OECD: Exploring The Linkages Between Subsidies And The Environment

Subsidies and tax concessions can also exacerbate the public sector deficit debt problems facing OECD coun-tries. Since the practical scope for raising taxes is often limited by political resistance, much of the burden of fis-cal adjustments may have to fall on the expenditure side of government policy. In this sense, the reform of subsidy programmes also has the potential to generate substantial fiscal benefits. However the actual situation is not likely to be as simple and the net effect of reforming subsidies will not necessary result in improvements for the envi-ronment, the economy, or the public budget. The actual effect of any reform will depend on the context in which the subsidies were granted in the first place, and on the specific way in which they are eventually reduced. To help fill this task, the OECD environment ministers asked the OECD to carry out a wide-ranging analysis of the effects of subsidies and tax disincentives to sound environmental practices in various economic sectors and the costs and benefits of their elimination or reform.

Responding to that request, the linkages between sub-sidies/tax concessions and their environmental conse-quences were explored, with the ultimate goal being to help define an agenda for future work by the OECD in this field. The results presented at the Workshop on Subsi-dies/Tax Incentives and the Environment in November 1995 were published as an OECD document. The report covers a wide range of topics and places emphasis on the relationship between environmental and tax concession policies, on the one hand, and sectoral policies (i.e. trans-port, energy, agriculture and industry) on the other. Sev-eral broad areas of consensus did come to light during the discussion.

A major problem in analyzing the environmental im-pact of subsidies is the definition of a subsidy. One of the possible attempts to analyze the environmental impact of subsidies according to this report can be seen in three basic perspectives:

the environmental perspective: any flow of goods and services that causes uncompensated environmental damage or irreversible harm to ecosystems
the economic perspective: any government-directed, market distorting intervention which decreases the costs of producing a specific good or service, or in-creases the price received for it
the fiscal perspective: a government expenditure, ex-emption from taxation, or assumption of liability which decreases the costs of producing a particular good/service, or increases the price which may be charged for it

In practice, a hybrid approach is most appropriate, and there is substantial need to build a political and social consensus in favor of subsidy reform. This publication can guide policy-makers toward the achievement of this goal by selecting key subsidy driven environmental problems in critical sectors such as agriculture, energy or transport and identifying major stakeholders who have interest in these changes.

Several conclusions can be drawn from the discussions in the workshop:

It is essential to develop a new OECD program on the linkage between economic subsidies, tax concessions, and the environment that would identify particular subsidies whose reform or elimination could lead to both environmental and economic benefits.
The work should concentrate on the specific question of how subsidies and tax concessions themselves im-pact the environment rather that on tax policy optimi-zation.
Within this program a careful analysis of sub-sidy/environment linkages should be carried out with the aim to improve transparency. The focus should be on direct and indirect subsidies (cash payment, inter-est rate subsidies, tax expenditure, etc.), with priority given to programs with clear budgetary implications and which are suspected of generating the most sig-nificant negative environmental side-effect.
Future work should concentrate on comparative case studies that would improve understanding of incen-tives facing individual economic actors. At present very little data, often of varying quality, exists that di-rectly links economic subsidies to environmental problems.
Finally an effort should be made to identify and in-crease understanding of subsidy clusters such as the energy sector. Such a cluster represents an area wherein the potential environmental and economic gains from subsidy reform could be the largest.

Subsidies and Environment, Exploring the Linkages. OECD document, 1996, pp 218. To receive a copy con-tact country OECD sales office or Publication Service, OECD, 2, rue AndrŽ-Pascal, 75775 Paris CEDEX 16, France. Internet: http://www.oecd.org/env/eco/pubs.htm.

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