Subsidies size - a snapshotAggregate subsidy estimates for selected economic sectors Over $ 1 trillion per year in Subsidies Sector RegionAgriculture 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$50 bn/year (Myers & Kent 2002) Source TEEB for policy Makers - Chapter 6 www.teebweb.orgMost sensible use of funds? Reform win-wins ? eg budget, climate, biodiversity?Need identification of subsidies, assessment of potential benefits of reform
“Imaginary public goods of avoidedpublic bads” - Biofuels Early stated ambitions: helping avoid climate change – avoiding a public bad. Subsidies in many forms launched US$ 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....?
The OECD tools… The „quick scan‟ model (OECD, 1998)The „checklist‟ (Pieters, 2003) 1. Features Scan 2. Incidental ImpactsIntegrated Assessment 3. Long-Term Effectiveness 4. Policy Reform: 14 impacts of various reform scenarios?
…the Quickscan “Is the support likely to have a negative impact on the environment?” Impact on economy Policy filter Assimilative capacity of envOECD, 1998 Source: OECD, 2005
…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)
…and the Integrated Assessment 1. Features ScanAnalysis of the • Objectives of the subsidy (economic/social/environmental)?economic, social and • Effectiveness analysis: Are objectivesenvironmental achieved?impacts of the • Cost-effectiveness: More cost-effective alternatives to meet objectives?subsidy(incl. design and 2. Incidental Impactssocial impacts) 3. Long-Term Effectiveness 4. Policy Reform: impacts of various reform scenarios?
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) 18
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 19
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 lossDemand 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 leads to higher resource use? YES
…Selected findings from Integrated Assessment Effectiveness Justification: support farmers’ income1. 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 effectiveness3. Long-Term Effectiveness Social aspects: Subsidy benefits all farmers (short term), no distinction on4. 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
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 24
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 subsidy1) 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 toimpact? 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 ntal3) What is the sectoral policycontext? 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 emergingsubsidy? 4) Social, economic 4) What are the and other impacts facilitating factors for5) Are there insurmountable YES success?obstacles to reform? Subsidy removal likely to 5) Long term benefit the environment effectiveness6) Are data available?·List of potentially ·Insights on validity of subsidy ·Outline of alternative policiesenvironmentally harmful rationale ·Analysis of impacts ofsubsidies for assessment ·Outline of trade offs between alternative policies·Insights on political feasibility environmental, social and ·List of compensatoryof subsidy reform economic impacts of subsidy measures 25
Developing a road map for subsidy reform: a checklistIs 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 influencingconsumption, production levels) and if so, what is it?3 Does it lead to significant or potentially excessive resource use (e.g. water use leading toloss 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 longtime? 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 otherpurposes? 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 bythe 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 orless money be used to achieve the same objectives with lesser environmental impacts? Source TEEB for policy Makers - Chapter 6 www.teebweb.org
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 israrely 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 demand16 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
Communicating results: EHS ID card Indicator AssessmentShort 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/rangeKey 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
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
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 AccordWhat new opportunities/plans in Austria and by Austria (eg in context of EU 30 budgets discussion / future of CP, CAP, CFP) ?
Lessons & recommendationsIn the short run, Countries should:• Establish transparent and comprehensive subsidy inventories,• Assess their effectiveness against stated objectives, their cost-efficiency, and their environmental impactsand, 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!
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