Subsidies and the Environment An Overview of the State of Knowledge Gareth Porter OECD Workshop on Environmentally Harmful Subsidies November 7-8, 2002

Purposes of the Study Identify different ways in which subsidies are defined and measured in each sector Identify different ways in which subsidies are defined and measured in each sector Document the availability of data on subsidies at the country level Document the availability of data on subsidies at the country level Identify significant gaps in the data on subsidies and needed research Identify significant gaps in the data on subsidies and needed research Identify methodologies for measuring the environmental impacts of subsidies Identify methodologies for measuring the environmental impacts of subsidies

Sectoral Scope of the Study Agriculture Agriculture Irrigation Water Irrigation Water Fisheries Fisheries Forests Forests Energy Energy Transport Transport

Types of Subsidies Included Budgetary transfers Budgetary transfers Market price support Market price support Subsidised and concessional credit Subsidised and concessional credit Underpriced materials, water and energy Underpriced materials, water and energy Forgone tax revenues Forgone tax revenues Foregone resource rents Foregone resource rents Uninternalised externalities Uninternalised externalities

Definition and Measurement: Agriculture Producer Support Estimate (PSE): Producer Support Estimate (PSE): All budgetary transfers + Market Price Support (based on price gap) Aggregate Measure of Support (AMS): only programs under WTO disciplines included Aggregate Measure of Support (AMS): only programs under WTO disciplines included

Definition and Measurement: Irrigation Water Cost Recovery: Public expenditures that benefit irrigators net of revenues from water charges. Cost Recovery: Public expenditures that benefit irrigators net of revenues from water charges. Resource rent: Difference between subsidised waters net economic benefit to the irrigator and charged price for water per unit. Resource rent: Difference between subsidised waters net economic benefit to the irrigator and charged price for water per unit.

Definition and Measurement: Fisheries Aggregate of all financial transfers benefiting fishing industries, including estimated MPS Aggregate of all financial transfers benefiting fishing industries, including estimated MPS PSEs can be calculated for sector as a whole but not for specific species, as it is for specific crops. PSEs can be calculated for sector as a whole but not for specific species, as it is for specific crops.

Definition and Measurement: Forests Cost recovery: Budgetary outlays for services benefiting forest companies net of revenues from those companies. Cost recovery: Budgetary outlays for services benefiting forest companies net of revenues from those companies. Resource rent: Commercial value of timber minus costs of bringing it to market, including forest charges and cost of attracting investment Resource rent: Commercial value of timber minus costs of bringing it to market, including forest charges and cost of attracting investment Price wedge: Gap between domestic prices and world prices for raw logs used by domestic processors Price wedge: Gap between domestic prices and world prices for raw logs used by domestic processors

Definition and Measurement: Energy Aggregate of all budgetary transfers, price support and tax subsidies: totals provide a rough idea of government support for both producers and consumers. Aggregate of all budgetary transfers, price support and tax subsidies: totals provide a rough idea of government support for both producers and consumers. Price wedge: Differences between actual prices and reference prices that would obtain in an undistorted market can be aggregated across energy products. Price wedge: Differences between actual prices and reference prices that would obtain in an undistorted market can be aggregated across energy products.

Definition and Measurement: Transport Unit of analysis is a mode of transport (car, train, bus). Unit of analysis is a mode of transport (car, train, bus). Cost recovery: The government expenditures (construction or maintenance or both) on a transportation system net of revenues from that system. Cost recovery: The government expenditures (construction or maintenance or both) on a transportation system net of revenues from that system. Marginal social cost internalisation: Failure by a government-supported transport system to internalise marginal social costs (congestion, accidents, environmental impacts). Marginal social cost internalisation: Failure by a government-supported transport system to internalise marginal social costs (congestion, accidents, environmental impacts).

Data Availability and Gaps: Agriculture Data on budgetary support by type of payment and MPS available for OECD countries Data on budgetary support by type of payment and MPS available for OECD countries Data on domestic support in non-OECD countries not disaggregated by type of support. Data on domestic support in non-OECD countries not disaggregated by type of support. WTO Trade Policy Reviews provide scattered additional data for disaggregation of domestic support. WTO Trade Policy Reviews provide scattered additional data for disaggregation of domestic support.

Data Availability and Gaps: Irrigation Water Cost Recovery Data: Cost Recovery Data: –No systematic data collection; –very rough OECD estimates for recovery of operations and maintenance and capital costs for 15 OECD countries; –World Bank estimates for 3 non-OECD countries. Resource Rent Data: Calculated for only a few non-OECD countries, using different methods. Resource Rent Data: Calculated for only a few non-OECD countries, using different methods.

Data Availability and Gaps: Fisheries OECD: annual estimates of seven types of financial transfers to OECD countries, , but no price support and some holes. OECD: annual estimates of seven types of financial transfers to OECD countries, , but no price support and some holes. APEC: country-by-country estimates for all APEC member economies, with detailed inventory of all identifiable programs, but many without cost data. Includes aquaculture. APEC: country-by-country estimates for all APEC member economies, with detailed inventory of all identifiable programs, but many without cost data. Includes aquaculture. WTO notifications: small proportion of subsidies reported, many without cost or benefit data. WTO notifications: small proportion of subsidies reported, many without cost or benefit data.

Data Availability and Gaps: Forests Cost recovery: No systematic data collection, very few estimates. Cost recovery: No systematic data collection, very few estimates. Resource rent: Relatively large number of estimates, mainly for tropical countries, using different methods of calculation. Resource rent: Relatively large number of estimates, mainly for tropical countries, using different methods of calculation. Price wedge : Estimates for seven countries Price wedge : Estimates for seven countries

Data Availability and Gaps: Energy Budgetary, price and tax subsidies: No systematic collection of data for OECD or non-OECD countriesexcept for coal. Budgetary, price and tax subsidies: No systematic collection of data for OECD or non-OECD countriesexcept for coal. Price Wedge: IEA, OECD and World Bank have estimated subsidies for specific energy products for all OECD countries and 9 non-OECD countries. Price Wedge: IEA, OECD and World Bank have estimated subsidies for specific energy products for all OECD countries and 9 non-OECD countries.

Data Availability and Gaps: Transport Cost recovery Cost recovery –No systematic data collection –EEA has published figures for all 12 members of European Community as of Marginal social cost internalisation: Marginal social cost internalisation: –EU is adopting unified national transport accounts based on common methodologies –UK, Germany and Switzerland accounts completed

Measuring Environmental Impacts: Agriculture Statistical correlation between PSEs and environmental indicators across countries and over time Statistical correlation between PSEs and environmental indicators across countries and over time Simulations of trade liberalizations impacts on environmental indictors using mathematical models Simulations of trade liberalizations impacts on environmental indictors using mathematical models Use of demand curves for fertilizer use to predict demand reduction from different subsidy levels Use of demand curves for fertilizer use to predict demand reduction from different subsidy levels

Measuring Environmental Impacts: Irrigation Water Mathematical Programming Models can simulate the results of different pricing scenarios aimed at achieving water use reduction targets. Mathematical Programming Models can simulate the results of different pricing scenarios aimed at achieving water use reduction targets. Calculation of net benefit (marginal value product) as basis for setting prices that are highly elastic. Calculation of net benefit (marginal value product) as basis for setting prices that are highly elastic.

Measuring Environmental Impacts: Fisheries No methodology to predict impact in change of levels or types of subsidies on fish stocks or capacity levels. No methodology to predict impact in change of levels or types of subsidies on fish stocks or capacity levels. Dynamic mathematical modeling or econometric estimation methods could be used. Dynamic mathematical modeling or econometric estimation methods could be used. In overcapitalised fisheries, subsidy reduction may not result in actual effort reduction. In overcapitalised fisheries, subsidy reduction may not result in actual effort reduction.

Measuring Environmental Impacts: Forests No cross-country research on budgetary transfers or resource rent impact on harvesting. No cross-country research on budgetary transfers or resource rent impact on harvesting. One empirical study on linkage between royalty levels and cutting suggests harvesting rates of high-value species are royalty-sensitive. One empirical study on linkage between royalty levels and cutting suggests harvesting rates of high-value species are royalty-sensitive. Case studies suggest underpricing of logs leads to inefficient processing and overcapacity, but no cross-country quantitative studies. Case studies suggest underpricing of logs leads to inefficient processing and overcapacity, but no cross-country quantitative studies.

Measuring Environmental Impacts: Energy When price wedge subsidises consumers, impact can be estimated from price elasticity of energy When price wedge subsidises consumers, impact can be estimated from price elasticity of energy Modeling international agreements can estimate impacts of subsidy removal if they take into account Modeling international agreements can estimate impacts of subsidy removal if they take into account –Redistribution of production –World price effects –Long term effects of fuel substitution

Measuring Environmental Impacts: Transport Price elasticities of transport demand can be used to model short- and long-term responses to price changes. Price elasticities of transport demand can be used to model short- and long-term responses to price changes. European studies use impact pathway approach to construct simplified air pollution functions. European studies use impact pathway approach to construct simplified air pollution functions. U.S. studies simulate impacts of efficient pricing on mode choice, total passenger travel and pollutant emissions for a given regional transport system. U.S. studies simulate impacts of efficient pricing on mode choice, total passenger travel and pollutant emissions for a given regional transport system.