- Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Ana Yábar Sterling, Pedro Herrera, Janet E. Milne and Hope Ashiabor
Chapter 9: Harmful subsidies on fossil fuels: ETS windfall profits and coal protection for electricity in Spain
Over the last decade, institutions such as the OECD or the EU have been advocating the removal of environmental harmful subsidies (EHS) and incentives as incompatible with sustainable development. On 21 October 2009 the EU Council decided on an urgent review of these subsidies, sector by sector, in order to identify and eliminate them, pointing out that they are in total opposition to the relevant ground rules for environmental policy, especially the EU goals with regard to energy and climate change. Furthermore, at the end of 2009 the leaders of both the G- 20 countries and the Asia- Pacific Economic Cooperation (APEC) forum made the commitment to phase out inefficient fossil- fuel subsidies. One of the main obstacles to success is rooted in the concept itself. If we assume, as the WTO- SCM Agreement does,1 that the term subsidies includes direct government payments along with foregone revenues, and accepting the approach put forth by Cox,2 EHS are those subsidies whose removal would lead to environmental improvement, ceteris paribus. A similar definition of EHS was adopted by the OECD3 over a decade ago: ‘a subsidy (that) encourages more environmental damage to take place than what would occur without the subsidy’. However, as Steenblik (2003) pointed out,4 an extended debate on the definition of subsidies is common to many economic sectors and differs between scientific approaches. Particularly relevant for the scope of this chapter is the emergence of the concept of implicit subsidies developed by environmental economists: those which arise from the failure to internalise externalities. A review of recent literature leads to the conclusion that a practicable definition of EHS is not yet available.
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