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When Removing Subsidies Benefits the Environment. DEVELOPING A CHECKLIST BASED ON THE CONDITIONALITY OF SUBSIDIES. OECD, 7,8 NOVEMBER 2002, Jan Pieters. !. Warning. All subsidies are unique. Generalisations seldom apply to all individual subsidies. The challenge to developing a checklist.

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when removing subsidies benefits the environment

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

warning

!

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

why a checklist
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

environment subsidy removal linkages

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

important factors 1
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

important factors 2
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

the basic template initial points of impact

= 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

the basic template resource productivity

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

initial points of impact and degrees of freedom

!

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

differences between removing subsidies to variable inputs compared to fixed ones
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

to be expected effects of subsidy removal

!

To be expected effects of subsidy removal

When Removing Subsidies Benefits the Environment

flow chart behind the checklist

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

structure of the checklist 1
Structure of the checklist (1)

Policy filter effective

Effectiveness

Enforcement

Removal with the subsidy

When Removing Subsidies Benefits the Environment

structure of the checklist 2
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

structure of the checklist 3
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

structure of the checklist 4
Structure of the checklist (4)

Concentration of market power

Degree of concentraion

When Removing Subsidies Benefits the Environment

concluding remarks
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