Reforming environmentally harmful subsidies. How to counteract distributional impacts

Report 2011/

Annegrete Bruvoll, John Magne Skjelvik og Haakon Vennemo

Reforming environmentally harmful subsidies. How to counteract distributional impacts

Category	Reports
Sub-Categories	n/a
Year	2011
Author(s)	Annegrete Bruvoll John Magne Skjelvik Haakon Vennemo
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Reforming environmentally harmful subsidies
How to counteract distributional impacts	
Ved Stranden 18
DK-1061 Copenhagen K
www.norden.org
Reforming environmentally harmful subsidies
How to counteract distributional impacts
The report discusses the theoretical principles for an efﬁcient envi	-	
ronmental and distribution policy and offers a comprehensive survey 
of experiences from policy reforms in different countries. The reform 
survey forms a background to recommendations for implementation 
of sustainable policy reforms, taking care of environmental, economic 
and distributional concerns. It particularly brings in the Nordic experi	-	
ences, both to enlighten the problems with environmentally harmful 
subsidies in these countries, and to discuss what can be learned from 
the experiences in a broader international context.
The analysis has been carried out during the period October 2010 – 
May 2011. The study was carried out by Vista Analyse AS and commis	-	
sioned by the Nordic Council of Ministers for the Environment.	
TemaNord 2011:551	
TemaNord 2011:551
ISBN 978-92-893-2253-9	
2011-551 Omslag.indd 1	30-08-2011 09:15:17

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Reforming*en	vironmentally*	
harmful*subsidies	*	
How)to)cou	nteract)distributional)impacts	)	
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Annegrete'Bruvoll,'John'Magne'Skjelvik'and'Haakon'Vennemo	'

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Reforming*en	vironmentally*harmful*subsidies	*	
How$to$counteract$distributional$impacts	$	$
TemaNord	$2011:551	$	
ISBN$978	@92@893	@2253	@9$	$
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Ved$Stranden$18	$	DK	@1061$Copenhagen$K$	$	
Phone$(+45)$3396$0200$	$	
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Content&
Preface	........................................................................................................................................................	(7!	
Executive(summary(	...............................................................................................................................	(9!	
1.!Background	(................................	................................	................................	................................	....(13	!	
2.!The(problem	(................................	................................	................................	................................	..(15	!	
2.1	!	Examples(of(environmentally(harmful(subsidies	(................................	................	(15	!	
2.2	!	Possible(benefits(from(removing(environmentally(harmful(
subsidies	(................................	................................	................................	............................	(17	!	
3.!The(Nordic(countries	(................................	................................	................................	..................	(21	!	
3.1	!	Tax(reforms	................................	................................	................................	.......................	(21	!	
3.2	!	Remaining(subsidies	(................................	................................	................................	......	(22	!	
4.!Definition(of(environmentally(harmful(subsidies	(................................	................................	.(25	!	
4.1	!	Theoretical(foundation	(................................	................................	................................	.(25	!	
4.2	!	Defining(inefficient(subsidies	(................................	................................	.....................	(26	!	
4.3	!	Partial(market(effects(of(environmentally(harmful(subsidies	(........................	(28	!	
5.!The(accounting(of(environmen	tally(harmful(subsidies	(................................	..................	(31	!	
5.1	!	Subsidies(in(general	(................................	................................	................................	.......	(31	!	
5.2	!	Recommendations(for(accounting(of(environmentally(harmful(
subsidi	es(................................	................................	................................	............................	(34	!	
6.!Experiences(with(subsidy	(reforms(around(the(world	(................................	....................	(37	!	
6.1	!	Sub	sidies(to(coal(production	(................................	................................	......................	(38	!	
6.2	!	Nuclear(power(subsidies	................................	................................	..............................	(41	!	
6.3	!	Exemptions(from(environmental(taxes	(................................	................................	..(41	!	
6.4	!	Biofuel(subsidies	(................................	................................	................................	.............	(42	!	
6.5	!	Subsidies(to(fossil(energy(consumption(in(some(low	Kincome(	
countries	(................................	................................	................................	............................	(43	!	
6.6	!	Subsidies(to(energy(c	onsumption(in(some(high	Kincome(countries	(..............	(46	!	
6.7	!	Subsidies(to(road(transport	(................................	................................	........................	(49	!	
6.8	!	Aviation(subsidies	(................................	................................	................................	..........	(51	!	
6.9	!	Water(subsidies	(................................	................................	................................	...............	(52	!	
6.10	!Subsidies(to(agriculture(and(fishing	................................	................................	.........	(54	!	
6.11	!Summary:(Lessons(learned	(................................	................................	.........................	(57	!	
7.!Compensation	(................................	................................	................................	...............................	(63	!	
7.1	!	Justifications(for(compensation	(................................	................................	.................	(63	!	
7.2	!	Income(distribution(inequity	................................	................................	......................	(63	!	
7.3	!	Market(failures	(................................	................................	................................	................	(66	!	
7.4	!	Adjustment(policies	(................................	................................	................................	.......	(67	!	
8.!Recommendations	(................................	................................	................................	.......................	(69	!	
8.1	!	Identify(the(environmentally(harmful(subsidies	(................................	.................	(70	!	
8.2	!	Estimate(the(environmental(and(economic	(costs	(................................	...............	(70	!	
8.3	!	Evaluate(the(need(for(compensation	(................................	................................	.......	(71	!	
8.4	!	Formulate(the	(reform	................................	................................	................................	....(71	!	
8.5	!	Communicate(the(reform	(................................	................................	.............................	(72	!	
8.6	!	Correct(for(negative(side(effects	(................................	................................	................	(74	!	
8.7	!	Avoid(new(types(of(inefficient(subsidies	(................................	................................	(74	!	
9.!Concluding(remarks	(................................	................................	................................	....................	(75	!	
References(	.............................................................................................................................................	(77	(	
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10.	!Appendix	(................................	................................	................................	................................	.........	(81	!	
10.1	!Appendix(1((	(Theoretical(foundation(to(taxes(and(subsidies	(........................	(81	!	
10.2	!Appendix(2((	(Attempts(to(remove(environmentally(harmful(subsidies	(..........	(90	!	
10.3	!Appendix(3((	(Planned(reforms	(................................	................................	...............	(119	!	
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Preface&
Removing( and( reforming( environmentally( harmful( subsidies( has( been( an(
important(focus(for(discussion,(and(some(action,(for(a(number(of(years.(In(
the( present(situation,(with(strong( pressures( for( fiscal( consolidation( at(the(
same(time( as( climate( and( other( environmental( challenges( remain( high( on(
the( international( agenda,( the( urgency( for( acting( on( this( issue( has( i	nK	
creased( greatly.( Social( considerations,( concern( over( distributional( effects(
of(subsidy(removal,(are(often(raised(as(arguments(against(such(action,(and(
have(been(and(remain(a(major(obstacle(to(such(reform(in(many(countries,(
both( developed( and( developing.( Both( the( G20( commitment( to( reform( of(
fossilKfuel(subsidies,(longKstanding(work(on(environmentally(harmful(su	bK	
sidies( by( the( Organisation( for( Economic( CoKoperation( and( Development(
(OECD),( and(work(on( such(subsidies(in( the(European( Union( (EU)( demo	nK	
strate(the(high(policy(relevance(of(this(issue.((	
The( Nordic( countries( are( known( for( using( a(strong( component( of( ec	oK	
nomic,( marketKbased( instruments( in( their( environmental( policy( mix,( as(
well( as( for( having( a( relatively( egalitarian( income( distribution.( How( to(
combine( such( goals( and( policies( is( an( important( concern( in( all( our( cou	nK	
tries,( and( distributional( effects( of(both( subsidy( removal( and( of( other( ec	oK	
nomic( instruments( such( as( green( taxes,( have( been( much( analysed( and(
discussed.(This(report(by(Vista(Analyse(AS(has(been(commissioned(by(the(
Nordic(Council(of(Ministers(to(give(an(overview(on(environmental(harmful(
subsidies,(subsidy(reforms(and(how(to(counteract(distributional(impacts.((	
The( analysis( has( been( carried( out( during( the( period( October( 2010		
May( 2011.( Main( sources( for( the( work( have( been( the( large( number( of(
reports( from( the( environmentally( harmful( subsidy( reform( initiatives(
made( by( the( G20( countries,( the( Global( Subsidies( Initiative,( the( EU( and(
the( OECD.( Authors( have( been( Annegrete( Bruvoll,( John( Magne( Skjelvik(
and(Haakon(Vennemo.((
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8(	Reforming*environmentally*harmful*subsidies	(	
The( report( discusses( the( theoretical( principles( for( an( efficient( env	iK	
ronmental( and( distribution( policy( and( offers( a( comprehensive( survey( of(
experiences( from( policy( reforms( in( different( countries.( The( reform( su	rK	
vey( forms( a( background( to( recommendations( for( implementation( of(
sustainable( policy( reforms,( taking( care( of( environmental,( economic( and(
distributional( concerns.( Experience( from( the( Nordic( countries( is( di	sK	
cussed,(both(to(throw(light(on(the(problems(with(environmentally(har	mK	
ful(subsidies(in(these(countries,(and(to(discuss(what(can(be(learned(from(
this( experience( in( a( broader( international( context.( Numerous( examples(
from( a( wide( range( of( developed( and( develop¬ing( countries( extend( the(
discussion.(We(foresee(that(this(report(gives(useful(Nordic(input(to(other(
countries( and( other( international( fora( to( remove( and( reform( enviro	nK	
mentally(harmful(subsidies.((
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Copenhagen,(July(2011(
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Halldór*Ásgrímsson*
Secretary(General(
Nordic(Council(of(Ministers(
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Executive&summary&&
Environmentally( harmful( subsidies( contribute( to( significant( enviro	nK	
mental( costs( and( pose( a( heavy( burden( on( public( budgets( around( the(
world.(According(to(IEA((2010),(the(phaseKout(of(fossil(fuel(consumption(
subsidies(would(reduce(global(energyKrelated(carbon(emissions(by(about(
6%	.( The( burden( on( public( budgets( is( particularly( high( in( developing(	
countries.(The(total(order(of(magnitude(of(fossil(fuel(subsidies(is(roughly(
estimated(to(almost(1%(of(world(GDP((IEA(et(al.(2010a).((	
Normally,( subsidies(are(thought( of( as( direct(support( over( public(bud	gK	
ets.( But( indirect( support( and( polluters( not( paying( the( external( emission(
costs( are( just( other( forms( of( environmentally( harmful( subsidies.( Lack( of(
environmental( taxes,( selective( exemptions( from( governmental( standards,(
preferential( market( access( and( price( support( represent( different( types( of(
off	Kbudget( subsidies( with( principally( the( same( effects( as( direct( subsidies.(	
Hence( reducing(the( extent( of( environmentally( harmful( subsidies( involves(
more( than( only(removing( the( onKbudget( subsidies.( Indirect( subsidies( and(
tax( exemption( should( also( be( removed,( and( polluting( activities( should( be(
fully(taxed(according(to(their(external(costs.((	
This( report( discusses( the( theoretical( principles( for( an( efficient( env	iK	
ronmental( and( redistribution( policy,( and( offers( a( survey( of( experiences(
from(policy(reforms(over(a(range(of(countries.(The(reform(survey(forms(a(
background( for( recommendations( of( sustainable( policy( reforms,( taking(
care(of(environmental,(economic(and(distributional(concerns.(We(partic	uK	
larly( bring( in( the( Nordic( experiences,( both( to( discuss( the( problems( with(
environmentally(harmful(subsidies(in(these(countries,(and(to(discuss(what(
can(be(learned(from(the(experiences(in(a(broader(international(context.(	
The(review(of(environmentally(harmful(subsidies(shows( different(e	xK	
periences( with( respect( to( why( subsidies( are( used( and( why( attempts( are(
made( to( remove( them.( The( motives( for( using( environmentally( harmful(
subsidies( differ( between( developing/emerging( economies( and( high( i	nK	
come( economies( like( the( Nordic( countries.( The( most( common( justific	aK	
tion( for( subsidies( to( energy( consumption( is( to( support( low( income(
groups.( According( to( estimates,( low( income( countries( face( the( highest(
economic(burdens(from(such(subsidies	.(Estimates(show(subsidies(reac	hK	
ing(up(to(15%(of(GDP(in(some(developing(countries((Ellis(2010).((	
Developed( countries( face( higher( environmental( awareness( and( hig	hK	
er( willingness( and( economic( possibility( to( prioritize( the( environment.(
The( Nordic( countries( are( among( the( richest( in( the( world,( and( typical(
characteristi	�…�•� �ƒ�”�‡� �•�–�”�‘���‰� �’�—�„�Ž�‹�…� �•�‡�…�–�‘�”�•ä� ��Š�‡� ò�™�‡�Ž�ˆ�ƒ�”�‡� �•�–�ƒ�–�‡ó� �•�‡�…�—�”�‡�•�	
minimum(income(and(social(service(levels,(while(the(counterpart(is(rel	aK	
tively( high( rates( of( taxation( compared( to( other( countries.( High(	enviro	nK

10	(	Reforming*environmentally*harmful*subsidies	(	
mental( standards( and( nature( preservation( seem( to( be( a( relatively(
stronger( norm( in( these( countries( compared( to( developing/emerging(
countries( and( more( densely( populated( areas( around( the( world.( Env	iK	
ronmentally( harmful( emissions( are( usually( subject( to( taxes( or( regul	aK	
tions,( and( subsidies( of( energy( consumption( are( not( widely( used.( Cons	eK	
quently,( the( Nordic( countries( have( experienced( significant( reductions( in(
most( of( the( polluting( emissions( with( local( and( regional( environmental(
effects(over(the(last(decades.(Though( environmentally(harmful(subsidies(
seem( to( be( more( common( in( the( form( of( support( to( industries,( emplo	yK	
ment(and(regional(development,(the(total(environmental(impact(is(pro	bK	
ably(relatively(lower(compared(to(most(other(countries.(	
The( core( of( the( problem( related( to( environmentally( harmful( subs	iK	
dies( is( that( the( support( benefits( significant( groups.( Removing( the( subs	iK	
dies( normally( provokes( opposition( from( pressure( groups( and( political(
parties.( To( raise( the( necessary( political( support,( it( is( important( to( pr	oK	
duce( high( quality,( reliable( information( about( the( benefits( and( costs,( in(
order( to( communicate( the( net( benefits( to( the( society.( Adversely,( it( has(
been( shown( that( lack( of( transparent( information( has( been( a( decisive(
obstacle( to( reforms.( Predictability( and( broad( political( support( increase(
the(possibility(of(implementing(sound(reforms.((	
The( subsidies( must( be( defined( along( principal,( theoretical( lines.(	GivK	
en( that( the( purpose( of( identifying( environmentally( harmful( subsidies( is(
to( advise( on( policy( change,( subsidies( correctly( levied( to( adjust( for( ma	rK	
ket( failure( or( in( order( to( correct( distributional( impacts( should( not( be(
included( in( the( definition( of( a( harmful( subsidy,( despite( their( possible(
environmental( effects.( On( the( other( hand,( tax( exemptions( and( several(
nonKbudgetary( support( mechanisms( should( also( be( included( in( addition(
to(the(direct,(budgetary(environmentally(harmful(subsidies.((
The(environmental(and(economic(costs(and(benefits(should(be( eval	uK	
ated(to(form(a(basis(for(which(reforms(to(prioritize.(The(original(purpose(
of( the( subsidies( must( be( identified( in( order( to( evaluate( whether( co	mK	
pensatory(measures(are(required(to(uphold(the(political(goals.((	
Compensatory( measures	*have( proven( to( be( of( crucial( importance( in(	
successful( reforms( of( harmful( subsidies( around( the( world.( Reducing(
harmful( subsidies( improves( the( public( budgets( and( releases( funding( for(
direct( compensation( packages.( To( avoid( new,( inefficient( subsidies,( it( is(
important( to( levy( the( compensation( as( close( to( the( prioritized( groups( as(
possible.((	
There( is( a( range( of( instruments( and( examples( of( compensation( pac	kK	
ages( used( to( alleviate( the( impacts( of( removing( subsidies,( targeting( the(
political( goals( more( efficiently( than( subsidies( to( environmentally( har	mK	
ful( activities.( The( Bolsa( Familia( program( in( Brazil,( the( Oportunidades(
program( in( Mexico,( cash( transfer( programs( in( Indonesia( and( Ghana( are(
all( successful( examples( of( comprehensive( social( protection( packages(
efficiently( targeting( low( income( groups( in( combination( with( removal( of(
environmentally( harmful( subsidies.( Diversified( income( taxation( is( a(

((	Reforming*environmentally*harmful*subsidies	(	11	(	
textbook( example( of( how( to( prioritise( low( income( groups( in( high( and(
low( income( countries	.(If( regional( compensation( is( justified,( lump( sum(	
support( could( be( given( to( general( activities( in( the( actual( regions,( for(
example( as( general( sup	port( to(	the( local( municipalities( or( as( investment(	
in(infrastructure.	((	
It( is( also( important( to( stress( the( need( for( avoiding( new(environme	nK	
tally( harmful( subsidies.( New( subsidies( should( only( be( used( to( correct(
market(failures(and(as(direct(support(to(politically(prioritized(groups(out(
of(distributional(concerns.(Subsidies(implemented(to(alleviate(the(trans	iK	
tion( of( the( economy( over( a( temporary( time( period( after( removing( env	iK	
ronmentally( harmful( subsidies( should( have( a( definite( time( frame.( Pa	rK	
ticularly,( it( is( important( to( look( into( new( subsidies( allegedly( meant( to(
target( greenhouse( gas( emissions,( if( the( subsidies( stimulate( other,( env	iK	
ronmentally( harmful( energy( sources.( Instead,( emissions( should( be( su	bK	
ject(to(direct(taxes.(
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1.	 Background&	
Subsidies( are( justified( in( theory( to( promote( overall( increase( in( social(
welfare.( Typically,( subsidies( are( used( to( adjust( for( market( failures( and(
income(distribution.(In(practical(policy(around(the(world,(the(use(of(su	bK	
sidies( does( not( follow(economic( theory.( Many( subsidies( are( inefficiently(
targeted(at(environmentally(harmful(activities(rather(than(at(the(partic	uK	
lar( income( groups( needing( support,( and( in( some( cases( the( effects( cou	nK	
ter( the( intention( of( subsidies.( Typical( examples( are( the( subsidization( of(
environmentally( damaging( energy( production( and( consumption.( Fuel(
subsidies( are( frequently( used( to( support( low( income( groups,( and( subs	iK	
dies(to(coal(extraction(are(given(to(support(competitiveness(in(industries(
and( employment.( Exemptions( from( environmental( taxes( for( industries(
out(of(competitiveness(concerns(are(also(common.(	
While(the(optimal(policy(would(be(to(tax(the(environmental(damages,(	
subsidies( to( polluting( activities( contribute( to( increase( rather( than( abate(
the( emissions.( The( practise( is( particularly(common( in(lowKincome( cou	nK	
tries.(This(contributes(to(preserve(old,(energy(intensive(technologies(and(
to( slow( down( the( transition( to( a( less( carbon( intensive( global( economy.(
The( economic( support( would( be( more( effective( if( given( directly( to( the(
targeted( income( groups.( In( addition( to( damaging( the( environment,( the(
subsidies(load(public(budgets(and(disturb(relative(competitiveness.((	
An( important( part( of( sustainable( policy( is( to( remove( or( adjust( env	iK	
ronmentally(harmful(subsidies.(Many(subsidy(reforms(have(been(carried(
through( over( time,( and( many( are( planned.( The( general( picture( is( that(
still( significant( maladjustments( remain,( and( that( countries( aiming( for(
reform( meet( strong( opposition( from( losing( parties.( According( to( IEA( et(
al.((2010a),(the(total(order(of(magnitude(of(fossil(fuel( subsidies(is(roug	hK	
ly(estimated(to(1%(of(world(GDP.(Removing(these(subsidies(is(estimated(
to(reduce(energyKrelated(carbon(emissions(by(about(6%((IEA(2010).((	
Over( the( last( decade,( several( parallel( initiatives( have( been( taken( to(	
increase( awareness( about( the( costs( related( to( environmentally( harmful(
subsidies,( and( to( form( policies( for( reforms.( The( initiatives( cover( ove	rK	
lapping(groups(of(countries.(	
The( OECD(has( conducted( several( reviews( of( harmful( policies( and( p	oK	
tential( policy( reforms( (see( e.g.( OECD( 1998,( 2005,( 2006a,( 2007,( 2010;(
Mourougane(2010;(Ekins(and(Salmons(2009).(	
In( 2009,( G20( leaders( committed( to( rationalize( and( phase( out( over( the(	
medium( term( inefficient( fossil( fuel( subsidies( that( encourage( wasteful( co	nK	
sumption.( This( initiative( was( followed( up( by( the( AsiaKPacific( Economic( C	oK	
operation( (APEC)( leaders( in( 2009.( These( commitments( were( made( in(
recognition( that( inefficient( fossilKfuel( subsidies( distort( markets,( impede(

14	(	Reforming*environmentally*harmful*subsidies	(	
investment( in( clean( energy( sources( and( undermine( efforts( to( deal( with( cl	iK	
mate( change.( On( request( of( the( G20,( the( IEA,( OECD,( World( Bank( and( OPEC(
produced(joint(reports(on(the(scope(of(energy(subsidies(and(suggestions(for(
the( implementation( of( their( phaseKout( (IEA,( OECD,( The( World( Bank( 2010;(
IEA,(OPEC,(OECD,(The(World(Bank(2010;(G20(2010).(	
The( studies( performed( by( IEEP( (IEEP( et( al.( 2007;( Valsecchi( et( al.(	
2009)( in( the( project( Environmentally( harmful( subsidies:( Identification(
and(assessment(are(developed(for(the(European(Commission.(	
��Š�‡� ����ï�•� �
�Ž�‘�„�ƒ�Ž�	Subsidies( Initiative( (GSI)( core( funders( include( the(	
governments( of( Denmark,(the( Netherlands,( New( Zealand,( Norway,( Uni	tK	
ed( Kingdom( and( Sweden.( This( initiative( was( launched( in( 2005( to( put( a(
spotlight( on( subsidies( and( how(they( undermine( efforts( to( put( the( worl	d(	
�‡�…�‘���‘���›� �‘��� �ƒ� �’�ƒ�–�Š� �–�‘�™�ƒ�”�†� �•�—�•�–�ƒ�‹���ƒ�„�Ž�‡� �†�‡�˜�‡�Ž�‘�’���‡���–ä� ��Š�‡� �
��ï�•� �…�—�”�”�‡���–�
period( runs( through( 2011( and( focuses( on( fossil( fuels( subsidies( (Victor(
2009;( Braithwaite( et( al.( 2010;( Ellis( 2010;( Jones( and( Steenblik( 2010;(
Koplow(et(al.(2010;(Laan(2010;(Laan(et(al(2010;(Lang(et(al.(2010;(Sawyer(
and(Stiebert(2010).(

2.	 The&problem&&	
2.1	 Examples(of(environmentally(harmful(subsidies(	!	
As(we(will(get(back(to(in(chapter(4(and(5,(the(extent(of(total(environme	nK	
tally( harmful( subsidies( are( difficult( to( estimate,( both( due( to( definition(
an	d( statistical( problems.( Different( estimates( may( include( different( su	bK	
sidy( bases.( The( estimates( in( this( chapter( are( not( necessarily(in( line( with(
the(theoretical(definition(in(chapter(4.2,(and(they(do(not(aim(to(cover(the(
total(sources(of(environmentally(harmful(subsidies.(Rather,(they(indicate(
the( size( of( such( subsidies( around( the( world( covered( by( existing( studies(
and(as(defined(by(the(refereed(sources.(The(methods(for(the(calculations(
are( under( evaluation( (cf.( chapter( 5).( In( particular,( taking( exemptions(
from( or( lack( of( externality( pricing( of( e.g.( coal( into( account( could( signif	iK	
cantly(increase(the(estimates.(	
The(main(picture(from(subsidies(included(in(these(studies(is(that:(
(	
�x Environmentally(harmful(subsidies(are(most(prevalent(in(developing(
countries(	
�x Consumer(subsidies(are(more(common(than(producer(subsidies(
(	
Most( of( the( estimates( cover( the( extent( of( subsidies( to(	fossil* fuels	.( The(	
estimates( by( IEA( et( al.( (2010a)( and( Lang( et( al.( (2010)( are( based( on( the(
priceKgap( approach	1,( hence( not( including( the( lack( of( externality( pricing(	
(cf.( chapter( 4.2).( According( to( these( sources,(	worldwide	(fossil( fuel(	co	n;	
sumption* subsidies*	amounted( to( $312( billion( in( 2009,( see( figure( 2.1,( the(	
cast( majority( of( them( in( non	KOECD( countries.( Less( work( ha	s( been( done(	
to( quantify( the(	producer* subsidies	.( According( t	o( IEA( et( al.( (2010a),( they(	
add( by( at( least( another( $100( billion.( Together,( these( subsidies( add( to(
0.7%(of(world(GDP(($58,000(billion(in(2009;(The(World(Bank).	2(	
(
(
(
(
(
(
(
(	
««««««««««««««««««««««««««	(	1(This(compares(final(consumer(price(with(reference(prices,(which(correspond(to(the(full(cost(of(supply,(or(
the(international(market(price(adjusted(for(the(costs(of(transportation(and(distribution.	(	2(http://siteresources.worldbank.org/DATASTATISTICS/Resourc	es/GDP.pdf	(

16	(	Reforming*environmentally*harmful*subsidies	(	
(	
 
 
 
 
 
 
 
 
 
 
 
 
Figure'2.1.'Economic'value'of'fossil5fuel'consumption'subsidies'by'type.'
Source:!IEA!(2010).!
(
Among(	20*non;OECD*countries	,(IEA(found(that(	oil*products	(were(the(most(	
heavily( subsidized( of( fossil( fuels( at( $152( billion( in( 2007( (Ellis( 2010,(
Morgan(2007),(equivalent(to(2.5%(of(total(GDP(in(the(20(countries.	3(This(	
estimate( includes( subsidies( to( industrial( and( residential( fuels,( kerosene(
and(liquefied(petroleum(gas((LPG),(as(well(as(transport(fuels.(Natural(gas(
subsidies( were( estimated( at( $70( billion( in( 2006,( while( consumer( subs	iK	
dies( for( coal( were( smaller( and( considered( to( be( around( $10( billion(
(Morgan,( 2007).( In( many( countries,( particularly( developing( countries(
with( low(GDP( per( capita,( consumptionKrelated( fossilKfuel( subsidies( have(
exceeded( 2%( of( GDP( for( many( years( (examples( are( Turkmenistan( with(
15.2%( of( GDP( in( 2008;( Ecuador,( 8.7%;( Egypt,( 8.4%( (Ellis( 2010)).( E	xK	
penditures(relating(to(the(subsidization(of(fossil(fuels( may(override(pu	bK	
lic(health(and(education(budgets.(	
Gasoline( taxation( is( one( frequent( example( of( fossilKfuel( subsidies.(	
Wagner( (2008)( takes( the( US( price( level( as( the( international( minimum(
benchmark(for(a(nonKsubsidised(road(transport(policy.(The(fuel(prices(of(
the( United( States( are( average( costKcovering( retail( prices( incl.( industry(
margin,( VAT( and( road( funds.( Wagner( (2008),( see( also( Victor( (2009),(
illustrate(the(retail(	gasoline	(prices(across(the(	world*countries	.((	
In( the( most(subsidized( countries,( the( retail( price( of( gasoline( is( below(	
the( price( for( crude( oil( in( the( world( market( (30( US( cents/litre),( and( the(
subsidies( make( fuel( nearly( free.( The( population( in( these( countries( is( so(
large( that( the( total( subsidies( add( to( significant( amounts.( Iran( has( the(
second( lowest( prices( on( earth( of( 0.1( US$per( litre,( and( their( fuel( subsidy(
totals( roughly( 1/7( of( the( total( of( all( world( energy( subsidies( (Victor(
2009).(The(most(subsidizing(countries(are(essentially(the(fuel(suppliers.( (	
The( countries( with( the( highest( prices( (up( to( 2( US$/litre)( apply( ma	sK	
sive(taxes(to(energy(products(created(to(raise(funds,(dominated(by(wes	tK	
ern( European( countries.( All( Nordic( countries,( with( the( exception( of( Ic	eK	
««««««««««««««««««««««««««	(	3(http://www.xist.org/charts/ec_gdp1.aspx	(

((	Reforming*environmentally*harmful*subsidies	(	17	(	
land,( belong( to( this( group.(	In( the( middle( are( countries( t	hat( often( have( a(	
mix(of(both(patterns.(They(tax(some(fuels(while(subsidizing(others.	(	
The( pattern( for( diesel( subsidies( may( differ,( as( diesel( is( generally( a	pK	
plied( to( a( wider( array( of( purposes( than( transportation,( and( diesel( users(
are(often(particularly(wellKorganized(freight(haulers((Victor(2009).((	
Also,( it( is( important( to( be( aware( of(	new,* emerging* environmentally*	
harmful*subsidies	( distorting( the(market,( such( as( subsidies( to( lowKcarbon(	
energy(and(renewable( energy.(Policy(support(for(lowKcarbon(energy(has(
increased( significantly( over( the( past( decade.( Examples( are( subsidies( to(
biofuels(and(diesel(and(nuclear(power,(see(e.g.(examples(in(chapter(6(and(
Appendix( 2.( The( IEA( estimates( that( worldwide( government( support( to(
renewable( electricity( and( biofuels( amounted( to( $57( billion( in( 2009,( up(
from( $41( billion( in( 2007( (IEA( et( al.( 2010a).( These( estimates( do( not( i	nK	
clude( subsidies( for( renewable( heat( technologies( or( other( emerging( lowK
carbon( energy( technologies( such( as( CCS.( The( arguments( have( been( to(
constrain( growth( in( greenhouse( gas( emissions,( to( diversify( the( supply(
mix,( prompted( by( varying( oil( prices( and( to( reduce( unemployment( fo	lK	
lowed( by( the( economic( crises( (IEA( et( al.( 2010a).( Also,( subsidies( to( r	eK	
newable( energy( are( becoming( more( common( and( the( amount( seems( to(
be(increasing.((	
The( problem( with( such( subsidies( is( that( all( energy( sources( imply(e	nK	
vironmental( costs.( LowKcarbon( biofuels( and( diesel( still( emit( CO	2(and(	
local( pollutants,( windKpower( and( hydro( power( require( land( use( and(
have( aesthetical( costs.( It( the( subsidies( are( not( related( to( positive( exte	rK	
nalities,( see( chapter( 4.2,( they( classify( as( environmentally( harmful( subs	iK	
dies.( Rather( than( subsidizing( the( fossil( fuels( alternatives( in( order( to(
combat( climate( change,( carbon( emissions( should( be( efficiently( managed(
by( carbon( prices( and/or( emission( trading( systems( (see( also( the( discu	sK	
sion( of( correct( pricing( of( energy( related( externalities( in( chapter( 10.1,(
Appendix(1).(
2.2	 Possible(benefits(from(removing(environmentally(
harmful(subsidies	!	
The( main( benefits( from( subsidy( reforms( can( be( categorized( into( env	iK	
ronmental( benefits( and( economic( effects,( including( reduced( strain( on(
government(budgets(and(improved(economic(effectiveness.((
2.2.1	 	Environmental'benefits''	
Given( the( extensive( support( to( energy( consumption( and( production,(
removing( the( inefficient( subsidies( would( dramatically( affect( the( energy(
markets.( Subsidies( on( certain( energy( production( or( consumption( u	nK	
dermine( the( competitiveness( of( alternative( energy( sources( and( efficient(
energy( technologies.( Exemptions( from( environmental( taxes( can( lock( in(

18	(	Reforming*environmentally*harmful*subsidies	(	
polluting( technologies( and( hinder( low( cost( pollution( reductions.( In( pa	rK	
ticular,(subsidies(directed(to(reduce(specific(variable(costs(can(have(lockK
in( effects.( This( may( hinder( the( development( and( deployment( of( env	iK	
ronmentally( friendly( technologies( and( have( negative( environmental(
effects( in( the( longer( term.( The( longer( a( subsidy( is( granted,( the( more( it(
will(impact(on(the(lockKin(effect(and(therefore(on(the(environment.(	
Removal( of( subsidies( would( imply( structural( adjustment( and( i	mK	
proved( efficiency( in( productivity( and( consumption.( For( example,( lower(
subsidies(to(coal,(gasoline(and(biofuels(increase(energy(prices(in(general,(
reduce( consumption( and( promote( more( efficient( utilization( of( energy(
and( substitution( to( nonKsubsidized( energy( sources.( Since( the( subsidies(
are( foremost( targeted( at( fossil( fuels,( the( emissions( of( greenhouse( gases(
would(be(reduced.(This(represents(a(winKwin(situation,(as(it(represents(a(
cost(efficient(option(of(reducing(GHG(emissions.(	
Different( studies( show( different( benefit( estimates,( dependent( upon(	
which( countries( are( included,( time( period( and( subsidies.( In( a( review( of(
the( literature( on( fossilKfuel( subsidies,( Ellis( (2010)( looks( into( six( major(
multiKcountry,( multiKfuel( studies( undertaken( since( the( early( 1990s,( co	vK	
ering( in( both( OECD( and( nonKOECD( countries.( All( six( studies( found( that(
fossilKfuel( subsidy( reform( would( result( lower( CO	2( emissions,( in( a( range(	
of(1.1%(in(2010(to(18%(in(2050.((	
Burniaux( et( al.( (2009)( base( their( study( on( 20( nonKOECD( countries.(	
They( conclude( that( world( GHG( emissions( would( be( reduced( by( 10%( by(
2050( if( consumer( subsidies( for( fossil( fuels( and( electricity( in( these( cou	nK	
tries(were(phased(out.(	
IEA( (2010)( estimates( that( a( universal( phaseKout( of( all( fossilKfuel( co	nK	
sumption( subsidies( by( 2020( would( cut( global( primary( energy( demand(
by( 5%( and( CO	2( emissions( by( 6%( compared( with( a( baseKline( in( which(	
subsidies(remain(unchanged,(see(figure(2.2.(
(
(
(
(
(
(
(
(
(
(
(
(
(
Figure'2.2.'Impact'of'fossil5fuel'consumption'subsidy'phase5out'on'global'ene	r5	
gy5related'CO	2'emissions.'	
Source:!IEA!(2010).!

((	Reforming*environmentally*harmful*subsidies	(	19	(	
2.2.2	 	Improved'budget'balances''	
Further,( removing( subsidies( would( remove( a( costly( drain( on( the( go	vK	
ernment( budgets.( The( subsidies( are( most( often( motivated( in( equity( i	sK	
sues,( such( as( to( support( low( income( groups( or( particular( di	sK	
tricts/industries.( In( most( cases,( removals( of( subsidies( demand( altern	aK	
tive( subsidies( to( meet( the( same( political( goals,( leaving( the( net( budget(
gain(less(than(the(initial(cut(in(harmful(subsidies.((	
As( mentioned( above,( the( subsidies( levied( to( fossil( fuel( consumption(	
and( production( were( estimated( to( 0.7%( of( world( GDP( in( 2009.( The( bu	rK	
den( is( heavier( for( the( low(income( countries.( Among( 20( nonKOECD(cou	nK	
tries,( the( oil( products( subsidies( were( equivalent( to( 2.5%( of( GDP,( and(
examples(are(found(with(rates(up(to(15%(for(some(countries.((	
IEA(et(al.((2010b)(review(a(number(of(empirical(studies(of(the(impact(	
of( removal( of( energy( subsidies( to( the( poor( income( groups,( based( on(
computable( general( equilibrium( models( (CGE)( (Oktaviani( et( al.( 2007;(
Manzoor( et( al.( 2009;( Abouleinein( and( KheirK	ElKDin( 2009;( ESMAP( 2004)	.(	
These( studies	(generally( show( that( the( low( income( groups( lose( when(	
removing( the( subsidies.( However,( as( noted( by( the( IEA,( the(	CGE( models(	
do( not( account( for( the( impact( of( the( redist	ribution( of( public( revenue.(	
The( general( textbook(theory( tells( us( that( subsidies( are( better( targeted( if(
used( directly( by( cash( transfers.( An( efficient( redistribution( of( the( budget(
targeted( directly( at( the( affected( income( groups,( would( more( effectively(
benefi	t(the(poor.(	(	
2.2.3	 	Economic'benefits'	
Inefficient(subsidies(generally(disturb(the(allocation(of(resources.(Hence,(
removal( of( environmentally( harmful( subsidies( will( per( definition( i	nK	
crease(overall(welfare.(	
Ellis((2010)(looks(into(six(major(multiKcountry,(multiKfuel(studies(u	nK	
dertaken( since( the( early(1990s.( All( six( studies( found( that( fossilKfuel( su	bK	
sidy(reform(would(result(in(aggregate(	increases*in*GDP	(in(both(OECD(and(	
nonKOECD(countries(in(the(range(of(0.1(to(0.7%(per(year(to(2050. (	
Other( studies( analysing( the( direct( effects( on( GDP( show( a( first( order(	
decrease( in( overall( production.( It( is( important( to(note( that( these( studies(
do( not( capture( the( benefits( from( reducing( the( subsidies,( and( the( as( they(
focus( on( the( direct( consequences( for( GDP.( In( addition,( there( are( fee	dK	
back(mechanisms(from(the(environment(to(economic( efficiency(in(terms(
of( health( effects,( reduced( depreciation,( and( direct( welfare( effects( in(
terms( of( consumption( of( nature/environment( services.( To( estimate( the(
total(benefits(from(a(more(efficient(policy,(effects(from(redistributing(the(
reduced( budget( costs( to( subsidies( and( revenues( from( increased( taxes(
should(also(be(accounted(for.((	
Keeping( this( in( mind,( the( literature( shows( that( the( direct( effects( on(	
GDP(are(usually(negative.(Abouleinein(and(KheirK	ElKDin((2009)(study(the(	
impact(of(phasing(out(fuel(subsidies(in(Egypt.(They(find(that(the(elimin	aK

20	(	Reforming*environmentally*harmful*subsidies	(	
tion( of( energy( subsidies,( without( any( offsetting( policy( actions,( would(
reduce( average( annual( GDP( growth( by( 1.4( percentage( points( over( the(
reference( period( and( depress( the( welfare( levels( of( households( at( all( le	vK	
els( of( the( income( distribution.( Manzoor( et( al.( (2009)( estimate( that( r	eK	
moving(subsidies(to(the(energy(sector(in(Iran(results(in(shrinking(of(ou	tK	
put,( the( reduction( in( urban( and( rural( welfare( respectively( by( 13( and(
12%,( and( also( predict( hyperinflation.( ESMAP( (2004)( finds( that( the( e	fK	
fects( on( the( macroeconomic( level( of( the( removal( of( electricity( subsidies(
in( Mexico( are( small,( with( GDP,( exports,( imports,( and( employment( all(
experiencing(small(declines.(Welfare(decrease( for( all(income(classes,(but(
the( poor( are( affected( most( because( electricity( subsidies( are( more( i	mK	
portant(in(proportionate(terms(for(their(incomes.(Oktaviani(et(al.((2007)(
find( that( removing( the( fuel( subsidies( in( Indonesia( reduce( household(
incomes(and(increase(domestic(prices,(and(hence(impair(macroeconomic(
performance(of(the(economy.(Overall(incidence(of(poverty(increase(from(
9(to(13%(of(the( population,(with(rural(areas(worst(affected.(The( authors(
conclude( that( the( government( should( offset( the( impact( of( subsidy( r	eK	
moval( with( measures( to( compensate( households.( Compensation,( and(
general(recycling(of(the(increased( public(revenue,(will(stimulate(the(ec	oK	
nomic(growth(beyond(these(findings.((

3.	 The&Nordic&countries&	
According( to( the( abovementioned( estimates,( support( to( fossil( energy(
consumption(and(environmentally(harmful(subsidies(in(general(are(most(
widespread(in(developing(countries.(A(lower(need(to(alleviate(poverty(in(
rich( countries( may( be( the( most( important( reason( for( this( difference.(
Also,( higher( awareness( and( economic( possibility( to( prioritize( both( high(
income( and( a( good( environment( imply( more( weight( on( sound( enviro	nK	
mental( policies( in( rich( countries.( This( is( wellKknow( from( the( soKcalled(
Environmental( Kuznets( Curve( literature,( studying( the( causes( for( the(
inverted(UKcurve(between(income(and(emissions((Stern(2004;(Bruvoll(et(
al.(2003).((	
Sachs( (2006)( reviews( the( economic( and( political( performance( of( the(	
Nordic( countries( compared( to( the( EnglishKspeaking( OECD(countries( and(
the(continental(western(EU(countries.(He(finds(that(the(Nordic( countries(
have( relatively( high( rates( of( taxation( compared( to( the( other( countries,(
and(generally(perform(better(when(it(comes(to(economic(growth,(income(
per( person( and( incentives( to( work.( He( largely( attributes( this( to( the( a	cK	
ceptance( for( industrial( change,( active( labor( market( policies,( public( se	cK	
tor(commitments(to(higher(education,(retraining(and(R&D(etc.((	
The( high( income( levels( might( have( spurred( the( relatively( early( a	tK	
tempts( at( imposing( environmental( regulations( in( the( 1960s( and( 1970s(
in( the( Nordic( countries,( along( with( several( other( western( countries( that(
also( started( focusing( on( the( environment( at( that( time.( The( Nordic( cou	nK	
tries( were( likely( not( as( polluted( as( many( other( industrialized( countries,(
since( they( had( relatively( few( industrial( hot( spots( and( relatively( sparse(
population.( Thus,( high( environmental( standards( have( been( a( stronger(
norm( in( these( countries( compared( to( poorer( and( more( densely(popula	tK	
ed( areas( around( the( world.( In( general,( the( environmentally( harmful(
emissions(are(subject(to(taxes(or(direct(regulations,(and(the(use(of(subs	iK	
dies(to(energy(consumption(is(sparse(compared(to(many(other(countries.((
3.1	 Tax(reforms(	
All( Nordic( countries( have( implemented( environmental( tax( reform( pac	kK	
ages( the( last( decades.( Environmental( taxation,( i.e.( reduction( of( implicit(
subsidies,( has( been( accompanied( with( compensatory( measures,( inclu	dK	
ing( lower( conventional( taxes,( typically( labor( taxes( (see( ECON( 1997a;(
Larsen(2002,(TemaNord(2006a).((	
Denmark	(introduced(a(tax(on(fossil(fuels(in(1977.(Originally,(it(was(i	nK	
tended( to( decrease( the( energy( consumption( in( order( to( reduce( the( ba	lK

22	(	Reforming*environmentally*harmful*subsidies	(	
ance(of(payments(deficit(and(to(some(extent(stimulate(the(use(of(natural(
gas.(The(tax(scheme(was(expanded( over(time(to(include(coal( and(natural(
gas( as( well.(	A(tax( freeze( was( imposed( in( 2001( but( the( tax( has( recently(	
increased( somewhat( (TemaNord( 2009).( Other( taxes,( mainly( on( labor(
have(been(reduced(over(the(years.(	
During( the( early( 1990s( a( number( of( economic( instruments( were( i	nK	
troduced( for( environmental( and( energy( policy( purposes( in(	Finland	,( and(	
since( then( the( emphasis( on( taxation( has( gradually( shifted( from( taxation(
of( labor( to( taxation( of( polluting( activities( (TemaNord( 2009).( The( most(
important( environmental( taxes( are( today( taxes( on( fossil( fuel( and( ele	cK	
tricity( use,( with( the(	CO	2( tax( as( the( most( dominant.( Taxes( on( different(	
kinds(of(waste(and(the(registration(tax(on(cars(are(also(imposed.((	
In(2010(a(carbon(tax(was(introduced(on(all(fossil(fuels(used(in(	Iceland	,(	
and(the(tax(system(of(vehicles(was(changed(to(entirely(depend(upon(CO	2(	
emissions.((	
In(	Norway	,( economic( instruments( notably( through( taxes( on( CO	2(	
emissions( and( electricity( have( been( used( since( early( 1990s.( Taxes( on(
labor( and( capital( gains( were( reduced( through( a( tax( reform( in( 1992,( and(
various( excise( duties( and( the( value( added( tax( have( been( increased( to(
broaden( the( tax( base.( Another( form( for( compensation( followed( the( i	nK	
crease( in( the( taxes( on( electricity( and( heating( oils( in( 2001,( with( an( i	nK	
crease(the(basic(tax(allowances.((	
In(	Sweden	( a( green( tax( shift( has( taken( place( since( the( 1990s,( higher(	
en	vironmental( taxes( have( been( shifted( against( increased( personal( a	lK	
lowances( and( lower( social( security( contributions.( The( government( has(
increased(the(	CO	2(tax,(the(electricity(tax,(the(diesel(tax,(the(waste(tax,(the(	
tax( on( gravel,( the( pesticide( tax,( the( road( vehicle( tax( and( petrol( tax,( and(
introduced(an(electricity(tax(for(industry((TemaNord(2009).	(	
3.2	 Remaining(subsidies(	
Still,(although(the(problem(compared(to(many(other(countries(are(small,(
the( Nordic( countries( still( have( many( remaining( producer( related( EHS,(
both( as( direct( subsidies( over( public( budgets( to( primary( sectors( and( e	nK	
ergy( production,( and( as( foregone( revenues( in( terms( of( exemptions( from(
optimal(taxation(for(certain(industries.(	
Environmentally( harmful( subsidies( financed( over(	public* budgets	(are(	
analysed( in( SWECO( (2008).( In( Norway,( these( are( typically( related( to(
support( to( transport,( agriculture,( forestry,( transport( and( regional( deve	lK	
opment.( Several( forms( of( transport( support( are( given( both( to( airports,(
roads( and( sea( transport,( which( stimulate( emissions( to( air( and( sea.( Su	pK	
port( to( primary( industries( also( stimulate( emissions,( and( contribute( to(
reduce(biological(diversification.(	
Further,( subsidies( are( given( to( stimulate( energy( production( and( sa	vK	
ing.( In( Norway,( 1.1( bill( NOK( was( allocated( to( production( of( wind( power(

((	Reforming*environmentally*harmful*subsidies	(	23	(	
in( 2009,( and( significant( subsidies( are( given( to( biofuels( and( heating( pr	oK	
jects.( All( of( these( energy( sources( imply( environmental( costs.( If( not( d	iK	
rected( at( positive( externalities,( the( subsidies( are( covered( by( the( defin	iK	
tion( of( environmentally( harmful( subsidies( (cf.( chapter( 4).( Rather( than(
subsidizing( the( fossil( fuels( alternatives,( carbon( emissions( should( be( eff	iK	
ciently( managed( by( carbon( prices( and/or( emission( trading( systems( (see(
also( the( discussion( of( correct( pricing( of( energy( related( externalities( in(
Appendix(1).((	
Support( is( directed( to( certain( industries( out( of( competitiveness( and(	
employment( concerns.( Direct( budget( support( is( politically( controversial(
and( can( also(be(practically(difficult( due(to(international(competitiveness(
legislation( (cf.( EU).( Instead,(	tax* differentiation* and* exemptions	(are(co	mK	
mon.( The( Norwegian( carbon( taxes( serve( as( example.( These( are( highly(
differentiated,( with( certain( industries( facing( low( rates( to( protect( labour(
and(stimulate(regional(development.(The(subsidy(element(consists(of(the(
avoided( tax( payment( in( the( industries( with( exemptions( or( lower( rates(
than(some(agreed(benchmark((cf(chapter(5.1).(Bruvoll(and(Dalen((2008)(
estimated( the( implicit( subsidies( to( 2,8( bill.( NOK( in( 2006,( see( figure( 3.1.	4(	
The(main(subsidized(sectors(are(the(	process(industries,(metal(and(che	mK	
ical( production,( and( fishing.( Some( of( these( polluters( have( later( been( i	nK	
cluded(in(the(emission(trading(system,(but(with(free(allowances.(	(	
Similar( implicit( subsidies( are( present( in( the( other( Nordic( countries,(	
with(lower(taxes(for(industries(and(electricity(generation.(
(
(
(
(
(
(
(
(
(
(
(
Figure'3.1.'Implicit	'subsidies'(and'taxes)'due'to'CO2'tax'exemptions'(and'ove	r5	
pricing)'in'Norway,'NOK,'2006.	'	
Source:!Bruvoll!and!Dalen!(2008,!2010).!
(
Reduced( VAT(rates( are( also( common( (see( also( chapter( 6.6).( The( general(
VAT(rates( are( about( 25%( in( all(the( Nordic( countries( (Iceland( 24,5%( and(
Finland( 22%),( and( all( countries( except( Denmark( use( reduced( rates( of(
about( 8K14%.( Several( the( VAT( rates( are( reduced( for( potentially( env	iK	
ronmentally( harmful( goods( and( services,( such( as( for( food( and( drinks,(
««««««««««««««««««««««««««	(	4(The(	EU(ETS(carbon(price,(which(also(corresponds(to(the(average(tax,(is(chosen(benchmark.(Households,(the(	offshore(sector(and(landfills(	pay(more(than(the(marginal(cost,(which(corresponds(to(an(uneven(fi	scal(tax(	burden.	(

24	(	Reforming*environmentally*harmful*subsidies	(	
and( passenger( transport.( The( VAT( is( totally( exempted( for( households(
energy( consumption( in( certain( rural( areas( (northern( parts( of( Norway)(
and( for( electricity( cars.( Electricity( taxes( are( also( lower( for( Norwegian(
industries(and(in(the(northern(parts(of(Sweden(and(Norway.((	
Another( type( of( subsidies( carried( out( as( tax( exemptions,( are( subs	iK	
dies(related(to(work(travels((see(also(chapter(6.7).(In(all(the(Nordic(cou	nK	
tries,( commuter( subsidies( are( formulated( as( reduced( income( taxes( for(
workers( travelling( between( their( domicile( and( second( residents( related(
to( their( work.( Deductions( are( also( given( to( general( work( travels( over( a(
certain(distance.((	
Indirect( subsidies( formulated( as( tax( exemptions( are( harder( to( reveal(	
and( calculate( than( direct( subsidies( to( fossil( fuel( consumption.( More(
thorough(investigation(of(these(sources(will(contribute(to(a(fuller(picture(
of(the(environmentally(harmful(subsidies(in(high(income(countries.((
(

4.	 Definition&of&environmentally&
harmful&subsidies&&	
4.1	 Theoretical(foundation	!	
To( decide( the( appropriate( actions( to( reduce( the( negative( effects( of( env	iK	
ronmentally( harmful( subsidies,( it( is( necessary( to( clarify( the( definition(
within(a(theoretical(framework.(	
In( a( Perfectly( Competitive( Market,	5(all( resources( are( efficiently( ut	iK	
lized( and( so	Kcalled( Pareto	Koptimality( is( achieved.( Pareto	Koptimality(	
means(that(no(one(can(increase(utility(unless(at(the(expense(of(others.(In(
this( ideal( situation( no( subsidies( are( needed,( except( for( re	Kdistribution(	
conce	rns.( But( in( reality,(market( failures,( such( as( external( effects,( market(	
power,( lack( of( information,( lack( of( competition( etc.( are( present( in( all(
economies.( Subsidies( are( one( of( several( means( to( correct( for( market(
failures.( Subsidies( then( serve( two( purposes;(	to( correct( for( market( fai	lK	
ures,( and( to( redistribute( wealth( out( of( equity( concerns,( see( summary( in(
table(4.1.	(	
Table&4.1.&The&main&principles&for&taxes&and&subsidies.&
&	Market&failures	&	ReFdistribution	&	
Taxes	!	Taxes!to!correct!negative!externalities,! equal!to!the!marginal!external!effect	!	Revenue	s!to!finance!subsidies!and!	other!public!expenditure	!	Subsidi es	!	Subsidi es!to!correct!positive!externalities,!equal!to!the!marginal!external!effect	!	Subsidi es!to!redistribute!wealth!according!to!political!preferences	!	
(
The( usual( cause( for( using( subsidies( in( the( market( failure( context,( is( to(
correct( for( externalities.( Externalities( are( costs( and( benefits( not( tran	sK	
mitted(through(prices(and(incurred(by(another(party(than(those(affected(
by( the( cost( or( benefit.( Hence,( the( market( prices( do( not( reflect( the( full(
social( costs( or( benefits( of( producing( or( consuming( a( product( or( service,(
and(producers(and(consumers(may(either(not(bear(all( of(the(costs(or(not(
reap(all(of(the(benefits(of(the(economic(activity.(A(benefit(is(called(a(pos	iK	
tive( externality( or( an( external( benefit,( while( a( cost( is( called( a( negative(
externality(or(an(external(cost.(	
In( the( presence( of( positive( externalities,( a( third( party( often( benefits(	
from(a(good( at(no(cost.(In(an(economic(perspective,(too(little(of(the(good(
««««««««««««««««««««««««««	(	5(The(core(assumptions(behind(a(Perfectly(Competitive(Market(are:(many(suppliers(each(with(an(insignificant(
share(of(the(market,(the(market(supplies(homogeneous(or(standardised(products,(perfect(information,(free(
entry(and(exit(of(sellers(	in(the(market,(and(no(externalities(in(production(and(consumption(so(that(there(is(no(	divergence(between(private(and(social(costs(and(benefits.	(

26	(	Reforming*environmentally*harmful*subsidies	(	
�‹�•� �’�”�‘�†�—�…�‡�†� �‘�”� �…�‘���•�—���‡�†ä� ��š�ƒ���’�Ž�‡�•� �ƒ�”�‡� �‡�†�—�…�ƒ�–�‹�‘��� �‘���‡� �’�‡�”�•�‘���•ï�
knowledge( level( benefits( the( society( beyond( the( private( individual( util	iK	
ty),( network( effects( (the( more( actors( using( a( network,( the( better( for(
others( using( the( same( network),( research( and( development( (e.g.( new(
technologies(can(be(disseminated(for(use(by(other(producers).	*External	i;	
ty*subsidies	(to(the(activity(can(be(used(to(correct(the(market(and(increase(	
the( supply( of( the( good,( either( as( price( and( investment( subsidies( or( as(
government(provisions.(	
Environmental( economics( typically( deals( with( negative( external	iK	
ties.( Examples( are( pollution( associated( with( transport,( or( energy( pr	oK	
duction( and( consumption.(	Externality* taxes	( are( efficient( corrections( of(	
negative( externalities,( with( optimal( taxes( equal( to( the( marginal( cost( of(
the(externality.	6((	
The( other( main( reason( for(	subsidies	( is( reKdistribution( of( wealth( and(	
the( support( of( specific( groups.( Support( to( publicly( provided( goods,(
support( of( low( income( groups( and( externality( subsidies( are( generally(
financed( b	y(fiscal* taxes	.( According( to( theory,( fiscal( taxes( should( min	iK	
mize( market( distortions.	7( This( is( in( contrast( to( externality( taxes,( for(	
which( one( purpose( is( to( influence( market( behaviour( and( to( reduce( the(
externalities.(
4.2	 Defining(inefficient(subsidies(	!	
In(this(work(	our(reference(point(is(the(perfect(situation(where(taxes(and(	
subsidies( optimally( correct( external( effects( and( non	Koptimal( distrib	uK	
tion.	!We(term(all(other(subsidies(	inefficient(subsidies.	((	
In( theory( an( inefficient( subsidy( may( be( a( subsidy( on( the( correct( item,(	
but(with(incorrect(dosage.(In(this(case(we(may(consider(the(incorrect(part(
of( the( dosage(to( be( inefficient.( Or( it(may( be( a(subsidy( on( an( inferior( item,(
i.e.( a( situation( where( a( subsidy( on( another( item(would( have( achieved( the(
same(objective(at(a(lower(distortionary(cost(to(the(economy.((	
In( practice( the( most( obvious( and(	first*	type( of( inefficient( subsidies( is(	
subsidies( to( polluting( activities( over( public( budgets,( with( an( unclear(
distributional(purpose.((	
The(	second*	type(of(inefficient(subsidies(is(the(indirect(support(related(	
to( exemptions( from( optimal( taxation.( The( second( type( also( implies( r	eK	
duced( public(budgets(relative(to(the(reference(point,(since(failure(to( co	rK	
rect( for( negative( externalities( implies( lost( revenues.( Tax( exemptions( are(
hence(equivalent(to(budgetary(subsidies(to(polluting(activities.((
««««««««««««««««««««««««««	(	6(Due(to(the(fiscal(element(in(externality(taxes	,(total(taxes(on(polluting(goods(should(vary(according(to(the(	
externality(rule(and(the(elasticity(of(demand(by(taking(into(account(the(additivity(theorem(in(Sandmo((2000).	(	7(Under(simplifying(assumptions,(the(fiscal(tax(rate(on(a(good(should(then(be(invers	ely(proportional(to(the(	
corresponding(own(price(elasticity(of(demand((Ramsey(1927).(Further,(taxes(should(be(levied(at(the(end(use,(
as((differentiated)(value(added(taxes((VAT),(implying(no(taxes(on(intermediate(goods(and(imports((Diamond(and(Mirrlees(1971)	.(

((	Reforming*environmentally*harmful*subsidies	(	27	(	
Finally,( the( third( category( covers( other( inefficient( subsidies( which(	
are( of( more( indirect( nature.( This( may( be( regulatory( support( mech	aK	
nisms,( income( and( price( support,( preferential( market( access,( exem	pK	
tions( from( governmental( standards( and( other( forms( of( subsidies( (see(
examples(later(in(table(5.1),(given(that(these(subsidies(do(not(correct(for(
market(failures(or(effectively(reKdistribute(wealth.(	
Further,( although( it( is( matter( of( judgement( we( believe( that( when(	
taking( the( reference( point( above,( it( is( not( meaningful( to( include(	eff	i;	
cient* subsidies	( in( the( definition( of( environmentally( harmful( subsidies,(	
even( if( efficient( subsidies( increase( the( environm ental( pressure.( For(
example,( subsides( correcting( for( positive( externalities,( such( as( to( r	eK	
search(and(education(can(increase(emissions( related( to(these( activities.(
Subsidies( correcting( for( market( failures( should( not( be( reduced( despite(
their( environmental( effects.( Given( such( subsidies,( the( label( harmful(
does( not( bring( about( the( right( connotations.( Instead,( if( not( already(
correctly( regulated,( the( environmental( costs( should( be( corrected(
through(appropriate(regulation.(	
Principally( the( definition( of(	environmentally* harmful* subsidies	( is(	
equivalent( to( all(	inefficient* subsidies	.(For( practical( purposes,( we( are( only(	
concerned( with( those( inefficient( subsidies( that( cause( environmental(
damages(of(some(significant(extent.(	
We( summarize( the( definition( of( environmentally( harmful( subsidies(	
as(follows:((	
(	
�x Environmentally(harmful(subsidies(are(inefficient(subsidies(causing(
(substantial)(negative(environmental(effects(	
�x Inefficient(subsidies(are(subsidies(other(than(those(that(efficiently(
correct(for(positive(externalities(or(efficiently(correct(for(
distributional(issues(	
�x For(practical(purposes(inefficient(subsidies(can(be(categorized(in(
three(main(groups:((
A. Subsidies(to(negative(environmental(externalities(	
B. Exemptions(from(taxation(of(negative(environmental(
externalities(	
C. Other(inefficient(subsidies((	
(
(
(
(
(
(

28	(	Reforming*environmentally*harmful*subsidies	(	
4.3	 Partial(market(effects(of(environmentally(harmful(
subsidies	!	
To( illustrate( the( principal( differences( between( type( A.( and( B.( subsidies,(
we(schematically(discuss(two(examples.((
4.3.1	 	Exemptions'from'taxation'of'negative'environmental'
externalities'	
The( first( example( illustrates( a( market( with( a( polluting( production( tec	hK	
nology,( for( example( coal( based( electricity( production,( see( figure( 4.1.(
Total( supply( faces( increasing( marginal( production( costs,( while( the( wil	lK	
ingnessK	toKpay((i.e.(demand(for(electricity)(is(downward(sloping.(In(equ	iK	
librium,(demand(meets(supply(at(	X*and(at(the(price(	p.((	
In(addition(to(the(costs(faced(by(the(producer,(the(production(implies(	
external(costs((for(example(carbon(emissions).(Hence,(the(total( marginal(
production( costs( are( higher( than( the( private( costs.( A( lack( of( taxation(
implies( an( efficiency( loss( equal( to( the( shaded( triangle,( i.e.( the( integral( of(
the(area(where(marginal(social(costs(exceed(marginal(willingness(to(pay.((	
The( optimal( equilibrium( would( be(	X*	,(p*,( while( the( actual( solution( is(	
at( a( higher( production,(	X,( and( lower( price,(	p.( The( firstKbest( policy( would(	
be( to( levy( a( tax( equal( to( the( marginal( damage( cost( of( production,( hence(
�”�ƒ�‹�•�‹���‰� �–�Š�‡� �’�”�‘�†�—�…�‡�”ï�•� �…�‘�•�–� �ƒ���†� �•�‡�…�—�”�‹���‰� �–�Š�‡� �‘�’�–�‹���ƒ�Ž� �•�‘�Ž�—�–�‹�‘��ä� ��‹���…�‡� �–�Š�‡�
reference( point( for( the( firstKbest( option( is( at(	X*	,(p*,( an( exemption( of( the(	
externality( tax( is( equivalent( to( an( environmentally( harmful( subsidy,( cf.(
situation(B.(above.(
(
�
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
Figure'4.1.'Lack'of'externality'taxes.'(Symbols:'X=quantity,'p=price,'*=optimal'
adjustment).'
(

((	Reforming*environmentally*harmful*subsidies	(	29	(	
Instead( of( environmental( taxation,( subsidies( of( alternatives( to( negative(
externalities(often(appear(more(politically(acceptable.( The(relevant(focus(
in(this(report(is(when(the(subsidies(are(given(to(negative(externalities.(
4.3.2	 	Subsidies'to'negative'environmental'externalities'	
Subsidies( to( negative( externalities( imply( two( additional( market( disto	rK	
tions.( A( common( example( is( when( rather( than( taxing( carbon,( subsidies(
are( given( to( fossil( fuels( (see( examples( in( chapter( 6),( see( figure( 4.2.( We(
use(producer(subsidies(as(a( case(for(illustration,(but(as(shown(in(Appe	nK	
dix( 1,( the( principal( market( effects( are( the( same( for( consumer( subsidies.(
��‡� �‹���…�Ž�—�†�‡� �ƒ� ò�…�Ž�‡�ƒ��ó� �–�‡�…�Š���‘�Ž�‘�‰�›á�	Sg,( in( addition( to( the( polluting( techno	lK	
ogy,(	Sb,(to( illustrate( the( effects( of( such( subsidies( on( nonKpolluting( tec	hK	
nologies.( The( supply( curve(	S*( represent( the( social( cost( curve,( including(	
�„�‘�–�Š� �‡�š�–�‡�”���ƒ�Ž� �…�‘�•�–�•� �ƒ���†� �’�”�‘�†�—�…�‡�”�•ï� �…�‘�•�–�•ä� ��‡���…�‡� �–�Š�‡� �‘�’�–�‹���ƒ�Ž� �•�‘�Ž�—�–�‹�‘��á�
�‹���…�Ž�—�†�‹���‰��„�‘�–�Š��’�”�‘�†�—�…�‡�”�•ï��…�‘�•�–�•��ƒ���†��‡�š�–�‡�”���ƒ�Ž��…�‘�•	ts,(is(in(	X*	,(p*.(	
We( look( at( a( situation( where( the( external( costs( are( not( internalized,(	
and( the( initial( market( solution( is( at(	X0,(p0.( So( far,( this( situation( implies( a(	
subsidy( of( type( B.( as( explained( above,( with( a( corresponding( efficiency(
loss(equivalent(to(the(dark(shadowed(area.((	
We(then(look(at(a(situation(where(the(government(subsidizes(the(po	lK	
luting( technology( by( a( subsidy( rate(	r,( cf.( A.( above.( The( supply( then( shift(	
outwards( (	S1b)( and( total( supply( increases( (from(	S0*to*S1).( The( market(	
equilibrium(price(decreases((from(	p0(to(	p1).((	
The( subsidies( imply(lower( energy( prices,( reduced( production( and( i	nK	
centives( to( invest( in( alternative( energy(	Xg,( and( the( polluting( energy( is(	
stimulated.( The( efficiency( loss( expands( due( to( an( increasing( difference(
between(marginal(social(production(cost,	*S*,(and(marginal(willingness(to(	
pay,(	D.(	
The(	winners	(are(	consumers	( (facing( lower( prices)( and(	polluting* pr	o;	
ducers	( (receiving( higher( prices(	p1+(r).( The(	losing* parties	( are( the(	env	i;	
ronment	( (as( pollution( increases),( the(	clean	( technologies( (as( the( market(	
price( decreases),( and(	public* budgets	( (direct( subsidy( expenditure( and(	
lack(of(tax(income).(
(
(
(
(
(
(
(
(
(
(
(
(

30	(	Reforming*environmentally*harmful*subsidies	(	
(
(
(
(
(
(
(
(
(
(
(
(
(
(
�
�
�
�
�
Figure'4.2.'A'subsidy'to'a'negative'externality.'(symbols:'S=supply,'D=demand,'
g=non5polluting'technology,'b=polluting'technology,'x=quantity,'p=price,'
r=subsidy,'0=time'before'the'subsidy,'1=time'after'subsidy,'*=optimal'adjus	t5	
ment).'
�
This( illustrates( that( removing( environmentally( harmful( subsidies( is( not(
only(a(matter(of(removing(direct(subsidies,(but(a(twoKstep(procedure:(	
(	
1. first(to(remove(budget(subsidies(to(polluting(technologies((A)(	
2. second(to(include(the(technologies(in(externality(tax(regimes((B)(	
(
Examples(are(to(reduce(subsidies(to(coal(production((1)(and(to(introduce(
carbon(taxes(on(the(emissions(from(coal(consumption((2).((

5.	 The&accounting&of&
environmentally&harmful&
subsidies&	
The( definition( of( environmentally( harmful( subsidies( for( accounting( pu	rK	
poses(proves(challenging(in(practise.(Several(reports(have(approached(the(
definition( problem( earlier,( starting( out( with( the( definition( of( subsidies( in(
general.(First,(it(is(challenging(to(define(what(instruments(are(really(subs	iK	
dies.( Second,( it( is( a( challenge( to( define( which( subsidies( are( inefficient.(
Third,( practicability( concerns( require( a( choice( of( which( inefficient( subs	iK	
dies(are(relevant(for(studies(of(negative(environmental(effects.((
5.1	 Subsidies(in(general(	
In( practise,( there( are( numerous( ways( of( creating( subsidies.( Subsidies(
may( be( formulated( as( direct( lump( sum( transfers( or( feedKin( tariffs,( or( as(
indirect( support.( The( latter( is( particularly( challenging,( as( the( subsidies(
can(take(form(as(differences(in(domestic(and(world(market(prices(resul	tK	
ing( from( trade( restrictions,( foregone( resource( rents( in( public( projects(
due( to( low( discount( rates,( publicly( owned( enterprises( or( prices( lower(
than(marginal(costs(due(to(e.g.(lack(of(pricing(negative(externalities.(Su	bK	
sidies( may( target( current( production( (e.g.( production( grants),( future(
production( (e.g.( R&D)( or( future( obligations( (e.g.( government( assistance(
to( environmental( trust( funds).( Some( target( specific( activities( and( entail(
obligations( for( the( recipient,( such( as( producing( energy( by( a( particular(
method( or( requiring( that( certain( facilities( are( modernised( or( shutdown(
(OECD(2005).((	
In(IEEP(et(al.((2007),(different(definitions(of(subsidies(for(the(purpose(	
of( accounting( are( reviewed,( see( table( 5.1.( The( European( system( of( a	cK	
counts( (ESA)( definition( aiming( to( satisfy( national( accounting( represents(
one(of(the(narrow(definitions;((	
òCurrent(unrequited(payments(from(government(to(producers(with(the(o	bK	
jective(of(influencing(their(levels(of(production,(their(prices(or(the(remuner	aK	
tion(of(the(factors(of(production.	ó(	
The(WTO(agreement(on(subsidies,(see(table(5.1,(is(the( only(international(
definition( that( is( both( legally( binding( and( agreed( across( sectors( and(
countries( (IEEP( et( al.( 2007;( WTO( 2011).( According( to( the( agreement,( a(
subsidy(is(deemed(to(exist(if(there(is:(

32	(	Reforming*environmentally*harmful*subsidies	(	
�x a(financial(contribution	(by(a(government(or(any(public(body	8(	
�x there(is(any(form(of(income(or(price(support,(and(	
�x a(benefit(is(thereby(conferred(
(	
All( three( of( these( elements( must( be( satisfied( in( order( for( a( subsidy( to(
exist.((	
This( definition( is( relatively( comprehensive( and(	serves( as	(a( starting(	
point(for(many(definitions(used(in(practice.(However,(the(definition(is(an(
instrument(of(international(trade(and(law,(and(does(not(specify(foregone(
revenues(related(to(lack(of(environmental(taxation	.(	
The(OECDs(perspective(is(even(broader(by(defining(a(subsidy(as:(
ò�ƒ��”�‡�•�—�Ž�–��‘�ˆ��ƒ��‰�‘�˜�‡�”�����‡���–��ƒ�…�–�‹�‘����–�Š�ƒ�–��…�‘���ˆ�‡�”�•��ƒ����ƒ�†�˜�ƒ���–�ƒ�‰�‡��‘����…�‘���•�—���‡�”�•��‘�”�
�’�”�‘�†�—�…�‡�”�•á��‹����‘�”�†�‡�”��–�‘��•�—�’�’�Ž�‡���‡���–��–�Š�‡�‹�”��‹���…�‘���‡��‘�”��Ž�‘�™�‡�”��–�Š�‡�‹�”��…�‘�•�–�•äó	(	
(OECD(2005).((	
This(definition(covers(general(support(measures,(such(as(tax(rebates(and(
exemptions,( preferential( market( access,( limited( liabilities,( and( selective(
exemptions(from(government(standards.(It(does(however(not(include(all(
types( of( lack( of( internalization( of( market( failures,( i.e.( the( full( costs,( u	nK	
less(	lack	(of(action(is(also(defined(	�ƒ�•��ƒ��–�›�’�‡��‘�ˆ�ò�‰�‘�˜�‡�”�����‡���–��ƒ�…�–�‹�‘��óä�	(	
��‹�‡�–�‡�”�•� s{{y� �†�‡�ˆ�‹���‡�•� �•�—�„�•�‹�†�‹�‡�•� �ƒ�•� ò	deviations* from* full* costing	óá� �ƒ�Ž�•�‘�	
including( implicit( income( transfers( resulting( from( lack( of( full( cost( pri	cK	
ing( or( nonKinternalisation( of( externalities,( cf.( the( element( B.( in( chapter(
4.2.( This( is( the( most( comprehensive( definition,( principally( including(
deviation( from( optimal( pricing( and( internalisation( of( external( benefits(
and(costs.(
&
&
&
&
&
&
««««««««««««««««««««««««««	(	8((i)(a(government(practice(involves(a(direct(transfer(of(funds((e.g.(grants,(loans,(and(equity(infusion),(pote	nK	tial(direct(transfers(of(funds(or(liabilities((e.g.(loan(guarantees);	(	
(ii)(government(revenue(that(is(otherwise(due(is(foregone(or(not(collected((e.g.(fiscal(incentives(such(as(tax(
credits);((iii)(a(government(provides(goods(or(services(other(than(general(infrastructure,(or(purchases(goods; (
(iv)(a(government(makes(payments(to(a(funding(mechanism,(or(entrusts(or(directs(a(private(body(to(carry(ou	t(	
one(or(more(of(the(type(of(functions(illustrated(in((i)(to((iii)(above(which(would(normally(be(vested(in(the(government(and(the(practice,(in(no(real(sense,(differs(from(practices(normally(followed(by(governments. (

((	Reforming*environmentally*harmful*subsidies	(	33	(	
Table&5.1.&Mapping&types&of&subsidy&to&definitions &
Type&of&subsidy	&	Definitions&of&a&subsidy	&	
&	ESA	&	WTO	&	OECE	&	Pieters	&	
OnFbudget&subsidies	&	
Direct!transfer!of!funds,!e.g.!grants!	!	X!	X!	X!	X!	Potential!direct!transfers!of!funds,!e.g.!covering!liabilities	!	!	X!	X!	X!	Government!provides!goods!or!services!other!than!general!infrastructure	!	!	X!	X!	X!	Government!	direct s!other!bodies!to!do!any!of!the!above	!	!	X!	X!	X!	
OffFbudget&subsidies	&	
Market!price!support	!	!	X!	X!	X!	Government!revenues!due!are!foregone!or!not!collected,! e.g.!tax!credits	!!	X!	X!	X!	Tax!exemptions!and!rebates	!	!	X!	X!	X!	Preferential!market!access	!	!	X!	X!	X!	Accelerated!depreciation!allowances	!	!	!	X!	X!	Regulatory!support!mechanisms,!e.g.!feedin!tariffs,!demand!quotas	!	!	!	X!	X!	Selective!exemptions!from!government!standards	!	!	!	X!	X!	Resource!rent!for!foregone!natural!resources	!	!	!	X!	X!	Implicit!subsidies,!e.g.!resulting	!from!the!provision!of!infrastructure	!	!	!	!	X!	Implicit!income!transfers!resulting!from!a!lack!of!full!cost!pricing	!	!	!	!	X!	Implicit!income!transfers!resulting!from!non	Ointernalisation!of!externalities	!!	!	!	X!	
Source:!IEEP!et!al.!(2007),!Valsecci!et!al.!(2009).!
5.1.1	 	Subsidies'with'negative'environmental'effects'	
The( definition( of( the( narrower( concept( of( environmentally( harmful( su	bK	
sidies( involves( further( challenges.( Several( definitions( exist( in( the( liter	aK	
ture,( which( are( not( necessarily( in( line( with( our( theoretical( definition( in(
chapter( 4.2,( as( they( may( also( include( subsides( efficiently( correcting( for(
market(failures(and(equality(issues.((	
For( example,( Valsecchi( et( al.(	(2009)( adapt( the( following( definition(	
from(	OECD((2005):(	(	
ò��Ž�Ž��‘�–�Š�‡�”��–�Š�‹���‰�•��„�‡�‹���‰��‡�“�—�ƒ�Žá��–�Š�‡��‡���˜�‹�”�‘�����‡���–�ƒ	lly(harmful]subsidy(increa	sK	
es(the(levels(of(output/use(of(a(natural(resource(and(therefore(increases(the(
�Ž�‡�˜�‡�Ž��‘�ˆ��™�ƒ�•�–�‡á��’�‘�Ž�Ž�—�–�‹�‘����ƒ���†����ƒ�–�—�”�ƒ�Ž��‡�š�’�Ž�‘�‹�–�ƒ�–�‹�‘����–�‘��–�Š�‘�•�‡��…�‘�����‡�…�–�‡�†äó	(	
In(their(working(definition(of( fossil(fuel(subsidies,(the( EU(use(the(worldK
market( prices( as( a( benchmark,( based( on( the( approach( of( the( IEA( (G20(
2010):((	
ò���ˆ�‘�•�•�‹�Ž	Kfuel(subsidy(is(any(government(measure(of(program(with(the(obje	cK	
tive(or(direct(consequence(of(reducing(below(worldKmarket(prices,(including(
all(costs(of(transport,(refining(and(distribution,(the(effective(cost(for(fossil(
fuels(paid(by(final(consumers,(or(of(reducing(the(costs(of(increasing(the(rev	eK	
nues(of(fossilK	�ˆ�—�‡�Ž��’�”�‘�†�—�…�‹���‰��…�‘���’�ƒ���‹�‡�•äó	(	
In( the( practical( approximation( to( their( calculations( of( environmentally(
harmful( subsidies,( the( OECD(has( identified( five( main( approaches( (OECD(
2005,( IEEP( et( al.( 2007):(	Programme*aggregation	;( adding( up( the( budge	tK	
ary( transfers( of( relevant( government( programmes,(	marginal* social* cost	;(	
measuring( the( difference( between( the( price( actually( charged( and( the(
marginal( social( cost,(	resource* rent	;( measuring( the( resource( rent( for	eK

34	(	Reforming*environmentally*harmful*subsidies	(	
gone( for( natural( resources,(	producer/consumer* support* estimate	;( mea	sK	
uring(the(budgetary(transfers(and(price(gaps(under(relevant(government(
programmes(affecting(production(and( consumption(alike,(and(	price;gap	;(	
measuring(the(difference(between(the(world(and(domestic(market(prices(
of(the(product(in(question.(	
The(	Effective* Rates* of* Assistance	( (ERA)( method( measures( net( go	vK	
ernment( assistance( to( an( industry( by( comparing( the( difference( betwee	n(	
the( valueKadded( by( the( assisted( sector( to( the( valueKadded( generated( by(
the( same,( but( unassisted( sector.( It( takes( into( account( not( only( support(
directed( at( an( industry( but(the( amount( of( support( indirectly( received( or(
the( tax( paid( by( the( industry( because( the( government( has( subsidized( or(
taxes( a( supply( industry( (IEEP( et( al.( 2007).( The( Norwegian( ERA( mea	sK	
urements( (see( e.g.( Fæhn( et( al.( 2001)( cover( indirect( taxes( and( subsidies,(
budget( support( included,( border( protection( and( price( regulations,( such(
as(discrimination(of(energy(prices.((	
These( reports( offer( useful( guidelines( for( the( definition( of( enviro	nK	
mentally( harmful( subsidies( in( practise.( Several( of( the( initiatives( me	nK	
tioned( in( chapter( 1( aim( to( improve( these( definition( frameworks.( The(
most( recent( one( is( the( Global( Subsidies( Initiative( GSI( guide( for( measu	rK	
ing( subsidies( to( fossilKfuel( producers,( including( a( list( of( potential(	direct*	
transfers	,(government* revenue* foregone	,(government;provided* or* ;*	pu	r;	
chased*goods*and*services	(and(	income*or*price*support	((GSI(2010).(	
Wh	en( comes( to( the( size( of( the( subsidies,( the( most( obvious,( direct(	
budget(support(type(subsidies(are(easy(to(measure(in(terms(of(economic(
transfers.( The( implicit( subsidies( related( to( a( lack( of( internalization( of(
environmental( cost( are( more( difficult( to( estimate( because( it( is( not( obv	iK	
ous(what(prices(are(correct.(The(total(effects(of(all(forms(of(subsidies(are(
principally( the( sum( of( the( general( equilibrium( effects( affecting( not( only(
the( polluters,( but( also( to( sectors( related( to( the( polluting( agents( and( i	nK	
teraction( throughout( the( economy.( Hence,( general( equilibrium( models(
may(be(necessary(to(capture(the(total(costs,(cf.(chapter(2.2.((
5.2	 Recommendations(for(accounting(of(
environmentally(harmful(subsidies	!	
Aside( from( pointing( to( the( several( studies( of( subsidy( accounting( fram	eK	
work( above,( it( is( beyond( the( scope( of( this( project( to( further( define( the(
practical( measurement.( For( more( details,( we( point( to( the( onKgoing(
works( by( e.g.( GSI( (2010).( Based( on( the( review( of( the( earlier( works,( we(
see( some( important( aspects( to( include( in( the( further( development( of(
guidelines( for( accounting( of( environmentally( harmful( subsidies.( These(
follow(as(consequences(of(using(the(perfect(competitive(market(situation(
as(a(reference,(and(are(important(to(the(policy(implications.((

((	Reforming*environmentally*harmful*subsidies	(	35	(	
5.2.1	 	Exclude'efficient'subsidies'	
Generally,( the( practical( definitions( from( the( sources( referred( to( above(
disregard( the( potential( theoretical( justification( of( the( subsidies( creating(
the( environmentally( effects.( Subsidies( targeted( to( correct( for( market(
failures( or( efficiently( directed( to( support( politically( prioritized( groups,(
should( not( be( included( in( the( accounting( of( environmentally( harmful(
subsidies,( despite( their( potential( negative( environmental( effects,( cf.(
chapter(4.2.(
5.2.2	 	Include'exemptions'from'externality'taxation'and'
other'	indirect'subsidies'	
While( the( main( focus( of( environmentally( harmful( subsidies( is( on( ec	oK	
nomic( transfers,( exemptions( from( externality( taxation( should( also( be(
included.( In( line( with( the( definition( in( chapter( 4.2,( environmentally(
harmful( subsidies( include( 1)( subsidies( to( negative( externalities,( 2)( e	xK	
emptions( from( environmental( taxation( and( 3)( other( indirect( subsidies(
(see( examples( in( table( 5.1)( when( not( correcting( for( market( failures( or(
effectively(reKdistributing(wealth.(
5.2.3	 	Define'the'benchmark'	
Finally,( the( differentiation( and( benchmark(for( externality( and( fiscal( ta	xK	
es( create( definition( problems.( For( instance,( tax( rates( on( final( energy( use(
are(often(higher(for(small(users((households)(than(for(large(users((ene	rK	
gy( intensive( industry),( cf.( the( Norwegian( electricity( taxes.( The( textbook(
defines(the(benchmark(tax(rate(as(a(weighted(average(of(the(tax(compu	tK	
ed( under( the( Ramsey( inverse( elasticity( rule( and( the( Pigouvian( marginal(
social( damage( (Sandmo( 1975,( 2000).( In( practise,( for( the( purpose( of( a	cK	
counting( the( extent( of( environmentally( harmful( subsidies,( estimates( of(
the( correct( benchmark( tax( do( usually( not( exist.( Measuring( the( correct(
level( of( environmental( taxes( is( challenging( (cf.( Bruvoll( 2009a,b).( The(
values(of(external(costs(are(not(observable(in(the(market(prices,(and(may(
rely(on(ethical(views(and(vary(across(individuals(and(interest(groups.(An(
example( is( what( social( cost( to( the( national( and/or( global( climate( should(
be( ascribed( a( tonne( of( CO	2( emissions.( Usual( approximations( are( the(	
emission( trading( price,( marginal( willingness( to( pay,( or( estimates( from(
cost(studies.(	
The( analyst( then( has( to( make( to( evaluate( which( benchmark( to( use	.(	
Importantly,( the( choice( of( benchmark( defines( the( extent( of( the( subsidy, (
and( even( whether( a( subsidy( exists.( If( for( example( a( high( carbon( tax( rate(
of( is( taken( as( benchmark,( energy( intensive( industries( are( subsidized,(
while( if( the( low( rate( is( taken( as( the( correct( estimate( of( external( costs,(
there(may(be(no(subsidy(at(all.((
(
(

(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(

6.	 Experiences&with&subsidy&
reforms&around&the&world&	
The( estimates( of( environmentally( harmful( subsidies( shown( in( chapter(
2.1( indicate( an( extensive( use( of( such( measures( around( the( world.( Ho	wK	
ever,( over( time( many( reforms( have( been( made( around( both( reducing(
public( spending( to( environmentally( harmful( subsidies( and( reducing(
environmental( tax( exemptions/implementing( new(environmental( taxes.(
This(chapter(reviews(examples(of(such(reforms.(Some(successful(reforms(
are( associated( with( compensation( programs( to( avoid( negative( distrib	uK	
tional( effects.( Other( reforms( have( been( less( successful.( In( order( to( u	nK	
derstand( how( to( efficiently( implement( future( reforms,( valuable(
knowledge(can(be(gained(from(earlier(experiences.( (	
The( studies( from( the( OECD,( GSI,( EU( and( G20( environmental( subsidy(	
reform( studies( mentioned( in( chapter( 1( offer( a( range( of( examples.( We(
consider( these( studies( the( most( updated( and( comprehensive( sources.(
Hence,( we( have( based( the( review( mainly( on( the( literature( from( these(
initiatives;(	The* G20	(countries	( (G20( 2010;( IEA( et( al.( 2010a;( IEA( et( al.(	
2010b),(the(	Global*Subsidies*Initiative	((Laan(et(al.(2010),(the(	EU	((IEEP(et(	
al.( 2007;( Valsecci( et( al.( 2009)( and( the(	OECD	( (Ekins( and( Salmons( 2009;(	
Hanesson(2006).(For(each(example,(the(origin(of(the(information(is(spe	cK	
ified.(The(examples(are(described(in(further(details(in(Appendix(2.(	
The( examples( show( that( once( in( place,( subsidies( are( hard( to( remove(	
even(if(the(original(motivation(is(no(longer(present.(Over(time,(the(cause(
for( supporting( low( income( groups( may( fade( out,( e.g.( due( to( general( i	nK	
creases( in( income,( development( of( alternative( labour( demand,( or( dem	oK	
graphic( changes	.(For( many( of( the( subsidies,( it( is( found( that( poor( hous	eK	
holds( benefit( much( less( than( the( richer( ones.( This( is( an( important( arg	uK	
ment( for( subsidy( reforms.( Another( pressing( aspect( is( increasing( budget(
costs.( Finally,( increasing( environmental( costs( and( awareness( are( i	mK	
portant( driving( factors( behind( subsidy( reforms.( In( particular,( many( of(
the(subsidies(stimulate(the(use(of( fossil(fuels( and(hence(the( emissions(of(
greenhouse(gases(and(local(pollutants.(	
A( fundamental( reason( to( the( preservation( of( environmentally(harmful(	
subsidies( is( the( opposition( from( benefitting( groups.( Removing( the( subs	iK	
dies( normally( provokes( significant( opposition( from( pressure( groups( and(
political(parties.(To(raise(the(necessary(political(support,(it(is(important(to(
produce( high( quality,( reliable( information( about( the( benefits( and( costs,(
and( to( communicate( that( the( reform( implies( net( benefits( to( the( society.(
The( typically( successful( reforms( rely( on( compensatory( measures( and( a(

38	(	Reforming*environmentally*harmful*subsidies	(	
broad(political(consensus.(If(overall(consensus(is(not(consolidated,(we(find(
examples(that(setbacks(arise(when(governments(change.((
6.1	 Subsidies(to(coal(production	!	
Coal( production( has( been( supported( in( many( countries( and( over( de	cK	
ades.(The(original(rationale(was(based(on(the(need(to(rationalise(the(coal(
industry( in( Europe,( against( increasing( competition( from( less( expensive(
imports,(or(less(expensive(alternatives((e.g.(gas).(	In(the(EU,(coal(is(heav	iK	
�Ž�›� �•�—�„�•�‹�†�‹�œ�‡�†� �„�›� �‰�‘�˜�‡�”�����‡���–�•á� �’�ƒ�”�–�‹�…�—�Ž�ƒ�”�Ž�›� �‹��� �
�‡�”���ƒ���›ï�•� ��—�Š�”�‰�‡�„�‹�‡�–�
�”�‡�‰�‹�‘��á� ���‘�”�–�Š�™�‡�•�–� ��’�ƒ�‹��á� �ƒ���†� ��‘���ƒ���‹�ƒï�•� �
�‹�—� ��ƒ�Ž�Ž�‡�›� ��‘�”�Ž�†� ��—�…�Ž�‡�ƒ�”� ��•�•	oK	
ciation(2011).(	(	
The( major( drivers( of( the( reforms( have( been( budgetary( consid	eraK	
tions,( reduced( perceived( need( to( secure( energy( independence( via( coal(
mining.( Coal( subsidies( inhibit( changes( in( the( industry,( slow( down( the(
transition( to( renewable( and( low( pollution( energy( sources,( and( remove(
the( incentives( to( develop( technologies( that( lower( the( pollution( content(
of(the(fuels(in(questions.((	
Subsidies(to(coal( extraction(also(increase(CO	2(emissions(as(they(sti	mK	
ulate( overproduction( of( coal( and( energy( consumption.(	Coal( is( the( most(	
carbon	Kintensive( of( the( fossil( fuels,( and( it( is( the( fastest	Kgrowing( carbon	K	
emitting( energy( source.( The( share( of( coal( related( world( CO2( emissions(
have( been( growing( over( time,( see( figure( 6.1.( The( share( was( about( 40(
percent( in( 2007,( and( EIA( expect( the( share( to( increase( to( 46( percent( by(
2035((EIA(2010).(	(	
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure'6.1.'World'energy5related'carbon'dioxide'emissions'by'fuel'type,'billion'
metric'tons.'
Source:!EIA!(2010).!

((	Reforming*environmentally*harmful*subsidies	(	39	(	
Over( time,( several( countries( have( reduced( or( removed( coal( subsidies.(
State( aid( for( coal( production( was( banned( starting( from( the( 1952( Eur	oK	
pean( Coal( and( Steel( Community( (ECSC),( but( several( community( legal(
instruments( have( allowed( multiple( exceptions.( After( 2002,( direct( state(
support( to( coal( production( was( banned( in( the( EU.( In( 2007,( the( eight( of(
the(EU(Member(states(produced(coal:(Poland,(Germany(and(Hungary,(the(
UK,( Spain,( Czech( Republic,( Slovakia( and( Greece.( France( closed( its( last(
mine(in(2004.((	
There( have( been( proposals( to( phase( out( coal( subsidies( by( 2022,( r	eK	
ducing( them( by( one( quarter( every( three( years,( but( some( 100,000( jobs(
are(involved.(To	�–�ƒ�Ž��ƒ�‹�†��–�‘��–�Š�‡��Š�ƒ�”�†��…�‘�ƒ�Ž��•�‡�…�–�‘�”��Š�ƒ�•��„�‡�‡����Š�ƒ�Ž�˜�‡�†��ˆ�”�‘���@xäv�	
�„�‹�Ž�Ž�‹�‘����‹���trru��–�‘�@tä{��„�‹�Ž�Ž�‹�‘����‹���trrz���‘�”�Ž�†���—�…�Ž�‡�ƒ�”���•�•�‘�…�‹�ƒ�–�‹�‘���trssä	(	
We( review( the( development( in( coal( subsidy( policies( and( reforms( in(	
the( five( countries( UK,( France,( Germany,( Poland( and( Spain( (sources:( E	uK	
rope(Economics(et(al.(2006;(IEA(et(al.(	2010b;(IEEP(et(al.(2007;(Laan(et(al.(	
2010).( The( examples( are( referred( in( detail( in( Appendix( 2,( chapters(
10.2.1	10.2.5.	(	
6.1.1	 	Subsidy'removals'	
Coal(subsidy(reforms(have(been(attempted(and(carried(through(for(half(	a(	
century.( In( the(	UK	,( reforms( were( attempted( throughout( the( 1960s( and(	
1970s.(Lack(of(commitment(and(political(turnover(rendered(these(efforts(
unsuccessful.(The(Thatcher(government(removed(the( subsidies,(meeting(
significant( protests,( in( the(midK1980s.( Since( the( 199	0s	( the( UK( has(mai	nK	
tained(a(more(or(less(competitive(coal(industry.((	
In(	France	,( the( reduction( of( coal( production( gradually( started( in( the(	
early( 1960s,( and( an( agreement( to( close( all( remaining( coal( mines( was(
reached( in( 1994.( Between( 1971( and( 2000,( the( state( spent( around(	@35(	
billion( on( restructuring( the( coal( sector.( In( 2007,( subsidies( to( the( coal(
sector(were(largely(stopped.((	
In(	Germany	,( hard( coal( mining( has( been( subsidized( for( almost( half( a(	
century.(In(2007,(the(average(mining(job(was(subsidized(by(	@75	,000(and(	
coal( mining( subsidies( amounted( to( almost( 30%( of( the( direct( subsidies(
granted( by( the( government( in( 2003.( Subsidies( were( reduced( by( 50%(
from(1998(to(2008,(and(the(aim(is(a(complete(phaseKout(by(2018.((	
Poland*	started( the( reform( process( in( 1990.( Restructuring( provided(	
for( a( strong( emphasis( on( environmental( protection,( restructuring( pr	oK	
grammes,( liquidation( of( consistently( unprofitable( mines( and( privatis	aK	
tion(of(those(which(turned(a(profit.((	
In(	Spain	(the(dependency(on(the(energy(supply(industry(and(contracts(	
it( had( made( with( governments( enabled( its( expansion( when( the( rest( of(
the(European(coal(industry(was(in(decline.(In(2004,(the(average(cost(per(
tonne( of( Spanish( coal( was( up( to( 9( times( higher( than( the( imported( coal(
cost.(The(energy(market(was(liberalised(in(1998,(with(the(introduction(of(
a(longKterm(restructuring(plan(including(increased(competition.((

40	(	Reforming*environmentally*harmful*subsidies	(	
Overall,(the(subsidy(reforms(have(led(to(significant(fall(in(coal(extra	cK	
tion(and(employment(within(the(coal(sector.(
6.1.2	 	Compensatory'measures'	
In( the(	UK	,( subsidies( were( given( to( stimulate( competitiveness( of( the( i	nK	
dustry(with(a(viable(future(and(aid(to(the(remaining(industry(to(compete(
in( the( reformed( electricity( market.( Support( was( given( to( create( or( saf	eK	
guard( jobs( within( socially( and( economically( disadvantaged( areas.( The(
aid( given( to( those( entering( unemployment( was( focused( on( creating( a	lK	
ternative( economic( activities.( This( increased( the( support( to( the( reform(
and( maintain( economic( growth( in( otherwise( disadvantaged( areas.( In(
France	,( extensive( measures( were( used( to( promote( alternative( economic(	
activity( in( the( affected( regions.( Former( miners( were( guaranteed( e	mK	
ployment(until(the(age(of(45,(when(those(with(at(least(25(years(of(service(
became( eligible( for( a( leave,( during( which( they( would( receive( 80%( of(
their(final(working(salary(until(retirement.(In(	Poland	,(relatively(generous(	
severance( packages( were( provided( to( miners( leaving( work,( based( on(
individual(arrangements.(
6.1.3	 	Evaluation'	
The( key( lessons( are( that( the( removal( of( coal( subsidies( has( proven( very(
challenging( due( to( social( consequences.( The( costs( associated( with( these(
reforms( still( the( main( causes( for( coal( subsidies( around( the( world:( e	mK	
ployment( costs,( end( fuel( costs( to( consumers( and( security( of( supply.( Ge	nK	
erous( compensation( packages(have( proven( important( to( facilitate( reform	,(	
and( gradual( removal( of( subsidy( has( also( helped( to( minimise( damaging(
dislocation.( Mining( interests( have( proven( effective( at( making( political(
alliances.(The(scale(of(economic(pressures(resulting(from(the(subsidies(can(
eventually( force( reform.( Climate( policy( and( environmental( pressure(
groups(have(become(increasing(pressing(forces(the(last(decades.((	
As(an(environmental(reform,(the(restructuring(of(the(	UK	(coal(sector(is(	
deemed( an( example( of( success.( It( enabled( the( country( to( maintain( a(
more(or(less(competitive(coal(industry,(but(it(was(at(the(cost(of(extensive(
mine(closures(and(significant(social(opposition.(A(key(lesson(from(the(UK(
experience( is( that( coupling( the( reform( with( measures( to( stimulate( ec	oK	
nomic(development,(and(therefore(create(new(job(opportunities(in(areas(
where( industrial( activities( are( to( be( scaled( down( or( closed,( can( increase(
support( to( the( reform( and( foster( economic( growth( in( the( longer( run.(
Strong(political(will(was(a(key(factor.(	
The(	French	(reform(required(over(40(years(to(complete(and(billions(of(	
Euros( to( support( the( workforce.( The( continuing( subsidies( in(	Germany	(	
however,( are( often( used( by( other( countries( as( an( argument( to( maintain(
subsidies( to( domestic( coal( industry.( The( subsidies( are( upheld( by( strong(
and(organised(particular(interests(connected(with(electoral(power. (

((	Reforming*environmentally*harmful*subsidies	(	41	(	
Poland	( has( still( a( very( high( extraction( rate( of( hard( coal( combined(	
with( a( complex( system( of( export( and( restructuring( subsidies.( However,(
the(reforms(started(out(only(two(decades(ago,(which(is(a(short(time(pe	rK	
spective( when( comparing( with( the( reforms( in( the( UK( and( Germany.(
Spain	( is( another( example( where( reforms( have( been( carried( out,( but( the(	
coal( sector( is( still( dependent( on( subsidies,( and( significant( subsidies( still(
remain.(
6.2	 Nuclear(power(subsidies(	!	
Direct( and( indirect( subsidies( for( nuclear( power( are( given( in( the( EU(
(Valsecci(et(al.(2009)(as(well(as(in(the(US((Koplow(2011).(The(direct(su	bK	
sidies( in( the( EU( cover( funding( for( R&D( programs( by( the( EU( and( several(
Member( States,( support( for( power( plant( decommissioning,( debt( writeK
offs,( provision( of( site( security,( and( safety( oversight.( Indirect( subsidies(
involve( international( treaties( limiting( full( commercial( and/or( state( li	aK	
bility,( preferential( tax( treatment( for( decommissioning( funds( and( d	eK	
commissioning(subsidies,(and(guaranteed(supply(contracts.((	
Negative( effects( are( radiation( and( lower( energy( prices,( reducing( the(	
incentives( of( technological( development( in( new( energy( sources( and( e	nK	
ergy( efficiency.( As( an( alternative( to( fossil( energy,( there( is( growing( pre	sK	
sure(to(consider(expansion(of(the(industry.((	
There( have( been( legal( attempts( to( challenge( the( lack(of( a( segregated(	
decommissioning(fund.(These(legal(challenges(failed(in(EU(courts.(Part(of(
the( political( agreement( in( Germany( related( to( the( nuclear( phaseKout(
policy( was( to( ensure( that( additional( taxes( would( not( be( selectively( i	mK	
posed(on(the(nuclear(industry.(
6.3	 Exemptions(from(environmental(taxes(	!	
Exemptions( from( environmental( taxes( are( commonly( used( to( support(
certain( industries.( The( subsidy( element( consists( of( the( avoided( tax( pa	yK	
ment(in(the(industries(with(exemptions(or(lower(rates(than(some(agreed(
benchmark( (see( chapter( 5.1).( The( exemptions( from( the( ecoKtaxes( in(
Germany( represent( an( example( (see( 10.2.6),( where( attempts( have( been(
made( to( reduce( the( subsidies.( The( logic( behind( the( German( ecoKtax,( i	mK	
plemented( in( 1999,( was( to( internalize( the( externalities( of( energy( use.(
The( tax( scheme(	contained( partial( exemptions( for( enterprises( in( the(	
manufacturing( s	ector( and( in( agriculture( and( forestry.(	Arguments( for(	
exemptions(have(been(concerns(about(competitiveness,(the(introduction(
of(the(emission(trading(system((ETS)(and(high(energy(prices.	(	
The( drivers( for( reducing( the( exemptions( were( both( environmental(	
and(based(on(competition(concerns.((

42	(	Reforming*environmentally*harmful*subsidies	(	
6.3.1	 	Subsidy'removals'	
In( 2003,( the( German( ecoKtax( rates( for( businesses( were( increased( from(
20( to( 60%( of( full( rate.( In( 2006( however,( new( exemptions( were( intr	oK	
duced,( including( total( exemptions( of( certain( energyKintensive( processes(
from(energy(taxation.(In(addition,(the(reduced(ecoKtax(rates(have(applied(
to( the( entire( energy(tax( rates( for( heating( fuels,( i.e.( including( the( petrol	eK	
um( excise( duty( that( already( existed( before( 1999.( For( electricity( and( for(
natural( gas( and( liquefied( gas,( this( means( a( reduction( of( 40%;( and( for(
heating( oil( 27%.( A( key( outcome( of( the( reform,( however,( was( the( chance(
of( moving( towards( harmonised( energy( taxation( with( a( harmonised( r	eK	
duction(of(subsidies.(
6.3.2	 	Compensatory'measures'	
The(reform(was(designed(as(revenueKneutral(with(simultaneous(increase(
in(energy(taxes(and(lowered(payroll(taxes.((
6.3.3	 	Evaluation	'	
The(ecoKtax(is(a(step(in(the(right(direction(for(reducing(subsidies(related(
nonKinternalised( external( costs.( The( exemptions( however( represent( a(
continuation( of( the( preKtax( lack( of( correct( incentives.( The( main( reason(
seems( to( be( concerns( about( competitiveness( in( the( world( markets.(
Worldwide( differences( in( energy( taxation( provided( the( rationale( for(
granting( ecoKtax( exemptions( to( domestic( industries( and( contribute( to(
the(difficulties(in(reforming(the(ecoKtax.(This(is(a(general(problem(across(
countries,( as( any( industry( can( claim(the( same( relative( burden( as( long( as(
any( competing( country( exempts( their( industries( from( full( externality(
taxation.( The( competitiveness( problem( points( to( the( need( for( intern	aK	
tional( cooperation( in( environmental( taxation,( not( only( for( carbon( emi	sK	
sions(with(global(environmental(effects,(but(for(all(kinds(of(pollution.(	
The( setKback( of( the( reform( also( shows( that( strong( leadership( on( its(	
own( it( is( not( a( sufficient( condition( for( the( reform( to( endure.( A( broad(
coalition( supporting( the( reform( is( preferable( to( avoid( setbacks.( In( the(
German( case,( changing( governments( allowed( for( reKconsiderations( of(
the(ecoKtax(exemptions.(
6.4	 Biofuel(subsidies	!	
Subsidies( to( biofuels( are( becoming( more( frequent( (cf.( 10.2.7).( The( EU(
biofuels( Directive( requires( the( members( to( ensure( that( a( minimum( pr	oK	
portion( of( biofuels( and( other( renewable( fuels( are( placed( on( their( ma	rK	
kets.( Also( in( the( Nordic( countries,( biofuel( subsidies( are( given.( A( variety(
of(	measures(have(been(introduced,(including(preferential(tax(treatments.((

((	Reforming*environmentally*harmful*subsidies	(	43	(	
Production( and( consumption( of( biofuels( do( not( imply( any( obvious(	
positive( externalities( that( justify( general( subsidies.( The( reasons( most(
commonly(given( are( to( stimulate( alternatives( to( fossil( fuels( and( thereby(
reduce( carbon(emissions.(Other(arguments(used(are(energy(security(and(
rural(development(by(stimulating(demand(for(certain(farm(products.((	
Concerning(	environmental* effects	,( the( firstKbest( policy( to( mitigate(	
emissions( would( be( to( place( correct( prices( at( the( polluting( energy(
sources,( including( biofuels,( cf.( the( theoretical( discussion( in( chapter( 4.(
Rather,( biofuels( production( involves( several( negative( environmental(
aspects,(such( as(energy(input,(fertilizing,(clearing(of(land(and(loss(of(	bioK	
diversity.(Studies(from(the(Nordic( countries(and(literature(surveys(point(
to( increasing,( rather( than( decreasing,( CO	2( emissions( from( biofuel( subs	iK	
dies((Holtsmark(2010,(Wibe(2010).((	
As( pointed( out( by( OECD( (2007),( biofuel( subsidies( have( made( little( ev	iK	
dent(contribution(to(	energy*security	(in(the(OECD(countries,(in(terms(of(mit	iK	
gating( price( spikes( and( localized( temporary( energy( shortages.( Also,( as( a(
policy(for	*transferring	(wealth	(to(people(living(in(rural(areas,(the(efficiency(in(	
these(subsidies(is(low,(as(the(instruments(are(not(directed(at(the(target.(	
Attempts( have( been( made( to( remove( some( of( the( subsidies.( This( has(	
led( to( new,( indirect( subsidy( systems,( such( as( biofuel( quotas( in( total( e	nK	
ergy( and( green( certificates.( Such( inefficient( subsidies( can( create( new(
problems( that( are( difficult( to( remove.( As( an( example( (see( Valsecci( et( al.(
2009)	,(Germany(has( a(relatively(long(history(of(political(support(for(bi	oK	
�ˆ�—�‡�Ž�•� �ƒ���†� �‹�•� �…�—�”�”�‡���–�Ž�›� �–�Š�‡� �™�‘�”�Ž�†ï�•� �Ž�‡�ƒ�†�‹���‰� �’�”�‘�†�—�…�‡�”� �‘�ˆ� �„�‹�‘�†�‹�‡�•�‡�Ž� �ƒ���†� �	uK	
�”�‘�’�‡ï�•� �Ž�‡�ƒ�†�‹���‰� �’�”�‘�†�—�…�‡�”� �‘�ˆ� �‡�–�Š�ƒ���‘�Žä� ����	2006,( the( German( government(	
established( a( system( of( gradually( increasing( taxes( on(biofuels.( The( large(
budgetary( implications( of( the( tax( exemption( secured( political( support(
for( these( reforms,( despite( domestic( industry( opposition.( However,( in(
2007(a(quota(system(was(introduced,(which(sought(to(reduce(the(impact(
of( the( introduction( of( taxes( on( biofuels.( The( system( is( another( form( of(
subsidy,(as(it(sets(a(minimum(requirement(of(the(biofuel(content(in(rel	aK	
tion( to( energy( content.( In( the( future,( bio( methane( from( biogas( will( also(
be(considered(in(the(total(and(the(petrol(quotas.((
6.5	 Subsidies(to(fossil(energy(consumption(in(some(
lowKincome(countries	!	
According( to( the( current( estimates( of( environmentally( harmful( subs	iK	
dies,( consumption( subsidies( to( fossil( energy( are( most( used.( We( review(
some(experiences(with(consumer(subsidies(to(fossil(fuels(by(looking(into(
the( subsidy( reforms( in( Mexico,( Indonesia,( Ghana,( Senegal( and( Malaysia(
(sources:( G20( 2010;( IEA( et( al.( 2010a,b;( Laan( et( al.( 2010).( The( examples(
are(referred(in(detail(in(Appendix(2,(chapters(10.2.8K10.2.12.(	
Subsidizing( energy( has( been( a( means( of( supporting( the( incomes( of(	
low(income( households.( These( subsidies( amount( to( significant( shares( of(

44	(	Reforming*environmentally*harmful*subsidies	(	
GDP(and(impose(heavy(loads(on(governmental(budgets.(In(2008,(19%( of(
government( expenditure( in(	Indonesia	( was( devoted( to( energyK	
consumption(subsidies.(Subsidies(were(reported(to(have(cost(the(	Mala	y;	
sian	(government(about(4%(of(GDP(in(2008.(In(2004,(	Ghana	(spent(roug	hK	
ly( 2.2%( of( its( GDP( subsidizing( fuels( and( 1%( on( support( to( its( national(
refinery( company.( In(	Mexico	,( subsidies( for( energy( consumption( have(	
been(equivalent(to(more(than(one(and(a(half%(of(GDP.((	
As(according(to(theory,(this(is(an(inefficient(instrument(to(support(the(	
poor.( In(	Ghana	,( it( was( found( that( the( rich( received( the( greatest( benefits(	
from(subsidies.(In(	Indonesia	,(it(is(estimated(that(only(roughly(15%(of(the(	
total( kerosene( subsidy( reached( the( poorest( 30%( of( the( population.(
Hence( subsidy( reforms( represent( great( potential( benefits( in( reducing(
poverty( efficiently.( Quantification( studies( of( how(and( to( what( extent( the(
poor(in(Ghana(would(be(affected(by(deregulation(were(important(for(the(
reform( support( and( for( designing( policies( to( reduce( impacts( of( higher(
fuel(prices(on(the(poor.((	
Another(cause(for(the(subsidies(has(been(to(reduce(externalities(from(	
other( energy( sources.( This( is( a( wellKknown( problem( in( western( cou	nK	
tries(today,(as(nonKfossil(fuels(are(increasingly(subsidized.(In(	Senegal	,(the(	
LPG( subsidies( were( originally( introduced( to( reduce( deforestation( by(
substituting( part( of( charcoal( consumption( with( LPG.( In( the( long( run,(
these( subsidies( led( to( an( unsustainable( fiscal( burden,( disproportionate(
benefits( for( the( relatively( rich( and( fuel( smuggling.( In( 2006,( the( cost( of(
LPG( subsidies( amounted( to( 1.4%( of( GDP.( It( had( also( adverse( distrib	uK	
tional(effects:(the(40(poorest%(of(the(population(gained(only(19%(of(the(
total( improvement( in( welfare( from( the( LPG( subsidy,( while( the( richest(
40%( gained( 61%.( The( IMF( has( estimated( that( if( conditional( cash( tran	sK	
fers( were( to( target( the( poorest( 10%( of( the( population,( 58( cents( of( the(
expenses( would( reach( people( in( the( poorest( quintile( of( the( population(
compared(with(22(cents(from(the(excise(tax( exemption(for(kerosene(and(
only(6(cents(for(the(	LPG(gas(subsidy((IM	F(2008).	(	
6.5.1	 	Subsidy'removals'	
Mexico	( is( currently( reforming( its( excise( arrangements( for( refined( pro	dK	
ucts( and( the( subsidies( are( expected( to( be( eliminated( by( late( 2012,( and(
retail(prices(of(fossil(fuels(have(gradually(increased.(It(is(expected(that(by(
continuing( current( policies( under( current( market( conditions,( subsidies(
to(gasoline,(diesel(and(LPG(will(disappear(in(the(medium(term.(	
Indonesia	( started( to( gradually( liberalize( the( fuel( market( in( 2005.( The(	
subsidies(for(diesel(and(fuel(oil(are(completely(eliminated(and(the(aim(is(
to( eliminate( all( energy( subsidies( by( 2014.( Government( expenditure( is(
almost( halved( from( nearly( 20%( in( 2008.( 40( million( households( shifted(
their(consumption(from(kerosene(to(LPG(in(the(period(through(2009. (	
Ghana	( has( made( several( attempts( to( liberalize( their( fuel( prices( with(	
stepwise( rises( in( petroleum( prices( to( better( link( domestic( with( intern	aK

((	Reforming*environmentally*harmful*subsidies	(	45	(	
tional(prices.(The(reform(included(a(communications(campaign(and(mec	hK	
anisms( that( were( intended( to( reduce( political( interference( in( fuel( prices.(
In(	Senegal	(a(phased(reduction(of(subsidies(to(LPG(started(in(1998,(but(the(	
plan( was( put( on( hold( in( 2002( due( to( increasing( global( LPG( prices,( e	xK	
change(rate(variations(and(inflation,(resulting(in(continuing(high(subsidies	.((	
Malaysia	( introduced( a( broad( package( of( reforms( to( their( energy( su	bK	
sidies(in(2008,(increasing(the(energy(prices(by(24	124%.(	
6.5.2	 	Compensatory'measures'	
In(	Mexico	,( the( government( has( implemented( a( cash( transfer( intended( to(	
help( lowKincome( households( cover( their( energy( needs,( see( box( 7.1.( This(
is( better( targeted( at( the( poor( and( is( formulated( to( avoid( incentives( for(
environmentally(harmful(increases(in(energy(consumption.((	
In(	Indonesia	,(the(government(undertook(a(cash(transfer(program(to(16(	
million( poor( families,( see( box( 7.1,( the( costs( amounting( to( about( 0.7%( of(
GDP.( In( the( continuation,( the( phasing( out( is( implemented( in( a( gradual(
manner(in(order(to(minimize(the(spillKover(impact(on(the(poor.(Incentives(
are(given(to(use(cleaner(and(more(efficient(energy(such(as(liquid(gas,(fun	dK	
ing(is(given(to(develop(the(capacity(to(use(renewable(energy,(income(taxes(
are( reduced,( the( rate( of( asset( amortization( is( accelerated,( import( duty(
exclusions( for( industries( using( renewable( energies( are( used,( and( fiscal(
disincentives,( such( as( imposing( sales( tax( and( value( added( tax( on( fossil(
fuels,( are( performed.( The( distribution( of( subsidized( fuel( is( contained( to(
certain( users,( for( example,( by( providing( a( subsidy( for( poor( fisherman( to(
buy( fuel( in( fixed( quantities.( The( price( subsidies( are( transformed( to( a( ta	rK	
geted(subsidy(through(reinforcement(of(poverty(alleviation(programs.(	
In(	Ghana	,(the(effect(on(the(poor(was(cushioned(by(crossKsubsidization(	
fuels(used(typically(for(cooking(and(lighting,(elimination(of(fees(for(stateK
run( primary( and( secondary( schools,( support( for( publ ic( transport,( extra(
funds( into( a( healthKcare( scheme( for( poor( areas,( increase( in( daily( min	iK	
mum( wage( and( programs( spread( electrification( to( rural( areas( and( pu	rK	
chase(essential(equipment(for(workers.((	
In(	Malaysia	,(the(government(offered(cash(rebates(in(the(form(of(lower(	
annual(road(taxes,(windfall(taxation(on(certain(sectors(and(expansions(of(
the(social(safety(net.(
6.5.3	 	Evaluation'	
These( examples( show( that( subsidies( to( energy( consumption( prove( ine	fK	
ficient(in(targeting(income(distribution.(With(positive(income(elasticities,(
high( income( groups( use( most( energy( and( benefit( most( of( the( subsidies.(
Rather,(subsidies(should(target(the(distributional(concerns(as(directly(as(
possible.( The(	Indonesian	(and(	Mexican	( experiences( highlight( the( i	mK	
portance(of(ensuring(a(suitable(compensation(strategy(for(poor,(and(that(
this( can( reduce( the( impact( on( government( expenditures.( At( the( same(

46	(	Reforming*environmentally*harmful*subsidies	(	
time,( stepped( approaches( have( shown( important,( with( some( fuels( being(
tackled( later( in( the( reform( process.( Still,( strong( political( opposition( co	nK	
tinues( to( hold( back(the( reform(strategies.( Also( the(Malaysian( experience(
underlines( the( need( for( compensation( packages( to( meet( the( negative(
distributional(consequences.(	
Ghana	(is(an(example(of(the(necessity(of(political(foundation(and(stability.(	
The( priceKsetting( regime( proved( to( be( only( as( robust( as( the( political( will(
behind(it.(The(poor(were(hardest(hit,(and(the(reform(was(suspended(during(
2003,(due(to(fear(of(social(and(political(instability(in(the(runKup(to(elections.(
After( coming( into( position,( the( opposing( party( (NDC)( fulfilled( its( promises(
from(the(election(campaign(and(reversed(the(process(by(reducing(fuel(taxes.(
After(that,( fuel( prices(in(Ghana(were(far(below( corresponding(fuel(prices( in(
neighbouring(countries,(leading(to( a( dramatic(increase(in(fuel(consumption(
and( smuggling( out( of( the( country.( Automatic( linking( of( domestic( and( inte	rK	
national( prices,( without( subsequent( crossKsubsidization,( helps( preventing(
politicization( of( fuel( prices.( Successful( communication( and( compensation(
strategies( improved( public( acceptance( of( the( price( increases( in( Ghana,(
pointing( to( the( necessity( of( ensuring( political( support.( The( protests( assoc	iK	
ated(with(the( 2003(reform(were(not( repeated(in(2005.(Research(to( identify(
those( mostKlikely( to( be( negatively( impacted( by( deKsubsidization,( info	rK	
mation( campaigns( about( the( benefits( of( reform,( cash( transfers( to( the( poor,(
and( greater( independence( and( transparency( of( fuel( prices( are( positive( fa	cK	
tors(for(the(success(of(subsidy(reforms.(	
Also,( energy( subsidies( to( reduce( the( use( of( another( energy( source(	
prove( to( create( new(environmental( problems,( such( the( LPG( subsidies( in(
Senegal	( used( to( reduce( charcoal( consumption.( This(may( be( a( warning( to(	
Ghana	,( who( crossKsubsidizes( fuels( to( alleviate( the( cost( effects( from( r	eK	
ducing( petroleum( subsidies.( Direct( measures( to( reduce( environmental(
damages( should( be( used( rather( than( subsidies( to( alternatives.( E.g.( disi	nK	
centives( for( the( use( of( charcoal( and( wood,( rather( than( fuel( subsidies,(
would( more( efficiently( address( the( goal( of( reducing( deforestation.( Ho	wK	
ever,(the(firstKbest(option(is(not(always(possible.(If(for(example(no(alte	rK	
natives( to( the( environmentally( damaging( energy( sources( are( available,(
the( elasticities( with( respect( to( demand( are( small,( and(it( is( likely(that(the(
only(effect(would(be(increased(costs(to(the(consumers.(
6.6	 Subsidies(to(energy(consumption(in(some(highK
income(countries	!	
VAT( reductions( are( a( direct( and( unconditional( subsidy( to( (energy)( co	nK	
sumption,(see(the(chapters(10.2.13	10.2.16(in(Appendix(2.(Several(cou	nK	
tries( apply( reduced( VAT( rates( to( energy( products( such( as( coal,( heating(
oil,(natural(gas(and(electricity.((	
Generally,( low(VAT(on( energy( has( a( primarily(social( objective( to( pr	oK	
tect(lowKincome(households.(The(subsidies(due(to(VAT(reduced(rates(for(

((	Reforming*environmentally*harmful*subsidies	(	47	(	
EU( households( in( the( beginning( of( the( 9	0s	(�ƒ�”�‡� �‡�•�–�‹���ƒ�–�‡�†� �–�‘� @yäu� �„�‹�Ž�Ž�‹�‘���	
(IEEP( et( al.( 2007).( As( can( be( seen( from( the( status( in( 2007,( several( more(
VAT(reductions( for( energy( products( have( existed( in( earlier( decades,( see(
table( 6.1.( A( number( of( EU( countries( have( abolished( VAT( reduction( for(
energy(products(over(time(past,(but(still(several(remained(in(2007.((	
In( the( Nordic( countries,( several( the( VAT(rates( are( reduced( for( pote	nK	
tially( environmentally( harmful( goods( and( services,( such( as( for( food( and(
drinks,(and(passenger(transport.(In(Norway,(the(VAT(is(totally(exempted(
for(energy(consumption(in(Northern(Norway(and(for(electric(cars.( (
Table&6.1.&Reduced&VAT&rates&for&energy&products&in&EU&Member&States,&households,&2007 .&
Member&state	&	Reduced&rate&applied&to:	&	
&	&	&	Year&	of&removal/remarks	&	
&	Coal	&	Fuel&Oil	&	Natural&Gas	&	Electricity	&	&	
Schemes&that&have&been&removed:	&	&	
Austria	!	X!	X!	X!	X!	1983	!	Belgium	!	!	X!	X!	X!	1980	t1983.!A!slightly!reduced!	^‰Œl]vP�Œš_�~íó�]v�š�}(�íõ9�continued!to!exist!until!1992.	!	Czech!Republic	!	X!	X!	X!	X!	1994	t1997	!	
Greece	!	X!	X!	X!	!	1992.!For!natural!gas,!the!reduced!rate!was!reintroduced!in!1998.	!	Hungary	!	!	X!	X!	X!	2003	t2005	!	Italy	!	!	X!	X!	!	1984	t1988.!Reduced!rate!for!	natural!gas!for!cooking!and!water!heating!continues!to!apply!to!southern!Italy.	!	Poland	!	X!	X!	X!	X!	1998	!	Portugal	!	!	X!	!	!	1996.!Reduced!rate!was!re	O	introduced!in!2001.	!	Slovakia	!	X!	X!	X!	X!	2003	!	
Schemes&that&continue&to&exist:	&	&	
Belgium	!	X!	!	!	!	!	Cyprus	!	!	!	X!	!	!	Estonia	!	X!	!	!	!	!	France	!	!	!	X!	X!	Only!on!standing!charg e	!	Greece	!	!	!	X!	X!	!	Ireland	!	X!	X!	X!	X!	^�WŒl]vP�Œš_�~íïX	5%)	!	Italy	!	X!	!	X!	X!	Natural!gas:!only!for!cooking!and!water	!heating!in!southern!Italy	!	Luxe	mO	bourg	!	X!	X!	X!	X!	�}o�v�(µo�}]oW�^‰Œl]vP�Œš_�(12%)	!	Malta	!	!	!	!	X!	!	Portugal	!	!	X!	X!	X!	!	United!Kingdom	!	X!	X!	X!	X!	!	
Source:!IEEP!et!al.!(2007).!
(
Several(reforms(have(been(performed(to(reduce(VAT(subsidies(and(other(
subsidies( to( energy( consumption.( These( examples( are( found( IEA( et( al.(
(2010b),(IEEP(et(al.((2007)(and(Valsecci(et(al.((2009).(	
In(	Poland	,(the(VAT(rate(for(energy(products(was(less(than(one(third(of(	
the( basic( national( VAT( rate( in( the( early( 1990s.( Poor( households( in( P	oK	
land( benefited( much( less( from( energy( subsidies( than( the( richer( ones.(
The( main( reason( for( the( reform( was( budgetary,( reinforced( by( external(

48	(	Reforming*environmentally*harmful*subsidies	(	
institutions( such( as( the( IMF( and( the( World( Bank.( The(	UK	( applies( a( r	eK	
duced(VAT(rate(on(energy(products,(providing(a(subsidy(to(the(final(co	nK	
sumers( of( these( products( equal( to( a( value( of( 10%( of( product( price( in(
2009.( This( promotes( greenhouse( gas( emissions,( acidification( and( depl	eK	
tion(of(nonKrenewable(energy(resources.((	
Another(type(of(subsidies(comparable(to(VAT(subsidies,(was(the(price(	
regulation(of(natural(gas(in(the(	United*States	,(where(natural(gas(consu	mK	
ers(	( and( producers(	(were( subsidized( by( allowing( producers( to( charge(	
prices(high(enough(to(	�…�‘�˜�‡�”��–�Š�‡��…�‘�•�–�•á��’�Ž�—�•��ƒ�ò�ˆ�ƒ�‹�”ó��’�”�‘�ˆ�‹�–ä���Š�‹�•��’�”�‹�…�‡��”�‡�‰	uK	
lation( by( the( large( number( of( different( natural( gas( producers( created(
extreme( administrative( burdens.( Prices( were( kept( artificially( low( in( 20(
years,(fuelling(a(large(increase(in(consumption.(	(	
Subsidy'removals'
In(	Poland	,( starting( in( 1995,( the( reform( gradually( increased( the( VAT( for(	
energy( products( to( bring( it( into( line( with( the( basic( rate( of( VAT.( The( r	eK	
form(was(successful(and(took(place(as(scheduled.( (	
In( the(	UK	,( attempt( at( reforming( the( VAT( subsidies( in( 1995( failed( for(	
political( reasons.( Sense( of( urgency( seems( to( be( lacking,( as( there( are( no(
signs(of(recent(calls(for(reform.(	
In( the(	US	,( deregulation( started( in( 1978,( and( in( 1993,( all( remaining(	
regulations(applying(to(the(wellKhead(price(of(natural( gas(were(elimina	tK	
ed,(allowing(the(market(to(completely(determine(the(price(of(natural(gas(
at( the( wellhead.( The( price( deregulation( spurred( production( and( the( r	eK	
placement(of(inefficient(technologies,(encouraging(a(more(rational(use(of(
natural(gas.((
Compensatory'measures'
In(	Poland	,( compensatory(measures(were( taken(for(poor( families( and( pe	nK	
sioners,( including( direct( allowances( and( cheap( credit( to( modernize( hea	tK	
ing( sources.( The( amounts( budgeted( for( direct( compensation( payments(
were(generally(modest(and(pertained(only(to(1%(of(all(households.(
Evaluation'
This(	Polish	( case( shows( that( increasing( VAT( rates( can( be( achieved( rel	aK	
tively(expediently(with(a(limited(need(for(compensatory(payments,(even(
in(a(country(where,(at(the(time,(household(income(was(much(lower(than(
in(most(EU(Member(States.(A(favourable( circumstance(was(that(inflation(
in( Poland( was( falling( continuously( from( nearly( 600%( in( 1990( to( 7%( in(
1999,( while( real( disposable( household( income( was( increasing( rapidly.(
This( left( the( share( of( expenditure( on( energy( more( or( less( unaltered.(
While( this( favourable( circumstance( that( may( not( will( repeated,( it( is( an(

((	Reforming*environmentally*harmful*subsidies	(	49	(	
example( of( the( potential( of( passing( through( reforms( in( periods( with(
great(structural(changes.(	
The(	UK	(represents(a(less(successful(attempt.(Despite(the(share(of(ene	rK	
gy( costs( in( budget( of( households( has( decreased( considerably,( and( other,(
less( distortionary( ways( of( providing( support( to( the( targeted( households(
are(available,(still(the(political(will(to(reform(seems(to(be(lacking.(This(may(
be( representative( for( the( VAT( subsidies( in( other( countries( as( well;( the(
political(costs(are(judged(higher(than(the(environmental(benefits.(	
The( process( of( deregulation( in(	US	( took( many( years.( The( reform( was(	
helped(by(the(rising(petroleum(prices(in(the(midK1970s,(which(increased(
consumers( acceptance( for( the( inevitability( of( higher( gas.( The( reform( is(
an(example(of( how(new(domestic(supplies(become(available(in(response(
to( higher( prices,( which( should( be( kept( in( mind( regarding( the( present(
policies(subsidizing(new(renewables.((
6.7	 Subsidies(to(road(transport(	!	
The(cases(outlined(in(this(chapter(are(discussed(in(IEEP(et(al.((2007)(and(
Valsecci(et(al.((2009).(The( examples( are(referred(in(detail(in(Appendix(2,(
chapters(10.2.17	10.2.21.(	
There( are( considerable( distributional( issues( related( to( transport( ta	xK	
es.(In(particular,(	heavy*goods*vehicles	(put(significant(stress(on(road(infr	aK	
structure.(These(subsidies(are(typically(indirect(subsidies(in(the(sense(of(
lack( of( full( pricing.( Subsidies( are( also( given( to( private( workKrelated(
transport(to(commuters.(Many(EU(Member(States(tax(diesel(fuel(at(lower(
rates(than(petrol,(providing(a(subsidy(for(households( and(firms.(Benefits(
of( the( subsidy( accrue( to( owners( of( private( dieselKfuelled( vehicles,( which(
tend( to( be( wealthier( than( owners( of( petrol( vehicles.( The( diesel( subsidy(
disadvantages( firms( producing( petrol( and( households( owning( petrol(
vehicles.(	
Another(form(of(transport(subsidies(are(support(to(	company*cars	(and(	
commuter*subsidies	.(These(are(typically(used(in(rich(countries,(where(the(	
losing( parts( are( typically( not( lowKincome( groups.( Company( car( taxation(
system(encourages(car(use,(with(a(declining(tax(rate(applied(drivers(who(
drove(the(most.(The(marginal(cost(to(the(employee(of(driving(a(company(
car( becomes( often( close( to( zero.( The( provision( of( company( cars( has( in(
the( EU( become( by( far( the( most( important( category( of( fringe( benefits.(
Commuter(subsidies(are(formulated(as( deductions(for( travelling(expen	sK	
es( from( income( taxes,( also( adding( up( to( significant( amounts( of( foregone(
eluded(revenues.(Tax(breaks(at(threshold(levels(give(strong(incentives(to(
reach(the(necessary(miles(to(secure(the(tax(benefits.(	
Rationales( for( the( commuter( subsidies( have( been( to( increase( access(	
to( job( markets( for( people( living( in( rural( areas.( Another( reason,( in( Ge	rK	
many,(was(to(offset(the(impacts(of(EcoKtax(reform.(

50	(	Reforming*environmentally*harmful*subsidies	(	
In(their(review(of(Nordic(countries,(Temanord((2008)(argues(that(tax (	
allowances( for( commuting( between( home( and( work( place( generally( i	nK	
cites( to( longer( transport( and( higher( cost,( resulting( in( more( and( bigger(
cars( and( more( mileage.( Given( according( to( mileage,( transport( allowance(
encourages( more( scattered( habitation( and( increases( CO	2Kemission( and(	
other( pollution.( They( argue( that( transport( allowance( should( be( given(
independent(of(the(actual(cost(and(only(with(small(regard(to(distance.((	
Examples( of( countries( that( have( this( subsidy( are( Austria,( Belgium,(	
Denmark,( Finland,( Germany,( Ireland,( Norway,( the( Netherlands( and(
Sweden.(
Subsidy'removals'
EU( countries( have( implemented( charges( to( capture( some( of( the( costs(
related( to( shipping( by( road.( Over( the( years( 2001	2005,( Austria,( Germ	aK	
ny( and( Switzerland( implemented(	distance	Kbased( heavy( goods( vehicles(	
charges(to(recover(infrastructure(costs.(	(	
Germany(started(the(reform(of(its(income(tax(deduction(system(to(be(	
independent( of( transport( mode( in( 2000,( also( benefitting( public(
transport( users.( The( perKkilometre( rate( was( increased( and( the( subsidy(
was( limited( to( travel( exceeding( 20( kilometres( to( work.( In( the( Nethe	rK	
lands,( the( travel( cost( deduction( since( 2001( has( been( restricted( to( co	mK	
muters(travelling(by(public(transport.(	
NGOs( campaigned( against( the( UK( company( car( subsidies( for( many(	
years,( but( were( resisted( by( those( benefiting( from( the( system.( In( 2002,(
the( system( was( fundamentally( changed( to( be( based( on( a( combination( of(
list(price(and(CO	2(emissions.(	
As( a( result( of( the( subsidy( reductions( to( shipping( by( road,( revenues(	
have(increased(and(there(have(been(a(shift(over(to(a(user(pays(principle.(
Transport( efficiency,( in( terms( of( haulage( load( per( vehicle( has( increased(
and(the(number(of(loaded(trips,(has(increased,(the(growth(in(road(freight(
has( decreased,( and( there( has( been( a( substitution( over( to( rail( transport.(
These( changes( have( decreased( associated( emissions( of( CO	2( and( other(	
pollutants(in(Germany.(	
The( commuter( subsidy( reforms( in( Germany( have( cut( the( subsidy( a	lK	
most(in(half.(It(has(however(been(criticised(by(allowing(the(subsidy(only(
for( trips( over( 21( km( per( day,( resulting( in( stronger( subsidies( to( those(
living(far(away.((
Evaluation'
A(strong(external(pressure(on(environment(and(economy(has(been(a(key(
driver( of( road( pricing.( Also,( budgetary( difficulties( can( be( a( motivating(
force( for( tax( or( subsidy( reform.( Still,( significant( subsidies( still( remain.(
Road( subsidies( are( generally( spread( across( both( industry( interests( and(
strong( consumer( groups,( and( reform( was( made( difficult( by( the( tradeKoff(

((	Reforming*environmentally*harmful*subsidies	(	51	(	
between( environmental( and( social( considerations.( Hence,( a( strong( ev	iK	
dence( base( has( been( a( key( requirement( to( secure( public( acceptance( and(
crossKparty(consensus.((	
The(company(car(subsidies(in(EU(are(also(still(widespread,( and(so(far(	
only(minor(environmentally(motivated(differentiation(reforms(are(done.(
Key( challenges( are( strong( vested( interests( and( lobbies( and( the( lack( of(
awareness(of(implied(welfare(loss.(The(reform(in(UK(is(an(exception,(and(
a( case( for( example( for( other( countries.( A( strong( evidence( base( was( ne	cK	
essary( to( convince( doubters( that( change( was( needed.( NGOs( campaigned(
on( this( for( many( years,( but( only(when( several( government( departments(
and(progressive( companies(had(been(persuaded(was(it(possible(to(make(
real( progress.( Strong( leadership( and( clarity( of( aims( and( transparency( in(
implementation( have( also( been( important.( These( are( also( examples( that(
a(gradual(approach(to(reform(can(be(effective(and(more(easily(accepted. (
6.8	 Aviation(subsidies(	!	
Source	:&IEEP!et!al.!(2007)!(see!also!10.2.22).!	
(
Since( the( 194	0s	,( the( aviation( industry( worldwide( has( enjoyed( several(	
benefits.( Financial( support( to( the( aviation( industry( includes( fuel( tax( e	xK	
emption,(VAT(exemptions(on(international(tickets,(and(duty(free(sales(on(
nonKEU( flights( and( on( board.( The( main( arguments( for( subsidy( reforms(
are( to( remove( relative( market( distortions( to( other( means( of( transport(
and(to(internalise(external(environmental(costs,(CO	2(emissions(in(parti	cK	
ular.( In( the( Kyoto( protocol,( national( emission( targets( exclude( intern	aK	
tional(aviation,(but(will(be(included(in(the(EU(ETS(from(the(start(of(2012.(
The( intention( is( for( the( EU( ETS( to( serve( as( a( model( for( other( countries(
considering(similar(national(or(regional(schemes,(and(to(link(these(to(the(
EU(scheme(over(time,(and(to(form(the(basis(for(wider,(global(action.((
Subsidy'removals'
From( the( start( of( 2012,( emissions( from( all( domestic( and( international(
flights( on( EU( airports( will( be( covered( by( the( EU( Emissions( Trading( Sy	sK	
tem.(Norway(and(Iceland(have(also(decided(to(include(emissions(from(air(
transport( in( the( system.( The( Netherlands( has( been( the( first( EU( country(
to( introduce( a( kerosene( tax( on( domestic( flights,( contributing( to( a( redu	cK	
tion(of(the(budget(deficit.(
Evaluation'
Earlier( attempts( of( removing( the( implicit( subsidy( to( the( aviation( indu	sK	
try(have(shown(that(unilateral(actions(are(difficult(to(carry(through.(Co	nK	
sensus( at( an( international( level( is( necessary( to( ensure( coordination( and(
harmonisation( of( national( strategies.( As( aviation( is( an( international( i	nK

52	(	Reforming*environmentally*harmful*subsidies	(	
dustry,( competitiveness( concerns( are( particularly( acute.( It( will( still( be( a(
challenge(to(reach(an(agreement(at(the(global(level(in(the(long(term.(
6.9	 Water(subsidies(	!	
The(environmental(problems(related(to(water(subsidies(are(less(relevant(
in(the(Nordic(countries,(while(particularly(pressing(in(countries(with(less(
precipitation(relative(to(population(density,(see(chapter(10.2.23	10.2.25.((	
Traditionally(water(subsidies,(i.e.(lack(of(full(pricing(for(water(services,(	
have( been( used( to( increase( productivity( and( enable( people( to( settle( in(
rural( areas( in( many( countries.( Subsidies( to( irrigation( prove( significant( in(
size,(and(water(scarcity(is(a(serious(threat(in(many(countries,(especially(in(
southern(Europe.(The(subsidies(have(shown(to(induce(overexploitation(of(
water( resources,( and( to( burden( public( budgets( as( operation( and( maint	eK	
nance( costs( are( not( covered,( and( hence( have( an( equity( dimension.( Such(
subsidies( can( represent( incentives( for( growing( waterKintensive( crops( in(
inappropriate( regions,( resulting( in( pollution( and( depletion( of( water( bo	dK	
ies,(water(overuse(and(use(of(inefficient(technologies.((	
According( to( OECD( (2000),( the( household( sector( have( moved( away(	
from( decreasingKblock( and( flatKfee( pricing( structures( and( toward( un	iK	
form( volumetric( or( increasingKblock( tariff( systems.( Most( countries( use(
twoKpart(tariffs,(i.e.(with(fixed( and(volumetric(components,(with(the(vo	lK	
umetric( portion( making( the( largest( portion( of( the( total( water( bill.( Many(
countries( use( pricing( systems( based( solely( on( volumetric( pricing,( with(
no( fixed( charge( element( at( all,( and( even( where( fixed( charges( persist,(
there( was( evidence( of( shifts( toward( the( reduction( or( even( abolition( of(
large(minimum(free(allowances.(	(	
The( examples( below( discuss( water( subsidy( reforms( in( the( Czech( R	eK	
public,(Australia(and(Spain,(described(in(Ekins(and(Salmons((2009),(IEEP(
et(al.((2007)(and(Valsecci(et(al.((2009	).(	
The( pricing( of( water( in( the(	Czech* Republic	( historically(covered( only(a(	
fraction( of( its( cost.( In(	Spain	,( water( pricing( is( usually( based( on( area( size(	
rather( than( on( the( actual( volume( of( water( used,( and( therefore( does( not(
provide( incentives( to( farmers( to( improve( water( use( efficiency.( This( has(
historically(led(to(a(relatively(high(level(of(consumption.((	
Australia	( offers( another( typical( example,( where,( prior( to( the( 1980s,(	
the( emphasis( of( was( on( engineering( solutions( and( on( increasing( water(
supply(to(address(shortages.(The( development(of(irrigation(was(explici	tK	
ly( intended( to( promote( rural( settlement.( During( the( 1980s,( increasing(
scarcity,(rising(supply(costs(and( pressure(on(state(budgets(led(to( a(nu	mK	
ber( of( initiatives,( including( experiments( with( pricing( reform( and( trad	aK	
ble( water( entitlements.( Main( drivers( were( environmental( and( resource(
management( considerations,( and( efficiency( improvements( in( order( to(
improve(competitiveness.(

((	Reforming*environmentally*harmful*subsidies	(	53	(	
Subsidy'removals'
The( introduction( of( price( signal( has( been( necessary( to( water( users(
aware(of(the(scarcity(of(the(resources.(	
After( 1990,( water( pricing( in( the(	Czech* Republic	(moved(from(covering(	
only( a( fraction( of( the( cost( to( full( cost( recovery,( and( the( cost( had( i	nK	
creased( by( 35( times( in( 2004.( All( houses( have( been( provided( with( co	nK	
sumption( metering,( creating( incentives( to( efficient( use.( The(	Australian	(	
reform( in( 1994( was( also( motivated( full( cost( of( resources,( efficiency( co	nK	
cerns( and( to( eliminate( crossKsubsidies( and( make( other( subsidies( tran	sK	
parent.( ConsumptionKbased( charges( were( made( for( households( and(
firms( and( crossKsubsidies( from( industrial( and( commercial( users( to(
households(were(reduced(or(eliminated.(	
After( the( reform,( the( volume( of( water( consumed( in( households( was(	
about( 10%( below( the( EU( average( in( the(	Czech* Republic	.( Between( 1990(	
and( 1999( water( withdrawals( decreased( by( 88%( in( agriculture,( by( 47%(
in( industry( and( by( 34%( in( public( water( mains.( In(	Australia	,( the( reform(	
led( to( a( decline( in( both( individual( water( consumption( and( the( unit( su	pK	
ply(cost(of(water(in(urban(areas.((	
In(	Spain	,( some( attempts( in( some( regions( to( remove( subsidies( have(	
been(made.(In(one(region,(a(new(water(charging(structure(included(both(
a( fixed( and( variable( charge( linked( to( water( use,( with( farmers( paying(
significantly( more( than( under( the( original( areaKbased( approach.( These(
resulted(in(a(30%(reduction(in(water(consumption.(
Evaluation'
The( water( subsidy( reform( in( the(	Czech* Republic*	is( considered( a( positive(	
example,( as( water( consumption( was( significantly( reduced.( The( reform(
was( helped( by( some( particular( circumstances,( as( the( former( Czechosl	oK	
vakia( witnessed( a( major( political( change( during( the( early( 199	0s	.( The(	
reform( was( hence( part( of( the( restructuring( and( shift( to( a( market( econ	oK	
my( and( a( gradual( recognition( of( environmental( values.( Another( helping(
factor(was(a(gradual(increase(in(cost,(in(step(with(increasing(incomes.(	
The(reforms(in(	Australia	(and(	Spain	(prove(less(successful.(In(	Australia	,(	
the( progress( has( been( slow( and( uneven,( and( in(	Spain	,( attempts( have(	
successfully( been( made( in( some( regions,( but( several( regions( still( subs	iK	
dize(water(consumption.(A(general(problem(seems(to(be(that(some(of(the(
factors( that( have( proven( important( to( the( more( successful( reforms( are(
not( used.( Both( compensation( mechanisms( and( political( information( and(
understanding( of( the( benefits( seem( to( have( been( lacking( in( these( r	eK	
forms.( In(	Australia	,( the( benefits(	( reduced( environmental( damage( and(	
improved( economic( efficiency( of( water( allocation(	( were( diffuse( and(	
poorly(understood(by(the( public,(as(were(the(costs(of(inaction,(and(there(
were(lack(of(consensus(on(some(of(the(basic(scientific( questions.(Rather,(
most( individual( consumers( were( worse( off( under( the( reform( than( they(
had( been( previously.( Also,( water( entitlements( were( perceived( as( a	cK

54	(	Reforming*environmentally*harmful*subsidies	(	
quired( rights.( Consequently,( there( was( considerable( resistance( to( any(
reductions( in( volumetric( entitlements.( The( reform( did( not( address( the(
potential( social( impacts( of( the( reforms( or( the( need( for( any( transitional(
support.(	
Hence,(information(and(compensation(measures(to(low(income(far	mK	
ers(may(help(passing(water(reforms(through.(
6.10	 Subsidies(to(agriculture(and(fishing(	
Significant(subsidies(to(primary(industries(have(evolved(over(decades(in(
both( developed( and( developing( countries.( As%( of( gross( farm( receipts,(
the( support( varied( widely,( see( figure( 6.2,( from( 1%( in( New( Zealand( to(
62%(in(Norway(in(the(period(2006	2008,(see(chapter10.2.26	10.2.28.(	
�
(
(
(
(
(
(
(
(
(
(
(
'
Figure'6.2.'	Producer'Support'Estimate'by'country,'1986	88'and'2006	08,%'of'	
gross'farm'receipts.	'	
Source:!OECD!(2009).!
(
In( EU,( agricultural(	and( fisheries( subsidies( form( over( 4%( of( the( budget.(	
The(	�Ž�ƒ�•�–� �†�‡�…�ƒ�†�‡á� �–�Š�‡� ��ï�•� �ƒ�‰�”�‹�…�—�Ž�–�—�”�ƒ�Ž� �’�‘�Ž�‹�…�›� �Š�ƒ�•� �—���†�‡�”�‰�‘���‡� �•�‹�‰���‹�ˆ�‹�…�ƒ���–�	
changes( as( subsidies( have( mostly( been( decoupled( from( production.( As(
seen( from( t	able( 6.2,( the( total( support( to( agriculture( as%( of( GDP( have(	
been( significantly( reduced( over( the( last( decades.(	Note( that( this( measure(	
also(reflects(the(growth(in(GDP,(and(the(support(still(remains(high(in(real(
numbers.	(	
(
(
(
(
(
(
(
(
(

((	Reforming*environmentally*harmful*subsidies	(	55	(	
Table&6.2.&Total&support&estimate,&percentage&of&GDP. &	
&&	1986	t88&	2007	t09&	
Iceland	!	5,0!	1,2!	
Norway	!	3,5!	1,0!	
New!Zealand	!	1,6!	0,2!	
European!	Union	!	2,6!	0,9!	OECD	!	2,3!	0,9!	
Source:!OECD!Producer!and!Consumer!Support!Estimates!database,!
http://www.oecd.org/document/59/0,3746,en_2649_33797_39551355_1_1_1_1,00.ht
ml#country.!
(
The( arguments( for( the( subsidies( are( usually( equity( concerns,( selfK
support( and( rural( development.( The( agricultural( sector( stands( for( si	gK	
nificant( emissions( to( air,( soil( and( water,( including( emission( of( gree	nK	
house( gases,( erosion,( deforestation( and( general( over( exploitation( of(
resources.(	Subsidies( to( primary( industries( are( considere	d( to( impose(	
significant( costs( to( developing( countries( by( distorting( trade,( since(
foremost( rich( countries( can( afford( to( support( their( producers.( It( has(
been(argued(that(subsidized(agriculture(is( one(of(the( greatest( obstacles(
to( economic( growth( in( the( develo	ping( world.( Also,( agricultural( and(	
fishery( subsidies( can( lead( to( over( exploitation( of( the( resources( and(
directly(harm(the(environment.	(	
In( this( section,( we( look(into( the( farm( subsidy( reform( in(	New(Zealand	(	
and(fishery(subsidies(in(the(EU(and(Norway.(The(sources(to(examples(are(
Ekins(and(Salmons((2010)(and(Hannesson((2006).((	
New*Zealand*	is(reputed(to(have(the(most(open(agricultural(markets(in(	
the( world( after( radical( reforms( started( in( 1984.( Before( that,(	there( had(	
been(a(gradual(acceleration(in(grants(and(subsidies,(adding(up(to(around(
30( different( forms( of( assistance.( These( subsidies( caused( severe( disto	rK	
tions( in( the( sector,( with( significant( excess( supply,( inflated( agricultural(
land( prices( and( distorted( pr	oduction( decisions.( In( the( early( 1980s,( New(	
Zealand( was( suffering( severe( economic( problems( and( substantive( ec	oK	
nomic( reforms( were( needed( to( increase( growth.( The( agriculture( sector(
was(a(primary(target.	(	
EU	( fisheries( subsidies( were( first( introduced( in( 1970( with( the( obje	cK	
tive( of( supporting( and( encouraging( increased( fish( production.( As( a( r	eK	
sult,(the(fishing(industry(became(increasingly(capitalKintensive(and(tec	hK	
nologically( productive.( The( increased( capacity( of( fishing( fleets( was( a(
major( factor( in( the( depletion( of( fish( stocks( over( the( following( decades.(
Overall( poor( performance( is( due( to( chronic( overcapacity( of( which( ove	rK	
fishing(is(considered(both(a(cause(and(a(consequence.(In(	Norway	,(fishery(	
subsidies(were(about(70%(of(value(added(in(the(industry(in(1981,(driven(
by( the( strong( standing( of( the( fishermen( organization( and( the( idea( that(
fisheries(were(important(to(keep(the(fishing(communities(viable. (

56	(	Reforming*environmentally*harmful*subsidies	(	
Subsidy'removals'
Starting( in( 1984,( Government( assistance( to( the( agricultural( sector( in(
New* Zealand	( was( virtually( eliminated( over( a( short( time( period.( Min	iK	
mum( price( schemes( were( abolished,( tax( concessions( and( free( gover	nK	
ment( services( were( withdrawn;( land( development( loans,( fertilizer( and(
irrigation( subsidies,( subsidized( credit,( assistance( for( flood( control,( soil(
conservation(and(drainage(schemes(were(phased(out.(	
As( a( result( the( economic( and( environmental( indicators( for( the( agr	iK	
culture( sector( have( improved( significantly.( Phosphate( leaching( was( r	eK	
duced;(the(reduction(in(the(national(sheep( flock(yielded(benefits(for(er	oK	
sion(control,(water(quality(and(methane(emissions;(and(there(was(a(su	bK	
stantial( decline( in( the( felling( of( native( forest.( While( these( benefits( were(
partly( offset( by( the( impacts( of( increases( in( other( agricultural( activities,(
the(overall(environmental(impact(was(positive.((	
The(	EU	( fishery( subsidies( have( shifted( to( balance( between( resources(	
and( fishing( fleet( capacity,( strengthen( the( competitiveness( of( the( sector,(
foster( protection( of( the( environment( and( natural( resources( and( encou	rK	
age( the( sustainable( development( in( areas( with( activities( in( the( fisheries(
sector.( In( particular,( the( most( direct( forms( of( capacityKenhancing( subs	iK	
dies(have(been(phased(out.(After(1981,(the(	Norwegian	(subsidies(gradua	lK	
ly( came( down,( encouraging( structural( changes( that( have( made( a( fund	aK	
ment(for(a(selfKsufficient(industry.((
Evaluation'
The( reform( in(	New* Zealand	( is( considered( a( success,( despite( the( lack( of(	
assistance( and( despite( its( relatively( rapid( implementation.( The( removal(
of( subsidies( was( initially( unpopular( and( culminated( in( the( largest( rural(
�•�‡�…�–�‘�”��’�”�‘�–�‡�•�–����ƒ�”�…�Š� �‹�����‡�™���‡�ƒ�Ž�ƒ���†ï�•��Š�‹�•�–�‘�”�›��‹���s{zxá��„�—�–��•�–�‹�Ž�Ž��‘���Ž�›�s¨�
of(the(farmers(left(the(industry(and(overall(rural(population(rose(slightly.(
As( opposed( to( the( recommendations( related( to( reforms( in( poor( cou	nK	
tries,(the(success(is(partly(ascribed(to(the(speed(of(the(reforms,(and(par	tK	
ly(to(the(state(of(the(government(finances.(Some(assistance(was(provided(
in(the(form(of(debt(rescheduling(in(1986	87(and(with(farm(debt(restru	cK	
turing,( while( the( government( wrote( off( some( farm( debt( and( encouraged(
private( lenders( to( do( the( same.( Expert( help( was( provided( to( help( far	mK	
ers(with(the(development(of(business(plans(and(credit(mediation.(	
Another(important(factor(was(the(general(consensus(among(the(main(	
political( parties( over( the( need( for( reform(	( both( in( agriculture( and( the(	
wider( economy.( The( reform( was( implemented( to( an( agreed( and( tran	sK	
parent( timetable(	( with( farmers( being( given( clear( signals( about( the(	
depth,(breadth(and(pace(of(the(reform,(and(was(part(of(a(wider(economic(
reform( programme( that( included( measures( which( reduced( factor( input(
prices.((	
The( reform( of( the( fishery( subsidies( in(	EU	(were( motivated( in( both( e	nK	
vironmental( and( fiscal( causes.( New( member( states( joining( the( EU( in(

((	Reforming*environmentally*harmful*subsidies	(	57	(	
2004( were( poorer( than( the( existing( EU15( and( had( high( expectations( of(
support( for( their( fishery( sectors.( Economic( pressures( resulting( from(
rising( oil( prices( and( falling( revenues( as( a( result( of( the( decline( in( fish(
stocks( resulted( in( heavy( lobbying( by( the( fishing( industry( to( maintain(
subsidies.( Still( it( is( an( example( of( the( difficulty( of( reversing( subsidies.(
The( fishery( subsidy( regime( had( been( in( place( for( several( decades,( and(
when( the( financial( periods( ended,( the( presumption( was( that( subsidies(
would( be( renewed( rather( than( removed.( This( is( a( general( problem( with(
implementing(subsidies(with(no(clear(time(limit.(	
Also( the(	Norwegian	( support( was( meant( as( extraordinary( emergency(	
after( some( years( with( falling( productivity.( In( addition,( the( resource(
wealth(in(the(form(of(offshore(oil( and(gas(deposits(discovered(in(the(late(
1960s	( justified( the( support.( Hence,( it( is( an( example( how( the( survival( of(	
subsidies(when(the(budget(constraint(is(not(pressing.((
6.11	 Summary:(Lessons(learned(	!	
This( chapter( summarizes( the( main( important( factors( from( the( review(
above.(
Energy'subsidies'are'inefficient'redistribution'instruments'
Environmentally( harmful( subsidies( prove( to( be( inefficient( instruments(
to( reKdistribute( wealth( and( to( support( regional( development.( This( co	nK	
firms( theory.( Several( examples( show( that( the( rich( receive( the( greatest(
benefits( from( the( subsidies( (10.2.9,( 10.2.10).( In( Indonesia,( only( roughly(
15%(of(the(total(kerosene(subsidy(reached(the(poorest(30%(of(the(pop	uK	
lation.( Hence( subsidy( reforms( and( redistribution( of( the( revenues( repr	eK	
sent( great( potential( benefits( in( reducing( poverty.( In( Senegal( (10.2.11),(
the( 40( poorest%( of( the( population( gained( only( 19%( of( the( total( i	mK	
provement( in( welfare( from( the( LPG( subsidy,( while( the( richest( 40%(
gained( 61%.( The( IMF( has( estimated( that( if( conditional( cash( transfers(
were(to(target(the(poorest(10%(of(the(population,(58(cents(of(each( dollar(
spent( would( reach( people( in( the( poorest( quintile( of( the( population( co	mK	
pared(with(only(22(cents(from(the(excise(tax(exemption(for(kerosene(and(
only(6(cents(for(the(LPG(gas(subsidy((IMF(2008).	(	
Clear'and'relevant'information'is'essential'
Good(quality(information(and(transparency(prove(crucial(to(secure(suff	iK	
cient( understanding( and( public( and( political( support( to( the( reforms( in(
many( cases.( Some( parties( will( per( definition( lose,( unless( they( are( co	mK	
pensated.( Resistance( to( the( reforms( is( expectedly( rather( the( rule( than(
the( exception.( The( benefits( from( improving( efficiency( in( the( total( policy(

58	(	Reforming*environmentally*harmful*subsidies	(	
mixture(must(be(communicated.(As(an(important(part(of(the(information(
communication,(both(losing(and(benefiting(parties(must(be(identified.((	
For( example,( the( twoKstep( reform( in( Ghana( (10.2.10)( illustrates( that(	
the( public( acceptance( was( significantly( higher( in( the( second( step,( when(
communication( was( more( emphasised.( Quantification( studies( of( how(
and( to( what( extent( the( poor( in( Ghana( would( be( affected( by( deregulation(
were( important( for( the( reform( support.( The( experiences( in( Ghana( along(
with( the( coal( subsidy( reform( in( France( (10.2.2)( are( pointed( out( as( good(
examples( of( research( to( identify( the( negatively( impacted( by( deK
subsidization,( and( the( importance( of( information( campaigns( about( the(
benefits( of( reform,( including( cash( transfers( to( the( poor.( The( strong( ev	iK	
dence(base(is(seen(as(a(key(requirement(of(public(acceptance(and(clarity(
of(aims(and(transparency(in(reducing(the(heavy(good(vehicle(subsidies(in(
Europe( (10.2.17).( For( the( successful( removal( of( company( car( subsidies(
in( England( (10.2.20),( a( strong( evidence( base( was( necessary( to( convince(
doubters( that( change( was( needed.( Only( when( government( departments(
and(progressive( companies(had(been(persuaded(was(it(possible(to(make(
real( progress.( In( reforming( the( German( biofuel( subsidies( (10.2.7),(
knowledge(about(the(large(budgetary(implications(of(the(tax(exemptions(
secured( political( support( for( these( reforms,( despite( domestic( industry(
opposition.(	
Conversely,( lacking( information( has( shown( to( hamper( reforms.( The(	
setbacks(of(the(removal(of(the(German(ecoKtax(exemptions((10.2.6)(illu	sK	
trate(the(difficulty(of(defending(the(general(concept(of(environmental(tax(
reform( to( the( public( and( stakeholders,( when( environmental( effects( i	nK	
teract.( Missing( information( is( a( possible( explanation( to( the( lacking( su	cK	
cess( of( the( water( subsidy( reform( in( Australia( (10.2.24).( Most( individual(
consumers(faced(higher(water(prices.(But(the(understanding(of(the(ben	eK	
fits( were( diffuse( and( poorly(understood( by( the( public,( as( were( the( costs(
of(inaction.(There(was(also(lack(of(consensus(on(some(of(the(basic(scie	nK	
tific(questions.(	
Missing( support( may( reflect( uncertainty( about,( or( a( lack( of( unde	rK	
standing(of,(the(severity(and(causes(of(an(environmental(problem,(or(the(
benefits(of(action.(Typically,(there(is(a(lack(of(knowledge(about(the(actual(
size( of( the( support( to( energy( production( and( consumption.( The( policy(
choice( is( more( transparent( if( the( targets( for( the( budget( spending( are(
clearly(identified.(	
Also,( as( any( subsidy( reform( will( have( distributional( consequences,( it(	
is( likely( that( the( evidence( itself( will( be( contested( by( stakeholders.( This(
underlines( the( importance( of( scientifically( objective,( transparent( and(
robust( information,( and( that( the( information( is( communicated( to( the(
publi	c.(

((	Reforming*environmentally*harmful*subsidies	(	59	(	
Predictable'and'clear'policy'is'also'important''
In( line( with( relevant( information( about( the( costs( and( benefits( to( diffe	rK	
ent( groups( and( the( society( as( a( whole,( it( seems( important( that( the( r	eK	
forms( are( carried( through( in( a( clear( and( predictable( manner.( Designing(
and( properly( implementing( an( appropriate( strategy( will( improve( the(
chance(of(successful(reform.(	
A( successful( example( is( the( agricultural( subsidy( reform( in( New( Ze	aK	
land( (10.2.26).( There( was( a( general( consensus( among( the( main( political(
parties(over(the(need(for(reform,(and(the(reform(was(implemented(to(an(
agreed( and( transparent( timetable(	( with( farmers( being( given( clear( si	gK	
nals(about(the(depth,(breadth(and(pace(of(the(reform.((	
As( illustrated( by( Laan( et( al.( (2010),( countries( without( a( comprehe	nK	
sive( strategy,( such( as( Indonesia( (10.2.9)( and( Senegal( (10.2.11),( flounder(
in( their( efforts( to( eliminate( fossil( fuel( subsidies.( Any( reform( strategy(
should( include( effective( mechanisms( to( prevent( backsliding,( such( as(
independent( regulation( of( fuel( prices,( automatic( priceKsetting( mech	aK	
nisms,( and( education( of( decisionKmakers( and( the( public( about( the( pro	bK	
lems(with(government(intervention(in(externality(pricing.(	
A( coherent( reform( policy( establishes( a( timeframe( for( implement	aK	
tion,( and( includes( information( on( complementary( policies( to( offset( u	nK	
desired( secondary( impacts.( A( broadest( possible( political( support( redu	cK	
es( the( risk( of( political( parties( working( against( the( reform( in( the( impl	eK	
mentation( phase.( International( political( consensus( proves( important(
particularly(for(reforms(involving(competitive( export(industries,(such(as(
aviation( (cf.( chapter( 6.8)( and( to( justify( increasing( costs( of( addressing(
global(warming.(
Strong'political'will'and'stable'political'power'strengthen'
reform'
Many( examples( show( that( strong( leadership( and( a( broad( coalition( are(
necessary( factors( to( secure( successful( subsidy( reforms.( Appropriate( and(
conductive( institutional( frameworks( are( key( factors.( Conversely,( the( a	bK	
sence( of( a( constituency( for( reform( can( be( a(major( factor( undermining(the(
successful(adoption(or(implementation(of(environmental(policy(reforms.(	
As(an(ex	ample,(the(successful(coal(subsidy(reform(in(England(	(10.2.1)(	
is(partly(explained(by(privatization(and(strong(political(will(following(the(
Thatcher(period,(who(managed(to(drive(	reform(through.(The(h	eavy(good(	
vehicle( subsidies( in( Europe(	(10.2.17,( 10.2.18)( point( to( the( need( for(	
strong( leadership,( cross	Kparty( consensus( to( reach( broad( public( a	cK	
ceptance(and(overcome(opposition.	(	
As( another( example,( t	he( use( of( economic( instruments( in( the( Dutch(	
water(polluti	on(control(policy	(was(a(great(success,(while(similar(reforms(	
executed( in( Germany( and( Denmark(were( less( successful( due( to( manip	uK	
lations(of(local(authorities((Andersen(2001).(	(

60	(	Reforming*environmentally*harmful*subsidies	(	
Other( examples( of( weak( political( foundation( are( many.( Laan( et( al.(	
(2010)(refer(to(the(example(of(Ghana((10.2.10)(which( demonstrates(that(
a( reform( strategy( will( only( be( as( robust( as( the( political( will( to( carry( it(
through( and( uphold( it.( Due( to( lacking( political( acceptance,( the( change( in(
policy(regime(opened(for(reversing(the(reform.(Governments(can(always(
�‘�˜�‡�”�”�‹�†�‡��–�Š�‡��”�‡�‰�—�Ž�ƒ�–�‘�”ï�•��†�‡�…�‹�•�‹�‘���•��ƒ���†��Ž�ƒ�™�•��…�ƒ����„�‡��…�Š�ƒ���‰�‡�†ä���Š�‡���‡���‡�‰	aK	
lese( government( appears( to( have( the( will( for( reform( of( their( fossil( fuel(
subsidies,( but( could( potentially( benefit( from( a( more( systematic( and(
comprehensive(set(of(policies(to(support(deKsubsidization((10.2.11).((	
The(commuter(subsidies(in(Europe(have(been(popular(among(a(broad(	
range( of( the( population,( and( prove( hard( to( remove( (10.2.19).( The( same(
problem(prevails(for(the(company(car(subsidies((10.2.20	10.2.21).(Lac	kK	
ing( support( may( be( due( to( the( many( opponents( among( commuters( who(
benefit( from( the( tax( deductions,( with( only( the( pressing( need( to( close(
large(budget(deficits( providing(sufficient(political(will( to(reduce(the(su	bK	
sidy.(As(pointed( out(by(IEEP( et(al.((2007),(budgetary( difficulties( can(be(a(
motivating(force(for(tax(or(subsidy(reform.((	
The( difficulties( in( removing( the( coal( subsidies( in( Germany(	(10.2.3)(	
are	(partly(explained(by(the(s	trong(links(between(particular(interests(and(	
political(parties.(Considering(the(attempt(to(e	co	Ktax(in(Germany(	(10.2.6)	,(	
it( is( seen( likely( that( re	Kelection( gave( momentum( to( reform( plans( that(	
already( existed( earlier,( and( changing( governments( allowed( for( re	K	
considerations( of( the( eco	Ktax( exemptions.( Also,( the( lack( of( VAT( subsidy(	
reforms(in(the(UK(	(10	.2.14)(is(explained(by(a(lack(of(political(will.(	(	
Compensation'is'often'necessary'
Compensatory( measures( have( proven( to( be( of( crucial( importance( in(
many( of( the( successful( reforms( around( the( world.( Particularly,( this( is(
important( in( the( low(income( countries,( where( the( subsidies( may( const	iK	
tute( a( significant( portion( of( their( income.( For( example,( the( Indonesian(
fossil( fuel( subsidy( reform( (10.2.9)( highlights( the( importance( of( ensuring(
a( suitable( compensation( strategy( for( poorer( sections( of( the( community,(
and( at( the( same( time( reducing( the( impact( on( government( expenditures.(
In( Malaysia( (10.2.12),( several( compensation( packages( were( used( to( mi	tK	
igate(increased(costs.(The(fossil(fuel(subsidy(reform(in(Mexico( (10.2.8)(is(
an(example(of(how(to(improve(price(signals(and( reduce(the(environme	nK	
tal( costs,( and( at( the( same( time( compensate( the( social( groups( initially(
targeted.(Lack(of(compensation(is(a(possible(reason(why(water(subsidies(
are(hard(to(remove(in(Spain((10.2.25).(	
Also( in( higher( income( countries,( different( kinds( of( compensations(	
prove( important( to( get( the( necessary( political( support,( and( to( avoid( si	gK	
nificant(social(costs.(In(the(successful( agricultural(subsidy(reform(in(New(
Zealand((10.2.26),(the(subsidy(reductions(were(part(of(a(wider(economic(
reform( programme( that( included( measures( which( reduced( factor( input(
prices,( to( mitigate( the( increasing( costs.( A( key( lesson( from( the( UK( coal(

((	Reforming*environmentally*harmful*subsidies	(	61	(	
subsidy( reform( (10.2.1)( is( that( coupling( the( reform( with( measures( to(
stimulate( economic( development,( and( therefore( create( new( job( oppo	rK	
tunities( in( areas( where( industrial( activities( are( to( be( scaled( down( or(
closed,( can( increase( support( to( the( reform( and( foster( economic( growth.(
In( France( (10.2.2),( the( expansion( of(nuclearKbased( electricity( generating(
capacity( and( the( generous( provisions( offered( to( the( former( miners(
helped( making( the( closure( of( all( the( coal( mines( possible.( Also,(	the( Dutch(	
tax* increase* on*	natural( gas( was( followed( with( reduced( personal( income(	
taxes( (10.2.16).( Consequently,( gross( wage( levels( rose,( and( the( large( m	aK	
jority(of(households	(saw(an(overall(increase(of(net(disposable(income.	(	
Timing'can'be'essential'
Changing( economic( conditions( with( high( economic( growth( are( good(
starting( points( for( reforms.( It( is( easier( to( implement( a( reform( when( the(
economic( outlook( is( good.( Also,( environmental( considerations( increase(
with( economic( growth,( and( can( play( a( major( motivation( role( determi	nK	
ing( the( success( of( reform.( The( political( and( economic( change( in( 1989(
from( communism( to( a( market( economy( allowed( changes( in( the( mining(
sector( and( the( reform( of( government( subsidies( to( the( sector( in( Poland(
(10.2.4)	.(While( inflation( was( falling( continuously( from( 586%( in( 1990( to(	
7%( in( 1999,( real( disposable( household( income( was( increasing( rapidly.(
These(favourable(circumstances(also(created(room(for(reducing(the(VAT(
subsidies(in(Poland((10.2.13).(	
Another( experience( is( the( removal( of( fishery( subsidies( in( Norway(	
(10.2.28).( This( reform( was( helped( by( the( sharp( decline( in( oil( prices( in(
1986( and( the( upturn( in( both( catch( and( fishery( prices( in( the( years( after(
1990.( However,( economic( growth( or( lack( of( budget( constraints( can( also(
be( used( as( arguments( for( keeping( the( subsidies( high.( The( national(
wealth( from( offshore( oil( and( gas( deposits( in( Norway( discovered( in( the(
late(196	0s	(kept(up(the(fishery(support(for(many(decades.(	
The(removal(of(natural(gas(subsidies(in(the(US((10.2.15)(is(also(an(e	xK	
ample( of( a( reform( being( pressed( forward( by( the( economic( realities.( The(
consumers( accepted( the( inevitability( of( higher( natural( gas( prices( after(
dramatic(price(rises(in(the(petroleum(markets.((
Gradual'approach?'
Several( of( the( examples( from( the( subsidy( reforms( point( to( the( i	mK	
portance( of( gradual( changes.( This( may( be( particularly( important( when(
significant( compensation( is( needed( to( avoid( transition( to( poverty( when(
removing( subsidies.( For( example,(	IEA( et( al	.( (2010b)( judged( it( important(	
to( provide( a( stepped( approach( to( the( Indonesian( fossil( fuel( reform(
(10.2.9)	,( with( some( fuels( being( tackled( later( in( the( reform( process,( and(	
to(focus(on(changing(household(behaviour.( Also,(the(	Czech(water(reform(

62	(	Reforming*environmentally*harmful*subsidies	(	
(10.2.23)( approached( a( gradual( increase( in( cost( in( step( with( increasing(
incomes,(limiting(the(impact.	(	
A(gradual(approach(may(contrast(some(of(the(experiences(mentioned(	
above,( since( long( time( tables( can( be( exposed( to( shifting( governments(
and( mobilization( of( pressure( groups.( A( contrasting( example( is( the( agr	iK	
culture( reform( in( New( Zealand(	(10.2.26)	.( The( reform( was( carried(	
through( rapidly,( over( just( a( few( years,( and( was( followed( by( the( other(
important( success( criteria( as( mentioned( above;( clear( information( and(
alleviating( measu	res.( In( contrast,( the( French( coal( subsidy( reform(	
(10.2.2)(	took(	a( long	Kterm,( gradual( approach( to( help( the( miners( and( the(	
economy(to(adapt.(Still(Laan(et(al.((2010)(	conclude(that(the(	deregulation(	
is( not( an( example( of( best	Kpractice,( as( it( required( over( 40( yea	rs( to( co	mK	
plete( and( billions( of( Euros( to( implement.( Also,( in( Spain( (10.2.5),( signif	iK	
cant(subsidies(remain(almost(20(years(after(reforms(started.	(	
(

7.	 Compensation&&	
7.1	 Justifications(for(compensation	!	
Removing( environmentally( harmful( subsidies( often( takes( time,( and( in(
many( cases( significant( social( support( is( taken( away( from( needy( groups(
in(the(population.(Without(compensation,(social(costs(could(be(very(high,(
and( political( protests( and( opposition( would( stop( reform.( In( many( cou	nK	
tries( competitiveness( concerns( and( regional( interests( reforms( may( also(
halt( reforms( and( require( compensation( for( subsidy( removal.( There( are(
no( general( rules( for( if( and( how( to( compensate( subsidy( removals.( Cou	nK	
tries( must( evaluate( the( social( needs,( the( political( situation,( and(the( need(
for(adjustment(periods(in(each(case.((	
However,( systematic( evaluation( is( important( to( avoid( unnecessary(	
public( spending( and( continuation( of( harmful( subsidies.( In( this( chapter(
we( systematise( the( justifications( for( compensation( along( theoretical(
lines( and( point( to( some( examples( of( compensation( schemes( related( to(
the(different(justifications(for(support.((	
The( theoretical( justification( for( compensation,( i.e.( public( support,( is(	
principally(the(same( as( for(subsidies,(cf.(chapter(4.1;(to(	correct* for* income*	
distribution* inequity	( and( to(	correct* for* market* failures	.( When( it( comes( to(	
environmentally( harmful( subsidy( reforms,( compensation( is( first( of( all(
justified( in( income( redistribution.( Also,( compensation( can( be( justified( to(
help(the(reform(through(political(processes(in(a(temporary(period.((
7.2	 Income(distribution(inequity	!	
As( seen( in( the( examples( in( chapter( 6,( when( removing( fossil( fuel( subs	iK	
dies(in(lowKincome(countries,(there(are(obvious(needs(for(compensation.(
The( original( cause( for( the( subsidies( to( consumption( of( energy( is( usually(
to( support( poor( households.( Formulation( of( efficient( support( programs(
is( then( a( core( part( of( the( reforms.( For( rich( countries,( however,( the( need(
for(compensation(is(generally(more(questionable.((	
The( general( rule( is( that( compensation( should( be( given( as( directly( to(	
the( targeted( group( as( possible.( Direct( income( support( targeted( at( the(
low( income( groups( is( far( more( effective( than( support( via( low( energy(
prices.( Energy( consumption( increase( with( income,( and( energy( subsidies(
primarily(benefit(those(using(most(energy.(

64	(	Reforming*environmentally*harmful*subsidies	(	
The*Bolsa*Familia*program* in	(Brazil	(represents(an(example(of(instruments(targe	tK	
ing(the(income(distribution(problems(directly,(and(at(a(low(cost.(Launched(in(2003,(
the(program(provides(income(support(to(poor(families,(subject(to(their(fulfilling(of(
certain( human( development( requirements,( such( as(	education	(participation(and(	
health	( programs.( Examples( are( child( school( attendance( including( participation( in(	
supplementary( socioKeducational( activities,( vaccinations,( nutritional( monitoring,(
prenatal(and(post( natal( tests((ILO(2009a).(Victims( saved(from(forced( labour(aut	oK	
matically( receive( unemployment( benefits,( and( those( who( have( children( are( e	nK	
rolled(in(the(conditional(cash(transfer(programme.(	
Bolsa(Familia	*is(the(largest(conditional(cash(transfer(programme(in(the(world.(	
��›� �–�Š�‡� �‡���†� �‘�ˆ� trrzá� �‹�–� �Š�ƒ�†� �”�‡�ƒ�…�Š�‡�†� �ƒ� �“�—�ƒ�”�–�‡�”� �‘�ˆ� ��”�ƒ�œ�‹�Žï�•� �’�‘�’�—�Ž�ƒ�–�‹�‘��� �ƒ�”�‘�—���†� vx�
million( people)(and(around(75%(of(the(estimated( number(of(poor(families,(corr	eK	
sponding(to(an(annual(cost(of(0.4%(of(the(GDP((ILO(2009a).(The(program(is(consi	dK	
ered(to(have(contributed( strongly(to( the(improvement(of(income(distribution(and(
to( poverty( reduction,( and( to( be( more( efficient( compared( to( other( cash( transfer(
programmes(because(of(its(targeting(features((ILO(2009a).(The(Gini(coefficient(is(a(
measure( of( the( inequality( of( a( distribution,( a( value( of( 0( expressing( total( equality(
and(a( value( of(1(maximal( inequality.	1(From( 2	001( to(2007,(the( Gini(coefficient( d	eK	
�…�Ž�‹���‡�†��ˆ�”�‘��� räx��–�‘�räwwá� �™�Š�‹�…�Š� �™�ƒ�•��–�Š�‡� �Ž�‘�™�‡�•�–��”�ƒ�–�‡��‹����–�Š�‡��…�‘�—���–�”�›ï�•��”�‡�…�‡���–� �Š�‹�•�–�‘�”�›ä�
The( social( security( pension( transfers( represent( a( high( share( of( overall( family( i	nK	
come(and(accordingly(impact(income(distribution.(	(	
Possible'compensation'policies'
Broad(based(social(support(programs(may(be(most(relevant(to(use(when(
removing(general(subsidies(covering(large(income(groups,(such(as(to(fuel(
oil( consumption.( Examples( of( relevant( direct( transfer( to( low( income(
groups(are:(	
(	
�x Cash*transfers,*	given(as	*lump(sum(financial(support(to(low(income(	
families((	
�x Food;based*programs	,(such(as(supplementary(feeding(programs(and(	
food(stamps,(vouchers,(and(coupons((	
�x Support*to*health*care*and*education**
*	
Successful( examples( of( such( programs( in( combination( with( removal( of(
environmentally(harmful(subsidies( are( the( Bolsa(Familia( program( in(Br	aK	
zil,( the( Oportunidades( program( in( Mexico,( cash( transfer( programs( in( I	nK	
donesia((see(box(7.1)(and(in(Ghana((chapter(10.2.10).(These(examples(are(
consistent( with( other( studies( showing( that( developing( countries( can(
transform( environmentally( harmful( subsidies( to( comprehensive( social(
protection( packages( efficiently( targeting( the( low( income( groups.( Other(
examples(are(the(severance(packages(and(direct(aid(provided(to(Polish,(UK(
and( French( miners( leaving( work( in( the( restructuring( of( the( coal( sector(
(6.1,(10.2.1,(10.2.2,(10.2.4).(	
(	
!	
(
(
(
(
(
(
(
(
(
(
(
(
(
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(
(
(
(
(
(	
Box'7.1	:'Examples'of'broad'based'support'programs'in'combination'with'redu	c5	
tions'of'subsides'of'fossil'fuel'consumption.	'

((	Reforming*environmentally*harmful*subsidies	(	65	(	
The( program( has( improved( the( job( market( and( resulted( in( real( gains( on( the(
minimum( wage.( Rural( pensions( have( strengthened( the( role( of( the( unions( and(
political(associations(representing(rural(workers(in(the(rainforest.((	
The( Brazilian( experience( is( consistent( with( several( studies( and( simulations(	
carried(out(by(ILO((ILO(2009b)(that(show(that(developing(countries(can(afford(to(
build( appropriate( and( relatively( comprehensive,( even( if( basic,( social( protection(
packages.(	
The* Oportunidades* program* in* Mexico	(is(their(main(antiKpoverty(program(	
(described(in(IEA(et(al.(2010a).(It(targets(human(capital,(i.e.(	education,*health*and*	
nutrition* of* children	.( The( distribution( mechanism( is( cash( transfer( and( health(	
clinic( visits.( Another( program( in( Mexico( stimulates(	employment	(in(rural(and(	
small(communities.(When(labour(demand(is(low(and(opportunities(are(few,(work(
is( provided( in( projects( typically( related( to( infrastructure( and( environmental(
preservation.( This( program( is( used( to( compensate( reduced( energy( subsidies( in(
Mexico,(see(chapter(6.5.(	
The* Cash* transfer* programs* in* Indonesia	( are( successfully( designed( targeted(	
cash( transfers( that( were( adopted( simultaneously( with( the( fuel( price( increases( in(
2005( (IEA( et( al.( 2010a).( The( Unconditional( Cash( Transfers( program( covers( 19.2(
million( households,( or( one( third( of( the( Indonesian( population.( The( government(
budget( savings(from(the(reduced(cost(of(fuel( subsidies((6.4),(was( estimated(to( be(
about($10.1(billion(in(2005	2006.(The(program( delivered(benefits(covering(more(	
than(the(increase(in(energy(costs.(This(served(to(increase(the(level(of(assistance(for(
the( poor(and(those( on(the(verge(from(falling(into( poverty,(and(to(make(fuel( price(
increases(acceptable.(The(government(also(used(the(savings(to(finance(programs(in(
education	,(rural*development	,(and(	health	.(The(poorest(deciles(received(21%(of(the(	
benefits,( while( deciles( 2,( 3( and( 4( captured( 40%.( IEA( et( al.( (2010a)( conclude( that(
the(program(proved(largely(successful(in(reaching(the(poor.(
(
(
(
(
(
(
(
(
(
(	
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
'
(
Box'7.1'(continued)	:'Examples'of'broad'based'support'programs'in'combination'	
with'reductions'of'subsides'of'fossil'fuel'	consumption.	'	
(
High( income( countries( offer( other( types( of( examples( of( direct( income(
support.( The( Nordic( countries( are(	characterized( by(	high( income( and(	
well	Kfunctioning(income(tax(and(social(support(systems(and(	an(extensive(	
social( security( net.( The( elements(	in( the(	Nordic( system( can( be( possible(	
models( for( other( countries( with( more( common( use( of( environmentally(
harmful(subsidies.(	Core(instruments(are:(	(	
Diversified* income* taxation.	( This( is( a( textbook( example( of( a( direct(	
measure( to( prioritise( low( income( groups.( E.g.( the( Norwegian( income(
taxation( is( progressive,( with( a( marginal( tax( of( 0%( for( low( income( and(
�‹���…�”�‡�ƒ�•�‹���‰� �–�‘� ���ƒ�š�‹���—��� wv¨� �‡���’�Ž�‘�›�‡�”�•ï� �…�‘���–�”�‹�„�—�–�‹�‘��� �‹���…�Ž�—�†�‡�†ä� ��‹�ˆ�ˆ�‡	rK	
entiation(of(this(tax(is(also(used(to(stimulate(regional(employment.(There(
are(several(examples(of(gradual(shifts(from(taxation(of(labour(to(taxation(
of( polluting( activities,( e.g.( in( Denmark( and( Finland( (c.f.( chapter( 3).( The(
German( ecoKtax( reform( (10.2.6)( was( accompanied( by( lowered( payroll(
taxes.(Another(example(of(diversified(income(taxation(to(compensate(tax(

66	(	Reforming*environmentally*harmful*subsidies	(	
expenses(are(increased(basic(tax(allowances(following(increases(in(taxes,(
c.f.( the( increase( in( electricity( and( heating( oil( taxes( in( Norway,( and( ge	nK	
eral(pollution(taxes(in(Sweden((chapter(3).(	
Public* health* insurance,	(pensions* and*social* security.	( Pensions( and( s	oK	
cial( security( are( seen( as( the( core( fundaments( in( the( social( security( net,(
securing( the( fundamental( support( to( persons( who( do( not( receive( e	mK	
ployment(income.(The(schemes( are( corrected( for(income,(private(capital(
and(family(situation.(	
Unemployment* benefits	.( The( labor( market( is( also( dominated( by( inst	iK	
tutions(including(strong(labor(unions(and(employer(associations,(signif	iK	
cant(elements(of(	wage*coordination	(securing(minimum(incomes.(	
These( schemes( offer( support( to( the( individuals( in( different( life( situ	aK	
tions(when(they(are(not(able(to,(or(have(lower(ability(to(selfKsupport.(	
Capital* taxes	,(heritage* taxes	(and(	property* value* taxes	( are( also( instr	uK	
ments(to(secure(public(revenues(and(to(redistribute(wealth.(
7.3	 Market(failures	!	
Beside( income( distribution,( the( willingness( to( prioritize( externalities(
increases( with( higher( income.( For( example,( cultural,( landscape( and( hi	sK	
torical( values( are( typical( common( goods( providing( welfare( to( the( soci	eK	
ty,( beyond( what( is( profitable( according( to( pure( market( behaviour.(	A(	
larger( share( of( the( budgets( to( support( the( development( in( rural( areas(
may(express(increasing(valuation(of(such(positive(externalities(not(taken(
care(of( in(the(market	.(Continuation(of(support(to(e.g.(regional(settlement(	
and( development( can( be( theoretically( justified( if( there( are( positive( e	xK	
ternal(qualities(related(to(regional(settlement(and(activity.(The(existence(
of( positive( externalities( (not( accounted( for( in( the( market)( related( to(
competitiveness( for( certain( industries( is( more( questionable.( Often( it( is( a(
means( to( maintain( longKterm( employment( and( regional( settlement,( to(
secure(full(employment(or(the(trade(balance.((	
Again,(the(general(rule(is(that(the(positive(externalities(should(be(co	rK	
rected( as( directly( as( possible.( If( rural( settlement( implies( positive( ex	terK	
nalities,( the( support( should( ideally( be( given( to( general( activities( linked(
to( the( actual( areas,( and( in( particular;( it( should( not( be(earmarked( at( sp	eK	
cific( industries( or( households.( Likewise,( if( the( subsidy( reforms( reduce(
production(in(some(industries( and(hence(increase(social(costs(related(to(
unemployment,( the( firstKbest( instrument( should( be( directed( at( stimula	tK	
ing(new(activity(in(general,(not(particular(industries.	9(	
««««««««««««««««««««««««««	(	9(Also,(supporting(specific(industries(di	rectly(is(generally(incompatible(with(international(trade(agreements(	(cf.(the(EU/EØS(regulations).	(

((	Reforming*environmentally*harmful*subsidies	(	67	(	
Possible'compensation'policies'
General* support* over* governmental* budgets.*	LumpKsum( support( can( be(	
distributed( to( the( local( municipalities( for( their( own( distribution( accor	dK	
ing( to(their( preferences.(	The*income*system* for*Norwegian* municipalities	(	
serves( as( an( example.( This( system( is( meant( to( even( out( the( differences(
between( the( different( regions.( Municipalities( with( low( incomes,( high(
population( growth,( and( high( level( of( decentralization( are( particularly(
emphasised.(	
Based( on( own( incomes( and( governmental( support,( local( politicians(	
can( stimulate( regional( development( by( prioritizing( local( infrastructure(
to(attract(new(industries(over(	municipal*budgets.	(	
The( government( can( also( stimulate( regional( development( over( the(	
governmental* budgets	( by( investing( directly( in( infrastructure,( culture,(	
decentralization( of( governmental( institutions,( supporting( health( care(
and(social(support(programs.(
7.4	 Adjustment(policies	!	
As(shown(in(the(many(examples(in(chapter(6,(removing(environmentally(
harmful( subsidies( requires( time( and( patience.( Normally,( it( takes( a( long(
time( before( the( problems( are( acknowledged( until( reform( starts( up,( and(
there(will(normally(be(a(long(transitional(period(toward(a(more( efficient(
policy(mix.(It(is(therefore(important(to(accept(stepwise(progress(through(
second( best( solutions( (where( one( or( more( optimality( condition( cannot(
be(satisfied)	.((	
For(instance,(compensation(can(be(needed(as(means(to(	reach*political*	
support	( for( the( reform.( It( can( also( be( necessary( to(	alleviate* adjustment*	
costs	(in(the(intermediate(period(to(the(afterKsubsidy(regime.(If(the(justif	iK	
cation( is( temporary( adjustment,( it( is( important( to( use(	temporary* instr	u;	
ments	,(followed(by(a(clear(timeKtable(for(phasing(out(the(support.(In(pa	rK	
ticular,( it( should( be( avoided( to( substitute( one( harmful( subsidy( by( a( new(
inefficient(policy(that(shows(difficult(to(remove(in(the(long(run.((	
Stepwise( progress( could( be( carried( through( by( partial( removal( of(	
subsidies.(	Two;part*tariffs	(and(intermediate(compensation(schemes(may(	
be( second( best( solutions( to( total( removal( of( the(subsidies.( T	wo	Kpart( ta	rK	
iffs( can( be( used( to( secure( a( subsidized( minimum( consumption( at( low(
pr	ice,(while(the(remaining(consumption(is(subject(to(market(prices.(Such(	
tariffs(may(be(formulated(as(a(lumpKsum(fee(as(well(as(a(perKunit(charge.(
Many( water( utilities( around( the( world( apply( twoKpart( tariffs( where( a(
volumetric(tariff( is(combined(with(a(fixed(charge.(The( latter(may(include(
a( minimum( consumption( or(not.( TwoKpart( tariffs( have( also( been( used( in(
the( energy( market( (cf.( the( Norwegian( electricity( market( up( to( the(
1980s	),(with(a(low(energy(price(below(a(certain(consumption(level,(and(a(	
higher(rate(below(this(level.(	
(

(
(
(
(
(
(
(
(

8.	 Recommendations&&	
The( survey( of( reform( experiences( outlined( in( chapter( 6( clearly( shows(
that( each( case( is( different.( How( to( manage( the( reforms( from( enviro	nK	
mentally( harmful( subsides( to( more( sound( policy( must( be( considered(
separately( for( each( case.( Particularly,( there( are( great( differences( b	eK	
tween( lowKincome( and( highKincome( countries( in( several( respects;( the(
need( for( subsidizing( lowKincome( groups( is( higher( in( lowKincome( cou	nK	
tries,( the( budgetary( burdens( of( the( subsidies( are( higher,( the( effects( of(
pollution( and( environmental( degradation( more( severe,( and( the( political(
systems(less(able(to(handle(the(needed(changes(effectively.(Bearing(these(
important(differences(in(mind,(we(will(summarise(some(core(steps(in(the(
direction(of(optimal(environmental(policy.((	
The( general( recommendation( is( to(	get* the* prices* right	,( at( the( same(	
time( as(	compensating* the*low;income*groups	( the( environmentally( har	mK	
ful( subsidies( were( meant( to( support.( A( total( reform( of( environmentally(
harmful( subsidies( in( many( cases( involves( a( twoKstep( policy( procedure.(
First,(direct(subsidies(should(be(removed.(The(costs(of(subsidies(to(ene	rK	
gy(consumption(pose(the(heaviest(burdens(on(lowKincome(countries.(For(
example,( subsidies( to( fossil( fuel( consumption( are( in( general( granted( to(
support( households.( Such( subsidies( stimulate( the( related( emissions,(
instead( of( reducing( them.( When( reducing( subsidies,( compensation( to(
lowKincome(households(is(usually(necessary(in(lowKincome(countries.((	
Second,( environmental( taxes( must( be( added( and( other,( indirect( su	bK	
sidies( should( be( removed.( While( this( is( a( long( step( for( countries( who(
should(first(remove(the(budgetary(subsidies(to(fossil(fuel(consumption,(it(
is( a( more( nearby( challenge( for( highKincome( economies.( Importantly,( by(
getting( the( prices( right,( the( resources( are( effectively( utilized.( More( co	rK	
rect(prices(will(help(growth(in(lowKincome(and(improve(the( possibilities(
to(support(the(poor.(Besides,(subsidies(in(terms(of(low(energy(prices(first(
of( all( support( those( using( most( energy,( which( proves( to( be( higher( i	nK	
come(groups.((	
Hence,( by( getting( the( prices( right,( we( mean( to( 1)( reduce( the( ineff	iK	
cient( subsidies,( 2)( implement( taxes( on( environmental( externalities( and(
reduce( tax( exemptions( for( existing( taxes( and( 3)( implement( redistrib	uK	
tion( of( income( as( closely( to( the( prioritized( groups( as( possible( to( avoid(
disturbing(other(parts(of(the(market.(

70	(	Reforming*environmentally*harmful*subsidies	(	
8.1	 Identify(the(environmentally(harmful(subsidies	!	
While(many( environmentally( harmful(subsidies( are( already( identified((cf.(
examples( in( chapter( 2.1),( costly( subsidies( may( survive( due( to( lack( of(
knowledge( about( their( effects.( Particularly( this( is( true( for( indirect( subs	iK	
dies,( where(it( is( difficult( to( trace(the(interacting( effects(and(the( legitimate(
purposes( are( often( unclear.( Indirect( subsidies( are( used( in( all( economies,(
but( indirect( environmentally( harmful( subsidies( may( be( relatively( most(
important( in(highKincome( countries.(Then(general(mappings( with(no( pr	eK	
defined( subsidies( in(mind( are( relevant.( In(the( practical( mapping( of( subs	iK	
dies,(guidelines(are(formulated(in(the(onKgoing(works(by(e.g.(GSI((2010).(	
A( strong( information( base( and( spread( of( information( are( also( i	mK	
portant(both(to(formulate(an(efficient(policy(reform,(and(to(attain(the(ne	cK	
essary( public( and( political( support,( cf.( chapter( 6.11.( Hence,( an( important(
step( is( to( identify( the( inefficient( subsidies( and( the( environmental( costs(
they(cause.(This(should(take(the(theoretical(perspective(as(point(of(depa	rK	
ture( (cf.( chapter( 4.2( and( Appendix( 1)( and( implies( a( thorough( revision( of(
the( complex(subsidy( policies,( cf.(the(identification( of(subsidies( outlined(in(
chapter(5.(The(identification(procedure(principally(implies(revealing(three(
main(categories(of(inefficient(subsidies((cf.(chapter(4.2):(	
(	
A. The(first(category(comprises(the(direct(subsidies(to(factors(expected(
to(cause(negative(environmental(externalities(	
B. The(second(category(comprises(the(subsidy(elements(due(to(lack(of,(
or(exemptions(from,(environmental(taxation.(This(implies(a(thorough(
revision(of(the(environmental(externalities(in(the(economy(and(the(
associated(environmental(taxes(and(regulations(	
C. Finally,(other(inefficient(subsidies(stimulating(negative(
environmental(externalities(can(take(form(of(e.g.(income(and(price(
support,(preferential(market(access,(exemptions(from(governmental(
standards((see(table(5.1)((	
(
Note( that( by(	inefficient* subsidies	,( we( mean( subsidies( other( than( those(	
that( efficiently( correct( for( positive( externalities( or( efficiently( correct( for(
distributional(issues.((
8.2	 Estimate(the(environmental(and(economic(costs(	!	
To( estimate( the( costs( of( the( environmentally( harmful( subsidi	es,( princ	iK	
pally(each(form(of(subsidy(must(be(evaluated.(The(analyses(should(cover(
three(main(types(of(costs:(	Environmental*costs	,(budget*costs	(and(	econo	m;	
ic* costs	( (see( chapter( 2.2).( Estimates( of( environmental( and( economic(	
costs(and(benefits(form(a(basis(for(which(reforms(to(prioritize.((	
The( increase( in( costs( due( to( the( subsidies( should( be( measured( rel	aK	
tive(to(the(theoretical(ideal.(Due(to(complex(interaction(between(sectors,(

((	Reforming*environmentally*harmful*subsidies	(	71	(	
such( cost( estimates( are( not( straightforward.( Subsidies( to( one( recipient(
imply(protection( from( competition( and( costs( to( the( discouraged( sectors.(
The( analytical( tools( may( be( poor( in( many( of( the( countries( with( the( lar	gK	
est( problems( concerning( environmentally( harmful( subsidies.( Bearing(
this( in( mind,( the( costs( should( ideally( be( estimated( within( computable(
general( equilibrium( model( frameworks( if( available.( This( would( offer( an(
aggregated(cost(picture,(including(the(economic(effects(of(the(alternative(
products( or( discouraged( technologies,( and( the( total( emission( effects(
following( changed( relative( prices.( If( such( analytical( tools( are( not( avail	aK	
ble(at(sufficient(detailing(levels,(estimates(may(rely(on(partial(analyses.((
8.3	 Evaluate(the(need(for(compensation(	!	
To( evaluate( the( need( for( compensation,( the( groups( losing( from( the( su	bK	
sidy( removals( must( be( identified.( In( some( cases,( losing( groups( are( easy(
to( identify,( cf.( the( subsidies( to( fossil( energy( consumption,( while( the(
groups( affected( by( indirect( subsidies( may( may( be( harder( to( identify.( To(
identify(the(groups(that(potentially(should(be(compensated,(one(method (
could( be( to( identify( and( assess( what( groups( benefit( from( the( subsidies.(
This( helps( to( reveal( what( political( goal,( or( which( groups( were( originally(
meant( to( be( supported,( and( whether( the( support( is( still( valid.( This( is( a(
natural( part( of( estimating( the( effects( of( the( environmentally( harmful(
subsidies( discussed( above.( Another( method( is( to( revise( political( doc	uK	
ments(and/or(interview(politicians(to(gain(understanding(of(the(original(
political(goals(of(the(subsidies.((	
If( the( original( intention( of( the(subsidy( with( respect( to(reKdistribution(	
of( income( still( prevails,( if( the( subsidy( removal( has( adverse( social( i	mK	
pacts,( or( if( the( social( benefits( are( not( fairly( distributed,( it( can( be( argued(
that( compensatory( measures( should( be( part( of( the( reform.( Compens	aK	
tion( can( also( be( justified( to( mitigate( transitional( costs( and( to( secure( p	oK	
litical(support(for(improved(market(efficiency(in(the(longer(term.(
8.4	 Formulate(the(reform	!	
The(reform(generally(implies(the(following(elements:(
(
1. Reduction/removal(of(environmentally(harmful(subsidies(	
2. Compensating(measures((	
3. Time(plan(	
(
The(main(part(of(the(reform,(the(removal(or(reduction(of(environmenta	lK	
ly( harmful( subsidies( (1),( may( target( existing( subsidy( instruments,(
and/or( imply( introduction( of( new( environmental( taxes.( The( new( policy(

72	(	Reforming*environmentally*harmful*subsidies	(	
instruments( should( be( formulated( as( closely( as( practically( possible( to(
the(economic(guidelines(for(regulation(of(externalities.((	
Broad(based(social(support( programs(may(be(most(relevant(compe	nK	
sation( schemes( (2)( when( removing( general( subsidies( covering( large(
income( groups,( such( as( subsidies( to( energy( consumption.( Lump( sum(
cash( transfers,( foodKbased( programs( and( support( to( health( care( and(
education(are(examples(of(relevant(direct(transfer(to(low(income(groups.(
Successful( examples( of( comprehensive( social( protection( packages( e	ffiK	
ciently( targeting( the( low(income( groups( in( combination( with( removal( of(
environmentally( harmful( subsidies( are( the( Bolsa( Familia( program( in(
Brazil,( the( Oportunidades( program( in( Mexico,( cash( transfer( programs( in(
Indonesia( (see( box( 7.1)( and( in( Ghana( (chapter( 10.2.10).( Other( examples(
are( the( direct( aid( provided( to( miners( leaving( work( in( the( restructuring(
of( the( coal( sector( in( Europe.(	Unemployment( benefits( can( be( used( as( d	iK	
rect( measures( to( counteract( the( negative( social( effects( of( closing( down(
polluting(	industries.	(	
Further,( diversified( income( taxation( is( a( textbook( direct( measure( to(	
prioritise( low( income( groups,( and( this( instrument( could( be( used( if( the(
subsidy( removal( has( negative( effects( on( low( income( groups( in( higher( i	nK	
come( countries.( H	ealth( care,( pensi	ons( and( social( security( secure( the( fu	nK	
damental(support(to(persons(who(do(not(receive(employment(income.(	(	
If( regional( compensation( is( justified,( lump( sum( support( could( be( gi	vK	
en(to(general(activities(in(the(actual(regions,(for(example(as(general(su	pK	
port( to( the( local( municipalities( or( as( investment( in( infrastructure,( cu	lK	
ture,(or(decentralization(of(governmental(institutions.(	(	
Compensation( to( reduce( income( effects( are( generally( of( a( more( pe	rK	
manent( character( than( support( in( transitional( periods( aiming( to( leave(
room( for( adjustment,( develop( new( production( and( employment( or( to(
secure( political( support.( Since( compensation(measures( prove( difficult( to(
remove,( it( is( important( to( give( clear( signals( when( the( time( period( is(
meant( to( be( temporary,( to( avoid( new,( longKlasting( inefficient( instr	uK	
ments(subsidies.((	
A( good( time( plan( (3)( is( important( to( secure( adaptation( of( the( i	nK	
volved( parties( to( the( changing( economic( frameworks,( and( to( reach( u	nK	
derstanding(and(political(support(to(the(reform.(
8.5	 Communicate(the(reform	!	
As( argued( in( chapter( 6.11,( good( communication( about( the( reforms( is( a(
general(factor(helping(the(reform(processes.(An(important(challenge(is(to(
increase( the( common( understanding( of( the( benefits( relative( to( the( costs(
from( correct( pricing( of( environmental( damages.( The( costs( to( enviro	nK	
ment( and( public( budgets( resulting( from( the( existing( subsidies( must( be(
communicated,( as( well( as( the( estimated( benefits( from( a( reform( and( the(
potential(compensatory(measures.((

((	Reforming*environmentally*harmful*subsidies	(	73	(	
It( is( likely(that( the( evidence( will( be( contested( by( groups( losing( ben	eK	
fits,( and( solid,( scientific( and( transparent( calculations( should( be( comm	uK	
nicated.( Generally,( tax( reforms,( such( as( removal( of( environmental( tax(
exemptions,(	�‹���…�”�‡�ƒ�•�‡� �‹��� �–�Š�‡� �’�‘�Ž�Ž�—�–�‡�”�•ï� �…�‘�•�–�•ä� ����†�—�•�–�”�‹�‡�•� ���ƒ�›� �Š�ƒ�˜�‡� �–�‘� �•�Š�—�–�	
down,(and(often(interest(groups(mobilize(and(argue(in(favour(of(preser	vK	
ing( work( places,( tax( incomes( and( export( interests.( Evidence( suggests(
that( the( more( environmentally( damaging( industries( not( only( receive(
greater( trade( protection( than( other( industries,( but( also( face( laxer( env	iK	
ronmental( controls( (OECD( 2005).( This( reinforces( the( tendency( to( lobby(
more(intensively(when(faced(with(multiple(regulations,(and(is(consistent(
with( empirical( evidence( (OECD( 2005).( Taxing( energy( externalities( may(
also( affect( households( negatively.( Particularly,( costs( will( increase( if( tax(
exemptions(or(subsidies(were(meant(as(to(distribute(income.((	
Politicians( are( generally( hesitant( to( implement( new( tools( with( any(	
losing( parts,( and( all( parties( involved( may( try( to( influence( the( policy( r	eK	
sponses( to( their( own( benefit.( The( information( about( consequences( are(
generally( asymmetric,( as( pressure( groups( and( other( competing( political(
parties( advocate( the( negative( effects,( while( the( positive,( yet( unseen( e	fK	
fects( of( e.g.( environmental( taxation( is( harder( to( argue( for.( Hence,( the(
majority( of( the( public( opinion( is( not( always( in( favour( of( correct( pricing(
of(the(external(costs.(This(is(reflected(in(the(political(representation,(and(
explains(why(policy(does(not(follow(economic(advice.( (	
Even( if( the( necessary( political( consensus( exists,( the( politicians( may(	
be( reluctant( to( direct( budget( support,( as( money( transfer( to( low( income(
groups( may( stigmatize( certain( parts( of( the( population( or( seem( unfair( to(
the( less( supported( groups.( Instead,( indirect( subsidies( covered( under(
alternative( political( goals( blur( the( impression( of( what( groups( are( pr	eK	
ferred.(For(instance,(the(support(to(energy(production(may(be(commun	iK	
cated( as( climate( policy( while( the( politicians( see( it( as( regional( industry(
support.(Also,(direct(support(to(industries(can(be(difficult(due(to(intern	aK	
tional( trade( legislation.( Instead,( indirect( support( as( tax( exemptions( and(
subsidies(can(be(more(politically( attractive.( Information(about(the(ben	eK	
fits(of(removing(the(environmentally(harmful(subsidies(and(the(rationale(
for( possible( compensation( measures( are( crucial( to( help( the( politicians(
overcome(such(barriers.((	
Likewise,( the( effects( of( the( compensation( measures( must( be( comm	uK	
nicated.( It( is( generally( important( to( understand( the( rationale( for( the(
compensation,( since( these( in( general( are( normative( equity( consider	aK	
tions,(cf.(chapter(6.11.(	
Finally,(the(time(plan(must(be(as(clear(and(transparent(as(possible,(a	lK	
lowing(the(economy(to(adjust.(The(need(for(long(term(adjustments(must(
be( weighed( against( the( higher( costs( and( political( uncertainty( associated(
compared(to(rapid(completion(of(reforms.((

74	(	Reforming*environmentally*harmful*subsidies	(	
8.6	 Correct(for(negative(side(effects	!	
If(the(reforms(provoke(new(negative(environmental(effects,(these(should(
be( corrected( for( directly( by( implementing( correct( prices( or( regulations.(
Adverse( effects( are( often( used( as( arguments( against( reforms.( For( exa	mK	
ple,( the( attempts( to( remove( the( biofuel( subsidies( implicit( in( the( tax( e	xK	
emptions( in( Norway( were( contested( on( the( arguments( that( fossil( fuel(
consumption( would( increase.( Rather,( the( optimal( policy( will( be( to( r	eK	
move( the( biofuel( subsidy( and( secure( correct( prices( on( emissions( from(
fossil(fuels.(
8.7	 Avoid(new(types(of(inefficient(subsidies	!	
Care( should( be( taken( to( avoid( the( development( of( new(environmentally(
harmful( subsidies.( Recent( examples( are( subsidies( to( other( energy(
sources(than(fossil(fuels.(Support(to(research(and(development(is(correct(
as(long(as(there( are( positive( externalities( associated( with(the(activity,(cf.(
4.1.( Mature( renewable( technologies( however,( do( not( involve( positive(
externalities( and( do( hence( not( require( subsidies.( As( all( energy( produ	cK	
tion( imply(some( sort( of( environmental( pressure,( all( subsidies( to( mature(
energy( technologies( bring( along(negative( externalities.( Rather( than( su	bK	
sidizing( the( fossil( fuels( alternatives,( carbon( emissions( should( be( eff	iK	
ciently( managed( by( carbon( prices( and/or( emission( trading( systems.(
Another( goal( related( to( renewable( energy( is( employment.( Rather,( the(
labour( market( should( be( stimulated( by( direct( measures.( The( IEA( est	iK	
mates( that( worldwide( government( support( to( renewable( electricity( and(
biofuels( (subsidies( for( renewable( heat( technologies( and( lowKcarbon(
energy( technologies( such( as( CCS)( amounted( to( $57( billion( in( 2009,( i	nK	
creasing(from($41(billion(in(2007.(	
When( transitional( consequences( are( large,( alleviating( support( to( i	nK	
dustries,( the( labour( market( or( specific( groups( may( be( needed,( or( co	mK	
pensatory( measures( are( necessary( to( overcome( political( barriers( to( r	eK	
form.( It( is( important( that( the( creation( of( such( subsidies( has( credible(
ò�•�—���•�‡�–� �…�Ž�ƒ�—�•�‡�•ó� �–�Š�ƒ�–� �‡���•�—�”�‡� �–�Š�‡�›� �ƒ�”�‡� �’�Š�ƒ�•�‡�†� �‘�—�–� �‹��� �–�Š�‡� �Ž�‘���‰� �–�‡�”��á� �’�”	eK	
venting(them(from(turning(into(new(sources(of(market(inefficiencies.( (

9.	 Concluding&remarks&	
Environmentally( harmful( subsidies( obviously( contribute( to( significant(
environmental( costs( and( pose( heavy( burdens( on( public( budgets( around(
the( world.( The( potential( gains( from( reducing( such( subsidies( seem( to( be(
highest( in( lowKincome( countries.( The( existing( estimates( particularly(
concern(subsidies(to(consumption(of(fossil(fuels.(However,(the(estimates(
do(not(at(all(cover(the(total(environmentally(harmful(subsidies,(including(
tax( exemptions( and( reductions( and( indirect( support( to( polluting( activ	iK	
ties.( To( get( a( full( picture( of( the( costs( related( to( such( subsidies,( there( is( a(
need( for( further( estimates( of( the( subsidies( inherent( in( general( gover	nK	
mental( policy( around( the( world.( For( instance,( there( is( little( insight( into(
these(numbers(also(in(the(Nordic(countries.((	
To( form( a( good( basis( for( future( environmentally( harmful( subsidy( r	eK	
forms,(the(framework(for(what(subsidies(to(include(should(be(developed(
and( be( closely( linked( to( the( theoretical( definition,( taking( the( firstKbest(
solution( as( the( reference.( The( mapping( should( be( extended( to( include(
more( of( the( tax( exemptions/lack( of( externality( taxes( and( other( implicit(
subsidies,(in(addition(to(the(fossil(fuel(subsidies(already(investigated.((	
The( existing( estimates( and( common( knowledge( of( the( policies( ind	iK	
cate( that( the( problem( decreases( by( income.( It( is( a(question( then,( whet	hK	
er( the( economies( with( the( most( pressing( subsidy( problems( can( learn(
from( high( income( economies( such( as( the( Nordic( countries.( The( social(
security( systems( within( the( Nordic( model( offer( several( possible( co	mK	
pensation( alternatives.( However,( other( factors( may( be( as( important.(
Transparent( information( and( communication( about( the( benefits( from(
environmental( harmful( subsidy( reforms( are( crucial( to( get( political( su	pK	
port( and( to( be( able( to( implement( the( reforms.( Compensation( is( another(
factor,( but( not( always( necessary.(	Environmental( regulations( can( also( be(	
successfully( be( accompanied( by( policies( promoting( industrial( restru	cK	
turing(and(creation(of(new(economic	(activities,(such(as(policies(suppor	tK	
ing( education,( R&D( and( cutting( regulations( of( industries( that( hamper(
change(and(growth.	(	
Also,(the(Nordic(welfare(state(model(is(reflected(in(relatively(high(tax(	
levels.( The( social( security( system( highly( relies( on( these( incomes.( Thus,(
the(relevance(of(applying(the(model(to(other(countries(requires(relativ	eK	
ly( high( incomes.(	As( the( average( income( levels( increase,( it( is( likely( that(	
the( environmental( qualities( become( more( valued( in( all( economies.( This(
creates( room( for( combined	(environmental( taxes( and( compensation( in(	
terms(of(increased(direct(spending(to(social(groups.(	(	
(	
(

(

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Department,(International(Labour(Office,(Geneva(March(2009.(
ILO((2009b):(Social(security(for(all.(Investing(in(social(justice(and(economic(deve	lK	
opment,(Social(security(policy(briefings(Paper(7,(Global(Campaign(on(Social(Secur	iK	
ty(and(Coverage(for(All,(Social(Security(Department,(International(Labour(Office.(
Joskow,(P.(&(N.(L.(Rose((1985):(The(effects(of(technological(change,(experience,(and(
environmental(regulation(on(the(construction(cost(of(coalKburning(generating(units.(
RAND(Journal(of(Economics(16(1),(1	17.	(	
Laan,(T.,(C.(Beaton(and(B.(Presta((2010):(Strageties(for(reforming(fossilKfuel(subs	iK	
dies:(Practical(lessons(from(Ghana,(France(and(Senegal,(The(Global(Subsidies(Initi	aK	
tive;(Untold(billions:(FossilKfuel(subsidies,(their(impacts(and(the(path(to(reform,(I	nK	
ternational(Institute(for(Sustainable(Development.(
Lang,(K.,(P.(Wooders(and(K.(Kulovesi((2010):(Increasing(the(momentum(of(fossilKfuel(
subsidy(reform:(A(roadmap(for(international(cooperation,(International(Institute(of(
Sustainable(Development.(
��ƒ�”�•�‡��á��ä�trrtã���Š�‡���ƒ���‹�•�Š��–�ƒ�š��”�‡�ˆ�‘�”���•��‹����–�Š�‡�s{{rï�•á��������‘���ˆ�‡�”�‡���…�‡��‘����‡���˜	iK	
ronmental(fiscal(reform.(
Manzoor,(D.,(A.(Shahmoradi(and(I.(Haqiqi((2009):(An(analysis(of(Energy(Price(R	eK	
form:(A(CGE(Approach,(Imam(Sadiq(University(and(Ministry(of(Energy,(Iran.(
Morgan,(T.((2007):(Energy(Subsidies:(Their(Magnitude,(How(they(Affect(Energy(I	nK	
vestment(and(Greenhouse(Gas(Emissions,(and(Prospect(for(Reform.(Menecon(Co	nK	
sulting.(
Mourougane,(A.((2010):(Phasing(out(energy(subsidies(in(Indonesia.(OECD(Economic(
Department(Working(Paper(No.(808.(
OECD((2000):(The(price(of(water:(trends(in(OECD(countries,(The(OECD(environment(
programme(1999	2000.(

((	Reforming*environmentally*harmful*subsidies	(	79	(	
OECD((2005):(Environmentally(harmful(subsidies(	(Challenges(for(reform,(OECD(	
Paris.(
OE	CD((2006a):(Subsidy(Reform(and(Sustainable(Development:(Economic,(enviro	nK	
mental(and(social(aspects,(OECD,(Paris.(
OECD((2006b):(The(political(economy(of(environmentally(related(taxes,(OECD,(Paris.(
OECD((2007):(Subsidy(Reform(and(Sustainable(Development:(Political(economy(
aspects,(OECD,(Paris.(
OECD((2009):(Agricultural(policies(in(OECD(countries,(Monitoring(and(evaluation,(
ISBN(978K	92K64K061729.(	
OECD((2010a):(Making(reform(happen.(Lessons(from(OECD(countries,(OECD,(Paris.(
OECD((2010b):(Economic(survey(of(Indonesia(2010.(
http://www.oecd.org/document/60/0,3746,en_2649_34113_46261052_1_1_1_1,00.
html(
Oktaviani,(R.,(D.(B.(Hakim(and(S.(Siregar((2007):(Impact(of(a(Lower(Subsidy(on(Ind	oK	
nesian(Macroeconomic(Performance,(Agricultural(Sector(and(Poverty(Incidences:(A(
Recursive(Dynamic(Computable(General(Equilibrium(Analysis.(MPIA(Working(P	aK	
per(2007	2008.(	
Pieters,(J.((1997):(Subsidies(and(the(environment:(on(how(subsidies(and(tax(ince	nK	
tives(may(affect(production(decisions(and(the(environment.(Paper(for(the(UN(
Fourth(Expert(Group,(Meeting(on(Financial(Issues(of(Agenda(21,(January(8	10,(Sa	nK	
tiago,(Chile.(
Ramsey,(F.((1927):(A(Contribution(to(the(Theory(of(Taxation,(Economic(Journal,(
March(47	61.(	
Sachs,(J.((2006):(Revisiting(the(Nordic(Model(	(Evidence(on(Recent(Macroeconomic(	
Performance.(Jeffrey(D.(Sachs,(Columbia(University(October(15th(2006.(
Sandmo,(A.((1975):(Optimal(taxation(in(the(presence(of(externalities,(Swedish(Jou	rK	
nal(of(Economics,(Vol.(77(pp.(86	98.	(	
Sandmo,(A.((2000):(The(Public(Economics(of(the(Environment.(Oxford:(Oxford(Un	iK	
versity(Press.(
Sawyer,(D.(and(S.(Stiebert((2010):(Fossil(fuels(	(at(what(cost?(Government(support(	
for(upstream(oil(activities(in(three(Canadian(provinces:(Alberta,(Saskatchewan(and(
Newfoundland(and(Labrador,(The(Global(Subsidies(Initiative((GSI)(of(the(Intern	aK	
tional(Institute(for(Sustainable(Development((IISD),(Geneva,(Switzerland.(
Steenblik,(R.P.(and(P.(Coroyannakis((1995):(Reform(of(coal(policies(in(Western(and(
Central(Europe.(Energy(policy,(vol.(23,(no.(6,(pp.(537	553.(	
Stern,(D.(I.((2004):(The(rise(and(fall(of(the(Environmental(Kuznets(Curve.(World(
Development,(32,(1419	1439.(	
��—�™�ƒ�Ž�ƒ�trsrã���‡�•�•�‘���•���‡�ƒ�”���‡�†��ˆ�”�‘����–�Š�‡���‡�•�–�”�—�…�–�—�”�‹���‰��‘�ˆ���‘�Ž�ƒ���†ï�•���‘�ƒ�Ž	KMining(	
Industry,(Global(Subsidies(Initiative((GSI)(of(the(International(Institute(for(Sustai	nK	
able(Development((IISD),(Geneva,(Switzerland.(
SWECO((2008):(Kartlegging(av(statlige(tilskuddsordninger((postene(70	89)(me	dK	
miljøskadelige(konsekvenser,(Rapport(nr.(142231K101KA01.(
TemaNord((2006a):(The(Use(of(Economic(Instruments(in(Environmental(Policy(in(
the(Nordic(and(Baltic(Countries(2001	2005.(TemaNord(Report(2006:525,(Nordic(	
Council(of(Ministers.(
TemaNord((2008):(Trafikafgivter(og(klimapåvirkning,(Hvordan(sænker(vi(bilernes(
CO2Kutlegning?(Det(Økologiske(Råd,(Naturvernforbundet(og(N	aK	
turskyddföreningen,(TemaNord(Report(2008:587.(Norisk(ministerråd.(
TemaNord((2009):(The(Use(of(Economic(Instruments(in(Nordic(Environmental(Pol	iK	
cy(2006	2009.(TemaNord(Report(2009:578.(Nordic(Council(of(Ministers.(	
The(Commission(of(the(European(Communities((2009):(Feform(of(the(Common(fis	hK	
eries(policyGreen(paper,(COM(2009)163(final,(Brussels.(
Valsecchi,(C.,(F.(Oosterhuis,(M.(Lewis,(P.(ten(Brink,(S.(Bassi(and(S.(Withana((2009):(
Environmentally(harmful(subsidies((EHS):(Identification(and(assessment,(Final(r	eK	
port(for(the(Eu	ropean(commissi	�‘��ï�•���
�����˜�‹�”�‘�����‡���–á���‘�˜�‡���„�‡�”�trr{ä	(

80	(	Reforming*environmentally*harmful*subsidies	(	
Victor,(D.((2009):(The(politics(of(fossilKfuel(subsidies,(The(Global(Subsidies(Initiative;(
Untold(billions:(FossilKfuel(subsidies,(their(impacts(and(the(path(to(reform,(Intern	aK	
tional(Institute(for(Sustainable(Development.(
Wagner,(A.((2008):(Data(Needs(for(Designing(Responses(to(Rising(Oil(Prices(in(the(
Transport(Sector,(GTZ(Transport(Policy(Advisory(Services.(
Wibe,(S.((2010):(Etanolens(koldioxideffekter,(en(översikt(av(forskningsläget((The(
CO2(effects(of(ethanol,(a(survey(of(the(research),(Report(to(Expertgruppen(för(
miljöstudier(2010:1,(The(Swedish(Ministry(of(Finance,(Regeringskansliet.(
World(Nuclear(Association((2011):(Energy(subsidies(and(external(costs,(
http://www.worldKnuclear.org/info/inf68.html(
WTO((2011):(WTO(analytical(index:(Agreement(on(subsidies(and(countervailing(
measures(http://www.wto.org/english/res_e/booksp_e/analytic_index_e/(
subsidies_01_e.htm(

10.	 Appendix&	
10.1	 Appendix(1((
(Theoretical(foundation(to(taxes(and(subsidies(	
Insight(into(optimal(pricing(of(environmental(problems(is(essential,(both(
to( understand( how(the( environmentally( harmful( subsidies( influence( the(
environment(through(the(economic(mechanisms,(and(to(understand(how(
the(alternative(policies(can(be(most(efficiently(formulated.(This(appendix(
offers( a( short( introduction( into( the( broader( range( of( causes( for( market(
corrections,(and(in(particular(negative(and(positive(externalities,(optimal(
regulation(and(hence(the(use(of(corresponding(taxes(and(subsidies.(Also,(
the( appendix( points( to( examples( of( inefficient( subsidies,( increasing( the(
environmental(damages.(	(	
10.1.1	 The'optimal'regulation'of'externalities'	
As(shown(in(table(4.1,(subsidies(and(taxes(should(be(used(to(correct(po	sK	
itive(and(negative(externalities,(and(to(adjust(for(equity(concerns.((	
Environmental((Pigouvian)(taxes(are(used(to(internalize(environme	nK	
tal(externalities(into(markets((Pigou(1920;(Sandmo(1975).(In(the(general(
case,( marginal( damage( costs( (	MDC	)( increase( with( increasing( emissions,(	
while( marginal( abatement( costs( (	MAC	)( increase( with( higher( abatement,(	
i.e.( decreasing( emissions,( see( figure( 10.1.( The( optimal( emission( level,(
minimizing( the( total( abatement( costs,( occurs( when( marginal( damage(
costs(equal(marginal(abatement(costs.(This(is(when(the(tax,(	t,(is(set(opt	iK	
mal,(	t*=MDC=MAC	.(If(	MDC	(is(constant,(	t*=MDC	.(This(is(relevant(when(the(	
relevant( regulation( is( not( likely( to( influence( marginal( damage( costs,( e.g.(
local(actions(against(greenhouse(gas(emissions.((	
The(	efficiency* loss	( equals( the( difference( between( marginal( damage(	
costs( and( marginal( abatement( costs.( In( figure( 10.1( this( corresponds( to(
the( entire( shaded( area( if( no( emissions( are( abated.( In( other( words;( the(
shaded(area(equals(the(	efficiency*gain	(given(optimal(regulation.((	
(
(
(
(
(
(
(
(
(

82	(	Reforming*environmentally*harmful*subsidies	(	
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
'
(
Figure'10.1.'Optimal'taxation'of'externalities.'
(
Pigouvian( taxes( internalize( the( costs( relating( to( environmentally( harmful(
production( and( consumption.( Typically,( this( is( relevant( for( the( fossil( fuels,(
causing( both( greenhouse( gas( emissions( and( harmful( emission( with( local(
health( effects.( A( tax( on( emissions( induces( spillKover( effects( throughout( the(
economy.( The( direct( effects( are( increased( costs( and( reductions( in( the( pr	oK	
duction( and( consumption( of( polluting( goods,( such( as( fossil( fuels.( NonK
polluting(technologies(and(R&D(in(other(technologies(becomes(more(profi	tK	
able.(The(relative(consumption(between(energy(and(other(goods(is(changed.((	
When( the( sources( causing( the( externalities( are( hard( to( identify,( or( if(	
the( marginal( damages( would( require( infinitely(high( taxes,( direct(	regul	a;	
tions	( can( be( more( efficient( than( taxation.( An( infinitely( high( tax( corr	eK	
sponds( to( a( regulation( with( zero( emissions,( the( externality( would( be(
zero(in(figure(10.1.((	
Cap* and* trade	( systems( principally( create( the( same( efficient( sol	uK	
tions( as( taxes.( Then,( the( level(	E( is( determined( exogenously,(leaving( the(	
market( to( find( the( equilibrium( price( equivalent( to(	t*in( figure( 10.1.( Id	eK	
ally,(the(cap( is( set( at(the( optimal(emission(level,(	E*	.(The(polluters( trade(	
emission( permits.( The( polluters( with( the( lowest( abatement( costs( will(
reduce( their( emissions,( while( those( with( higher( marginal( abatement(
costs( than( the( market( price( for( emission( permits( will( generate( the( r	eK	
maining(emissions.(
10.1.2	 Taxing'negative'production'externalities'	
Figure( 10.2( illustrates( the(market( effect( of( an( externality( tax( on( the( pr	oK	
duction( of( a( polluting( technology( when( a( clean( substitute( exists.( A( typ	iK	
cal( example( is( carbon( emissions( in( the( electricity( market,( with( coal(

((	Reforming*environmentally*harmful*subsidies	(	83	(	
based( electricity( production( and( nonKcarbon( electricity( production.( T	oK	
tal(supply(faces( increasing(marginal(costs(comprising(the(polluting(tec	hK	
nology,(	Sb,( and( the( nonKpolluting( technology,(	Sg.( The( willingnessK	toKpay(	
(i.e.( demand( for( electricity)( is( downward( sloping,( i.e.,( volumes( increase(
with( decreasing( prices.( In( equilibrium,( demand( meets( supply.( The( firstK
best( solution( to( an( external( problem( is( to( obtain( the( right( prices,( i.e.,( by(
levying( a( tax( on( the( polluting( technology( equal( to( the( marginal( external(
production(cost.(The(tax(shifts(both(the(supply(of(the( polluting(technol	oK	
gy(and(total(supply(inward(to(	S1b(and(	S1,(respectively.(In(the(new(equili	bK	
rium,( the( purchaser( price( increases( (from(	p0*to(	p1*)( and( total( demand( is(	
reduced((from(	x0*to*x	1*).(The(polluting(technology(output(price(decreases(	
from	*p0*to*p1b,(equal(to(the(purchaser(price,(	p1*,(minus(the(tax,(	t.(The(vo	lK	
ume( of( the( polluting( technology( reduces( from	*x0b*to*x1b.( Since( the( clean(	
technology( is( not( taxed,( it( receives( the( total( purchase( price,(	p1*,( i.e.,( the(	
price(for(the(technology(increases(as(does(output((from	*x0g*to(	x1g).((	
Hence,( taxing( the( polluting( technology( implies( a( support( to( the( nonK	
polluting( technology( as( profitability( increases.( The( optimal( solution( i	nK	
ternalizing( total( costs( is( at(	p1*,(x1*.( The( efficiency( gain( relative( to( an( u	nK	
regulated(market(corresponds(to(the(shaded(area.(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
Figure'10.2.'A'tax'on'a'production'technology'with'a'negative'externality'in'a'
market'with'a'substitutable'good.'
(Symbols:!S=supply,!D=demand,!g=nonOpolluting!technology,!b=polluting!technology,!x=quantity,!p=price,!t=tax,!
0=time!before!the!tax,!1=time!after!tax,!*=optimal!adjust ment).!
10.1.3	 Taxing'negative'consumption'externalities'	
Another(case(is(negative(externalities(associated(with(consumption,(such(
as( locally( harmful( emissions( from( oil( heaters.( In( that( case,( firewood( and(
electricity( are( examples( of( alternative( energy( technologies.( Then,( the(

84	(	Reforming*environmentally*harmful*subsidies	(	
Pigouvian(tax(would(be(levied(on(the(consumption(side.(As(seen(in(figure(
10.3,( the( mechanisms( would( be( the( same( as( for( the( tax( on( the( produ	cK	
tion( side;( the( polluting( energy( production/consumption( is( reduced,( a	lK	
ternative( energy( is( stimulated,( leaving( the( overall( energy( sales( reduced.(
The(efficiency(gain(relative(to(an(unregulated(market(corresponds(to(the(
shaded(area.((
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
'
Figure'10.3.'A'tax'on'a'consumption'technology'with'a'negative'externality'in'a'
market'with'a'substitutable'good.'
(symbols:!	S=supply,!	D=demand,!	g=nonOpolluting!technology,!	b=polluting!technology,!	x=quantity,!	p=price,!	t=tax,!	
0=time!before!the!tax,!1=time!after!tax,!*=optimal!adjustment). !
10.1.4	 Subsidizing'positive'externalities'	
In( the( presence( of( positive( externalities,( subsidies( (negative( Pigouvian(
taxes)( serve( the( optimal( solutions.( The( aim( is( to( reward( the( agent( cau	sK	
ing( the( externality,(and( to( create( incentives( to( generate( an( optimal( level(
of( externality.( This( level( is( reached( when( production( costs( equal( the(
marginal(production(costs(including(the(externality(values.((	
Typical( examples( of( goods( with( positive( external( effects( are( research(	
and( development.( Such( activities( normally( generate( knowledge( over(
time( that( benefits( other( agents,( or( to( new( products( that( has( a( higher(
value( than( what( is( captured( in( the( product( price.( Positive( externalities(
are( normally( present( at( the( research( and( development( phase.( This( a	pK	
plies( to( research( on( new( technologies( through( learningK	by	Kdoing( (see,(	
for(instance,(Joskow(and(Rose(1985).(	
Network( externalities( can( arise( at( the( implementation( phase:( the(	
more( agents( use( a( network,( the( more( useful( for( others( using( the( same(
network.( The( use( of( a( good( that( is( interdependent( in( a( network( will( i	nK	
crease( the( usefulness( to( others( using( the( same( technology.( Network(
externalities(often(have(tipping(points.(For(example,(electric(cars(are(less(

((	Reforming*environmentally*harmful*subsidies	(	85	(	
attractive( unless( many( utilize( the( technology( to( bring( along( enough(
charging( stations( for( long( distance( transport.( When( passing( a( tipping(
point,(it(becomes(profitable(for(to(establish(charging(stations(at(less(ce	nK	
tral( locations.( The( market( does( not( take( this( into( account,( and( without(
regulation,( lockKin( effects( may( occur,( i.e.( the( present( tipping( point( may(
not(be(reached.(	
Other( examples( are( education(	(�‘���‡� �’�‡�”�•�‘���•ï� �����‘�™�Ž�‡�†�‰�‡� �Ž�‡�˜�‡�Ž� �„�‡��	eK	
fits( the( society( beyond( the( private( individual,( and( vaccination(	( which(	
reduces(the(risk(of(nonKvaccinated(to(get(sick.(	
In( the( presence( of( positive( externalities,( prices( should( be( corrected(	
by( a( subsidy( rate( equal( the( value( of( the( externality(	r,( increasing( the(	
amount(of(supply(to(a(level(where(marginal(cost(equals(marginal(benefit	.(	
When( subsidising( the( supply( of( research,( see( figure( 10.4,( profitability(
increases(as(the(suppliers(receive(the(new(market(price(plus(the(subsidy.(
Demand(increases(as(the(cost(is(reduced.(	
The( same( mechanisms( work( when( subsidizing( demand,( see( figure(	
10.5.( A( subsidy( equal( to( the( marginal( benefit( of( e.g.( network( effects( r	eK	
lated( to( the( use( of( charging( stations( would( increase( demand( and( reduce(
marginal( costs( related( to( supply( of( such( energy.( In( both( cases,( supply(
and( demand( increase,( marginal( production( cost( increases( but( is( co	mK	
pensated(by(the(decrease(in(subsidy(and(consumer(costs.(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(	
(	
Figure'10.4.'A'subsidy'on'a'production'technology'with'a'positive'externality.'
(symbols:!	S=supply,!	D=demand,!	x=quantity,!	p=price,!	r=subsidy,!0=time!before!the!tax,!1=time!after!tax).!	
!
(
(
(
(
(

86	(	Reforming*environmentally*harmful*subsidies	(	
(
(
(
(
(
�
�
�
�	
(
(
(	
�
(
(
(
(
Figure'10.5.'A'subsidy'on'a'consumption'technology'with'a'positive'externality.'
(symbols:!	S=supply,!	D=demand,!	x=quantity,!	p=price,!	r=subsidy,!0=time!before!the!tax,!1=time!after!tax).!	
10.1.5	 Other'market'failures'	
In( addition( to(	external* effects	,( market( imperfections( are( often( associated(	
with(	information* failure	,(non;competitive* markets*	or(	public* goods	.( If( a( ma	rK	
ket( failure( exists,( the( outcome( is( not(	Pareto* efficient	.( That( means( that( i	mK	
�’�”�‘�˜�‡���‡���–�•� �–�‘� �ƒ�–� �Ž�‡�ƒ�•�–� �‘���‡� �’�ƒ�”�–�‹�…�‹�’�ƒ���–ï�•� �™�‡�Ž�Ž	Kbeing( can( be( made( without(	
�”�‡�†�—�…�‹���‰��ƒ���›��‘�–�Š�‡�”� �’�ƒ�”�–�‹�…�‹�’�ƒ���–ï�•��™�‡�Ž�Ž	Kbeing.(Such(reallocations(are(typically(	
best( ensured( by( measures( directly( targeted( at( the( market( failure,( both( for(
environmental(costs(as(described(above,(and(for(other(market(failures.((	
For( example,( to( avoid( lack( of( information,( information( campaigns,(	
legislation(to(support(a(free(press,(banning(of(inside(trade(etc.(are(typical(
examples( of( regulations.( To( secure( competitive( markets,( a( necessary(
condition( is( the( free( entry( of( new(suppliers( and( demanders.( Such( direct(
measures( reduce( the( risk( of( creating( unintended( negative( effects,( such(
as(environmental(damages(and(overKexploitation(of(resources.((
10.1.6	 Other'reasons'for'policy'intervention'	
Then,(interventions(to(correct(for(market(imperfections(are(motivated(in(
removal( of( failures( that( hinder( maximum( outcome( in( the( economy.( A	nK	
other,( principally( different,( form( of( intervention,( is( redistribution( of(
wealth.( Typical( political( goals( are( to( avoid( poverty,(or( to( secure( an( even(
income( distribution,( to( uphold( regional( settlement( or(certain( industries.(
This( is( the( main( reasons( for( the( use( of( inefficient( subsidies( not( closely(
related( to( the( groups( in( target,( but( at( e.g.( fossil( fuel( consumption( or( e	nK	
ergy(production(industries.(

((	Reforming*environmentally*harmful*subsidies	(	87	(	
These( interventions( are( political( and( normative,( and( economics( has(	
no(role(in(determining(which(target(group(should(be(favoured.(However,(
after( the( political( goal( is( determined,( economics( can( analyse( how( to(
reach(the(target(at(lowest(possible(cost.((	
Income* distribution:*	Besides( correcting( for( market( failures,( the( main(	
reason( for( public( intervention( is( to( influence( the( levels( of( wealth( and(
income,( to( secure( the( living( standards( of( low( income( groups( in( general(
and(to(reduce( poverty(in(particular.(In(practice,(this(implies(a(transfer(of(
resources( from(high(to(low(income(groups.(The(purpose(of(	fiscal*taxes	(is(	
to( raise( revenue( for( public( expenditure.( To( minimize( any( deadweight(
loss,( fiscal( taxes( should( be( levied( where( they( are( least( likely( to( distort(
economic( activity( (Ramsey( 1927,( Diamond( and( Mirrlees( 1971).( Note(
that( this( contrasts( the( purpose( of( the( Pigouvian( taxes,( where( the( inte	nK	
tion(is(to(correct(the(market(failure(and(influence(market(adjustment.(	
Regional*development:*	Most(countries(consider(some(level(of(scattered(	
habitation(a(good(in(itself.(Regional(policy(is(high(on(the(agenda(at(least(in(
the(Nordic(countries.(Often,(subsidies(to(particular(industries(are(justified(
in( regional( concerns.( E.g.( coal( subsidies( in( Europe(were( frequent( partic	uK	
larly(over(the(last(half(of(the(20	th(century,(and,(more(recently,(biofuel(su	bK	
sidies( are( partly( motivated( in( support( to( agriculture( and( forestry,( to( u	pK	
hold( rural( employment( and( habitation.( If( regional( development( is( the(
political( goal,( the( support( would( be( most( efficient( if( given( as( support( to(
local( communities( and( general( industrial( support,( without( being( ea	rK	
marked(to(specific(industries(or(products.(A(development(in(the(quality(of(
public( services,( such( as( education( and( health( services,( is( another( type( of(
policy(stimulating(a(continuation(of(regional(settlement.((	
Energy* security?*	Energy( security( is( frequently( used( as( argument( for(	
subsidising(energy(production.(The(concerns(for(energy(security(are(rela	tK	
ed( to( price(levels( and(supply(disruption	10.(First,( politicians( are(concerned(	
that(users(are(able(to(access(the(energy(services(they(require.(This(is(pri	nK	
cipally( a( matter( of( prices(	( a( wellKfunctioning( market( will( adjust( market(	
prices(to(balance(demand(and(supply.(The(political(concerns(seem(to(deal(
with(the(level(of(the(market(price;(relatively(high(market(prices(are(polit	iK	
cally( unacceptable( and( taken( as( signals( of( lacking( energy( security.( The(
second( concerns( relates( to( the( ability( of( the( energy( system( to( cope( with(
shocks(and(change,(securing(uninterrupted(physical(availability.(
10.1.7	 Creating'environmentally'harmful'subsidies'	
Rather(than(using(environmental(taxes,(subsidies(of(alternatives(to(neg	aK	
tive( externalities,( such( as( less( polluting( energy( sources,( appear( less( p	oK	
litically(controversial.((
««««««««««««««««««««««««««	(	10(See(definitions(from(e.g.(the(IEA(and(the(New(Zealand(Governments(http://www.iea.org/subjectqueries/	(	
keyresult.asp?KEYWORD_ID=4103.	((http://www.med.govt.nz	/templates/MultipageDocumentPage____32084.	(	aspx	(

88	(	Reforming*environmentally*harmful*subsidies	(	
The(effects(of(such(subsidies(are(illustrated(in(figure(10.6,(representing(	a(	
ò�…�Ž�‡�ƒ��ó��–�‡�…�Š���‘�Ž�‘�‰�›á�	Sg,(in(addition(to(the(polluting(technology,(	Sb.(The(supply(	
curve(	S*( represent( the( social( cost( curve,( including( both( external( costs( and(	
�’�”�‘�†�—�…�‡�”�•ï��…�‘�•�–�•ä���ˆ��–�Š�‡�•�‡��…�‘�•�–�•��ƒ�”�‡����‘�–��‹���–�‡�”���ƒ�Ž�‹�œ�‡�†á��–�Š�‡����ƒ�”���‡�–��•�‘�Ž�—�–�‹�‘����™�‹�Ž�Ž�
be( in(	x0,(p0.( Rather( than( taxing( the( negative( externality,( the( government(	
subsidizes(the( clean(technology(by(a(subsidy( rate(	r.(The( supply(of(the(clean(	
technology( then( shift( outwards( (	S1g)( and( total( supply( increases( (from(	S0*to*	
S1).( The( market( equilibrium( price( decreases( (from(	p0(to(	p1b).( Consumers(	
benefit(while(polluting(producers(lose(from(lower(prices.(The(profitability(of(
the(alternative(technology(increases,(as(they(receive(the(higher(price(	p1b(+(r.((	
As(the(production(based(on(alternative(technologies(increases(and(	po	lK	
luting( production( decreases,( this( seems( to( be( a( favourable( regime.( This(
resembles( the( effects( as( in( the( optimal( situation,( with( a( tax( on( the( exte	rK	
nality.( The( polluting( technology( would( lose( with( an( externality( tax.( Fu	rK	
ther,( the( profitability( of( the( clean( technology( would( increase.( But( these(
two( solutions( are( principally( very( different.( First,( the( potential( efficiency(
gain( from( internalizing( the( externality( is( lost,( cf.(the( dark(shaded( triangle(
in(figure(10.6.(Second,(the(efficiency(loss(is(increased(further(by(the(subs	iK	
dy,( as( the( gap( between( the( marginal( production( costs( and( marginal( wil	lK	
ingness(to(pay(increases(at(any(volume(beyond(	x*.((	
Naturally,( the( subsidy( can( be( adjusted( to( attain( the( same( pollution(	
reductions( in( both( alternatives.( The( difference( is( that( a( higher( cost( is(
imposed(on(the(society,(as(the(total(consumption(of(energy(increases((to(
x1),( rather( than( being( reduced( (to(	x*)( in( the( optimal( alternative.( The(	
production( of( clean( energy( increases( more( than( the( reduction( of( the(
polluting( technology.( The( lower( purchaser( prices( and( higher( producer(
price( reflect( an( increasing( span( between( the( marginal( production( costs(
and(the(marginal(willingness(to(pay(for(energy.(
�
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(	
(	
(	
(	
Figure'10.6.'A'subsidy'on'the'supply'side.	 	
(symbols:!	S=supply,!	D=demand,!	g=nonOpolluting!technology,!	b=polluting!technology,!	x=quantity,!	p=price,!	
r=subsidy,!0=time!before!the!subsidy,!1=time!after! subsidy,!*=optimal!adjustment).!

((	Reforming*environmentally*harmful*subsidies	(	89	(	
Subsidies( are( also( used( to( support( particular( parts( of( the( demand( side.(
Such( subsidies( are( generally( not( theoretically( well( founded.( The( arg	uK	
ments( are( usually( that( the( subsidies( reduce( negative( externalities( in(
other(parts(of(the(market.(The(same(mechanisms(would(take(place( if(the(
demand( of( the( use( of( e.g.( nonKpolluting( energy( was( subsidized,( rather(
than(taxing(the(use(of(fossil(fuels,(see(figure(10.7.(	
(	
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
Figure'10.7.'A'subsidy'on'the'demand'side.'
(symbols:!	S=supply,!	D=demand,!	g=nonOpolluting!technology,!	b=polluting!technology,!	x=quantity,!	p=price,!	
r=subsidy,!0=time!before!the!subsidy,!1=time!after!subsidy,!*=optimal!adjustment). !
(
Compared( to( a( tax( on( the( demand( causing( the( externality,( the( efficiency(
gain(by(adjusting(to(the(optimal(solution(	x*(is(lost.(An(additional(efficiency(	
loss( accrue( due( to( the( subsidy,( as( marginal( production( costs( are( higher(
than( marginal( willingness( to( pay( at( any( quantity( beyond( the( starting(
point.(	
(
(
(
(
(
(
(
(
(
(
(
(
(

90	(	Reforming*environmentally*harmful*subsidies	(	
10.2	 Appendix(2((
(Attempts(to(remove(environmentally(harmful(
subsidies((	
10.2.1	 Coal'subsidies'in'United'Kingdom'	
Sources	:&IEA!et!al.!(2010b),!IEEP!et!al.!	(2007).	&	
Background!
From( 1957,( British( electricity( generators( were( required( to( purchase( a(
given( quantity( of( British( coal( at( set( prices,( but( were( allowed( to( pass( the(
costs( onto( consumers( (IEEP( et( al.( 2007).( Reforms( had( been( attempted(
throughout( the( 1960s( and( 1970s.( By(the( 1990s( the( British( coal( industry(
had(become(very(inefficient(by(world(standards.((
Policy!change!
The( privatisation( of( stateKowned( companies( started( in( the( late( 1970s( by(
the( Thatcher( government.( Subsidies( were( removed( in( the( midK1980s,(
there( were( extensive( mine( closures,( and( in( 1990( the( UK( government( r	eK	
negotiated(the( agreement(to( introduce( a(gradual( decline( over(three( years(
in( guaranteed( price( and( quantity( purchased( of( British( coal.( The( UK( has(
since( maintained( a( more( or( less( competitive( coal( industry( (IEEP( et( al.(
2007).( In( 1999,( however,( the( UK( government( imposed( a( moratorium( on(
the( construction( of( new( gasKfired( power( stations( in( order( to( protect( the(
domestic( coal( industry.( This( moratorium( was( replaced( in( 2000( with( a(
direct( subsidy( to( the( coal( industry( of( GBP( 100( million( per( annum( for( the(
next( two( years,( allowing( the( elements( of( the( coal( industry( with( a( viable(
future( without( aid( to( ride( out( temporary( market( problems.( In( 2002,( the(
government( agreed( to( an( investment( aid( package( for( the( remaining( coal(
mines( in( a( bid( to( allow( the( British( coal( industry( to( compete( in( the( r	eK	
formed( electricity( market( and( to( create( or( safeguard( jobs( within( socially(
and(economically(disadvantaged(areas((Europe(Economics(et(al.(2006).((
Compensation!
Government( aid( to( those( entering( unemployment( from( the( coalKmining(
sector( was( focused( on( creating( an( enabling( environment( for( the( deve	lK	
opment( of( alternative( economic( activities( in( mining( areas,( rather( than( a(
severance(package.(This(increased(support(to(the( reform(and(stimulated(
economic(growth(in(otherwise(disadvantaged(areas((IEEP(et(al.(2007).((
Evaluation!
Privatization( and( strong( political( will( following( the( Thatcher( period(
were( determining( factors( to( drive( the( reform( through.( The( UK( unde	rK	
went( two( recessions( in( 1980( and( the( early( 1990s,( particularly( affecting(
the( inefficient( manufacturing( sector( (IEEP( et( al.( 2007).( The( negative(
local( and( national( economic( situation( was( not( a( positive( factor( in( the(
reforms.( CoalKmining( jobs( in( the( coalfields( of( England( and( Wales( a	cK

((	Reforming*environmentally*harmful*subsidies	(	91	(	
counted( for( about( a( quarter( of( all( male( jobs( located( in( these( areas.( In(
1981( there( were( 160( 000( unemployed,( before( the( main( pit( closures( b	eK	
�‰�ƒ��ä� ��Š�‡� ���‹���‡�”ï�•� �•�–�”�‹���‡� �‘�ˆ� s{zv	85( weakened( the( British( trade( union(	
movement,( as( it( was( not( effective( at( stopping( the( government( plan( to(
reform(the(sector((IEEP(et(al.(2007).((	
The( UK( experience( shows( that( coupling( the( reform( with( measures( to(	
stimulate( economic( development,( and( therefore( create( new( job( oppo	rK	
tunities( in( areas( where( industrial( activities( are( to( be( scaled( down( or(
closed,( can( increase( support( to( the( reform( and( foster( economic( growth(
(IEEP(et(al.(2007).(By(2004,(some(60%(of(jobs(lost(from(the(coal(industry(
in(the(early(1980s(had(been(replaced(by(new(nonKcoal(jobs(for(men(wit	hK	
in( the( same( area.( The( total( unemployment( rate( was( less( than( 1%( above(
the( national( average( in( areas( in( which( coal( pits( had( been( shut( down( b	eK	
tween( 1995( and( 2005( (Europe( Economics( et( al.( 2006).( Since( then,( the(
pace(of(nonKcoal(male(jobs(continued(to(accelerate((IEEP(et(al.(2007).((
10.2.2	 Coal'subsidies'in'France'	
Source	:&IEA!et!al.!(2010b),!Laan!et!al.!	(2010).	!	
Background!
After(the(World(War(II,(coal(was(expected(to(play(a(key(role(in(the(reco	nK	
struction( of( the( French( economy.( In( the( 195	0s	,( the( coal( policy( gradually(	
changed,( as( the( creation( of( a( common( market( for( coal( and( steel( was(
formed,( and( the( important( mine( areas( Ruhr( and( Saar( were( reKunified(
with( Germany.( Coal( production( targets( were( reduced( in( the( 196	0s	.( At(	
the( same( time,( a( special( fund( was( created( to( promote( investment( in( the(
mining(regions,(retrain(workers(and(encourage(entrepreneurship,(and(to(
support( the( establishment( of( new(businesses,( industrial( zones( and( ent	iK	
ties( responsible( for( local( economic( development.( In( 1982,( French( coal(
prices(was(60%(higher(than(for(imported(coal.((
Policy!change!
After( a( gradual( reduction( of( coal( production( starting( in( the( early(1960s,(
an( agreement( was( reached( in( 1994( to( close( all( remaining( coal( mines.(
Between( 1971( and( 2000,( the( state( spent( around(	@35( billion( on( restru	cK	
turing( the( coal( sector.( In( addition( to( European( competition( legislation,(
the( major( drivers( of( the( reform( were( budgetary( considerations( and( a(
reduced( perceived( need( to( secure( energy( independence( via( coal( mining(
due(to(an(expansion(of(nuclear(energy(capacity.(In(2007,(subsidies(to(the(
coal(sector(were(largely(stopped.(
Compensation!
Extensive( measures( were( used( to( promote( alternative( economic( activity(
in(the(affected(regions(and(longKlasting(measures(to(protect(the(interests(
of(the(former(miners.(Former(miners(were(guaranteed(employment(until(
the( age( of( 45,( when( those( with( at( least( 25( years( of( service( became( elig	iK

92	(	Reforming*environmentally*harmful*subsidies	(	
ble(for(a(leave,(during(which(they(would(receive(80%(of(their(final(wor	kK	
ing(salary(until(retirement((Laan(et(al.(2010).((
Effects!
While( coal( was( still( a( crucial( source( of( energy( at( the( start( of( the( reform,(
the( last( French( coal( mine( was( closed( in( 2004.( However,( after( a( reform(
lasting(many(decades(social(support(is(provided(to(over(200(000(people.(
Its( activities( require( state( support( of( around(	@700( million( a( year,( an(	
amount(that(will(decline(over(time((Laan(et(al.(2010).((
Evaluation!
The( (costly)( expansion( of( nuclearKbased( electricity( generating( capacity(
and(the(generous(provisions(offered(to(the(former(miners(helped(making(
the(closure(of(all(the(coal(mines(possible.(According(to(Laan(et(al.((2010),(
those(likely(to(be(negatively(affected(by(the( reform(were(identified(early(
in( the( process,( and( a( longKterm,( gradual( approach( was( taken( that( en	aK	
bled(the(miners(and(the(economy(to(adapt.(Still(Laan( et(al.( conclude(that(
the( deregulation( is( not( an( example( of( bestKpractice,( as( it( required( over(
40( years( to( complete( and( billions( of( Euros( from( the( French( government(
to( underwrite( structural( adjustment.( Only(wealthy( countries( like( France(
can( afford( to( pay( such( large( subsidies( over( a( long( period( to( support( the(
workforce( of( a( single( industry.( However,( the( case( study( provides( an( i	lK	
lustration(of(good(principles(for(reforming(producer(subsidies. (
10.2.3	 Coal'subsidies'in'Germany'	
Sources	:&IEA!et!al.!(2010b),!IEEP!et!al.!	(2007).	!	
Background!
In(Germany,(hard( coal(mining(has(been(subsidized(for(almost(half(a( ce	nK	
tury.( Subsidies( are( defended( as( a( vehicle( to( maintain( jobs( and( domestic(
energy( supply.( The( original( subsidies( were( provided( by( a( surcharge( on(
the( price( of( electricity.( This( was( considered( unconstitutional( and( the(
subsidy( was( shifted( to( the( budget( in( 1994.( This( shift( of( the( source( of(
subsidies(from(the(energy(consumer(to(the(budget(led(to(domestic(bud	gK	
etary( and( environmental( considerations( becoming( the( main( drivers( of(
subsidy( reform.( In( 2007,( the( average( mining( job( was( subsidized( by(
@75,000.( Coal( mining( subsidies( amounted( to( almost( 30%( of( the( direct(
subsidies(granted(by(the(government(in(2003.((
Reform!
The( reform( aims( for( a( gradual( reduction( of( the( subsidies( to( a( complete(
removal.( Subsidies( were( reduced( from(	@4.73( billion( in( 1998( to(	@2.38(	
billion(in(2008,(with(a(complete(phaseKout(by(2018.(

((	Reforming*environmentally*harmful*subsidies	(	93	(	
Effects!
Production( has( fallen( by( 43%( and( number( of( employees( by( 50( percent(
from( 1997( to( 2005.( The( numbers( of( mines( have( fallen( from( 19( in( 1997(
to(8(in(2006,(and(the(remaining(number(is(expected(to(be(5(in(2012.(The(
decline(is(however( partly(caused(by(other( factors,(causing(a(reduction(in(
relative( competition( to( other( countries.( The( unemployment( rates( in( the(
affected(areas(are(somewhat(higher(than(the(national(average.	!	
Evaluation!
The(main(argument(against(a(subsidy(reform(seems(to(be(energy(secur	iK	
ty( of( supply( and( alternative( domestic( production.( Strong( links( between(
particular( interests( and( political( parties( makes( it( difficult( to( introduce(
reform.( Public( support( for( the( sector( has( decreased( over( time,( drive( by(
tight(budgets(and(decreasing(reliance(on(coal,(decreasing(number(of(jobs(
and(increased( concern(about(the( environment.(At(the(same(time(there(is(
a( widespread( public( awareness( that( coal( subsidies( run( counter( to( ec	oK	
nomic( sense( and( about( the( financial( and( environmental( effects( of( the(
subsidies( (IEA( et( al.( 2010b).( Tight( budgets,( the( decreasing( reliance( on(
coal,( the( decreasing( number( of( jobs( involved( and( a( growing( public( co	nK	
cern( about( the( environment( and( climate( change( has( decreased( public(
support( for( the( sector( over( time.( Also,( shifts( in( political( power( have(
shown(to(open(up(new(opportunities.(
10.2.4	 Coal'subsidies'in'Poland'	
Sources	:&IEA!et!al.!(2010b),!IEEP!et!al.!	(2007).	!	
Background!
Prior( to( 1990,( the( coal( mining( sector( in( Poland( was( state( owned( and(
operated( to( provide( high( employment( and( cheap( energy,( rather( than( to(
generate( profits.( Local( policies( kept( coal( prices( below( international( le	vK	
els,( with( large( economic( and( environmental( consequences.( This( was(
achieved( through( low( endKuser( prices,( market( barriers,( and( direct( su	bK	
sidies( to( the( stateKowned( enterprises( (IEEP( et( al.( 2007,( Suwala( 2010).(
Political( and( economic( change( in( 1989( from( communism( to( a( market(
economy( allowed( changes( to( the( mining( sector( and( the( reform( of( go	vK	
ernment( subsidies( to( the( sector.( A( key( objective( of( the( government( was(
to( liberalise( coal( prices( so( that( they( could( be( determined( by( market(
forces.((
Reform!
1990	1993	:( Attempt( to( adapt( to( free( market( economy.(	1993	1996	:*ReK	
structuring( provided( for( the( closure( of( a( number( of( unprofitable( mines,(
adaptation( of( extraction( levels( to( the( falling( domestic( demand,( a( strong(
emphasis( on( environmental( protection,( and( improved( working( efficie	nK	
cy.(	1996	2002	:*Restructuring( programmes,( technical( modernisation,(	
debt( forgiveness,( export( incentives,( determined( reduction( of( emplo	yK

94	(	Reforming*environmentally*harmful*subsidies	(	
ment,( liquidation( of( consistently( unprofitable( mines,( privatisation( of(
those( which( turned( a( profit.(	2002	present:*	Continued( employment( r	eK	
�†�—�…�–�‹�‘���•á� �™�”�‹�–�‹���‰� �‘�ˆ�ˆ� �•�‘���‡� �‘�ˆ� �–�Š�‡� �‹���†�—�•�–�”�›ï�•� ���ƒ�•�•�‹�˜�‡� �†�‡�„�–á� �ƒ� �ˆ�”�‡�‡�œ�‡� �‘���
�”�‡���—���‡�”�ƒ�–�‹�‘��� �—���–�‹�Ž� �–�Š�‡� �’�”�‘�‰�”�ƒ�����‡ï�•� �…�‘���…�Ž�—�•�‹�‘��á� �’�”�‹�˜�ƒ�–�‹�•�ƒ�–�‹�‘��� �‘�ˆ� �–�Š�‡�
more(profitable(mines(and(closure(of(the(lossKmaking(ones,(introduction(
of(a(sixKday(working(week.((
Compensation!
Relatively( generous( severance( packages( were( provided( to( miners( lea	vK	
ing( work,(based( on( individual( arrangements.( Miners( who( have( accepted(
a(oneKoff(severance(payment(in(return(for(an(undertaking(never(again(to(
seek( employment( in( the( mining( sector( have( received( an( average( pa	yK	
���‡���–��‘�ˆ�@stárrr��–�‘�@svárrrä	(	
Effects!
Extraction( fell( by( almost( 50%( from( the( mid( 198	0s	( to( 2000( and( emplo	yK	
ment(levels(were(reduced(significantly.	!	
Evaluation!
IEEP( et( al.( (2007)( conclude( that( the( key( components( of( the( last(	pr	oK	
gramme( period( met( with( strong( criticism( from( the( trade( unions( in( the(
mining( industry.( Still,( in( general,( the( reform( was( carried( out( without(
major( social( conflicts,( despite( the( significant( employment( losses.( It( is(
easier(to(implement(a(reform(when(there(is(more(confidence(in(the(ma	rK	
kets( and( from( the( public( in( new( economic( activities.( IEEP( et( al.( (2007)(
draws(several(conclusions(from(the(Polish(example:(The(rationale(for(the(
maintenance(of(inefficient(subsidies(and( industries(becomes(weak(when(
the( economic( outlook( is( bright.( Reforming( heavily( subsidised( sectors(
weighs( heavily( on( state( budgets,( as( generous( severance( packages( are(
needed( for( buying( support( to( the( reform.( Such( costs( are( however( exp	eK	
rienced( in( the( short( to( medium( term,( until( completion( of( the( reform,(
while(subsidies(would(continue(in(the(long(term.(Secondly,(it(is(easier(to(
implement( a( reform( when( the( economic( outlook( is( not( grim,( enviro	nK	
mental( considerations( can( play( a( major( role( in( determining( the( success(
of( reform:( in( particular,( any( efforts( directed( towards( the( reduction( of(
GHGs(emissions(is(now(likely(to(be(met(with(more(tolerance(by(the(pu	bK	
lic,( given( the( high( political( priority( that( climate( change( is( receiving.(
Third,( reforms( need( to( include( analysis( of( the( potential( cascade( impacts(
on(the(whole(economy.(
Future!
Restructuring( of( the( industry( continues( and( public( funding( will(be( ded	iK	
cated( to( restructuring( of( employment( and( reducing( production( capac	iK	
ties.( The( international( price( of( hard( coal( has( increased( in( recent( years,(
improving( the( economic( situation( of( some( coal( mines.( This( has( raised(
questions( about( the( rationale( for( maintenance( of( state( support( for( pro	fK	
itable(companies,(and(there(is( intense(discussion(on(the(efficiency(of(the(

((	Reforming*environmentally*harmful*subsidies	(	95	(	
sector.( However,( potential( plans( to( withdraw( financial( support( for( s	eK	
lected(mines(face(strong(resistance(from(industry((IEA(et(al.(2010b).(	!	
10.2.5	 Coal'subsidies'in'Spain'	
Source	:&IEA!et!al.!(2010b).!	
Background!
In( the( 1980s( the( Spanish( coal( industry( was( heavily( dependent( on( the(
energy( supply( industry( and( contracts( it( had( made( with( governments.(
This( enabled( its( expansion( when( the( rest( of( the( European( coal( industry(
was( in( decline( (Europe( Economics( et( al.( 2006).( Between( 1994( and( 2005(
the( EU( authorised(	@12.9( billion( in( aid( to(Spain( in( order( to( provide( ope	rK	
ating( aid( to( maintain( access( to( coal( reserves( and( support( for( reducing(
coal( mining( activity( (Europe( Economics( et( al.( 2006).( In( 2004,( the( ave	rK	
age( cost( per( tonne( of( Spanish( coal( was( up( to( 9( times( higher( than( the(
imported(coal(cost((Europe(Economics(et(al.(2006).(
Reform!
The( energy( market( was( liberalised( in( 1998( with( the( introduction( of( a(
longKterm( restructuring( plan.( Minimum( quotas( for( Spanish( coal( conti	nK	
ued,(but(power(companies(were(allowed(to(contract(directly(with(mining(
companies( for( the( amount( and( price( under( their( quota,( leading( to( co	mK	
petition( between( the( individual( companies( (Europe( Economics( et( al.(
2006).( Power( companies( continue( to( have( an( obligation( to( purchase(
fixed(quantities(of(domestic(coal(until(the(year(2012(as(part(of(a(subsidy(
agreement((IEA(2009).((
Effects!
Employment(in(the(coal(mining(sector(fell(nationally(from(by(nearly(70%(
over(the(period(from(1995(to(2005.(Coal(made(up(34%(of(the(fuel(mix(for(
electricity(generation(in(2002(but(and(by(28%(in(2005((Europe(Econo	mK	
ics(et(al.(2006).(
Evaluation!
The( Spanish( hard( coal( sector( is( still( dependent( on( subsidies( to( be( co	mK	
petitive( with( imported( coal,( and( significant( subsidies( still( remain.( Ope	rK	
ating( aid( to( coal( mines( is( gradually( declining( from(	@503( million( in( 2005(	
to(	@450( million( in( 2007,( but( these( figures( remain( considerable( for( an(	
industry(with(less(than(7000(miners((IEA(2009).(
10.2.6	 Eco5tax'exemptions'in'Germany'	
Source	:&IEA!et!al.!(2010b),!IEEP!et!al.!	(2007).	!	
Background!
The(logic(behind(the(German(ecoKtax,(implemented(in(1999,(was(to(raise(
energy( taxes( to( internalize( the( externalities( of( energy( use.( EcoKtax( e	xK

96	(	Reforming*environmentally*harmful*subsidies	(	
emptions( imply(lack(of( taxes( on( the( external( costs( from( energy,( and( are(
principally( equivalent( to( energy( subsidies.( A( reform( to( reduce( the( ecoK
tax( exemptions( was( carried( out( in( 2003.( The( drivers( for( this( reform(
were(both(environmental(and(political.(The(European(Commission(was(a(
main( promoter( of( reform( on( competition( grounds( because( ecoKtax( e	xK	
emptions( potentially( distort( competition.( Arguments( against( the( reform(
were( concerns( about( competitiveness,( the( introduction( of( the( emission(
trading(system((ETS)(and(high(energy(prices.((
Reform!
In(2003,(the(ecoKtax(rates(for(businesses(were(increased(from(20(to(60%(
of( full( rate.( In( 2006( however,( new( exemptions( were( introduced.( The(
reform( contained( partial( exemptions( for( enterprises( in( the( manufactu	rK	
ing(sector(and(in(agriculture(and(forestry,(allowing(qualifying(businesses(
to(pay(only(20%(of(the(standard(rate(and(guaranteeing(enterprises(in(the(
manufacturing( sector( a( refund( of( 95%( of( the( remaining( eco( tax( pa	yK	
ments( that( exceed( the( relief( on( pension( scheme( contributions( (IEEP( et(
al.( 2007).( They( are( among( the( largest( tax( exemptions( amounting( to(
�ƒ�„�‘�—�–� ss� �„�‹�Ž�Ž�‹�‘��� @�’�‡�”� �›�‡�ƒ�”� �‹��� trru	2006( (IEEP( et( al.( 2007).( The( Co	mK	
mission( allowed( reduced( industry( ecoKtax( rates( to( be( continued( until(
2012,( but( approved( the( tax( cap( only( under( the( condition( that( the( Ge	rK	
man( industry( meets( its( voluntary( commitment( targets.( These( targets(
were( committed( to( by( industry( in( order( to( obtain( ecoKtax( exemptions(
and(involve(a(mandatory(reduction(of(CO	2(emissions.((	
Compensation!
The(reform(was(designed(as(revenueKneutral(with(simultaneous(increase(
in(energy(taxes(and(lowered(payroll(taxes.	!	
Effects!
The( 2003( reform( was( carried( out( successfully( but( the( reform( faced( a(
setback( in( 2006,( with( new( exemptions( having( been( created,( including(
total( exemptions( of( certain( energyKintensive( processes( from( energy( ta	xK	
ation.( In( addition,( the( reduced( ecoKtax( rates( have( applied( to( the( entire(
energy( tax( rates( for( heating( fuels,( i.e.( including( the( petroleum( excise(
duty(that(already(existed(before(1999.(For(electricity( and(for(natural(gas(
and( liquefied( gas,( this( continues( to( mean( a( reduction( of( 40%;( and( for(
heating( oil( 27%.( A( key( outcome( of( the( reform,( however,( was( the( chance(
of( moving( towards( harmonised( energy( taxation( with( a( harmonised( r	eK	
duction(of(subsidies.(
Evaluation!
The(ecoKtax(is(a(step(in(the(right(direction(for(reducing(subsidies(related(
nonKinternalised( external( costs.( The( exemptions( however( represent( a(
continuation( of( the( preKtax( lack( of( correct( incentives.( The( main( reason(
seems( to( be( concerns( about( competitiveness( in( the( world( markets.( I	nK	
creased( energy( prices( contribute( to( the( perception( that( there( is( already(

((	Reforming*environmentally*harmful*subsidies	(	97	(	
a( heavy( burden( on( industry.( Worldwide( differences( in( energy( taxation(
provided( the( rationale( for( granting( ecoKtax( exemptions( to( domestic( i	nK	
dustries( and( contribute( to( the( difficulties( in( reforming( the( ecoKtax( (IEEP(
et( al.( 2007).( IEEP( et( al.( conclude( that( the( reform( relates( to( the( question(
of( setting( incentives( for( industry( to( reduce( its( energy( consumption(
without( harming( its( competitiveness,( and( to( find( suitable( ways( to( co	mK	
bine(the(economic(instruments(of(energy(taxation(and(emissions(trading.((	
IEEP(et(al.((2007)(conclude(that(strong(leadership(on(its(own(it(is(not(	
a( sufficient( condition( for( the( reform( to( endure.( A( broad( coalition( su	pK	
porting(the(reform(is(preferable(to(avoid(setbacks.(In(this(case,(it(is(likely(
that( reKelection( gave( momentum( to( reform( plans( that( already( existed(
earlier.( Changing( governments( allowed( for( reKconsiderations( of( the( ecoK
tax(exemptions.(
10.2.7	 Biofuel'subsidies'in'Germany'	
Source	:&Valsecci!et!al.!(2009).!	
!
The( EU( biofuels( Directive( requires( the( members( to( ensure( that( a( min	iK	
mum( proportion( of( biofuels( and( other( renewable( fuels( are( placed( on(
their( markets.( A( variety( of( measures( were( subsequently( introduced,(
including(preferential(tax(treatments.(Removal(of(the( tax(exemption(will(
increase( the( price( of( biofuels,( thus( reduce( the( incentive( for( production(
and( therefore( reduce( impacts( on( the( environment( from( the( cultivation(
and(processing(of(biofuels.(Germany(has(a(relatively(long(history(of(poli	tK	
�‹�…�ƒ�Ž��•�—�’�’�‘�”�–��ˆ�‘�”��„�‹�‘�ˆ�—�‡�Ž�•��ƒ���†��‹�•��…�—�”�”�‡���–�Ž�›��–�Š�‡��™�‘�”�Ž�†ï�•��Ž�‡�ƒ�†�‹���‰��’�”�‘�†�—�…�‡�”��‘�ˆ�
�„�‹�‘�†�‹�‡�•�‡�Ž��ƒ���†���—�”�‘�’�‡ï�•��Ž�‡�ƒ�†�‹���‰��’�”�‘�†�—�…�‡�”��‘�ˆ��‡�–�Š�ƒ���‘�Ž���ƒ�Ž�•�‡�…�…�‹��‡�–��ƒ�Žä�trr{ä	(	
The(value(of(the(subsidy(in(2004,(measured(in(terms( of(total(revenue(	
forgone( due( to( tax( exempt	�‹�‘���•á� �™�ƒ�•� @xsz� ���‹�Ž�Ž�‹�‘��ä� ��Š�‡� �„�‡���‡�ˆ�‹�–�‡�”�•� �ƒ�”�‡�	
biofuels(producers((primarily(large(agroKindustrial(companies(capable(of(
producing( large( quantities( of( biofuels( or( petroleum( companies( using(
cheaper(nondomestic(production(for(their(blends)(and(consumers(of(byK
products( such( as( rapeseed( cake( sold( as( livestock(feed.( Losers( are( public(
budgets( and( to( some( extent( consumers( of( other( goods( based( on( grain(
and(oil(seeds(given(price(increases.((
Reform!
The( 2004( tax( exemption( has( undergone( successive( reforms( despite( i	nK	
dustry( opposition.( In( 2006,( the( German( government( established( a( sy	sK	
tem( of( gradually( increasing( taxes( on( biofuels.( However,( in( 2007( a( quota(
system( was( introduced,( which( sought( to( reduce( the( impact( of( the( intr	oK	
duction(of(taxes(on(biofuels.(The(system(is(another(form(of(subsidy,(as( it(
sets(a(minimum(requirement(of(the(biofuel(content(in(relation(to(energy(
content.( In( the( future,( bio( methane( from( biogas( will( also( be( considered(
in(the(total(and(the(petrol(quotas.((

98	(	Reforming*environmentally*harmful*subsidies	(	
Evaluation!
The( large( budgetary( implications( of( the( tax( exemption,( secured( political(
support( for( these( reforms,( despite( domestic( industry( opposition.( I	nK	
stead,(indirect(subsidies(were(introduced(through(the(quota(system.(
10.2.8	 Fossil'fuel'subsidies'in'Mexico'	
Sources	:&G20!(2010),!IEA!et!al.!	(2010a).	&	
Background!
Subsidized(energy(prices(in(Mexico(have(represented(a(serious(economic(
strain( on( the( government( budget( and( contributed( to( increasing( reliance(
on(refined(product(imports.(Subsidies(for( electricity,(gasoline,(diesel(and(
liquefied(petroleum(gas(were(equivalent(to(more(than(one(and(a(half%(of(
GDP(over(the(period(2005	2009.((	
Reform!
Mexico( is( currently( reforming( its( excise( arrangements( for( refined( pro	dK	
ucts(and(the(subsidies(are(expected(to(be( eliminated(by(late(2012.(Retail(
prices( for( gasoline,( diesel( and( LPG( are( set( by( the( government.( Subsidies(
to( gasoline( and( diesel( are( planned( to( be( phased( out( by( the( end( of( 2010,(
and(the(gap(of(LPG(prices(is(to(close(in(2012.((
Compensation!
The( government( has( implemented( a( cash( transfer( intended( to( help( very(
lowKincome( households( cover( their( energy( needs,( see( box( 7.1.( This( is(
better( targeted( at( the( poor( and( is( formulated( to( avoid( incentives( for( e	nK	
vironmentally(harmful(increases(in(energy(consumption.(	!	
Effects!
Since( 2009,( retail( prices( of( fossil( fuels( have( been( gradually( increased	.(	
The( prices( of( lowKoctane( gasoline( and( diesel,( highKoctane( gasoline( and(
LPG( increased( by( around( 0.6	1.0%( per( month( over( a( period,( and( prices(	
on( magna,( premium,( diesel( and(LPG( increased( by( around( 2.5	5.0%( over(	
six(months.(
Future!
A(census(of(fossil(fuels(consumers(at(the(household(level(will(allow(wellK
targeted(and( focused(support(programs(to(compensate(poor(households(
for( fossil( fuel( price( increases.( It( is( expected( that( the( census( will( be( fi	nK	
ished( in( 2011.( G20( (2010)( expects( that( by( continuing( current( polic ies(
and( based( on( current( market( conditions,( subsidies( to( gasoline,( diesel(
and(LPG(are(expected(to(disappear(in(the(medium(term.	!	
Evaluation!
This( reform( is( an( example( of( a( refor	m(achieving( improved( price( signals(	
and( reducing( the( environmental( costs,( and( at( t	he( same( time( compensa	tK	
ing(the(social(groups(initially(targeted.(	(

((	Reforming*environmentally*harmful*subsidies	(	99	(	
10.2.9	 Fossil'fuel'subsidies'in'Indonesia'	
Sources	:&G20!(2010),!IEA!et!al.!	(2010a,b).	&	
Background!
Indonesia(has(a(long(history(of(directly(subsidizing(energy(as(a(means(of(
supporting( the( incomes( of( poor( households.( In( 2008,( 19%( of( gover	nK	
ment( expenditure( was( devoted( to( energyKconsumption( subsidies.( At( the(
same( time,( a( number( of( institutional( reforms( and( policy( changes( are(
���‡�‡�†�‡�†� �–�‘� ���‡�‡�–� ����†�‘���‡�•�‹�ƒï�•� �–�ƒ�”�‰�‡�–�•� �ˆ�‘�”� �‰�”�‘�™�–�Š� �ƒ���†� �’�‘�˜�‡�”�–�›� �”�‡�†�—�…�–�‹�‘���
and( to( move( to( an( environmentally( sustainable( development( path(
(OECD( 2010a).( Only( a( small( amount( of( the( subsidies( to( oil( products(
reached( the( poor.( In( 1999,( only( roughly( 15%( of( the( total( kerosene( su	bK	
sidy(reached(the(poorest(30%(of(the(population.((
Reform!
In( 2005,( the( government( started( to( gradually( liberalize( the( fuel( market(
with(the(aim(of(completely(eliminating(fuel(subsidies.(In(2010,(Indonesia(
announced( plans( to( eliminate( energy( subsidies( by( 2014.( The( gover	nK	
ment( raised( subsidized( prices( by( an( average( of( 125%( in( 2005( and( 29%(
in( 2009.( From( 2010( the( aim( is( to( phase( out( fossil( fuel( subsidies,( and(
there( is( a( program( to( transform( kerosene( to( LPG.( The( payment( subsidy(
mechanism( is( changed( from( a( cost( and( fee( system( to( margin( and( a( di	sK	
tribution(cost(system.	!	
Compensation!
A( large( part( of( the( consumption( basket( of( the( poor( is( affected( by( higher(
fossil( fuel( prices.( Alongside( with( the( price( increases( in( 2005( and( 2009,(
the( government( undertook( a( cash( transfer( program( to( 16( million( poor(
families,( see( box( 7.1,( the( costs( amounting( to( about( 0.7%( of( GDP.( In( the(
continuation,( the( phasing( out( is( implemented( in( a( gradual( manner( in(
order(to(minimize(the(spillKover(impact(on(the(poor.(Incentives(are(given(
to( use( cleaner( and( more( efficient( energy( such( as( liquid( gas,( funding( is(
given(to(develop(the(capacity(to(use(renewable(energy,(income(taxes(are(
reduced,( the( rate( of( asset( amortization( is( accelerated,( and( import( duty(
exclusions(for(industries(using(renewable(energies( are(used,(fiscal(disi	nK	
centives,( such( as( imposing( sales( tax( and( value( added( tax( on( fossil( fuels,(
are(performed.(The(distribution(of(subsidized(fuel(is(contained(to(certain(
users,(for(example,(by(providing(a(subsidy(for(poor(fisherman(to(buy(fuel(
in( fixed( quantities.( The( price( subsidies( are( transformed( to( a( targeted(
subsidy(through(reinforcement(of(poverty(alleviation(programs.((
Effects!
The( state( budget( for( 2011( estimates( that( the( share( of( government( e	xK	
penditure(is(reduced(to(11%((19%(in(2008).(The(subsidies(for(diesel(and(
fuel( oil( are( completely( eliminated.( 40( million( households( shifted( their(
consumption(from(kerosene(to(LPG(in(the(period(through(2009.((

100	(	Reforming*environmentally*harmful*subsidies	(	
Future!
The( phasing( out( strategy( is( to( be( sequenced( through( managing( the( d	eK	
mand( side( by( adopting( measures( that( will( reduce( fossil( fuel( energy( co	nK	
sumption( and( then( by( gradually( narrowing( the( gap( between( domestic(
and(international(prices.((
Evaluation!
The( reform( has( significantly( reduced( the( budget( expenses( to( enviro	nK	
mentally( harmful( subsidies.( The( Indonesian( experience( highlights( the(
importance( of( ensuring( a( suitable( compensation( strategy( for( poorer(
sections( of( the( community( in( implementing( reform,( and( that( this( can( be(
a( reduced( impact( on( government( expenditures( and( as( a( proportion( of(
GDP( (Laan( et( al.( 2010).( At( the( same( time,( it( was( important( to( provide( a(
stepped( approach( to( the( reform,( with( some( fuels( being( tackled( later( in(
the( reform( process,( and( taking( a( comprehensive( approach( to( the( policy(
problem,( for( example,( focussing( on( changing( household( behaviour( with(
support( to( switch( from( kerosene( to( LPG( (IEA( et( al.( 2010b).( Still,( strong(
political( opposition( continues( to( hold( back( implementation( of( Indon	eK	
�•�‹�ƒï�•��”�‡�ˆ�‘�”����•�–�”�ƒ�–�‡�‰�‹�‡�•���ƒ�ƒ����‡�–��ƒ�Žä�trsrä	(	
10.2.10	 Fossil'fuel'subsidies'in'Ghana'	
Source	:&Laan!et!al.!(2010).!	
Background!
In( 2004,( Ghana( spent( roughly( 2.2%( of( its( GDP( subsidizing( fuel( and( 1%(
on( support( to( its( national( refinery( company.( A( government( commission(
�ˆ�‘�—���†� �–�Š�ƒ�–� �
�Š�ƒ���ƒï�•� �”�‹�…�Š� �”�‡�…�‡�‹�˜�‡�†� �–�Š�‡� �‰�”�‡�ƒ�–�‡�•�–� �„�‡���‡�ˆ�‹�–�•� �ˆ�”�‘��� �•�—�„�•�‹�†�‹�‡�•�
and( quantified( how( and( to( what( extent( the( poor( would( be( affected( by(
future( deregulation( (Bacon( and( Kojima,( 2006).( This( was( an( important(
foundation( for( communicating( the( necessity( for( reform( and( for( desig	nK	
ing(policies(to(reduce(impacts(of(higher(fuel(prices(on(the(poor. (
Reform!
Ghana( has( made( several( attempts( to( liberalize( their( fuel( prices.( In( the(
2001( reform,( exKrefinery( petroleum( prices( increased( by( 91%( and( aut	oK	
matic(priceKsetting(mechanism(were(implemented.(In(the(2003(reform(a(
new( deregulation( was( carried( through,( and( fuel( prices( rose( by( 90%.( In(
the(2005(reform,(quarterly(price( adjustments(were(replaced(by(monthly(
price( adjustments( in( 2006( to( better( link( domestic( with( international(
prices.( The( reform( included( a( communications( campaign( and( mech	aK	
nisms(that(were(intended(to(reduce(political(interference(in(fuel(prices.(
Compensation!
In( the( 2001( reform,( the( effect( on( the( poor( was( cushioned( by( crossK
subsidization(fuels(used(typically(for(cooking(and(lighting((kerosene(and(
LPG).( The( 2005( reform( included( policies( to( assist( the( poor.( The( gover	nK

((	Reforming*environmentally*harmful*subsidies	(	101	(	
ment( eliminated( fees( for( stateKrun( primary( and( secondary( schools,( i	nK	
creased( the( number( of( publicKtransport( buses,( put( a( price( ceiling( on(
publicKtransport( fares,( channelled( extra( funds( into( a( healthKcare( scheme(
for(poor( areas;(raised(the( daily(minimum(wage(by(22%(and(started (	pr	oK	
grams( to( help( spread( electrification( to( rural( areas( and( purchase( esse	nK	
tial(equipment(for(workers.(It(also(continued(its(previous(policy(of(crossK
subsidizing(kerosene(and(LPG.(
Effects!
The( poor( were( hardest( hit,( and( the( reform( was( suspended( during( 2003,(
citing( fear( of( social( and( political( instability( in( the( runKup( to( elections.(
The( gap( between( international( and( domestic( prices( increased.( The( pol	iK	
cy( was( abandoned( when( oil( prices( soared( in( 2007( and( 2008,( and( price(
ceilings( were( set( in( 2008( (Kojima,( 2009).( The( government( continued( to(
subsidize( fuel.( After( coming( into( position,( the( opposing( party( (NDC)( fu	lK	
filled( its( promises( from( the( election( campaign( and( reduced( fuel( taxes( in(
2009.( After( that,( fuel( prices( in( Ghana( were( more( than(45%( below(corr	eK	
sponding( fuel( prices( in( neighbouring( countries,( leading( to( a( dramatic(
increase(in(fuel(consumption(and(smuggling(out(of(the(country.(
Evaluation!
Laan( et( al.( (2010)( conclude( that( the( policies( employed( to( ease( the( r	eK	
moval( of( subsidies( were( only( partially( and( temporarily( successful.( The(
priceKsetting( regime( proved( to( be( only(as( robust( as( the( political( will( b	eK	
hind(it,(demonstrating(that(governments(will(be(tempted(to(intervene(in(
fuel( pricing( for( political( reasons.( Due( to( lacking( political( acceptance,( the(
change( in( policy( regime( opened( for( reversing( the( reform.( A( completely(
independent( pricing( board( is( difficult( to( achieve.( Governments( can( a	lK	
�™�ƒ�›�•� �‘�˜�‡�”�”�‹�†�‡� �–�Š�‡� �”�‡�‰�—�Ž�ƒ�–�‘�”ï�•� �†�‡�…�‹�•�‹�‘���•� �ƒ���†� �Ž�ƒ�™�•� �…�ƒ��� �„�‡� �…�Š�ƒ���‰�‡�†ä� ��—�–	oK	
matic( linking( of( domestic( and( international( prices,( without( subsequen	t(	
crossKsubsidization,( is( necessary( to( prevent( politicization( of( fuel( prices.(
The( 2005( reform( included( successful( communication( and( compensation(
strategies( that( improved( public( acceptance( of( the( price( increases.( Pr	oK	
tests(associated(with(the(2003(reform(were(not(repeated(in(2005.((
10.2.11	 LPG'subsidies'in'Senegal'	
Source	:&Laan!et!al.!(2010).!	
Background!
In( the( 197	0s	,( Senegal( had( a( goal( of( reducing( deforestation( by( substitu	tK	
ing( part( of( charcoal( consumption( with( LPG.( LPG( was( subsidized( first(
through( cooking( equipment( and( from( 1988( the( government( started( to(
subsidize( LPG( fuel( itself.( The( LPG( subsidy( program( reduced( household(
pollution( and( reduced( pressure( on( forests.( But( the( policy( also( led( to( an(
unsustainable( fiscal( burden,( disproportionate( benefits( for( the( relatively(
rich(and(fuel(smuggling.((

102	(	Reforming*environmentally*harmful*subsidies	(	
Reform!
A( phased( reduction( of( the( subsidy( in( annual( increments( of( 20%( was(
started( in( 1998.( The( plan( was( put( on( hold( in( 2002( due( to( increasing(
global( LPG( prices,( exchange( rate( variations( and( inflation,( resulting( in(
continuing(high(subsidies	.((	
Effects!
In(2006,(the(cost(of(LPG(subsidies(amounted(to(1.4%(of(GDP.(In(2008,(the(
IMF( found( that( the( 40( poorest%( of( the( population( gained( only( 19%( of(
the(total(improvement(in(welfare(from(the(LPG(subsidy,(while(the(richest(
40%(gained(61%.(
Evaluation!
Laan( et( al.( (2010)( conclude( that( this( is( not( the( outcome( of( a( successful(
policy.( The( government( has( attempted( to( reform( the( subsidy( for( over( a(
decade( and( has( made( little( headway.( However,( removal( of( the( subsidy(
risks(an(increase(in(the(use(of(charcoal(and(firewood(by(some(households.((
Future!
According(to(Laan(et(al.((2010),(Senegal(could(learn(from(the(packages(of(
measures( used( by( Ghana( and( France( (see( chapter( 10.2.2( and( box( 7.1):(
i.e.,( research( to( identify( those( mostKlikely( to( be( negatively( impacted( by(
de	Ksubsidization,( information( campaigns( about( the( benefits( of( reform,(	
cash( transfers( to( the( poor,( and( greater( independence( and( transparency(
of(fuel(prices.(Disincentives(for(the(use(of(charcoal(and(wood,(rather(than(
fuel( subsidies,( would( be( a( more( direct( way( to( address( the( goal( of( redu	cK	
ing( deforestation.( Earlier( in( the( program( to( encourage( LPG( use,( the( go	vK	
ernment( reduced( charcoal( production( quotas( and( increased( woodK
cutting(licence(fees((Sokona(and(Deme(2004).(A(program(to(promote(the(
use( of( sustainably( harvested( wood( fuel( is( reported( to( have( helped( to(
reduce( the( effect( of( LPG( deKsubsidization( on( deforestation( (The( World(
��ƒ����á�trryä� ���� �ƒ�†�†�‹�–�‹�‘��á�ò�‰�”�‡�‡��� �…�Š�ƒ�”�…�‘�ƒ�Žó� ���ƒ�†�‡� �ˆ�”�‘����ƒ�‰�”�‹�…�—�Ž	tural( waste(	
is(being(tested(in(Senegal(and(offers(a(cheap(alternative(to(charcoal(from(
forests( (All( Africa,( 2009).( Disincentives( for( charcoal( and( LPG( would(
make( such( more( environmentally( friendly(technologies( more( profitable.(
Laan( et( al.( (2010)( claim( research( is( required( to( identify( the( populations(
most(likely(to(revert(to(charcoal(use(or(to(be(otherwise(disadvantaged(by(
subsidy( reform.( The( IMF( has( estimated( that( if( conditional( cash( transfers(
were(to(target(the(poorest(10%(of(the(population,(58(cents(of(each(dollar(
spent( would( reach( people( in( the( poorest( quintile( of( the( population( co	mK	
pared(with(only(22(cents(from(the(excise(tax(exemption(for(kerosene(and(
only(6(cents(for(the(LPG(gas(subsidy((IMF(2008).(	
(
(

((	Reforming*environmentally*harmful*subsidies	(	103	(	
10.2.12	 Electricity'and'petroleum'subsidies'in'Malaysia'	
Source:!IEA!et!al.!(2010b).!
Background!
Malaysia( has( had( a( cap( on( the( price( of( electricity( and( petroleum( pro	dK	
ucts(in(place(for(some(years.(The(difference(between( world(market(pri	cK	
es(and(the(caps(have(been(subsidised(by(the(government.(Rising(oil(pri	cK	
es( in( 2007( and( 2008( substantially( increased( subsidies( as( the( gap( b	eK	
tween( world( market( prices( and( the( price( caps( on( electricity( and(
petroleum( products( widened,( putting( pressure( on( the( budget( and(
prompting( the( Malaysian( government( to( review( their( subsidy( policies.(
Subsidies(were(reported(to(have(cost(the(Malaysian(government(USD(14(
billion(in(2008,(or(about(4%(of(GDP.(
Policy!change!
In(2008,(the(government(introduced(a(broad(package( of(reforms(to(their(
energy( subsidies.( The( package( included( subsidy( reductions( and( social(
support( packages.( In( 2008( the( price( of( natural( gas( for(power( generation(
was( raised( by( 124%,( and( the( average( electricity( tariff( for( all( sectors( of(
the( economy( was( increased( by( 24%,( petrol( prices( by( 41%( and( diesel(
prices(by(63%((Hamid(2008).(	!	
Compensation!
To( offset( the( increased( prices,( the( Malaysian( government( offered( cash(
rebates( in( the( form( of( lower( annual( road( taxes,( cash( rebates,( windfall(
taxation(on(certain(sectors(and(an(expansion(of(the(social(safety(net.	!	
Effects/evaluation!
The( price( rises( were( successfully( implemented( despite( widespread( pr	oK	
tests( (IEA( et( al.( 2010b).( Several( compensation( packages( were( used( to(
mitigate(increased(costs.(
10.2.13	 VAT'subsidies'on'energy'in'Poland'	
Source	:&IEA!et!al.!(2010b),!IEEP!et!al.!	(2007).	&	
Background!
The( VAT( rate( for( energy( products( (7%)( was( less( than( one( third( of( the(
basic( national( VAT(rate( (22%)( in( Poland( in( the( early( 1990s.( Freund( and(
Wallich( (1997)( found( that( poor( households( in( Poland( benefited( much(
less(from(energy(subsidies(than(the(richer(ones.(The(main(reason(for(the(
reform( was( budgetary,( reinforced( by( external( institutions( such( as( the(
IMF( and( the( World( Bank.( Both( energy( producers( and( consumers( pr	oK	
tested,(as(net(sales(prices(decreased(and(consumer(prices(increased. (

104	(	Reforming*environmentally*harmful*subsidies	(	
Policy!change!
The( reform( proposed( to( gradually( increase( the( VAT(for( energy( products(
to( bring( it( into( line( with( the( basic( rate( of( VAT.( This( was( planned( to( be(
carried( out( over( three( years( from( an( initial( base( of( 7%( in( 1995,( to( 12%(
in(1996,(17%(in(1997,(and(finally(up(to(22%(in(1998.((
Compensation!
Protests( and( strikes( against( higher( energy( prices( and( consumer( price(
increases(in(general(were(widespread(in(Poland(during(the(1990s.(Trade(
unions( did( not( object( to( the( raises( in( VAT,( but( sought( compensation( for(
energy( price( increases.( The( Polish( government( assured( unions( that( e	xK	
cessive( price( hikes( would( not( be( allowed,( and( compensatory( measures(
were(taken(for(poor(families(and(pensioners,(including(direct(allowances(
and( cheap( credit( to( modernize( heating( sources.( The( amounts( budgeted(
for(direct(compensation(payments(were(generally(modest(and(pertained(
only(to(1%(of(all(households.	!	
Effects!
The( VAT( increase( from( 1995( to( 1998( was( successful( and( took( place( as(
scheduled.( However,( a( previous( proposal( that( would( have( seen( VAT( on(
electricity( increase( to( 22%( in( 1995( was( dropped( at( the( end( of( 1994( as(
part(of(a(package(of(measures(to(curb(inflation.((
Evaluation!
This( case( study( shows( that( increasing( VAT( rates( for( energy( products( to(
basic( VAT( rates( can( be( achieved( relatively( expediently( with( a( limited(
need( for( compensatory( payments,( even( in( a( country( where,( at( the( time,(
household(income(was(much(lower(than(in(most(EU(Member(States((IEA(
et( al.( 2010b).( IEEP( et( al.( (2007)( conclude( that( the( original( rationale( for(
the( subsidy( to( help( poor( households( was( found( not( to( be( fully( valid.(
Hence,( change( can( be( achieved( in( spite( of( a( lack( of( public( support( if( the(
need( is( strong( enough.( A( favourable( circumstance( creating( the( policy(
space(for(the(reform(was(that(inflation(in(Poland(was(falling(continuou	sK	
ly( from( 586%( in( 1990( to( 7%( in( 1999,( while( real( disposable( household(
income( was( increasing( rapidly.( As( a( result,( the( share( of( expenditure( on(
energy( in( household( consumption( was( more( or( less( unaltered( over( the(
1990s(despite(the(real(energy(price(increases.(IEA(et(al.((2010b)(point(to(
the( fact( that( market( fluctuations( and( the( relaxation( of( price( controls(
were( more( important( determinants( of( consumer( prices( for( energy( than(
an( increasing( VAT( rate( in( Poland( during( the( 1990s.( This( is( a( key( lesson(
for( a( number( of( other( EC( Member( States( which( still( have( reduced( VAT (
rates(for(energy(products.((	
(
(

((	Reforming*environmentally*harmful*subsidies	(	105	(	
10.2.14	 VAT'subsidies'on'energy'in'UK'	
Source	:&Valsecci!et!al.!(2009).!	
(
The( UK( applies( a( reduced( VAT(rate( on( energy( products( (electricity,( nat	uK	
ral(gas,(heating(oil(and(coal),(thus(providing(a(subsidy(to(the(final(consu	mK	
ers( of(these( products( and( promoting( greenhouse(gas( emissions,( acidific	aK	
tion( and( depletion( of(nonKrenewable( energy(resources.( The( subsidy( value(
was( 10%( of( product( price( in( 2009.( The( winners( are( the( households( and(
other(eligible(entities(with(the(highest(energy(consumption.(
Policy!change!
Attempt( at( reform( in( 1995( failed( for( political( reasons.( Sense( of( urgency(
seems(to(be(lacking,(as(there(are(no(signs(of(recent(calls(for(reform.	!	
Future!
In( contrast( to( the( Polish( VAT( reform,( the( UK( represents( a( less( successful(
attempt.( The( original( rationale( to( the( subsidy,( to( support( to( lowKincome(
households,(is(no(longer(valid((Valsecci(et(al.(2009),(but(the(political(will(to(
reform(seems(to(be(lacking.(The(share(of(energy(costs(in(budget(of(hous	eK	
holds( has( decreased( considerably,( and( other,( less( distortionary( ways( of(
providing( support( to( the( targeted( households( are( available.( The( OECD(
Environment(&(Taxation(committee(calls(for(reform,(but(there(is(no(sense(
of(urgency,(as(there(seems(to(be(no(other(signs(of(calls(for(reform.(
10.2.15	 Natural'gas'subsidies'in'the'United'States'	
Source	:&IEA!et!al.!(2010b).	&	
Background!
Prices(of(natural(gas(transported(across(state(lines(were(regulated(in(the(
United( States( from( the( midK1950s( through( to( 1978,( resulting( in( a( co	nK	
sumer( subsidy( for( natural( gas( through( price( regulation.( Prices( were( set(
to( allow( companies( to( charge( prices( high( enough( to( cover( the( actual(
�…�‘�•�–�•� �‘�ˆ� �’�”�‘�†�—�…�‹���‰� ���ƒ�–�—�”�ƒ�Ž� �‰�ƒ�•á� �’�Ž�—�•� �ƒ� ò�ˆ�ƒ�‹�”ó� �’�”�‘�ˆ�‹�–ä� ��‡�‰�—�Ž�ƒ�–�‹���‰� �’�”�‹�…�‡�•�
charged( by( the( large( number( of( different( natural( gas( producers( created(
extreme( administrative( burdens.( Prices( were( kept( artificially( low( in( 20(
years,( fuelling( a( large( increase( in( consumption.( Producers( had( little( i	nK	
centive( to( explore( for( and( develop( new(natural( gas( supplies( at( the( reg	uK	
lated( price.( After( the( oil( price( shocks( of( the( midK1970s,( natural( gas( b	eK	
came(scarce,(and(electricity(prices(doubled(or(even(trebled.(In(winters(of(
1976( and( 1977,( shortages( of( natural( gas( forced( the( closing( of( many(
schools( and( factories( in( the( U.S.( Midwest.( In( 1978,( the( government( d	eK	
cided( to( end( the( subsidy( through( the( deKregulation( of( federal( gover	nK	
ment(price(controls(on(natural(gas(sold(in(interstate(markets.(

106	(	Reforming*environmentally*harmful*subsidies	(	
Reform!
The( U.S.( Congress( started( deregulation( in( 1978.( In( 1993,( all( remaining(
regulations(applying(to(the(wellKhead(price(of(natural( gas(were(elimina	tK	
ed,(allowing(the(market(to(completely(determine(the(price(of(natural(gas(
at(the(wellhead.((
Effects!
The( price( deregulation( spurred( production,( and( encouraged( a( more( r	aK	
tional(use(of(natural(gas.(Whereas(in(the(1960s(large(industrial(and(po	wK	
erKplant(facilities(using(natural(gas(burned(it(in(rather(simple(steam(ge	nK	
erators,( higher( prices( (combined( with( developments( in( technology)(
spurred( the( replacement( of( these( inefficient( technologies( with( co	mK	
binedKheat(and(power(and(combinedKcycle(gas(turbines.(	!	
Evaluation!
The( effects( of( price( regulation( were( foreseen( by( economists( before( the(
shortfalls( in( deliveries( started( to( become( acute,( but( it( took( a( crisis( to(
spur( action.( The( process( of( deregulation( took( many( years.( Consumers(
accepted(the(inevitability(of(higher(gas(prices(after(petroleum(prices(had(
also( risen( dramatically( in( the( midK1970s.( But( once( it( was( completed,(
new(domestic(supplies(became(available,(in(response(to(higher(prices. (
10.2.16	 Natural'gas'and'electricity'taxes'in'the'Netherlands'	
Source:!OECD!(2006b).!
(
In( 1996( the( Netherlands( introduced( a( regulatory( energy( tax	*on( the( use(	
of(natural(gas(and(electricity.(In(later(years,(the(rates(were(raised(several(
times.( As( rates( went( up,( the( personal( income( tax( was( stepwise( reduced,(
explicitly( to( redress( in( part( the( distributional( impact( of( the( energy( tax.(
Gross(wage(levels(rose(continuously(and(benefit(payments(were(regula	rK	
ly( increased.( As( a( consequence,( although( the( isolated( impact( of( the( tax(
was( slightly( negative,( the( large( majority( of( Dutch( households( saw( an(
overall(increase(of(net(disposable(income(between(1995(and(2002.(
10.2.17	 Heavy'good'vehicle'subsidies'in'Europe'	
Source	:&IEEP!et!al.!(2007).!	
Background!
There( are( considerable( distributional( issues( related( to( transport( taxes.(
In( particular,( it( appears( that( there( is( a( quite( big( discrepancy( between(
levels( of( consumption( and( taxes( paid( by( the( business( community( and(
household.(In(the(EUK15,(households(account(for(just(over(50%(of(energy(
taxes( paid( but( their( final( energy( consumption( account( for( just( above(
26%( of( total( energy( consumption( (IEEP( et( al.( 2007).( Heavy( goods( veh	iK	
cles( put( significant( stress( on( road( infrastructure,( increasing( infrastru	cK

((	Reforming*environmentally*harmful*subsidies	(	107	(	
ture( costs.( To( recover( these( costs,( some( countries( have( implemented(
charges( to( capture( some( of( these( costs,( thereby( reducing( implicit( subs	iK	
dies( to( shipping( by( road.( In( Germany,( the( system( collects( net( charges( of(
@täw� �„�‹�Ž�Ž�‹�‘��ä� ���� �ƒ�†�†�‹�–�‹�‘��á� �–�Š�‡� �Š�ƒ�—�Ž�ƒ�‰�‡� �Ž�‘�ƒ�†� �’�‡�”� �˜�‡�Š�‹�…�Ž�‡� �Š�ƒ�•� �‹���…�”�‡�ƒ�•�‡�†á� �–�Š�‡�
number( of( empty( trips( has( decreased( (by( 6%)( and( 6%( of( road( freight(
has(shifted(to(rail.(These(changes(have(decreases(associated(emissions(of(
carbon(dioxide(and(other(pollutants(in(Germany((CIT(2006).(
Reform!
Over( the( years( 2001	2005,( Austria,( Germany( and( Switzerland( impl	eK	
mented( distanceKbased( heavy( goods( vehicles( charges( to( recover( infr	aK	
structure(costs.((
Results!
The(main(benefits(have(been(economic,(shifting(infrastructure(funding(to(
���‘�”�‡� �‘�ˆ� �ƒ� ò�—�•�‡�”� �’�ƒ�›�•ó� ���‘�†�‡�Ž� �„�ƒ�•�‡�†� �‘��� �†�‹�•�–�ƒ���…�‡� �–�”�ƒ�˜�‡�Ž�Ž�‡�†� �ƒ���†� �–�›�’�‡� �‘�ˆ�
vehicle.( In( Switzerland,( the( policy( has( noticeably( slowed( growth( in( road(
freight,( but( has( caused( little( modal( shift.( However,( because( the( Swiss(
policy(is(based(on(vehicle(weight(and(emissions,(there(has(been(a(shift(to(
lower(emission(vehicles((CIT,(2006).(
Evaluation!
IEEP( et( al.( (2010)( concluded( that( a( strong( external( pressure( on( env	iK	
ronment( and( economy( (in( this( case,( transit( traffic)( was( a( key( driver( of(
the( countries( leading( on( road( pricing.( IEEP( et( al.( point( to( the( need( for(
strong(leadership,(crossKparty(consensus(and(broad(public(acceptance(to(
overcome( opposition.( Also,( a( strong( evidence( base( was( a( key( requir	eK	
ment( of( public( acceptance( and( clarity( of( aims( and( transparency( in( i	mK	
plementation( are( also( important.( According( to( IEEP( et( al.,( although( not(
the( most( economically( efficient( solution,( earmarking( of( revenues( have(
improved( public( acceptance( and( lessKthanKideal( interim( measures( may(
be(used.(
10.2.18	 Diesel'subsidies'	
Source	:&Valsecci!et!al.!(2009).!	
Background!
Many( EU( Member( States( tax( diesel( fuel( at( lower( rates( than( petrol,(
providing( a( subsidy( for( users( of( diesel( fuel( (households( and( firms).( Di	eK	
sel( gives( rise( to( CO	2,(CO( and(NO	x( emissions( that( cause( climate( change;( it(	
requires( larger( amount( of( oil( for( production( and( emits( fine( particles.(
Valsecci(et(al.((2009)(examine(nonKcommercial(diesel(subsidies(in(the(UK(
(no( subsidy;( no( difference( between( diesel( and( petrol( excise( duty),( Au	sK	
tria((EU(average(subsidy;(diesel(is(taxed(21%(less(than(petrol,(amounting(
�–�‘� @stz� ���‹�Ž�Ž�‹�‘��á� �ƒ���†� �–�Š�‡� ��‡�–�Š�‡�”�Ž�ƒ���†�•� ��� �Š�‹�‰�Š� �•�—�„�•�‹�†�›â� �†�‹�‡�•�‡�Ž� �‹�•� �–�ƒ�š�‡�†�

108	(	Reforming*environmentally*harmful*subsidies	(	
vr¨� �Ž�‡�•�•� �–�Š�ƒ��� �’�‡�–�”�‘�Žá� �ƒ���‘�—���–�‹���‰� �–�‘� @wyr� ���‹�Ž�Ž�‹�‘��ä� �	�‘�”� �…	ommercial	*dieK	
sel,(prices(are(lower(in(all(three(countries.((
Policy!change!
UK( has( equalised( its( excise( duty( rates( of( nonKcommercial( fuels.( No( ev	iK	
dence( has( been( found( of( Austrian( reform( efforts.( The( Netherlands( i	nK	
creased(excise(duty(on(diesel(by(3(cents(a(litre(in(2008(and(an(additional(
1(cent(per(litre(in(2009,(leaving(petrol(rates(unchanged.(	!	
Future!
Benefits( of( the( subsidy( accrue( to( owners( of( private( dieselKfuelled( veh	iK	
cles,( which( tend( to( be( wealthier( than( owners( of( petrol( vehicles.( The( di	eK	
sel( subsidy( disadvantages( firms( producing( petrol( and( households( ow	nK	
ing(petrol(vehicles.(
10.2.19	 Commuter'subsidies'in'Europe'	
Source	:&IEEP!et!al.!(2007).!	
Background!
��‘�����—�–�‡�”�•ï� �•�—�„�•�‹�†�‹�‡�•� �ƒ�”�‡� �‘�ˆ�–�‡��� �‰�‹�˜�‡��� �‹��� �–�Š�‡� �ˆ�‘�”��� �‘�ˆ� �†�‡�†�—�…�–�‹�‘���•� �ˆ�‘�”�
travelling( expenses( from( their( income( taxes( and( are( in( place( in ( many(
�…�‘�—���–�”�‹�‡�•ä� �ä�‰ä� @vázxw� �„�‹�Ž�Ž�‹�‘��� �™�‡�”�‡� �—�•�‡�†� �‹��� �ƒ�����—�ƒ�Ž� �…�‘�����—�–�‡�”	Ktax( d	eK	
ductions( in( Germany,( Austria,( and( Sweden( ( IEEP( et( al.( 2007).( Other(
countries( that( have( this( subsidy( are( Belgium,( Denmark,( Finland,( Ir	eK	
land,(and(the(Netherlands.( (	
In(Germany,(the(original(rationale(for(the(subsidy(was(to(increase(a	cK	
cess( to( job( markets( for( people( living( in( rural( areas.( The( tax( commuter(
subsidies(were(increased(in(order(to(offset(the(impacts(of(EcoKtax(reform(
(see(chapter(10.2.6).((	
In( the( Netherlands,( all( employees( living( more( than( 10( km( from( their(	
work(could( deduct( an( amount( of( travel( costs( from( their( taxable( income.(
This(amount(was(related(to(the(distance(from(home(to(work(and(it(clea	rK	
ly(was(a(subsidy(on(commuter(traffic,(including(by(car.((
Reform!
In( Germany,( the( income( tax( deduction( for( automobiles( was( reformed( to(
be( independent( of( transport( mode( in( 2000,( also( benefitting( public(
transport( users.( At( the( same( time,( the( perKkilometre( rate( was( increased.(
In( 2006,( the( subsidy( was( reduced( further.( After( 2007,( the( subsidy( was(
limited( to( travel( exceeding( 20( kilometres( to( work.( In( the( Netherlands,(
the( travel( cost( deduction( since( 2001( has( been( restricted( to( commuters(
travelling(by(public(transport.(

((	Reforming*environmentally*harmful*subsidies	(	109	(	
Results!
��Š�‡�trrv��
�‡�”���ƒ����”�‡�ˆ�‘�”����”�‡�†�—�…�‡�†��–�Š�‡��•�—�„�•�‹�†�›��„�›�ur¨��–�‘�@v��„�‹�Ž�Ž�‹�‘��ä���Š�‡�
2006( reform( achieved( further( reductions.( Since( 2000,( the( subsidy( has(
been(cut(almost(in(half(from(historical(levels.(
Evaluation!
The(reformers(praised(the(German(2006(reduction(in(subsidies,(but(cri	tK	
icised(the( fact(that(by( allowing(the(subsidy(only(for(trips(over(21(km(per(
day,(the(end(result(was(a(subsidy(even(more(heavily(tilted(to(those(living(
far( away( from( their( places( of( work( (IEEP( et( al.( 2007).( Reform( is( made(
difficult( by( the( tradeKoff( between( environmental( and( social( consider	aK	
tions,( with( only( the( pressing( need( to( close( large( budget( deficits( provi	dK	
ing( sufficient( political( will( to( reduce( the( subsidy.( Main( opponents( were(
commuters( who( benefited( from( the( tax( deductions.( As( pointed( out( by(
IEEP( et( al.( (2007),( a( gradual( approach( to( reform( can( be( effective( and(
more( easily( accepted,( and( budgetary( difficulties( can( be( a( motivating(
force(for(tax(or(subsidy(reform.(
10.2.20	 Company'car'subsidies'in'the'UK'	
Source	:&IEEP!et!al.!(2007).!	
(
The( system( had( three( tax( bands( based( on( annual( mileage,( and( a( decli	nK	
ing( percentage( tax( rate( applied( to( the( band( of( drivers( who( drove( the(
most.( Tax( breaks( were( available( at( the( 2,500( and( 18,000( annual( mile(
thresholds,( giving( a( strong( incentive( to( drivers( who( were( approaching(
these(mileages(to(cover(the(additional(miles(to(secure(the(tax(benefits.(In(
addition,( once( the( vehicle( was( over( four( years( old,( the( tax( liability( was(
reduced( by( 25%.( In( 2005( in( the( UK( there( were( 1.4( mill( company( cars,(
which( represent( 5%( of( the( total( numbers( of( registered( cars.( NGOs( ca	mK	
paigned( against( the( subsidy( for( many( years,( but( were( resisted( by( those(
benefiting(from(the(system.(
Reform!
In(2002,(the(system(was(fundamentally(changed(to(be(based( on(a(comb	iK	
nation(of(list(price(and(CO	2(emissions.	!	
Compensation!
The(reform(was(intended(to(be(revenue(neutral.	!	
Effects!
The( number( of( company( cars( in( UK( fell( by( 250,000.( The( mileageKbased(
approach( has( been( eliminated.( Average	!CO	2( emissions( from( company(	
cars(were(lower(than(for(private(cars(in(2007.	!

110	(	Reforming*environmentally*harmful*subsidies	(	
Evaluation!
According(to(IEEP(et(al.((2007),(it( took(a(long(time(to(achieve(consensus,(
and( a( strong( evidence( base( was( necessary( to( convince( doubters( that(
change( was( needed.( NGOs( campaigned( on( this( for( many( years,( but( only(
when( several( government( departments( and( progressive( companies( had(
been(persuaded(was(it(possible(to(make(real(progress.(
10.2.21	 Company'car'subsidies'in'other'EU'countries'	
Source	:&Valsecci!et!al.!(2009).!	
Background!
Company( cars( are( particularly( important( drivers( of( the( whole( fleet.( The(
preferential( fiscal( treatment( is( common.( The( provision( of( company( cars(
has(in(the(EU(become(by(far(the(most(important(category(of(fringe(ben	eK	
fits( (Valsecci( et( al.( 2009).( The( subsidy( reform( in( the( UK,( see( chapter(
10.2.20,( is( a( good( example( of( a( successful( reform.( In( another( case,( the(
Netherlands,( there( have( been( no( attempts( to	!remove( the( subsidy( in( the(	
sense( of( increasing( taxable( income( from( company( car( possession( to( the(
ò�‘�’�–�‹���ƒ�Žó��Ž�‡�˜�‡�Žä���ƒ�–�Š�‡�”á��–�Š�‡��…�‘���’�ƒ���›��…�ƒ�”��–�ƒ�š�ƒ�–�‹�‘����•�›�•�–�‡����‡���…�‘�—�”�ƒ�‰�‡�•��…�ƒ�”�
use,( as( the( marginal( cost( to( the( employee( of( driving( a( company( car( b	eK	
comes( often( close( to( zero.( The( winners( are( employees( with( a( company(
car( (mainly( male( employees( in( the( medium( to( high( income( brackets).(
Losers(are(the(taxpayers(in(general.((
Future!
According( to( Valsecci( et( al.( (2009),( no( reforms( are( conducted( in( the(
sense( of( increasing( taxable( income( from( company( car( possession( to( the(
ò�‘�’�–�‹���ƒ�Žó� �Ž�‡�˜�‡�Žä� ����Ž�›� ���‹���‘�”� �‡���˜�‹�”�‘�����‡���–�ƒ�Ž�Ž�›� ���‘�–�‹�˜�ƒ�–�‡�†� �†�‹�ˆ�ˆ�‡�”�‡���–�‹�ƒ�–�‹�‘���
reforms(are(done.(Key(challenges(are(strong(vested(interests(and(lobbies(
and(the(lack(of(awareness(of(implied(welfare(loss.(
10.2.22	 Aviation'subsidies'in'the'	EU	'	
Source	:&IEEP!et!al.!(2007).!	
Background!
Since( the( 194	0s	,( the( aviation( industry( worldwide( has( enjoyed( several(	
benefits.( Financial( support( to( the( aviation( industry( includes( fuel( tax( e	xK	
emption,( VAT(exemption( on( international( tickets,( and(duty( free( sales( on(
nonKEU( flights( and( on( board.( The( main( arguments( for( reform( are( to( r	eK	
move( relative( market( distortions( to( other( means( of( transport( and( to(
internalise( external( costs( of( aviation( and( to( help( meet( CO	2( reduction(	
targets( (IEEP( et( al.( 2007).( International( aviation( is( not( included( in( the(
Kyoto(protocol(in(terms(of(emission(reduction,(but(will(be(from(the(start(
of( 2012.( The( intention( is( for( the( EU( ETS( to( serve( as( a( model( for( other(
countries( considering( similar( national( or( regional( schemes,( and( to( link(

((	Reforming*environmentally*harmful*subsidies	(	111	(	
these(to(the(EU(scheme(over(time,(and(to(form(the(basis(for(wider,(global(
action.(
Reform!
From( the( start( of( 2012,( emissions( from( all( domestic( and( international(
flights( on( EU( airports( will( be( covered( by( the( EU( Emissions( Trading( Sy	sK	
tem.	11( Airlines( will( receive( tradable( allowances( covering( a( certain( level(	
of( CO	2( emissions( from( their( flights( per( year.( After( each( year( operators(	
must( surrender( a( number( of( allowances( equal( to( their( actual( emissions(
in( that( year.( Norway( and( Iceland( have( also( decided( to( include( emissions(
from( air( transport( in( the( system.( The( Netherlands( has( been( the( first( EU(
country(to(introduce(a(kerosene(tax(on(domestic(flights.((
Effects!
The( introduction( of( the( Dutch( fuel( tax( allowed( the( reduction( of( the(
budget(deficit,	*generati	���‰��ƒ����‡�•�–�‹���ƒ�–�‡�†�@sv����‹�Ž�Ž�‹�‘����ƒ�†�†�‹�–�‹�‘���ƒ�Ž��”�‡�˜�‡���—�‡ä	(	
Evaluation!
From( earlier( attempts( of( removing( the( implicit( subsidy( to( the( aviation(
industry,( IEEP( et( al.( (2007)( conclude( that( unilateral( actions( are( unlikely(
to(be(successful.(Consensus(at(the(EUKwide(level(was(necessary(to(ensure(
coordination( and( harmonisation( of( national( strategies.( As( aviation( is( an(
international( industry,( competitiveness( concerns( are( particularly( acute.(
Despite( EU( wide( harmonisation,( it( will( still( be( necessary( to( ensure( that(
other( national( carriers( outside( Europe( do( not( enjoy( unfair( advantage:(
reaching( an( agreement( at( the( global( level( will( thus( be( necessary( in( the(
long(term.(
10.2.23	 Water'subsidies'in'Czech'Republic'	
Source	:&IEEP!et!al.!(2007).!	
Background!
The(pricing(of(water(historically(covered(only(a(fraction(of(its(cost.(A(low(
price( for( water,( well( below( full( cost( recovery,( was( an( actual( subsidis	aK	
tion( of( water( extraction,( treatment( and( distribution( and( led( to( overe	xK	
ploitation(of(water(resources.((
Reform!
After( 1990,( water( pricing( in( the( Czech( Republic( moved( from( covering(
only( a( fraction( of( the( cost( to( full( cost( recovery.( This( hidden( subsidy( has(
been( gradually( removed,( and( in( 2004( the( cost( of( 1( m	3( of( water( was( 35(	
times( higher( than( in( 1990.( In( the( Czech( Republic,( all( houses( have( been(
provided( with( metering( to( measure( drinking( water( consumption.( The(
««««««««««««««««««««««««««	(	11(http://ec.europa.eu/clima/policies/transport/aviation/index_en.htm	((

112	(	Reforming*environmentally*harmful*subsidies	(	
reform( also( addressed( the( fees( for( withdrawal( of( both( surface( and(
ground(water,(and(also(the(discharge(of(waste(water.((
Effects!
The( volume( of( water( consumed( in( households( decreased( by( about( 40%,(
from( 1989( to( 2002.( In( 2003,( it( was( about( 10%( below( the( EU( average.(
Between( 1990( and( 1999( water( withdrawals( decreased( by( 88%( in( agr	iK	
culture,(by(47%(in(industry(and(by(34%(in(public(water(mains.(
Evaluation!
IEEP(et(al.((2007)(conclude(that(this(is(a(positive(example(of(reform,(with(
improved( resource( management.( Affordability( issues( are( in( principle(
important( where( domestic( consumers( are( concerned(	( however( they(	
were(not(directly(addressed(in(this(case.(Gradual(increase(in(cost,(in(step(
with( increasing( incomes,( nonetheless( helped( to( limit( the( impact.( During(
the( early( 199	0s	,( the( former( Czechoslovakia( witnessed( a( major( political(	
change.( The( institution( of( the( independent( Czech( Republic( subsidies( for(
operation( costs( decreased,( lead( to( a( gradual( recognition( of( environme	nK	
tal( values.( The( reform( was( hence( part( of( the( restructuring( and( shift( to( a(
market( economy.( Also,( a( gradual( rise( of( water( charges( may( have( made(
the( introduction( of( higher( prices( less( problematic.( The( reform( seems( to(
have(lacked(social(consideration,(as(lower(charges(were(not(designed(for(
low(income(households.((
10.2.24	 Water'subsidies'in'Australia'	
Source:!Ekins!and!Salmons!(2009).!
Background!
Prior( to( the( 1980s,( the( emphasis( of( water( policy( was( on( engineering(
solutions( and( on( increasing( water( supply( to( address( shortages.( The( d	eK	
velopment( of( irrigation( was( linked( to( policies( explicitly( intended( to(
promote( rural( settlement.( Water( was( often( overKallocated( and( was( typ	iK	
cally( supplied( below( cost,( providing( little( incentive( for( conservation.(
Furthermore,( crossKsubsidisation( between( sectors( resulted( in( an( ineff	iK	
cient( allocation( between( competing( uses.( During( the( 1980s,( increasing(
scarcity,(rising(supply(costs(and( pressure(on(state(budgets(led(to( a(nu	mK	
ber( of( stateKlevel( initiatives( to( improve( the( management( of( municipal(
water( utilities( and( irrigation( networks,( including( the( first( experiments(
with( pricing( reform( and( tradable( water( entitlements.( While( enviro	nK	
mental( and( resource( management( considerations( played( their( part,( the(
main(driver(for(reform(in(the(water(sector(was(a(wider(drive( to(improve(
the(economic(efficiency(of(infrastructure(sectors(and(utilities,(in(order(to(
improve( competitiveness.( This( drive( was( underpinned( by( a( belief( in( the(
benefits( of( introducing( rational( pricing( for( scarce( resources( and( the( d	eK	
velopment(of(competitive(markets(in(these(sectors.((

((	Reforming*environmentally*harmful*subsidies	(	113	(	
Reform!
Among( the( objectives( of( the( water( reform( in( 1994( were( to( ensure( that(
water( prices( reflected( the( full( cost( of( resources( and( to( eliminate( crossK
subsidies( and( make( other( subsidies( transparent( and( increase( efficiency.(
Most( urban( water( authorities( introduced( consumptionKbased( charges(
for( households( and( firms.( CrossKsubsidies( from( industrial( and( comme	rK	
cial(users(to(households(were(reduced(or(eliminated.(
Results!
This( led( to( a( decline( in( both( individual( water( consumption( and( the( un it(
supply( cost( of( water( in( urban( areas.( However,( progress( was( slow( and(
uneven,( both( across( waterKuse( categories( and( between( states,( and( new(
water(reform(initiative(was(launched(in(2004.(
Evaluation!
Ekins( and( Salmons( (2009)( suggest( several( explanations( to( the( slow( pr	oK	
gress.(One(is(that(the(reform(was(very(general,(with(no(real(consideration(
of( detailed( implementation( issues.( Further,( the( benefits(	(reduced(env	iK	
ronmental( damage( and( improved( economic( efficiency( of( water( allocation(
( were( diffuse( and( poorly( understood( by( the( public,( as( were( the( costs( of(
inaction.( Rather,( most( individual( consumers( were( worse( off( under( the(
reform(than(they(had(been(previously,(in(so(far(as(they(faced(higher(water(
prices.( There( was( also( lack( of( consensus( on( some( of( the( basic( scientific(
questions.( Practical( difficulties( in( measuring( water( use( and( in( assessing(
the( impact( of( water( diversion( on( other( users( made( implementation( of(
reform( principles( exceptionally( complex.( Also,( water( entitlements( were(
perceived( as( acquired( rights,( often( under( policies( explicitly( designed( to(
encourage( rural( settlement( and( irrigation( development.( Consequently,(
there( was( considerable( resistance( to( any( reductions( in( volumetric( ent	iK	
tlements.( The( reform( did( not( address( the( potential( social( impacts( of( the(
reforms(or(the(need(for(any(transitional(support.((
10.2.25	 Water'subsidies'in'Spain'	
Source:!Valsecci!et!al.!(2009).!
(
In( Spain,( water( pricing( is( usually( based( on( area( size( rather( than( on( the(
actual( volume( of( water( used,( and( therefore( does( not( provide( incentives(
to(farmers(to(improve(water(use(efficiency,(and(has(historically(lead(to(a(
relatively( high( level( of( consumption.( Traditionally( irrigation( has( been(
used( to( increase( productivity( and( enable( people( to( settle( in( rural( areas,(
and(as(an(instrument(for(combating(desertification.(Valsecci(et(al.( do(not(
consider(the(rationale(still(valid,(as(low(charges(eventually(translate(into(
poorly( maintained( water( infrastructures,( which( in( turn( reduce( irrig	aK	
�–�‘�”�•ï��…�‘���’�‡�–�‹�–�‹�˜�‡���‡�•�•��ƒ���†��…�ƒ�’	acity(to(pay,(and(influences(the(selection(of(	
crops( leading( to( unsustainable( patterns( and( lowKvalue( subsidised( cu	lK	
tures.(Furthermore,(from(a(social(perspective,(subsidies(benefit(all(far	mK

114	(	Reforming*environmentally*harmful*subsidies	(	
ers.( Losers( are( reduced( water( availability( to( the( society( at( large( an	d(	
farmers( facing( worsened( environmental( conditions,( increased( pollution(
and( reduced( water( availability.( The( introduction( of( a( price( signal( to(
make( farmers( aware( of( the( scarcity( of( water( resources( has( been( reco	mK	
mended,(and(to(induce(them(to(adopt(waterKsaving(technologies(without(
affecting(crop(distribution.(
Policy!change!
Some( successful( attempts( to( remove( subsidies( have( been( made.( In( one(
region,( a( new( water( charging( structure( included( both( a( fixed( and( vari	aK	
ble( charge( linked( to( water( use,( with( farmers( paying( significantly( more(
than(under(the(original(areaKbased(approach.((
Effects!
These(changes(resulted(in(a(30%(reduction(in(water(consumption.((
Evaluation!
The( reforms( carried( through( had( significant( impact,( but( several( regions(
still( subsidize( water( consumption.( Subsidy( removal( may( significantly(
�”�‡�†�—�…�‡� �ˆ�ƒ�”���‡�”�•ï� �‹���…�‘���‡ä� ��Ž�•�‘á� �–�Š�‡� �‹�•�•�—�‡� �‘�ˆ� �‡�Ž�ƒ�•�–�‹�…�‹�–�›� �Š�‘�™�‡�˜�‡�”� �Š�ƒ�•� �„�‡�‡���
stressed(	( i.e.( under( certain( conditions( price( increases( can( have( little(	
�‡�ˆ�ˆ�‡�…�–� �‘��� �™�ƒ�–�‡�”� �…�‘���•�—���’�–�‹�‘��á� �ƒ���†� �–�Š�‡� �‹���’�ƒ�…�–� �‘��� �ˆ�ƒ�”���‡�”�•ï� �‹���…�‘���‡� �…�ƒ��� �„�‡�
significant.(Valsecci(et(al.(suggest(compensation(measures(to(low(income(
farmers.(
10.2.26	 Agricultural'subsidies'in'New'Zealand''	
Source:!Ekins!and!Salmons!(2010).!
Background!
Over( the( 196	0s	(and(197	0s	,( there( had( been( a( gradual( acceleration( in(	
grants(and(subsidies(to(the(agricultural(sector(in(New(Zealand,(including(
a( range( of( productionKrelated( measures,( fertilizer( subsidies,( loans( to(
farmers( at( belowKmarket( rates,( generous( tax( rebates( and( lucrative( i	nK	
centives( for( land( development.( Around( 30( different( forms( of( assistance(
were( given( to( farmers.( These( subsidies( caused( severe( distortions( in( the(
sector,( with( significant( excess( supply,( inflated( agricultural( land( prices(
and( distorted( production( decisions( (Ekins( and( Salmons( 2010).( In( the(
early( 1980s,( New( Zealand( was( suffering( severe( economic( problems( and(
substantive( economic( reforms( were( needed( to( increase( growth.( The(
agriculture(sector(was(a(primary(target.(
Reform!
Starting( in( 1984,( Government( assistance( to( the( agricultural( sector( was(
virtually(eliminated(over(a(short(time(period.(Minimum(price(schemes(for(
wool,( beef,( lamb(and( dairy( products( were( abolished,( tax( concessions( and(
free(government(services(were(withdrawn;(land(development(loans,(fert	iK

((	Reforming*environmentally*harmful*subsidies	(	115	(	
lizer( and( irrigation( subsidies,( subsidized( credit,( assistance( for( flood( co	nK	
trol,(soil(conservation(and(drainage(schemes(were(phased(out(from(1987.(
Results!
The(Effective(Rate(of(Assistance((ERA)(fell(from(123%(in(1983(to(around(
zero( by( the( 1990s.( The( economic( indicators( for( the( agriculture( sector(
have( improved( across( the( board( since( the( subsidies( were( eliminated.(
The(removal(of(fertilizer(subsidies(led(to(a(reduction(in(phosphate(leac	hK	
ing( from( hill( country( pasture( catchments;( the( reduction( in( the( national(
sheep( flock( yielded( benefits( for( erosion( control,( water( quality( and( m	eK	
thane( emissions;( the( removal( of( land( development( subsidies( led( to( a(
substantial( decline( in( the( felling( of( native( forest.( While( these( benefits(
were(partly(offset(by(the(impacts(of(increases(in(other(agricultural(activ	iK	
ties( (	e.g.*	dairy( and( deer( sectors),( the( overall( environmental( impact( was(	
positive.(The(removal(of(subsidies(was( initially(unpopular(and(culmina	tK	
�‡�†� �‹��� �–�Š�‡� �Ž�ƒ�”�‰�‡�•�–� �”�—�”�ƒ�Ž� �•�‡�…�–�‘�”� �’�”�‘�–�‡�•�–� ���ƒ�”�…�Š� �‹��� ��‡�™� ��‡�ƒ�Ž�ƒ���†ï�•� �Š�‹�•�–�‘�”�›� �‹���
1986.( Rural( incomes( declined( during( the( 1980s,( many( small( rural( firms(
went( out( of( business.( Still( only( around( 1%( of( farmers( left( the( industry,(
while(the(overall(rural(population(rose(slightly(between(1981(and(2001.(
Compensation!
Despite(these(social(impacts,(little(use(was(made(of(transitional(assistance(
measures.(This(was(partly(due(to(the(speed(of(the(reforms,(and(partly(due(
to( the( state( of(the(government( finances.( Some( assistance( was(provided(in(
the( form( of( debt( rescheduling(in( 1986	87( and( with(farm( debt(restructu	rK	
ing,( while(the(government( wrote( off(some( farm( debt( and( encouraged( pr	iK	
vate( lenders( to( do( the( same.( Expert( help( was( provided( to( help( farmers(
with(the(development(of(business(plans(and(credit(mediation.(
Evaluation!
There(was(a(general(consensus(among(the(main(political(parties(over(the(
need( for( reform(	( both( in( agriculture( and( the( wider( economy.( The( pr	oK	
cess( was( extended( in( 1990.( The( leftKwing( government( did( not( have( a(
significant(constituency(in(rural(communities(and(hence(did(not(stand(to(
lose( much( support.( The( reform( was( implemented( to( an( agreed( and(
transparent(timetable(	(with(farmers(being(given(clear(signals(about(the(	
depth,( breadth( and( pace( of( the( reform.( The( reform( of( agricultural( subs	iK	
dies( was( part( of( a( wider( economic( reform( programme( that( included(
measures( which( reduced( factor( input( prices.( Thus,( while( the( main( far	mK	
�‡�”�•ï��‘�”�‰�ƒ���‹�œ�ƒ�–�‹�‘����™�ƒ�•	(unhappy(about(the(removal(of(subsidies,(it(stron	gK	
ly( supported( the( wider( reform( process,( which( it( considered( would( ease(
the(pressure(on(farmers(by(lowering(production(costs.(	
(
(

116	(	Reforming*environmentally*harmful*subsidies	(	
10.2.27	 Fishery'subsidies'in'EU''	
Source:!Ekins!and!Salmons!(2010).!
(
EU(fisheries(subsidies(were(first(introduced(in(1970(with(the(objective(of(
supporting(and(encouraging(increased(fish(production.(In(particular,(the(
subsidies( were( aimed( at( promoting( capital( investment( in( larger( and(
more( efficient( fleets,( and( at( adapting( production( and( marketing( cond	iK	
tions.( As( a( result,( there( was( a( threefold( increase( in( the( engine( power( of(
the( fishing( fleets( over( the( next( seventeen( years( and( the( fishing( industry(
became( increasingly( capitalKintensive( and( technologically( productive.(
The( increased( capacity( of( fishing( fleets( was( a( major( factor( in( the( depl	eK	
tion(of(fish(stocks(over(the(following(decades.(According(to(The(Commi	sK	
sion(of(the(European(communities((2009),(88%(of(fish(populations(could(
increase( and( generate( more( economic( output( if( they( were( left( for( only(a(
few( years( under( less( fishing( pressure.( 30%( of( these( stocks( may( not( be(
able(to(replenish.(93%(of(the(cod(in(the(North(Sea(are( fished(before(they(
�…�ƒ��� �„�”�‡�‡�†ä� ��‘�•�–� �‘�ˆ� ��—�”�‘�’�‡ï�•� �ˆ�‹�•�Š�‹���‰� �ˆ�Ž�‡�‡�–�•� �ƒ�”�‡� �‡�‹�–�Š�‡�”� �”�—�����‹���‰� �Ž�‘�•�•�‡�•� �‘�”�
returning( low( profits.( Overall( poor( performance( is( due( to( chronic( ove	rK	
capacity(of(which(overfishing(is(both(a(cause(and(a(consequence. (	
In(recognition(of(the(role(of(subsidies( in(the(buildKup( of(overcapacity,(	
and(hence(overKfishing,(there(has(been(a(shift(in(focus(towards(balancing(
fleet(sizes(to(available(fish(stocks.(
Reform!
The(reforms(did(not(reduce(the(magnitude(of(the(support.(The(subsidies(
for(the(period(2000	2006(were(double(the(contribution(for(the(previous(	
period.( Rather,( the( subsidies( shifted( to( provisions( for( environmental(
projects( including( provisions( for( the( adjustment( of( fishing( effort,( redu	cK	
ing( the( excess( capacity( of( the( fishing( fleet,( development( of( marine( pr	oK	
tected( areas,( phasingKout(of(subsidies(for(vessel(rebuilds,(making(avail	aK	
ble( of( extra( funds( for( vessel( scrapping.( The( reforms( have( aimed( to( ba	lK	
ance( between( resources( and( fishing( fleet( capacity,( strengthen( the(
competitiveness( of( the( sector,( foster( protection( of( the( environment( and(
natural( resources( and( encourage( the( sustainable( development( in( areas(
with(activities(in(the(fisheries(sector.(
Compensation!
Early( retirement( schemes( and( individual( compensatory( payments( for(
fishers(made(redundant(as(a(result(of(vessel(decommissioning.(
Results!
There( has( been( a( shift( in( focus( towards( balancing( fleet( sizes( to( available(
fish( stocks.( In( particular,( the( most( direct( forms( of( capacityKenhancing(
subsidies( have( been( phased( out,( with( assistance( being( reKdirected( to(
provisions( for( vessel( decommissioning,( transitional( support( measures(
and(environmental(projects.(

((	Reforming*environmentally*harmful*subsidies	(	117	(	
Evaluation!
The(involvement(of(the(environmental(NGOs(in(the(development(of(fis	hK	
eries( policy( has( played( an( important( role( in( raising( the( public( profile( of(
fisheries( subsidy( issues( and( hence( increasing( the( political( pressure( for(
reform.( However,( there( were( also( a( number( of( factors( that( have( held(
back( the( reform( process.( The( subsidy( regime( has( been( in( place( for( over(
35( years( and( has( become( an( entrenched( part( of( the( fisheries( manag	eK	
ment( regime.( When( the( financial( periods( have( ended,( there( has( been( a(
presumption( that( subsidies( would( be( renewed( rather( than( removed,(
with(no(active(reconsideration(being(given(to(the(rationale(for(subsidies.(
New( member( states( joining( the( EU( in( 2004( were( poorer( than( the( exis	tK	
ing( EU15( and( had( high( expectations( of( support( for( their( fishery( sectors.(
Economic( pressures( resulting( from( rising( oil( prices( and( falling( revenues(
as( a( result( of( the( decline( in( fish( stocks( resulted( in( heavy( lobbying( by( the(
fishing(industry(to(maintain(subsidies.(This(was(successful(in(generating(
political(desire(to(assist(the(industry(and(has(impeded(subsidy(reform.(
10.2.28	 Fishery'subsidies'in'Norway'	
Source:!Hannesson!(2006).!
Background!
The(first(years(after(the(Second(World(War(the(fisheries(in(Norway(were(
quite( profitable.( After( some( years,( they( started( to( lag( behind( other( se	cK	
tors,( and( subsidies( were( given( to( support( incomes( in( the( industry,( see(
figure( 11.1.( This( support( was( meant( as( extraordinary( emergency.( I	nK	
stead,( the( subsidies( continued( to( increase( to( a( peak(in( 1981,( amounting(
to( about( 70%( of( value( added( in( the( industry.( According( to( Hannesson(
(2006),( this( was( driven( by( the( strong( standing( of( the( fishermen( organ	iK	
zation( and( the( idea( that( fisheries( were( important( to( keep( the( fishing(
communities( viable.( In( addition,( the( resource( wealth( in( the( form( of( of	fK	
shore(oil( and(gas(deposits(discovered( in(the(late(196	0s	(justified(the(su	pK	
port.( Hence,( the( budget( constraint( was( not( pressing.( Subsidies( were(
given( as( price( subsidies,( to( scrapping( and( selling( of( boats,( to( investment(
in( boats( and( to( interest( payments.( The( effects( on( the( fish( stock(are( diff	iK	
cult(to(isolate,(since(stocks( are(subject(to(environmentallyKdriven(fluct	uK	
ations( and( exploitation( by( other( countries.( According( to( Hannesson,(
there( are( indications( that( the( subsidies( encouraged( decline( in( the( fish(
stock.((
Reform!
After(the(peak(in(1981,(the(subsidies(gradually(came(down.(
Results!
The(removal(of(subsidies(encouraged(structural(changes(that(have(made(
a(fundament(for(a(selfKsufficient(industry.(	!

118	(	Reforming*environmentally*harmful*subsidies	(	
Evaluation!
Hannesson( concludes( that( the( subsidy( reform( is( easier( when( there( is( a(
perception( of( crisis,( and( if( the( pain( is( alleviated.( The( removal( of( fishery(
subsidies( was( helped( by( the( sharp( decline( in( oil( prices( in( 1986( and( the(
upturn(in(both(catch(and(fishery(prices(in(the(years(after(1990. (
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure'10.8.'Government'subsidies'to'Norwegian'fisheries'according'to'general'
agreement.'
Source:!Hannesson!(2006).!
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((	Reforming*environmentally*harmful*subsidies	(	119	(	
10.3	 Appendix(3((
(Planned(reforms(	
The( potentials( for( future( reforms( are( under( investigation( of( several( of(
the( mentioned( initiatives( in( chapter( 1.( IEA( (2010)( presents( an( updated(
overview(over(some(announced(reforms(under(planning,(see(table(12.1	.(!	
Table&	12.1.&Plans&to&reform&energy&subsidies&in&selected&countries. &	
China	!	Oil!product!prices!were!indexed!to!a!weighted!basket!of!international!crude!prices!in!2008.!Natural!gas!prices!rose!by!25%!in!May!2010.!Plans!exist!to!remove!preferential!power!tariffs!for!energyintensive	!industries!and!to!extend!tiered!	pricing!for!households.	!	Egypt	!	Plans!to!eliminate!energy!subsidies!to!all!industries!by!the!end!of!2011.	!	India	!	Abolished!gasoline!price!regulation!in!June!2010!and!plans!to!do!the!same!for!diesel.!The!price!of!natural!gas!	paid!to!producers!under!the!regulated!price!	regime!was!increased!by!230%!in!May!2010.	!	Indonesia	!	Set!goal!to!reduce!spending!on!energy!subsidies!40%!by!2013!and!fully!eliminate!fuel!subsidies!by!2014.	!	Iran	!	Plans!to!replace!subsidised!energy!pricing!with!t	argeted!assistance!to!low	Oincome!	groups!over!the!period!2010	t2015.!Reforms!call!for!the!prices!of!oil!products,!	natural!gas!and!electricity!to!rise!to!market	Obased!levels.	!	Malaysia	!	Announced!reductions!in!subsidies!for!petrol,!diesel!and!LPG!as!the!first!	step!in!a!	gradual!subsidyreform!programme.	!	Mexico	!	Intends!to!phase!out!subsidies!to!gasoline!and!diesel!by!the!end!of!2010.	!	Russia	!	Natural!gas!prices!for!industrial!users!are!to!continue!increasing!toward!intern	aO	tional!levels!through!2014!based!on!the!ba	lancing!of!revenues!from!domestic!and!	export!sales.!Pricing!in!the!wholesale!electricity!market!is!scheduled!to!be!fully!liberalised!in!2011.	!	Saudi!Arabia	!	The!Electricity!and!Co	OGeneration!Regulatory!Authority!(ECRA)!plans!minor!	electricity!tariff!increas	es!for!industrial!and!commercial!users.	!	South!Africa	!	Plans!to!increase!electricity!tariffs!by!approximately!25%!per!year!over!2010	t	2013.	!	
Source:!IEA!(2010).!
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