This document discusses environmentally harmful subsidies (EHS). It defines EHS as government actions that confer advantages to consumers or producers but discriminate against sound environmental practices. The document examines different definitions of subsidies and proposes a practical definition of EHS. It notes that while EHS have been identified, systematic quantification across sectors and countries is still needed. The document outlines the potential benefits of EHS reform, such as reduced pollution, increased competitiveness, and enabling funds to be spent elsewhere. It also discusses arguments against reform and lessons learned, such as the need for transparency, mitigating adverse impacts, strong leadership, and a well-managed process.

1. Environmentally Harmful Subsidies (EHS):
Definition, Quantification, Impact and
Rationale
Patrick ten Brink
Senior Fellow and Head of Brussels Office
www.ieep.eu
Based on report prepared by IEEP, FEEM, Ecologic and IVM for DG
Environment
and
thanks to Ian Skinner, Carolina Valsecchi and Samuela Bassi
Ad Hoc Working Group on EHS
7 December 2006
Brussels

2. Subsidies: Different definitions for different
purposes
For accounting and trade purposes narrower
definitions are used (as easier to quantify), e.g.
‘… current unrequited payments from governments
to producers with the objective of influencing
their levels of production, their prices or the
remuneration of the factors of production …’
(Euro system of accounts)
OECD definition (for policy context):
‘… government action that confers an advantage on
consumers or producers in order to supplement
their income or lower their costs…’ (2005)

3. Mapping definitions to ‘subsidies’ (extract)
Type of Subsidy Definitions of a subsidy
ESA WTO OECD Pieters
On-budget subsidies
Direct transfer of funds, e.g. grants X X X X
Potential direct transfers of funds, e.g. X X X
covering liabilities
Off-budget subsidies
Income or price support X X X
Government revenues due are foregone or not X X X
collected, e.g. tax credits
Tax exemptions and rebates X X
Regulatory support mechanisms, e.g. feed-in X X
tariffs, demand quotas
Implicit income transfers resulting from a X
lack of full cost pricing

4. Practical Definition of an EHS
Possible definition of EHS (adapted from OECD,
1998 and 2005):
a result of a government action that confers an
advantage on consumers or producers, in order
to supplement their income or lower their costs,
but in doing so, discriminates against sound
environmental practices.
• OECD focusing on identifying practical ways to
achieve reform rather than further refining the
definition (as set out in OECD’s presentation)

5. Quantification of EHS
• Arguably no need to refine definition further as
we already have lists of subsidies
• Few systematic attempts to quantify subsidies
across sectors and countries (OECD progress)
• For energy most comprehensive is EEA (2004):

6. Benefits of EHS reform - theory
• EEA (2004)/OECD (2005): significant benefits – ‘win-win’
situations – from subsidy removal
• Benefits arise from reduction in adverse impacts
• Adverse impacts arise from a number of linkages:
• Effects on production levels
• Effects on emissions/resource depletion
• Effects on environmental quality
• Indirect burdens on the economy from inefficient allocation of
government monies.
Subsidies generally support production, thus leading to higher
(inefficient) levels of inputs to the production process,
resulting in higher (inefficient) levels of resource use and
pollution

7. Benefits of EHS reform - details
Reforming EHS has the potential to:
• Reduce production levels, thus saving resources,
including energy, and causing less pollution
• Increase competitiveness by exposing subsidised
sectors to competition
• Enable governments to spend more money on
other areas (e.g. education), as no longer have to
pay the subsidy
• Overcome technological ‘lock-in’ whereby
alternative, less established, and possibly more
environmentally-friendly, technologies are unable
to compete on an equal basis with the subsidised
sector

8. Benefits of EHS reform - opportunities
• Spending money that subsidises coal in Germany
on renewables would lead to more innovation and
a higher level of economic efficiency (UBA, 2003;
Institute Applied Ecology, 2005)
• Subsidising renewables or energy retrofits of
buildings instead of coal in Germany could reduce
CO2 emissions (UBA, 2003)
• Removing subsidies in energy could (IEA, 1999):
• Reduce energy consumption
• Increase GDP through higher economic efficiency
• Reduce emissions of CO2 and other pollutants
• Removing coal and nuclear subsidies in the UK
would reduce CO2 emissions (Michaelis, 1997)

9. Overcoming the Arguments against Reform
Removing subsidies will…(or will it?)
• … harm competitiveness – But keeping subsidies is bad for
long-term competitiveness of the sector; sector becomes
dependent on subsidy and puts strains on public finances and
can reduce national competitiveness
• … result in job losses – In the short-term, can be the case, for
the specific sector, but compensatory measures can address
some adverse short-term impacts and incentives can be put in
pace to attract investment; also possible employment gains
from use of monies elsewhere – net effect depends on relative
labour intensities
• … have implications for social equity – But poorer households
spend less on energy than middle income households, so better
ways of helping the former than subsidies
• … adversely impact on energy security – There is unlikely to be
any ‘insecurity of supply’ for coal – one of the most subsidised
energy sources – in the EU for the foreseeable future. Also if
funds used for renewables it actually can increase security.

10. Lessons for EHS reform
• There is a need for good quality information and
transparency – to inform the decision-making
process, the design of policies and ensure expected
outcomes are widely understood
• Subsidy reform does not happen in isolation –
reform should be part of a broader reform package
including, e.g., policies to mitigate adverse impacts of
subsidy removal
• There is a need for strong leadership and a broad
coalition - a champion of reform to galvanise
support and communicate with stakeholders
• The need for a well-managed process – consider
staging the reform and taking advantage of
economically beneficial circumstances

11. Questions for discussion
• What insights do you have on the level of subsidies and the
type – what data is there?
• Do you know of any data on employment and
competitiveness impacts - positive or negative from the
EHS and from its removal?
• Are you more concerned about the strict EHS or wider
EHS? Is it only on budget subsidies that are important to
address or also issues of full cost recovery and social
pricing?
• Do you have examples of useful subsidy reform processes
and lessons from why they have worked or not?
• Where would you suggest efforts be put?

12. Environmentally Harmful Subsidies (EHS):
Definition, Quantification, Impact and
Rationale
Thank you and looking forward to the
discussions!
Patrick ten Brink
Head of Brussels Office
ptenbrink@ieep.eu
www.ieep.eu
Based on report prepared by IEEP, FEEM, Ecologic and IVM for DG Environment
Thanks to Ian Skinner and Carolina Valsecchi