THE WORK OF THE OECD ON ENVIRONMENTALLY HARMFUL SUBSIDIES

1
THE WORK OF THE OECD ON ENVIRONMENTALLY HARMFUL
SUBSIDIES

• Anthony Cox
• OECD
• Environmentally Harmful Subsidies and Ways to
  Eliminate Them
• Budapest, 2-3 September 2004

2

• OECD WORK ON EHS
• Long history of subsidy analysis
• Ministerial mandate 2001
• Horizontal work program
• Final report later in 2004

3

• SUBSIDIES ARE PERVASIVE
• OECD transfers at least USD 400 billion a year to
  different sectors
• Equal to around 1.9 of GDP
• Distort prices and resource allocation decisions
• Negative effects on the environment
• Not all subsidies are environmentally harmful
• But they are generally inefficient policy tools

4

• HOW MUCH?
• Agriculture USD 318 billion in 2002
• 1.2 of GDP in OECD countries
• Fisheries USD 6 billion a year
• 20 of the value of landings
• European road and rail transport USD 40 billion
  a year
• Energy sector USD 20-30 billion a year
• Limited comparability, patchy coverage
• Certainly an underestimate

5

• WHAT IS AN ENVIRONMENTALLY HARMFUL SUBSIDY?
• Starting point all subsidies are potentially
  environmentally harmful
• Defining a subsidy is itself difficult
• WTO ASCM is the only legally recognised
  definition
• Border protection
• Government infrastructure
• Uninternalised externalities
• Common reporting framework desirable

6

• CHECKLIST APPROACH
• Identify those subsidies whose removal would lead
  to an environmental improvement, other things
  being equal

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• CHECKLIST APPROACH
• Two stage process
• Identify effects of subsidies on consumer and
  producer decisions
• Identify the link between these decisions and the
  environment
• Policy filter
• Technology lock-in
• Conditionality of subsidy
• Provides a quick scan
• .. and not a substitute for detailed analysis

8
Flow chart of the checklist
Economic activity suspected to be linked to
certain deteriorating environmental values
Sectoral analysis reveals strong forward or
backward linkages
No
No
Do not consider removing subsidies on
environmental grounds
No
Yes
Yes
No
Sectoral analysis (including linked sectors)
reveals the economic activity or its linkages
being subsidised, other policy measures being in
place, such as policy filters
Yes
Subsidy removal might benefit the environment
CHECKLIST
Description of all relevant subsidies
Yes
Policy filter effectively limits environmental
damage
Subsidy removal is not likely to have significant
environmental benefits
No
No
More benign alternatives are available now or
emerging
No
Yes
No
Does conditionality lead to higher production
No
Yes
9

• CASE STUDIES
• Checklist applied to a number of sectors
• Agriculture
• Fisheries
• Transport
• Energy
• Water

10

• LESSONS LEARNED FROM CASE STUDIES
• Significant scope for reducing environmentally
  harmful subsidies.
• Checklist is a useful policy tool
• Improved transparency
• Identifies data problems
• Sectoral characteristics
• Resource endowments and environmental profiles

11

• IDENTIFYING POLICY OBSTACLES
• Special interests and rent-seeking behaviour
• False perceptions and fear of change
• Concerns over competitiveness and distribution
• Lack of transparency
• Legal, technical and administrative constraints
• Perception of entitlement to subsidies

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• OPPORTUNITIES FOR REFORM
• Challenge the mantras
• Identify policy options for meeting goals
• Improve targeting and design of subsidy programs
• Exploit windows of policy opportunity
• Increased transparency
• Remove structural impediments
• Transitional measures
• Competition policy reform

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THE WORK OF THE OECD ON ENVIRONMENTALLY HARMFUL
SUBSIDIES

• Anthony Cox
• OECD
• Environmentally Harmful Subsidies and Ways to
  Eliminate Them
• Budapest, 2-3 September 2004