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
  waters net economic benefit to the irrigator and
  charged price for water per unit.

7
Definition and MeasurementFisheries

• 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 MeasurementEnergy

• 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 MeasurementTransport

• 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 GapsIrrigation 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 GapsFisheries

• 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 GapsForests

• 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 GapsEnergy

• Budgetary, price and tax subsidies No systematic
  collection of data for OECD or non-OECD
  countriesexcept 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 GapsTransport

• 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 liberalizations 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.