THE WORK OF THE OECD ON ENVIRONMENTALLY HARMFUL SUBSIDIES

1. THE WORK OF THE OECD ON ENVIRONMENTALLY HARMFUL SUBSIDIES Anthony Cox OECD Environmentally Harmful Subsidies and Ways to Eliminate Them Budapest, 2-3 September 2004

2. OECD WORK ON EHS • Long history of subsidy analysis • Ministerial mandate 2001 • Horizontal work program • Final report later in 2004

3. SUBSIDIES ARE PERVASIVE • OECD transfers at least USD 400 billion a year to different sectors • Equal to around 1.9% of GDP • Distort prices and resource allocation decisions • Negative effects on the environment • Not all subsidies are environmentally harmful • But they are generally inefficient policy tools

4. HOW MUCH? • Agriculture: USD 318 billion in 2002 • 1.2% of GDP in OECD countries • Fisheries: USD 6 billion a year • 20% of the value of landings • European road and rail transport: USD 40 billion a year • Energy sector: USD 20-30 billion a year • Limited comparability, patchy coverage • Certainly an underestimate

5. WHAT IS AN ENVIRONMENTALLY HARMFUL SUBSIDY? • Starting point: all subsidies are potentially environmentally harmful • Defining a subsidy is itself difficult • WTO ASCM is the only legally recognised definition • Border protection • Government infrastructure • Uninternalised externalities • Common reporting framework desirable

6. CHECKLIST APPROACH • Identify those subsidies whose removal would lead to an environmental improvement, other things being equal

7. CHECKLIST APPROACH • Two stage process • Identify effects of subsidies on consumer and producer decisions • Identify the link between these decisions and the environment • Policy filter • Technology lock-in • Conditionality of subsidy • Provides a “quick scan” • ….. and not a substitute for detailed analysis

8. Flow chart of the checklist Economic activity suspected to be linked to certain deteriorating environmental values Sectoral analysis reveals strong forward or backward linkages No No Do not consider removing subsidies on environmental grounds No Yes Yes No Sectoral analysis (including linked sectors) reveals the economic activity or its linkages being subsidised, other policy measures being in place, such as policy filters Yes Subsidy removal might benefit the environment CHECKLIST Description of all relevant subsidies Yes Policy filter effectively limits environmental damage Subsidy removal is not likely to have significant environmental benefits No No More benign alternatives are available now or emerging No Yes No Does conditionality lead to higher production No Yes

9. CASE STUDIES • Checklist applied to a number of sectors • Agriculture • Fisheries • Transport • Energy • Water

10. LESSONS LEARNED FROM CASE STUDIES • Significant scope for reducing environmentally harmful subsidies. • Checklist is a useful policy tool • Improved transparency • Identifies data problems • Sectoral characteristics • Resource endowments and environmental profiles

11. IDENTIFYING POLICY OBSTACLES • Special interests and rent-seeking behaviour • False perceptions and fear of change • Concerns over competitiveness and distribution • Lack of transparency • Legal, technical and administrative constraints • Perception of “entitlement” to subsidies

12. OPPORTUNITIES FOR REFORM • Challenge the mantras • Identify policy options for meeting goals • Improve targeting and design of subsidy programs • Exploit windows of policy opportunity • Increased transparency • Remove structural impediments • Transitional measures • Competition policy reform

13. THE WORK OF THE OECD ON ENVIRONMENTALLY HARMFUL SUBSIDIES Anthony Cox OECD Environmentally Harmful Subsidies and Ways to Eliminate Them Budapest, 2-3 September 2004