New Oecd Report: Subsidy Reform - Improving The Environment Through Reducing Subsidies
The environmental effects of support to energy, agri-culture and transport have attracted considerable scientific and political interest in recent years. Total support levels in OECD countries are declining slowly - even increasing in some sectors and countries. A number of analytical studies have shown that the linkages between support and the environment are complex and often indirect. The non-internalization of external costs can be also considered an "implicit subsidy." The approach required to address implicit subsidies would be to remove existing supports from environmentally harmful activities and to internalize external costs.
Solving this problem is not an easy task.
Therefore OECD Environmental Ministers in February, 1996 supported the 1995 request by G-7 Ministers of the Environment to continue the work related to the effects of subsidies and tax disincentives on sound environmental practices in various economic sectors and the costs and benefits of their elimination or reform. Part of this work has resulted in the report "Improving the Environment Through Reducing Subsidies" that was submitted to the Environmental Policy Committee and Council at the Ministerial Level. The report draws heavily on the results of a number of recent OECD studies in the field of subsidy reform, and collects and synthesizes the available work on current support measures. The main objective is to indicate whether a particular support or tax incentive has significant adverse effects on the environment, and it offers policy makers advice on how they can prioritize support measures of removal or reform. The study does not provide a list of specific support measures that should be reformed. Rather, it concentrates on the examination of the effects of the removal of those types of support measures that are harmful to the environment, the current levels of support, and the trends illustrated by empirical evidence in the agriculture, energy, transport and industry sectors. Finally, it deals with implementation strategies. Based on the analysis and reviewed literature some of the main findings of this report can be summarized:
- A subsidy can be defined as environmentally harmful if it encourages more environmental damage to take place than that which would occur without the sub-sidy.
- The largest percentage of support has been imple-mented through minimum price regulations, which increase the marginal revenues of the producer at the expense of consumers and taxpayers.
- Support in the OECD countries is mainly given to inefficient firms in mature industries in order to protect them from foreign competition.
- The tax jurisdiction under which the support measures are applied has a significant effect on the economic and environmental aspects.
- Support measures consist of a combination of direct financial mechanisms and regulations. Removing only one element from such combination will often have only limited influence.
- Support measures may also represent a rather weak beneficial effect on income, growth and employment, while having adverse effects on the environment.
- It is difficult to calculate the exact environmental effect of support policies across the sectors. A brief analysis may be completed through an examination of the elas-ticity of demand and supply in a given sector, the point of impact of the support measure in the market exchange, and direct and indirect links between the point of impact of the support and resulting pollution or other adverse impact.
- The positive effects of the support removal will often become apparent only after relatively long time span. Any estimates of the environmental benefits of support removal will necessarily depend on assumed technical development and the time horizon examined.
- Because of the increasing benefits that accrue over a longer time period the total environmental benefits of support removal will be larger than estimates based on empirical evidence.
The study offers a few general policy conclusions:
First, it is essential that the transparency of support measures is increasing in order to clarify the trade-offs between sectoral and general interests in society. Second, the removal of support measures on the use of "through-put" material and energy should be a high priority in or-der to stimulate technological change and decrease gov-ernmental spending. Third, to reap the maximum benefit from the support reduction, an effective and well-directed environmental policy will also be required. Last but not least, identification of all the beneficiaries and losers asso-ciated with the support policy will help to understand full costs and benefits of such removal.
Finally the study indicates that future OECD work should focus on international co-operation in reducing support levels. In particular, the study supports further negotiations regarding multilateral reductions and sug-gests further development of appropriate removal strate-gies. In this context, the shared goals of OECD Member countries, particularly those under global or regional envi-ronmental conventions such as the Kyoto Protocol to the UN Framework Convention on Climate Change or UN Framework Convention on Biological Diversity, may be realized. The OECD should develop appropriate indica-tors to measure support levels, such as the Producer and Consumer Subsidy Equivalents, and publish the relevant data and trends in new or existing periodical reviews.
OECD: Improving the Environment Through Reducing Subsidies, OECD Paris 1998, forthcoming. To get a copy contact country OECD sales office or Publication Service, OECD, 2, rue AndrŽ-Pascal, 75775 Paris CEDEX 16, France. http://www.oecd.org/env/eco/pubs.htm
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