Environmentally Harmful Subsidies in the Water Sector

1. Environmentally Harmful Subsidies in the Water Sector R. Andreas Kraemer Ecologic Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

2. Preview • Taxonomy of subsidies in the water sector • Environmental effects of subsidy removal • Pieters’ Checklist Approach for detecting Environmentally Harmful Subsidies • Background & scope • Lessons learned • New OECD project (2004) on subsidisation in the water sector Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

3. Low interest loans; • Underpricing; • Substandard rate of return; • Debt relief for infrastructural investment projects; • Tax exemptions (e.g.: water supply services are exempt from VAT); • Subsidies for building new or upgrading existing water plants; • Subsidies to operation & maintenance costs; Water Catchment Surface & Groundwater • Charges below cost recovery; • Environmental externalities not included; • Substandard rate of return; • Financial assistance for irrigation water abstraction; • Indirect subsidy via tax exemption (e.g. groundwater abstraction tax); • Compensation payments for environmentally friendly farming practices; Water Abstraction Water Distribution/ Storage/ Supply Network Agriculture Industry Households -Cross-subsidisation; - Interest-free loans for infrastructural investments; - Underpricing; - Investment subsidies; Water Use • Financial assistance / low interest loans for infrastructure; • Financing investments / operating costs of water works; • Retrofitting of water-using installations; • Financed water supply to ensure a lower price for citizens; Waste Water Collection Network Waste Water Treatment Water discharge to the environment Taxonomy of Water Subsidies (Extract) Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

4. Negative Effects Overabstraction Drawdown Degradation of water based eco-systems Inefficient resource use Cultivation of water inefficient crops Declining fertility Technological lock-in Positive Effects Reduced wastage (upgraded distribution infrastructure) Reduced water use (water saving appliances) Water quality improvements (e.g. increased treatment) Possible Environmental Effects Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

5. Pieters’ Checklist Approach I • Most OECD countries operate substantive subsidisation schemes in the water sector with significant budgetary allocations • Aims of Pieters’ checklist (2002): • Identify preferable options for subsidy reform • Provide a decision-making tool for policy-makers  Quick-Scan procedure that allows to concentrate further reform efforts Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

6. Step 1: Description of the subsidy Step 2: Policy filter effectively limits env. damage Y Subsidy removal is NOT likely to have significant environmental benefits N N Step 3: Benign alternatives available (now or future) Y N Step 4: Size & conditionality lead to higher volumes Y Y Effects indeterminate - could be large - Step 5: High concentration of market power N Step 6: Subsidy removal is likely to have significant environmental effects Pieters’Checklist Approach Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

7. Lessons learned I Strengths of Pieters’ checklist • Practical decision making tool for systematically approaching subsidy reform • Necessitates categorisation and prioritisation of alternative options - increases transparency • Enhances consistency and comparability of decisions • Application to real-life cases (AU, NZ): Checklist captured most important outcomes Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

8. Lessons learned II Limitations and possible remedies • Quick scan procedure favours focus on short run environmental effects  Scale of effects is important: nature and severity of environmental damage should influence the ranking of reform options Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

9. Lessons learned III • Important to account for specificity of the water sector when applying the checklist: • Long life-span of capital assets and investment goods • Water services: contribution to public health • Redistributive effects Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

10. Flanders Austria France Germany Public-private partnership waste water Public-private partnership WSS Agences de l‘Eau Loan programmes after Unification OECD Study (June 04) - I Mechanisms for Managing Public Environmental Expenditures in Selected OECD countries • Analysis of public environmental expenditure programmes in the water supply & sanitation sector • Four countries / systems Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

11. OECD Study (June 04) - II • Task: Analysis of programmes using the OECD/EAP checklist for good practices in PEEM • 3 Dimensions • Environmental effectiveness • Fiscal prudence • Management efficiency • Goal: Provide reference for • National and regional policy makers in economies in transition • Representatives of lender organisations Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004

12. Environmentally Harmful Subsidies in the Water Sector R. Andreas Kraemer Ecologic, Pfalzburger Str. 43-44, D-10717 Berlin +49-30-86880-0,  +49-30-86880-100 kraemer@ecologic.de, www.ecologic.de Environmentally Harmful Subidies and Ways to Eliminate Them, Budapest, 2-3 September 2004