Paying the Polluter
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Paying the Polluter

Environmentally Harmful Subsidies and their Reform

Edited by Frans H. Oosterhuis and Patrick ten Brink

Pledges to reform environmentally harmful subsidies (EHS) have increased over the past few years, at both global and national levels. Paying the Polluter addresses the most important issues to be considered when embarking upon these necessary reforms.
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Chapter 3: Hidden subsidies: the invisible part of the EHS iceberg

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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