Available data indicate that subsidies are pervasive throughout OECD countries and worldwide. Every year, OECD countries transfer at least USD 400 billion to different economic sectors. Much of this support is potentially environmentally harmful. Subsidies distort prices and resource allocation decisions, altering the pattern of production and consumption in an economy. As a result, subsidies can have negative effects on the environment that are unforeseen, undervalued or ignored in the policy process. For example, fuel tax rebates and low energy prices stimulate the use of fossil fuels and greenhouse gas emissions and subsidies for road transport increase congestion and pollution. Agricultural subsidies can lead to the overuse of pesticides and fertilizers, and in fisheries to the overexploitation of fish stocks...

This synthesis report provides an extended summary of the findings of the horizontal project on environmentally harmful subsidies. It addresses the definition of subsidies and presents a checklist approach to identifying when the removal of subsidies is likely to have a beneficial effect on the environment. The report then presents the key findings from the case studies conducted as part of the project. The sectors examined were agriculture, fisheries, transport, energy and water. The range of issues involved in the reform of environmentally harmful subsidies is discussed in the last part of the report, focusing on the political economy of subsidy policy reform.

The objective of this chapter is to develop a checklist that could help identify subsidies whose removal would benefit the environment most. The checklist focuses on two interrelated issues: the effects of subsidy removal on producers’ and consumers’ decisions; and the directness of the link between those decisions and the environment. The effects of subsidy removal on producers’ and consumers’ decisions depend on the overall policy setting of the subsidy (including environmental policy measures), on its conditionality, the availability of alternatives, and the nature of competition on factor and product markets. Since the environmental impact of subsidies depends on numerous factors, the checklist cannot substitute for a thorough analysis of the subsidies under consideration for removal. It can, however, serve as a first “quick scan” of subsidies that are likely to yield environmental benefits when removed and identify important elements that should go into an in-depth analysis.

The removal of environmentally harmful subsidies offers the tantalising prospect of a win-win” situation for both the economy and the environment. Yet, despite growing environmental awareness and pressures on government budgets, governments around the world have been reluctant to dismantle perverse subsidies. This chapter therefore attempts to identify the political and economic impediments to subsidy reform in developed economies. Since government policies are ultimately a consequence of political choices, it is necessary to examine the political incentives and motives of policy makers. Accordingly, three main issues are addressed here. First, the reasons as to why otherwise responsible governments support policies that are both economically and environmentally harmful are identified. Second, the tactics used by various groups to influence policy decisions are discussed, providing insights into the reasons why governments shelter some sectors to the detriment of society at large, but not others. Finally, in the light of these political realities, the discussion examines ways of tackling some of these obstacles and impediments to reform.

OECD Ministers asked the OECD Secretariat to initiate work on environmentally harmful subsidies in 2001. In 2004 they renewed their long-standing commitment to reduce trade distorting and environmentally harmful subsidies. The World Summit on Sustainable Development had also addressed the problem of environmentally harmful subsidies and the adopted Plan of Implementation includes several references to them. While the OECD is internationally recognised as a leading organisation in the field of subsidy measurement and analysis, especially for agriculture, fisheries and coal, the work is characterised by a range of methodological approaches, patchy and incomplete data, and non-comparable subsidy estimates across the various sectors...