Environmentally Harmful Subsidies and their Reform
Edited by Frans H. Oosterhuis and Patrick ten Brink
Chapter 4: Can we recognize an environmentally harmful subsidy if we see one?
Defining a subsidy, assessing its magnitude and the seriousness of its environmental damage includes many economic and environmental variables and requires many conventions and assumptions that are political in nature. As a result, studies based on the difference between the subsidized and non-subsidized state are complex and convincing only in so far as the underlying conventions and political views are shared. Nevertheless, subsidies may influence the present and future environment in many ways, in particular by stifling technological change and reducing responsiveness to environmental demands and regulation. This chapter presents critical remarks concerning analyses that compare environmental effects of moving from a subsidized to a non-subsidized state, and outlines an alternative approach for assessing whether removing a particular subsidy is likely to have beneficial environmental effects. Central to this approach is that the various conditions under which subsidies are granted (statutory incidence) have stark differing effects on decisions made by the polluter. The more this statutory incidence slows down technological change, the more the subsidy is likely to damage the environment. Statutory incidence might therefore serve as a predictor of probable environmental benefits of subsidy removal and could be used as part of an assessment process to prioritize subsidies for reform. Subsidy reform is best undertaken as a part of wider policy reform, because of the complicated interactions between various policies, the taxation jurisdiction, autonomous changes and technological development.
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