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Environmentally Harmful Subsidies (EHS): Definition, Quantification, Impact and Rationale Patrick ten BrinkSenior Fellow and Head of Brussels Officewww.ieep.euBased on report prepared by IEEP, FEEM, Ecologic and IVM for DG Environmentandthanks to Ian Skinner, Carolina Valsecchi and Samuela BassiAd Hoc Working Group on EHS7 December 2006BrusselsSubsidies: Different definitions for different purposes For accounting and trade purposes narrower definitions are used (as easier to quantify), e.g.‘… 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 …’(Euro system of accounts)OECD definition (for policy context):‘… government action that confers an advantage on consumers or producers in order to supplement their income or lower their costs…’ (2005)Mapping definitions to ‘subsidies’ (extract)Type of SubsidyDefinitions of a subsidyESAWTOOECDPietersOn-budget subsidiesXXXXDirect transfer of funds, e.g. grants XXXPotential direct transfers of funds, e.g. covering liabilitiesOff-budget subsidiesXXXIncome or price supportXXXGovernment revenues due are foregone or not collected, e.g. tax creditsXXTax exemptions and rebatesXXRegulatory support mechanisms, e.g. feed-in tariffs, demand quotasXImplicit income transfers resulting from a lack of full cost pricingPractical Definition of an EHS Possible definition of EHS (adapted from OECD, 1998 and 2005):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.• OECD focusing on identifying practical ways to achieve reform rather than further refining the definition (as set out in OECD’s presentation)Quantification of EHS• Arguably no need to refine definition further as we already have lists of subsidies• Few systematic attempts to quantify subsidies across sectors and countries (OECD progress)• For energy most comprehensive is EEA (2004): Benefits of EHS reform - theory•EEA (2004)/OECD (2005): significant benefits – ‘win-win’situations – from subsidy removal•Benefits arise from reduction in adverse impacts•Adverse impacts arise from a number of linkages:• Effects on production levels• Effects on emissions/resource depletion• Effects on environmental quality• Indirect burdens on the economy from inefficient allocation of government monies.Subsidies generally support production, thus leading to higher (inefficient) levels of inputs to the production process, resulting in higher (inefficient) levels of resource use and pollutionBenefits of EHS reform - detailsReforming EHS has the potential to:• Reduce production levels, thus saving resources, including energy, and causing less pollution• Increase competitiveness by exposing subsidised sectors to competition • Enable governments to spend more money on other areas (e.g. education), as no longer have to pay the subsidy• Overcome technological ‘lock-in’ whereby alternative, less established, and possibly more environmentally-friendly, technologies are unable to compete on an equal basis with the subsidised sectorBenefits of EHS reform - opportunities• Spending money that subsidises coal in Germany on renewables would lead to more innovation and a higher level of economic efficiency (UBA, 2003; Institute Applied Ecology, 2005)• Subsidising renewables or energy retrofits of buildings instead of coal in Germany could reduce CO2 emissions (UBA, 2003)• Removing subsidies in energy could (IEA, 1999):• Reduce energy consumption• Increase GDP through higher economic efficiency• Reduce emissions of CO2 and other pollutants • Removing coal and nuclear subsidies in the UK would reduce CO2 emissions (Michaelis, 1997) Overcoming the Arguments against ReformRemoving subsidies will…(or will it?)•… 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. Lessons for EHS reform• 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