When Removing Subsidies Benefits the Environment 1 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 To identify those items that indicate subsidies for which removal is beneficial for the environment. The challenge to developing a checklist

When Removing Subsidies Benefits the Environment 3 Why a Checklist 1.Ranking options for removal according to their possible beneficial environmental effects Need to focus, since subsidies are hard to remove 2.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 Site specific: Env. Impact Analysis Environment – Subsidy Removal linkages Pollution; rates of exploitation Policy Filter Subsidy removal Changes in competitiveness Autonomous change Assimilative capacity Environmental effects Environmental values Long list of subsidies to be removed on environmental grounds Use of the checklist Economic Technological Environmental management Infrastructure

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

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

When Removing Subsidies Benefits the Environment 9 Initial points of impact and degrees of freedom Point of impactdegrees of freedom, left OutputModes of production Profit, income Production volume, Modes of production, Other products, Variable inputs Fixed inputsChoice of inputs (unless...) DemandProduction volume, Modes of production ! Strong link between subsidy (removal) and the environment X X X X X

When Removing Subsidies Benefits the Environment 10 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 !

When Removing Subsidies Benefits the Environment 11 To be expected effects of subsidy removal Point of impactShort term effectsLong term effects Output Lower production Exit Variable inputs Lower production Exit Removal of lock-in Exit Fixed inputs Removal of lock-in Exit Profit and incomeExit, less innovation (?) Demand Lower production Exit !

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

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

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

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

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

When Removing Subsidies Benefits the Environment 17 Concluding remarks 1.It is political economy; economic analysis is just a tool 2.The checklist only yields a preliminary ranking It cannot replace more detailed analyses 3.Hopefully the reasoning behind the checklist helps to structure our thinking on the environmental effects of subsidy removal 4.Why dont we try the checklist, the proof of the pudding is in the eating