Environmentally Harmful Subsidies and their Reform
Edited by Frans H. Oosterhuis and Patrick ten Brink
Chapter 12: Reform of environmentally harmful subsidies: distributional issues
Environmentally harmful subsidies are often motivated by the benefit they give to low-income groups. If reform is to succeed, some form of compensation may be desirable. However, in a concrete situation unwarranted claims for compensation may arise, and compensation may be carried out in a less effective way, leading to unsuccessful outcomes. What then are the key distinguishing features of a compensation policy that enables successful reform of environmentally harmful subsidies? Based on economic theory and case studies from around the world we suggest three steps to successful compensation in environmentally harmful subsidy reforms: we first discuss how to identify winners from the subsidies, then who should be compensated and finally how to compensate.
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