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Edited by Frans H. Oosterhuis and Patrick ten Brink

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Edited by Frans H. Oosterhuis and Patrick ten Brink

In this chapter we focus on subsidies in three closely related areas: agriculture, food and water. Given the resource and pollution intensity of many activities in the food chain and the water cycle, the potential environmental impact of such subsidies is high. The actual impact, however, depends on the specific design and conditions of each support scheme. Direct agricultural subsidies, such as those under the EU Common Agricultural Policy, have undergone major changes that may make them less environmentally harmful, but there remains room for further 'greening'. There are many other, often less visible subsidies that could be reform candidates, especially those that do not (anymore) serve their original objective, or do so in an inefficient way.

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Ronald Steenblik and Jehan Sauvage

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Patrick ten Brink and Sirini Withana

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Jan Pieters

Defining a subsidy, assessing its magnitude and the seriousness of its environmental damage includes many economic and environmental variables and requires many conventions and assumptions that are political in nature. As a result, studies based on the difference between the subsidized and non-subsidized state are complex and convincing only in so far as the underlying conventions and political views are shared. Nevertheless, subsidies may influence the present and future environment in many ways, in particular by stifling technological change and reducing responsiveness to environmental demands and regulation. This chapter presents critical remarks concerning analyses that compare environmental effects of moving from a subsidized to a non-subsidized state, and outlines an alternative approach for assessing whether removing a particular subsidy is likely to have beneficial environmental effects. Central to this approach is that the various conditions under which subsidies are granted (statutory incidence) have stark differing effects on decisions made by the polluter. The more this statutory incidence slows down technological change, the more the subsidy is likely to damage the environment. Statutory incidence might therefore serve as a predictor of probable environmental benefits of subsidy removal and could be used as part of an assessment process to prioritize subsidies for reform. Subsidy reform is best undertaken as a part of wider policy reform, because of the complicated interactions between various policies, the taxation jurisdiction, autonomous changes and technological development.

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Frans Oosterhuis and Katharina Umpfenbach

In this chapter we focus on subsidies that stimulate the production and consumption of energy. Such subsidies abound throughout the world, and most of them accrue to fossil fuels. Estimates of global energy subsidies vary widely (depending on definition and measurement), but they tend to amount to hundreds of billions of euros per year. Reforming these subsidies could contribute significantly to the reduction of CO2 emissions and other environmental problems. Despite several pledges on energy subsidy reform, progress in this area remains sluggish. This can be explained by the various interests and policy objectives that the support schemes (supposedly) serve. Reform strategies should assess the validity of these objectives and look for less distortionary and more cost-effective instruments to achieve them if they are considered to be (still) valid.

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Patrick ten Brink, Markus Lehmann, Bettina Kretschmer, Stehanie Newman and Leonardo Mazza

By adopting the Strategic Plan for Biodiversity 2011-2020, Parties to the Convention on Biological Diversity (CBD) in 2010 committed to eliminate, phase out or reform incentives (including subsidies) that have harmful effects on biodiversity by 2020 at the latest. This task is a Herculean one, and not just because of their prevalence. As subsidies and other market distortions that result in harmful incentives are an integral part of the policy landscape, they are frequently difficult to identify, isolate, and remove. It is also a Sisyphean task: in an ever-changing policy landscape, new subsidies are frequently introduced, and new evidence about their impacts is continually cropping up. Sometimes it is only when combinations of policies and programmes are taken together do they generate harmful environmental effects, such as the incentives for urban sprawl or for biofuels. In some instances, even the combinations of programmes may not be the only cause of the problem. Such features add to the complexity in identifying and addressing harmful incentives. This chapter explores what types of subsidies have negative impacts on biodiversity. It looks at positive incentive measures for biodiversity and explores the relationship between harmful and positive incentives. Finally, it explores what needs to be done to realise the commitment of the Strategic Plan for Biodiversity, building on positive case examples of successful reforms.

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Laurent Franckx and Inge Mayeres

In this chapter we analyse three possible cases of EHS in the transport sector: the absence or partial implementation of road pricing, company car taxation and tax deductibility of commuting expenses. Even while some steps have been taken in an environmentally progressive direction, there are still possibilities for reform. The absence or partial implementation of road pricing leads to an implicit subsidy for road users. Where road pricing has been introduced, it was limited to specific segments of the market (trucks on motorways), which significantly reduces the beneficial impacts on congestion and the environment. Differentiated kilometre charges that apply to all vehicles and cover a larger part of the network, would be a good direction for reform. In the case of company car taxation, test-cycle CO2 emissions are increasingly included as a parameter in the determination of the in-kind benefit. However, parameters affecting local air quality have not been included. Moreover, the in-kind benefit does not depend directly on the actual kilometres driven, which is also an important determinant of CO2 emissions and other external costs. As people are not perfectly flexible in their location of residence, it can make sense to subsidize commuting up to a point, and certainly to decrease the price of commuting compared to leisure travel. However, these subsidies should favour the transport modes with the smallest social costs. Where reforms have been implemented successfully, these were not mainly motivated by environmental concerns. Therefore, the resulting schemes are still not quite optimal. Further reforms will probably take place when improving the environmental performance of the tax and subsidy system also allows the pursuit of other objectives that are higher on the political agenda.

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Kai Schlegelmilch

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Ronald Steenblik

Environmentally harmful subsidies can be considered a subset of total government support. However, since the marginal environmental harm of any particular subsidy depends on how it interacts with other subsidies and policies, the answer to the question, 'How much does the world subsidize environmental harmful activities?' cannot be answered simply by summing up estimates of subsidies deemed a priori to have a reasonable potential to be environmentally harmful. Detailed, internationally comparable estimates of government support are, in any case, available only for certain sectors and countries - mainly for primary industries (agriculture, fisheries and energy) and their products. Primary industries certainly are of interest in this context because resource extraction, harvesting and cultivation are intimately connected with the natural environment. But, as environmentally extended input-output tables and models show, other economic activities can also have significant environmental impacts, both direct and indirect. The purpose of this chapter is not so much to attach a definitive number to the global scale of environmentally harmful subsidies as to provide a broad survey of the existing sectoral estimates of the environmental effects that they may be exacerbating. Some observations on how monitoring of potentially environmentally harmful subsidies could be improved conclude the chapter.