Subsidies and the Environment

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

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

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

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

5. Definition and Measurement: Agriculture • 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

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

7. Definition and Measurement:Fisheries • 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.

8. Definition and Measurement: Forests • “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 • “Price wedge”: Gap between domestic prices and world prices for raw logs used by domestic processors

9. 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. • “Price wedge”: Differences between actual prices and reference prices that would obtain in an undistorted market can be aggregated across energy products.

10. Definition and Measurement:Transport • 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. • “Marginal social cost internalisation”: Failure by a government-supported transport system to internalise marginal social costs (congestion, accidents, environmental impacts).

11. Data Availability and Gaps: Agriculture • 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. • WTO Trade Policy Reviews provide scattered additional data for disaggregation of domestic support.

12. Data Availability and Gaps:Irrigation Water • 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.

13. Data Availability and Gaps:Fisheries • OECD: annual estimates of seven types of financial transfers to OECD countries, 1996-1999, 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. • WTO notifications: small proportion of subsidies reported, many without cost or benefit data.

14. Data Availability and Gaps:Forests • “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. • “Price wedge” : Estimates for seven countries

15. Data Availability and Gaps:Energy • Budgetary, price and tax subsidies: No systematic collection of data for OECD or non-OECD countries—except 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.

16. Data Availability and Gaps:Transport • “Cost recovery” • No systematic data collection • EEA has published figures for all 12 members of European Community as of 1991. • “Marginal social cost internalisation”: • EU is adopting unified national transport accounts based on common methodologies • UK, Germany and Switzerland accounts completed

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

18. Measuring Environmental Impacts: Irrigation Water • 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.

19. Measuring Environmental Impacts: Fisheries • 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. • In overcapitalised fisheries, subsidy reduction may not result in actual effort reduction.

20. Measuring Environmental Impacts: Forests • 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. • Case studies suggest underpricing of logs leads to inefficient processing and overcapacity, but no cross-country quantitative studies.

21. Measuring Environmental Impacts: 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 • Redistribution of production • World price effects • Long term effects of fuel substitution

22. Measuring Environmental Impacts: Transport • 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. • U.S. studies simulate impacts of efficient pricing on mode choice, total passenger travel and pollutant emissions for a given regional transport system.