Public Subsidies and Policy Failures 1 Building a Grand Deal to phase out harmful energy subsidies André de Moor INFORSE-Europe Seminar, 29 November 2002, Brussels Sustainable Energy for Europe

Public Subsidies and Policy Failures 2 Public Subsidies and Policy Failures: How Subsidies Distort the Natural Environment, Equity and Trade, and how to Reform them Cees van Beers André de Moor Delft University ofRIVM Netherlands Institute of TechnologyPublic Health and the EnvironmentThe Netherlands Edward Elgar Publishers, Cheltenham UK, November 2001

Public Subsidies and Policy Failures 3 Key Messages: 4 Current energy subsidies run up to $240 billion a year worldwide, mostly targeted towards fossil fuels 4 Current support ineffective in serving policy objective of promoting growth. 4 At the same time, there are large negative effects on the natural environment and international trade 4 Scope to close a Grand Deal on phasing out fossil fuel subsidies and phasing in sustainable energy while serving the UNFCCC 4 Ingredients for reform: transparency, de-coupling, institutional enhancement

Public Subsidies and Policy Failures 4 Cost of energy subsidies ( , $US bln/yr) a) Subsidies for electricity in OECD countries have been attributed to fossil fuels according the shares. b) Subsidies from non-payments and bail out operations have not been attributed to energy sources. Source: de Moor (2001), van Beers and de Moor (2001)

Public Subsidies and Policy Failures 5 Motives and impacts of energy subsidies: economic potential for reform 4 Effectiveness and Efficiency  energy subsidies do not encourage economic growth  eliminating energy subsidies in non-OECD countries stimulates global economic growth 4 Environmental consequences  eliminating energy subsidies in non-OECD countries reduces global CO 2 by 5%  other studies show that eliminating all energy subsidies reduces global CO 2 by 8% 4 Conclusion: economic potential for reform

Public Subsidies and Policy Failures 6 Political Potential for Reform: the Promise of Jo’burg 4 Broad support at WSSD for phasing out harmful subsidies 4 Subsidy reform in energy (article 19):  Article 19p: “Policies to reduce market distortions... by removing market distortions, including restructuring taxation and phasing out harmful subsidies, where they exist, to reflect their environmental impacts, with such policies taking fully into account the specific needs and conditions of developing countries with the aim of minimizing the possible adverse impacts on their development”  Article 19q: “Take action, where appropriate, to phase out subsidies in this area that inhibit sustainable development, taking fully into account the specific conditions and different levels of development of individual countries and considering their adverse effect, particularly on developing countries”

Public Subsidies and Policy Failures 7 Lock-in mechanisms and subsidy addiction 4 Economic Barriers  rent-seeking: adjust behaviour to maximise subsidy revenues  subsidies affect incentives, get capitalised and lead to subsidy addiction 4 Institutional and Political Barriers  get support from political groups or consumers  cover up favours  stick into rules inherited from the past 4 International Barriers  prisoners dilemma: reluctant to act alone  fear of losing competitiveness  fear that benefits of reform may leak away

Public Subsidies and Policy Failures 8 4 Integrate a Grand Deal in broader political vision  initiate transitions  clear and feasible targets and timetables 4 Good governance  improve transparency in policies and institutions  develop common and clear subsidy methodology and information networks  de–link subsidies from prices and taxes 4 Identify winners and losers  address all interests  use benefits to create win-win situations and compensate losers  introduce a Subsidy Reform Fund Building a Partnership on Subsidy Reform:

Public Subsidies and Policy Failures 9 Building a Partnership on Subsidy Reform: 4 Enhance effective and transparent institutional structures:  link subsidies to trade relations: WTO versus UNFCCC  stronger and broader mandate for a WTO-‘plus’ to include domestic subsidies (f.e. in energy, forestry, fisheries sectors)  more transparency through independent Decision Panel and allowing for ‘outside’ complaints 4 Wanted: political leadership  OECD in the strongest economic and financial position

Public Subsidies and Policy Failures 10 Grand Deal on energy, forestry and climate change 4 The Deal is simple:  ban OECD fossil fuel subsidies in exchange for financial and technology assistance in removing non–OECD subsidies and commitment to Kyoto Protocol  or in concrete terms: phase out fossil fuel subsidies and phase in sustainable energy 4 Why?  major step for OECD countries in realizing Kyoto targets  financial and technology transfers to non–OECD countries  motivate US re–involvement in international climate policy (?)  minimal implications for international trade  environmental benefits 4 Include forestry subsidies: as sinks are in CDM, necessary to prevent double perversity

Public Subsidies and Policy Failures 11 Key priorities for energy subsidy reform 4 Improve and strengthen subsidy transparency 4 Develop a clear methodology to identify and assess energy subsidies 4 Set up information networks 4 Initiate a process for (gradual) reform of ineffective and harmful energy subsidies 4 Work towards an international Grand Deal:  common methodology  clear and feasible targets and timetables  identify winners and losers  use benefits for creating win-win situations  introduce a Subsidy Reform Fund