Determining the environmental effects of indirect subsidies: integrated method and application to the Netherlands

Abstract

The term 'environmentally damaging subsidies' covers all sorts of direct and indirect subsidies with negative consequences for the environment. This article presents a method to determine the environmental impact of these subsidies. It combines a microeconomic framework with an environmental impact module. The method is particularly useful for analysing indirect subsidies. These are often hidden, and therefore, not recognized as subsidies. Use of the method will provide a basis for formulating corrective policy. The method is applied to several important subsidies in the Netherlands, in agriculture, energy and transport sectors. The results reveal large environmental effects, which deserve serious attention from policy makers. To illustrate the specific features of the method, its application to a particular subsidy, namely the exemption of excise taxes on aviation fuels, is presented in full detail.

Subsidies in Aviation

“…Consequently, if subsidies are present, they can lead to the expansion of aviation systems to the extent where significant shares of GDP and employment depend on this industry, as has been argued to be the case of Dubai [91]. In the context of on-going debates on the regional development potential of aviation, as well as discussions of its environmental impacts, it would thus seem relevant to discuss the importance of subsidies in purported effects of aviation on economic growth and job generation, or in relation to the cost of climate change and other environmental externalities, but this is rarely done (e.g., [5][6][7][8]26]). …”

“…The Organisation for Economic Co-operation and Development (OECD) consequently defines subsidies as "any measure that keeps prices for consumers below market levels, or for producers above market levels, or that reduces costs for consumers or producers" [25] (p. 114). This paper follows OECD by defining subsidies as any form of financial aid or in-kind support extended to the aviation sector or its supply chain (for a taxonomy of subsidies see also [26]). …”

Relationship between Fiscal Subsidies and CO2 Emissions: Evidence from Cross-Country Empirical Estimates

“…The reduction in per unit cost aided by subsidies often influences choice of production techniques and facilitate overexploitation of natural resources, overproduction, and subsequent climate change concerns [8,30]. Similar subsidy-led adverse environmental impacts are considerable in several resource-intensive sectors, for example, primary sector (e.g., agriculture, fisheries), transport, energy, and water [31][32][33][34][35][36]. Overproduction in agricultural sector and consequent biodiversity loss is often caused by provision of input subsidies (e.g., fuel, fertilizer, and pesticide subsidy), which incentivizes their overuse by lowering per unit variable costs for the farmers [6].…”

Why is the subsidy on fertilizers for rice in Sri Lanka continued?

“…Much of the concern there revolves around distortions to international commodity trade (CluniesRoss 1990; Rayner et al 1995;Sharma 2004;Elliot 2006;Abboushi 2007;Yusuf 2009), environmental impacts (Bradshaw and Smit 1997;Santos et al 2006;Gottschalk et al 2007;van Beers et al 2007), and the effectiveness of agri-environmental payments (Kleijn et al 2001;Kleijn and Sutherland 2003;Primdahl et al 2003). But market failures and Marxist economics embodying "excessive economism" and "top down structuralist assumptions" continue to dominate the discussion.…”

“…In the long-term, large-scale investments in subsidies have often resulted in economic inefficiencies, imposing a burden on government budgets and taxpayers (Gulati and Sharma 1995;Kleijn et al 2001;Govereh et al 2002;Dorward et al 2004;Fan et al 2008;Anderson and Martin 2009a;Dorward 2009). Adding to this issue of sustainability, are the environmental and social damages of subsidies that often cross geographical and generational boundaries (de Moor and Calamai 1997; Van Beers and Van den Bergh 2001;OECD 2005OECD , 2007van Beers et al 2007). …”