Charles University in PragueEnvironment Center

Milan Ščasný

„State of play environmental harmful subsidies“

(Introduction for discussion)

EEB, CUEC and SSL seminarPrague, 21-22 November 2003

Why subsidise ?

Key objectives for subsidy and support measures introduction:

• protect (sectoral) employment and investment,

• safeguard domestic supply and reduce external dependency,

• stimulate (rural) economic development and growth,

• abate policy or support of the poor, • provide access to basic living conditions

Environmental harmful subsidies

„… all kinds of financial supports and regulations that are put in place to enhance the competitiveness of certain products, processes or regions, and that, together with the prevailing taxation regime, (unintentionally) discriminate against sound environmental practises.“

OECD, 1998, Part I, p. 7

Environmental harmful subsidies

• there is NO activity with ANY negative environmental effect

• negative effects on the environment refer to those levels of waste and emissions, incl. those of the previous and subsequent stages of Q/C, that are generated because a support measure is in place and which would not occur if no support was applied

• GOAL: how to satisfy a particular need with the lowest possible environmental impact ?

The linkages between SUPPORT and the ENVIRONMENT (by

OECD1998)Linkage 1:link between the support measure and volume and

composition of output

Linkage 2: impact of the changes in the level & composition

of output on actual pollution and waste levels

Linkage 3:damage done to the environment by the resulting

changes in pollution and waste levels

Classification of support measures

• immediate budgetary impact• condition of the support / points of impact

• support resulting in PRICE INCREASE of PRODUCERS (purchase of agri products)

• support leading to DECREASE of production COSTS (tax rebates for industry)

• support resulting in a decrease of final price paid by CONSUMERS (cross-subsidy of electricity)

• support that is not conditional on production or input levels

Effects on government budgetsPoints of impact /

support conditionality On-budget Off-budget

Outputs 1.Deficiency payments2.Sales premiums3.Preferential sales tax and VAT rates

1.Market price support- Border Protection- Market access restrictions- Government brokered sales contracts

Raw material

inputs

1.Support to material and energy input ( energy, fertilisers, irrigation water)2.Provision of infrastructure below long run marginal cost

1.Material and services in kind

C/L inputsEarnings

1.Support to non-material and non-energy inputs 2.Accelerated depreciation allowances3.Debt write off4.Support to R&D

1.Concessional credit 2.Royalty concessions3.Low rate of return req.4.Exemptions from stand. 5.Insufficient provision for future envi. liabilities

Sources: OECD (1998), adapted from Steenblik (1995) and Centre for International Economics (1988)

Environmentaly harmful subsidies

Sector, bil. USD van Beers & de Moor

Myers & Kent

Agriculture 325 325

Transport 225 558

Energy 205 145

Water 60 60

Other 135 22

TOTAL 950 1 1101 950 incl.

„implicit subsidy“

Environmentaly harmful subsidies

• Total EHS: 1000 bil. USD -14*GDP-CR2002

• 75% in OECD MS

• 3,6% OECD-GDP

• mostly supported sectors influences 97% of world trade

• 100 bil. USD yearly additional costs in poorer countries involved by subsidy policy of West (WB; EEB 2002)

For debate…• we should consider „a historical reason“ of support

introduction

• it is not too late make change if we find soemthing is not perfect

• ask for a removal or a reform ?– remove support measure?– change priorities?– adjust criterias?

• focus not only „visible“ on/off budgetary support measures:

– „implicit subsidy“ - non-internalised externalities– inefficiently allocated public spendings (transport

infrastructure, housing policy)– privatisation, deregulation, liberalisation– efficient use of non-national grants (SF/CF in particular)

The key stages in the CHECKLIST