Developing a roadmap for subsidy reform: Methodological steps and policy challenges

1. Developing a roadmap for subsidy reform: Methodological steps and policy challenges Patrick ten Brink (IEEP) Discussion session: Environmentally Harmful Subsidies (EHS) EEEN-forum, Feb 9, 2012 (14.00h-15.30h) Leuven `

2. Presentation Structure • Introduction: state of play & what are seen as EHSs ? • Developing the road map: the steps • EHS Assessment: an example • Lessons, recommendations and way forward

3. Introduction: state of play & what are seen as EHSs ?

4. Subsidies general introduction • The last decade has witnessed increasing, and in some cases considerable,efforts for the phasing out or reform of subsidies in various countries • Yet, the overall level of subsidies remains remarkable • Globally, agricultural & fisheries subsidies of particular concern - biodiversity • Energy & transport – climate & energy security & technological lock in, budgets • Water (full cost recovery) – resource availability/efficiency/innovation • Not all subsidies are bad for the environment • Even ‘green’ subsidies can still distort economies and markets, and may not be well-targeted or cost-effective • Phasing out ineffective subsidies frees up funds which can bere-directed to areas with more pressing funding needs

5. Examples of EHS Fishing Grants, guarantees, tax exemptions + no liability for damage to sea bed et al Coal mining direct transfers, little liability for damage Water use Non resource pricing Source: www.treehugger.com Source: http://srforums.prosoundweb.com/ Source: Guardian Source: www.wisebread.com Deforestation – no resource costs, no compensation for damage Energy: oil spills Only partial liability / compensation for damage Agriculture Direct payments + no liability for eutrophication damage et al Source: www.oilism.com

6. Subsidies come in different shapes and forms • Direct transfers of funds (e.g. fossil fuels, roads, ship capacity)or potential direct transfers (e.g. nuclear energy and liability) • Income or price support (e.g. agricultural goods and water) • Tax credits (e.g. land donation/use restrictions) • Exemptions and rebates (e.g. fuels) • Low interest loans and guarantees (e.g. fish fleet expansion/modernisation) • Preferential treatment and use of regulatory support mechanisms(e.g. demand quotas; feed in tariffs) • Implicit income transfers by not pricing goods or services at full provisioning cost (e.g. water, energy) or value(e.g. access to fisheries) • Arguably also, implicit income transfer by not paying for pollution damage (e.g. oil spills) and other impacts(e.g. IAS, damage to ecosystems) People may mean different things when talking about subsidies; what are considered subsidies may also depend on context (eg state aid, WTO etc)

7. Categorising EHS: different economic types

8. Subsidies • Some are “on-budget” (visible in government budgets) others “off-budget” (not accounted in national budgets) – transparency varies • (Negative) Impacts on the environment can be direct(e.g. subsidies to convert forest to biofuels, road building in biodiversity rich areas) or indirect(e.g. tax breaks; climate change effects) • Impacts can be immediate(convert land, road build, oil spill) ,later / spread over many years(eg fisher capacity support, fossil fuel subsidies) • Impacts can occur locally(subsidy for road building),nationally (eg subsidy for hydro), internationally (eg resource extraction impacts ), globally (eg climate change) • Other impacts less clearly negative (e.g. hydro power; or subsidies with policy filters); • Some generate environmental benefits (e.g. payments to farmers for ecosystem services) • Some redress market failures (e.g. rail) or level the economic playing field (e.g. RES) • Even subsidies apparently benign but may have negative effects, depending (e.g. subsidies for modernisation of fleet + decommissioning)

9. Subsidies, intention and design • Subsidies generally launched with “good” intentions • for food provision (e.g. CAP and CFP), • for energy security (e.g. coal subsidies), • to support industries/technologies (e.g. nuclear, renewables), • for competitiveness (e.g. exemptions to taxes for energy intense industries), • for poverty alleviation and social concerns (e.g. food, water, fuel, electricity subsidies), • to address climate change (e g. biofuels; renewables, energy conservation) and • for the environment (e.g. PES HVN) • Objectives can become out-dated (e.g. food provision, energy security and coal). • There can be a major difference between stated objectives and actual effects (e.g. biofuels). • Some subsidies are “blunt” instruments for the objective – either wrong instrument or badly designed • They can have many (unforeseen at the time)impacts on the environment

10. Subsidies size - a snapshot Aggregate subsidy estimates for selected economic sectors Over $ 1 trillion per year in Subsidies Source TEEB for policy Makers - Chapter 6 www.teebweb.org Most sensible use of funds? Reform win-wins ? eg budget, climate, biodiversity? Need identification of subsidies, assessment of potential benefits of reform

11. “Imaginary public goods of avoided public bads” - Biofuels • Early stated ambitions: helping avoid climate change – avoiding a public bad. • Subsidies in many forms launched • US$ 11bn/yr (‘06: US+EU+Canada)(GSI 2007, OECD 2008) • Cost of reducing CO2 ~ US$ 960 to 1700/tCO2 equiv. (OECD 2008) Not cost effective • Where biofuels fom converted forrest lands – there may be net increase of emissions Effect opposite to stated objective. Could a careful assessment earlier have avoided this....?

12. We need an inventory and assessment of EHS to identify the “good” still relevant, targeted, effective, positive impacts, few negative effects the “bad” no longer relevant, waste of money, important negative effects the “ugly” badly designed – eg inefficient, badly targeted, potential for negative effects Develop a road map for EHS Reform Source: building on Sumaiia and Pauly 2007

13. Developing the Road map

14. Subsidy reform flowchart 1. Screening of subsidies 2. Potential for reform 4. Opportunities for action 3. Reform scenarios 5) Does the subsidy fulfil its objectives? 1) Is there a threat to biodiversity? 12) Is there a window of opportunity for reform? 9) Are there suitable reform option(s)? 2) Is there a subsidy? 6) Does the subsidy lead to socio-economic issues? 10) What are its/their expected costs and benefits (economic, environmental, social)? 13) Is there a policy champion to drive reform? 3) Does the subsidy lead to potential direct/ indirect biodiversity impacts? 7) Are there more benign alternatives? 14) Is there public/ political support to reform? 11) Is the reform understandable, practical and enforceable? 4) Are these potential impacts limited by existing ‘policy filters’? 8) Are there obstacles or pressures to reform? Subsidy removal or reform can be timely & successful Subsidy removal or reform is needed Analysis of alternative policies & compensatory measures Identification of potentially biodiversity harmful subsidies It merits inclusion on roadmap for reform Source Bassi and ten Brink 2012 forthcoming building on TEEB 2011 and Valsecchi et al 2009

15. Subsidy reform: quick scan & traffic lights The above result is a communication tool. Depth of analysis behind answers depends on need – proportionality principle.

16. Building on the OECD tools… 1. The ‘quick scan’ model (OECD, 1998) 2. The ‘checklist’ (Pieters, 2003) • 1. Features Scan • 2. Incidental Impacts • 3. Long-Term Effectiveness • 4. Policy Reform: impacts of various reform scenarios? 3. Integrated Assessment

17. 1. …the Quick-scan “Is the support likely to have a negative impact on the environment?” Impact on economy Assimilative capacity of env Policy filter Use elasticities, econometrics, modelling Source: OECD, 2005 OECD, 1998

18. Economic activity linked to deteriorating environmental values. Sectoral Analysis reveals strong forward or backward linkages. Do not consider removing subsidies on environmental grounds. no no yes yes • Sectoral Analysis reveals: • The economic activity or its linkages are subsidised. • Other policy measures in place (policy filters) no yes Subsidy removal might benefit the environment Checklist Description of all relevant subsidies Subsidy removal is not likely to have a significant environmental benefit. yes Policy filter limits environmental damage no no More benign alternatives are available or emerging yes no Conditionally lead to higher production yes Subsidy removal might benefit the environment 2. …the Checklist “Is the subsidy removal likely to have significant environmental benefits?” (Pieters, 2003)

19. 3. …and the Integrated Assessment Analysis of the economic, social and environmental impacts of the subsidy (incl. design and social impacts) • 1. Features Scan • Objectives of the subsidy (economic/social/environmental)? • Effectiveness analysis: Are objectives achieved? • Cost-effectiveness: More cost-effective alternatives to meet objectives? • 2. Incidental Impacts • 3. Long-Term Effectiveness • 4. Policy Reform: impacts of various reform scenarios? Similar to impact assessment; in cases modelling approach adopted

20. Subsidy reform flowchart – integrates OECD tools 1. Screening of subsidies 2. Potential for reform 4. Opportunities for action 3. Reform scenarios 5) Does the subsidy fulfil its objectives? 1) Is there a threat to biodiversity? 12) Is there a window of opportunity for reform? 9) Are there suitable reform option(s)? 2) Is there a subsidy? 6) Does the subsidy lead to socio-economic issues? 10) What are its/their expected costs and benefits (economic, environmental, social)? 13) Is there a policy champion to drive reform? 3) Does the subsidy lead to potential direct/ indirect biodiversity impacts? 7) Are there more benign alternatives? 14) Is there public/ political support to reform? 11) Is the reform understandable, practical and enforceable? 4) Are these potential impacts limited by existing ‘policy filters’? 8) Are there obstacles or pressures to reform? Subsidy removal or reform can be timely & successful Subsidy removal or reform is needed Analysis of alternative policies & compensatory measures Identification of potentially biodiversity harmful subsidies It merits inclusion on roadmap for reform Source Bassi and ten Brink 2012 forthcoming

21. Doing the assessment • Can start looking either at environmental problems, or at subsidies • Can do a quick scan assessment to develop an inventory of EHS that could be contenders for being on the road map. • Someone with fair knowledge of the subsidy/sector/environmental problem and/or with access to good data/reports can develop a first cut assessment - eg traffic light assessment in a period of days per subsidy • This would be to create a first cut map, as an working tool • To move towards a formal roadmap would require careful quantitative and stakeholder analysis • of the current effects of the subsidy (economic, social, environmental) • what the options for reform could usefully be (in light of potential effectiveness, practicability, enforceability, understandability), and • what the likely benefits are. The latter is like doing an impact assessment, and in cases may use models (though models don’t answer all questions).

22. Assessments – an example

23. e.g. Irrigation EHS in Spain • What is the subsidy about? • Low water prices for farmers in EU >> contributed to increased water use in agriculture in past 2 decades (EEA, 2009) • In Spain - low irrigation water pricing in many areas: ie below full cost recovery, sometimes below financial costs • Price often based on plot size (ha) rather than water volume (m3) • Type: Off budget subsidy to input (water) • Conditionality: water consumption for agriculture • Objective: stimulate agriculture, support farmers income • Case study area: Pisuerga Valley + some conclusions on whole of Spain

24. Spain: Main findings of EHS report • Water scarcity a major issue in Spain (& in Med countries in general) – expected to worsen in the medium-long term • Infrastructures: Irrigation techniques inefficient, old water infrastructures, substantial leakage and wastage • Sector: Irrigation responsible for about 70-80% water use • Water pricing : ~0.01€/m3 Pisuerga Valley (2003), average ~0.05 €/m3 Spain (2007) • No link to consumption, low price >> no incentive to use water efficiently >> overuse of scarce resource

25. ...example: Spanish water pricing Size:Pisuerga Valley: between 2.1 and 3.5 M €/yr. Spain ~ 165 M€/yr • Env impacts of irrigation: • water overuse (between 20-70%), • pollution (eg fertilizer use 20-50%), • soil salination, • biodiversity loss • Demand elasticity: • generally low but depends on local conditions (eg climate, soil) & water price • change in crops requires time • different effects on farmers’ income and water consumption

26. … Selected findings from Checklist • Policy filter limits damage? NO/little • License/water trading >> some efficiency but limited # of transactions; issues of transparency and enforcement • Some subsidies todrip irrigation/modernisation >> increased consumption (eg due to crop changes) – technology alone not enough! • CAP cross-compliance: some signals of reduced water use • More benign alternatives exist?YES • improved technology & monitoring • price signals/ volumetric rates • programmes for crop changes • compulsory water use (good) practices Does the subsidy lead to higher resource use?YES

27. …Selected findings from Integrated Assessment • 1. Features Scan • Objectives of the subsidy (economic/social/environmental)? • Effectiveness analysis: Are objectives achieved? • Cost-effectiveness: More cost-effective alternatives to meet objectives? • 2. Incidental Impacts • 3. Long-Term Effectiveness • 4. Policy Reform: impacts of various reform scenarios? • Effectiveness • Justification: support farmers’ income • Effect on budget:reduced public revenues (~ 165 M€ in Spain) • Incidental impacts • Environmental impacts • Long term effectiveness • Social aspects:Subsidy benefits all farmers (short term), no distinction on wealth/needs • Affordability:Water demand can be inelastic – impact on farmers income • Example of successful reform: • Guadalquivir area – higher fixed + variable charge >> 30% water reduction; longer term resource availability

28. Recommendations and Way forward

29. Potential benefits of EHS reform • Reduce the use of resource intensive inputs, thus saving resources (eg water, energy) & causing less pollution (hence savings on policy measures) • Increase competitivenessby exposing subsidised sectors to competition and supporting future competitiveness by resource availability • Level the playing fields / fix market distortionsby making resource prices reflect resource value, and making polluters pay for their pollution • Overcome technological ‘lock-in’ where environmentally-friendly technologies / practices face a non-level playing field vis-à-vis subsidised practice • Release public funding, enabling governments to divert budget to other areas - e.g. education, energy saving and/ or reducing debt

30. New Momentum for Reforms(?) • New commitment to subsidy reform (Pittsburgh – G20) • Increasing call for subsidy reform in EU • Renewed effort on promised EHS roadmap • Contributions to discussions on the financial perspective (budget) • Systematic look within CP, CAP, CFP/EFF • National efforts – FR, UK making use of tool (Others?) • Global: 2010 commitment at CBD COP 10 Nagoya • UNEP Green Economy Report. Expectations for Rio+20 • Opportunities:national debt cuts (eg Ireland, Portugal, others?) • Mechanism for (most cost-effective) climate mitigation • Mechanism for resource efficient Europe / EU 2020 context (Resource efficiency road map et al)

31. Lessons & recommendations In the short run, Countries should: • Establish transparent and comprehensive subsidy inventories, • Assess their effectiveness against stated objectives, their cost-efficiency, and their environmental impacts and, based on these assessments: • Create & seize windows of opportunity (eg financial crisis, need to curb public spending) • Develop prioritized plans of actionfor subsidy removal/reform for medium term (to 2014) • Design the reform process carefully:clear targets, transparent costs and benefits, engagement with stakeholders, coordination among government bodies. • Implement transition management:stage the reform, take into account “affordability” • Subsidy reform does not happen in isolation. Make reform part of a broader package of instruments (EFR+), including policies to mitigate adverse impacts of subsidy removal. >> Make a good use of funds liberated!

32. Questions • What do you see as EHS in your countries that merit consideration for a road map? • Which ones would your experience suggest merit urgent attention? • What lessons have you seen as regards identification and assessment of EHS? • What methods have you applied? • How do you see a balance between quick scan and in-depth analysis? • What example of EHS reform have you come across and what enabled them to take place? • Who could drive EHS Roadmap for reform in your countries? + of course the session questions

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