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

1. Environmentally Harmful Subsidies (EHS):
priorities and quantification
Patrick ten Brink
Senior Fellow and Head of IEEP Brussels Office
ptenbrink@ieep.eu
with contributions from Samuela Bassi, Policy Analyst, IEEP
& building on IEEP et al (2007) Reforming Environmentally Harmful Subsidies
www.ieep.eu
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
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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)
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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: http://srforums.prosoundweb.com/ Source: www.wisebread.com
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: www.treehugger.com
Source: www.oilism.com
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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
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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: http://srforums.prosoundweb.com/
– 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
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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
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Source: www.wisebread.com

11. Examples of EHS reform: agriculture
Afforestation measures in
Extremadura & Andalucia, Spain
Source: www.mlahanas.de
• 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
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12. Examples of EHS reform: fisheries
Subsidies to high seas bottom trawl (HSBT) fleets
Source: www.treehugger.com
• 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.
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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
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• 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.
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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)
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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: www.oilism.com
pollution/clean up and damage to ecosystems
>> incentive to avoid damage less than it
should be
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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
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tomorrow’s priorities”
http://ec.europa.eu/environment/nature/biodiversity/economics/index_en.htm

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.
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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.
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Tomorrow’s subsidies should not reflect yesterday’s priorities

22. Thank you
Patrick ten Brink
ptenbrink@ieep.eu www.ieep.eu
IEEP is an independent not for profit institute dedicated to advancing an
environmentally sustainable Europe through policy analysis, development and
dissemination.
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