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Patrick ten Brink and Sirini Withana

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Sirini Withana, Patrick ten Brink, Leonardo Mazza and Daniela Russi

A broad definition of environmentally harmful subsidies (EHS) encompasses 'hidden' or implicit subsidies that result from a lack of full cost pricing for the provision of goods and services, lack of resource pricing and non-internalization of externalities. These subsidies can arise due to explicit decisions such as choosing a policy of only partial cost recovery. They can also be due to a lack of actions such as the regulation or taxation of pollution to internalize externalities or putting in place charges that would reflect resource values. Although such a broad definition can lead to difficulties in measuring the scale of subsidies involved, it is important to recognize that such perverse incentives exist and can be quite significant in several sectors. Some may opt to recognize these as subsidies, while others prefer to use the term de facto or implicit subsidies or even refer to them as incentives. This chapter will examine cases of implicit subsidies due to the lack of full cost pricing, including for water, sub-soil assets and fisheries resources, as well as implicit subsidies arising from the non-internalization of externalities. It will provide an overview of these issues and provide examples of their consequences in terms of pollution and overuse of scarce resources in different countries. In addition, it will examine experiences in identifying and addressing such implicit environmentally harmful subsidies that can serve as examples to others considering reform.
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Patrick ten Brink, Sirini Withana and Frans Oosterhuis

There is a growing list of commitments to reform environmental harmful subsidies from the global to the local level. Although public statements of the urgency for subsidy reform and declarations of commitment to such reforms have been increasing, progress to date has been relatively slight, with several notable exceptions. There is a new consensus that the conditions necessary for subsidy reform are increasingly aligned - a growing realization of resource scarcity, an appreciation of environmental and health impacts and a need for fiscal consolidation - creating a range of windows of opportunity between now and 2020 for EHS reform. This chapter presents guidelines to support countries in the identification of EHS, prioritization for reform and principles to guide the reform process. Subsidies are an integral part of political economy and current weaknesses in their design are undermining the potential for the transition to a green economy. There is a need for a systematic approach to address this systemic problem - both by reforming existing subsidies and correctly designing new subsidies for tomorrow's priorities.