The International Yearbook of Environmental and Resource Economics 2004/2005

The International Yearbook of Environmental and Resource Economics 2004/2005

A Survey of Current Issues

New Horizons in Environmental Economics series

Edited by Tom Tietenberg and Henk Folmer

This major annual publication provides a state-of-the-art survey of contemporary research on environmental and resource economics by some of the leading experts in the field.

Chapter 7: Environmentally harmful subsidies

Jean-Philippe Barde and Outi Honkatukia

Subjects: economics and finance, environmental economics, environment, environmental economics


Jean-Philippe Barde and Outi Honkatukia1 INTRODUCTION Every year, OECD countries give about US$400 billion in subsidies to different economic sectors. The objectives of governments’ subsidies to various economic activities are often presented as to promote economic growth, employment and incomes. Subsidies distort prices, affect resource allocation decisions and change the amount of goods or services produced and consumed in an economy. Policies providing subsidies are generally introduced for various social or economic reasons, but they can have unintended negative effects on the environment that are generally ignored. Subsidies can thus result in a policy failure (see below) and be harmful to the environment. In agriculture, for example, they can lead to the overuse of pesticides and fertilizers and in fisheries to the overexploitation of the fish stock. Fuel tax rebates, subsidies for road transport, and low energy prices generally stimulate the consumption of fossil fuels and greenhouse gas emissions and increase congestion and air pollution. Over the past 20 years, the OECD has made significant progress in the measurement and analysis of subsidies for sectors such as agriculture, coal production and fisheries. Factors contributing to the relatively modest progress in measuring support for other sectors range from complex methodological and data issues to a lack of political will to provide reliable and internationally comparable subsidy figures in some areas like manufacturing. Tradeoffs are made both at national and international levels as data collection is often resource intensive and aggregate subsidy estimates are only as good as the underlying data....

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