When Removing Subsidies Benefits the Environment

1. When Removing Subsidies Benefits the Environment DEVELOPING A CHECKLIST BASED ON THE CONDITIONALITY OF SUBSIDIES OECD, 7,8 NOVEMBER 2002, Jan Pieters When Removing Subsidies Benefits the Environment

2. ! Warning All subsidies are unique Generalisations seldom apply to all individual subsidies The challenge to developing a checklist To identify those items that indicate subsidies for which removal is beneficial for the environment. When Removing Subsidies Benefits the Environment

3. Why a Checklist • Ranking options for removal according to their possible beneficial environmental effects • Need to focus, since subsidies are hard to remove • Avoiding unjustifiable claims as much as possible • Subsidy removal is worthwhile for efficiency reasons • The environment motive may be better served by environmental policy When Removing Subsidies Benefits the Environment

4. Environmental managementInfrastructure EconomicTechnological Site specific: Env. Impact Analysis Environmental values Environmental effects Environment – Subsidy Removal linkages Autonomous change Pollution; rates of exploitation Subsidy removal Changes in competitiveness Policy Filter Use of the checklist Assimilative capacity Long list of subsidies to be removed on environmental grounds When Removing Subsidies Benefits the Environment

5. Important factors (1) • Policy filters • Environmental management regimes (environmental requirements, zoning, quota) • Restrictions because of infrastructure • The lock-in effect • Dependent on their conditionality, subsidies cast technology in stone, especially if granted to capital intensive industries • Benign can become malign, depending on ‘autonomous’ technical change outside the subsidised firms Permanent flux When Removing Subsidies Benefits the Environment

6. Important factors (2) • Effects on the choice of: • Products • Volumes of production • Modes of production • Input uses • Environmental profiles of clusters of technologies • Favoured technology compared to its alternatives • Forward and backward linkages Permanent Flux When Removing Subsidies Benefits the Environment

7. = initial point of impact Emissions Natural resources Variable inputs Economic activity Energy Product Materials Machinery,buildings,land Fixed inputs Waste Policy filters The basic template: initial points of impact Profit, income Demand Mode of production Output When Removing Subsidies Benefits the Environment

8. Emissions Natural resources Economic activity Energy Product Materials Mode of production Machinery,buildings,land Waste The basic template: resource productivity Decrease (E+W) / P Conditionality impacts these ratios differently • End-of-pipe • Inputs / P When Removing Subsidies Benefits the Environment

9. ! Initial points of impact and degrees of freedom X X X X X Strong link between subsidy (removal) and the environment When Removing Subsidies Benefits the Environment

10. Variable inputs Immediate effect on production volumes Continuous effects on resource productivity Always “right” Direct link with substance flows; backward linkages Fixed inputs Effects on new investments Discontinuous effects on resource productivity Sometimes “wrong” Indirect link with substance flows; backward linkages ! Differences between removing subsidies to variable inputs compared to fixed ones When Removing Subsidies Benefits the Environment

11. ! To be expected effects of subsidy removal When Removing Subsidies Benefits the Environment

12. yes no no yes no yes yes no Flow chart behind the checklist Description of the subsidy Subsidy removal not likely to be environmentally beneficial Policy filter effective Benign alternatives available Conditionality leads to higher volumes Effects are indeterminate Concentration of market power Subsidy removal likely to benefit the environment When Removing Subsidies Benefits the Environment

13. Structure of the checklist (1) Policy filter effective Effectiveness Enforcement Removal with the subsidy When Removing Subsidies Benefits the Environment

14. Structure of the checklist (2) Benign alternatives available What alternatives Forward and backward linkages Environmental profiles Present and future When Removing Subsidies Benefits the Environment

15. Structure of the checklist (3) Conditionality leads to higher volumes Size of the subsidy Duration of the subsidy • Conditionality • Output • Variable costs • Fixed costs • Profit and income • Demand Elasticities of demand and supply Backward and forward linkages Environmental profiles Long term, short term, exit and entry Present and future When Removing Subsidies Benefits the Environment

16. Structure of the checklist (4) Concentration of market power Degree of concentraion When Removing Subsidies Benefits the Environment

17. Concluding remarks • It is political economy; economic analysis is just a tool • The checklist only yields a preliminary ranking It cannot replace more detailed analyses • Hopefully the reasoning behind the checklist helps to structure our thinking on the environmental effects of subsidy removal • Why don’t we try the checklist, the proof of the pudding is in the eating When Removing Subsidies Benefits the Environment