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Subsidies to the Use of Natural Resources

Environmental Economics Research Paper No.2
This report was prepared by a consultant,
the National Institute of Economic an Industry Research (NIEIR),
for the Department of the Environment, Sport and Territories.
Commonwealth of Australia, 1996
ISBN 0 642 24864 8

Executive summary

1. This report sets out the findings of a study which examined financial and environmental subsidies to a range of Australian resource activities. Financial subsidies include non-recovery of public management costs, favourable tax treatment, direct contributions and lower than normal rates of return. Environmental subsidies cover the non-payment of environmental disruption costs by the entities causing the disruptions; in economic terms the disrupting activities give rise to environmental externalities. Resource activities examined in the study are energy production and use, water, waste water, solid waste disposal, extraction from forests, agricultural chemicals, natural attractions and extraction from fisheries. A summary of the financial and environmental subsidies considered in the study is presented in Table ES1.

2. Financial subsidies tend to decrease costs and increase activity levels of entities. Environmental subsidies decrease costs for activities that cause environmental disruption and therefore also encourage higher activity levels than might be socially optimal. If financial subsidies are associated with environmental subsidies environmental disruption will tend to be magnified.

3. Removal of financial and environmental subsidies from resource activities is constrained by other policy concerns, for example competitiveness, but if achieved would tend to improve fiscal as well as environmental performance. The improvement of the fiscal performance of governments could be achieved, for example through increased revenues from charges for services and environmental damages and through reduction of treatment and control expenditures by governments.

4. In each of the resource areas studied detailed data on financial and environmental subsidies proved very difficult to obtain. This is especially the case for environmental subsidy data as in many cases market valuation of environmental externalities is lacking; also those valuations that are available are generally contentious because of the estimation approaches used. Where estimates were made of subsidy values, lack of precise data dictated that order of magnitude value ranges be estimated. Valuation of subsidies affecting the environment is a relatively new field of quantitative economic analysis and much more work remains to be done on the valuation and analysis of these subsidies, how they might be removed and what the impact of their removal would be.

In future, it may be appropriate for government entities to identify and quantify subsidies affecting the use or degradation of environmental resources. This may become an important issue in the context of the national agenda for micro-economic reform.

5. The analysis of financial and environmental subsidies in the resource activities reviewed indicated that subsidies are being partially removed in these areas as governments are demanding a wider and more stringent application of the user and polluter pays principles. But the application of these principles is very variable in both the financial and environmental subsidy areas.

6. In the financial subsidies area a very important issue is the payment of user charges, access fees and extraction levies by direct users of community owned resources. Although some analytical and policy development work has been done on this issue in Australia, particularly in the energy field, it is apparent that few efforts have been made to develop a coherent policy framework.

7. A related issue is the apportionment of the cost of public agencies for resource management activities. The trend is to higher cost recovery through the more extensive use of levies and charges on the specific resource industries involved. It appears,however, that more critical analysis of the cost apportionment is required, particularly of claimed benefits to the community at large, that is, the public goods aspects of the agencies’ functions.

8. The environmental impact of subsidy removal was not quantified although an indication of the outcomes is given. This is an area in which further work is needed. Partial or full subsidy removal by the use of financial instruments might not achieve environmental objectives, therefore necessitating consideration of other policy instruments including regulation and information programs.

9. A summary of the results of the subsidy analysis in each resource area is provided in Table ES2. Briefly the summary indicates that substantial financial subsidies remain, particularly in the water sector, and that environmental subsidies are probably significant in all sectors but quantification of them is seriously deficient.

The subsidy estimates provided in Table ES2 provide order of magnitude indications of the subsidies judged to be amenable to quantification from available sources. As discussed in the main body of the report the estimates and the data they are drawn from vary considerably in accuracy.

10. In this study it is estimated that government payments and revenue foregone, through financial subsidies to the use of natural resources, totalled at least $5.7 billion in 1993–94, equal to 4.4 per cent of the total revenue of Australian governments. Environmental subsidies, for those areas covered by the study, and where quantified estimates were possible, amounted to at least $8 billion, equal to a further 6 per cent of total government revenue.

11.In total the subsidies for which quantified estimates have been made amount to $13.7–14.8 billion. These amounts are significant both in relation to GDP (3.2 to 3.5 per cent) and to the total of the budget deficits of the federal and State governments (about 77–83 per cent). It should be noted, however, that a significant proportion of any increase in revenues might be required to control and repair environmental damage, and raising the revenues will have varying effects on the activities from which they are raised.

12. These totals overestimate the revenue which could be recouped from removal of financial subsidies and imposition of the environmental charges which have been estimated, if only because the imposition of charges would reduce the level of exploitation of natural resources. However, it should be emphasised that lack of data prevented quantification of many environmental subsidies, and the figures presented here should be regarded as a low rather than a high estimate of the total.

13.More detailed studies of the subsidies in each resource activity would provide more robust estimates and improved understanding of the subsidies involved. Priority areas for further study would be the water, waste water, solid wastes, energy/transport and agricultural input activities, the valuation of water and air quality, biodiversity impacts and the opportunity costs of forestry operations. Also of priority for further analysis is the evaluation of policy instruments to remove subsidies including an assessment of the financial, economic and environmental impact of the instruments.

14.A further priority for further study is the international dimension of the subsidies. This examination would cover both international environmental problems, e.g. the enhanced greenhouse effect, and the impact on the economy and the environment of subsidy removal in each area.Removal of subsidies on internationally traded resources and inputs into traded goods, for example water inputs to agricultural products, is often constrained because of competitiveness concerns. International negotiation and cooperation will be needed to remove many of these constraints.

15. A strength of this study is the insights it provides on the financial and environmental subsidies in the resource activities examined; a weakness is that, given the wide scope of the study and the resources available, it was not possible to examine and analyse the eight resource activities in detail. This points to a need for systematic and comprehensive reporting by public management agencies on subsidies to the use of natural resources.

Table ES1: Summary of subsidies, removal policy instruments


Resource sector/use Financial subsidies Environmental subsidies Subsidy removal instruments
1. Energy production and consumption

Fossil fuels

  • coal
  • natural gas
  • oil
Direct subsidies, low access fees, tax treatment, public agency costs. Atmospheric emissions (CO2, SOx, NOx, CH4, particulates); also land and water impacts of these activities.(see note below) Removal of financial subsidies (competitive neutrality, recovery of public agency costs, etc.), improved pricing (user charges) and imposition of environmental charges (externality pricing, levies). Regulation (standards, tradable quota instruments).
Renewable energy Direct subsidies, tax treatment, public agency costs. Water flows (hydro), atmospheric emissions (biomass), noise (wind), aesthetics (solar). Competitive neutrality policies, environmental charges. (Note that subsidies may be appropriate for renew-able energy industry development.)
Electricity Returns to capital, tax treatment. Transmission impacts (aesthetics, electro magnetic fields). Competitive neutrality policies, environmental charges, regulation.
Energy use Direct subsidies, public agency costs. Atmospheric emission and other by-product impacts. Competitive neutrality policies, environmental charges, regulation.
Road transport Road use costs and charges (excises, etc.). Atmospheric emission (NOx, VOCs, CO2, CO, particulates, etc.) and other by-product impacts.(see note below) Flora and fauna impacts. Noise.Run-off. Competitive neutrality policies, improved pricing, environmental charges, regulation.
2. Water
  • catchment (water supply, hydro); distribution (pipelines, pumping facilities, etc.)
Returns to capital; capital and recurrent subsidies; taxation; public agency costs.

Charges not related to use, non-recovery of some costs.

Flora and fauna effects, reduced flow effects, cold flow effects from dams, greenhouse impacts (methane); land disturbance.

Effects of irrigation over-use.

Competitive neutrality policies, e.g. commercial pricing, normal rates of return; regulation; environmental charges. See Waste water below.
3. Waste water treatment and disposal (Covers water-borne effluents in all sectors: untreated drainage, sewer-age systems and other treatment plants)
  • treatment
  • ultimate disposal
Returns to capital, tax treatment public agency costs, direct subsidies. Water quality impacts of liquid wastes disposal into streams etc.on humans, animals, fish, plants, tourism activities, etc. Competitive neutrality policies, environmental charges, regulation.

Nutrient rich waters could be usefully disposed of, e.g. onto land for agricultural and forestry purposes.

4. Solid waste disposal (By recycling, land fill, incineration, stockpile, illegal dumping) Below normal rates of return, taxation, public agency costs. Leaching from landfill sites into streams/ oceans; litter, odours, greenhouse and other atmospheric emissions (CO2,CH4, etc.), particulates (dust, etc.) from landfill and incineration. Competitive neutrality policies, regulation, improved pricing, environmental charges.
5. Extraction of forest products (Covers forestry operations, not forest product plants such as pulp mills) Access fees/royal-ties, public agency costs. Soil erosion; flora and fauna effects and reduction in bio-diversity; aesthetics; green-house impacts; and water catchment impacts (reduction in water production, siltation and effects of turbidity); loss of tourism and other economic potential. Competitive neutrality policies,restructured access fees, regulation, environmental charges.
6. Agricultural chemicals
  • fertilisers,
  • pesticides,
  • herbicides,
  • fungicides.
Direct subsidies, public agency costs, tax treatment. Stream (e.g. blue-green algae) and ocean (e.g. Great Barrier Reef) water quality degradation affecting down-stream and ocean water users (effects on incomes, health, overall utility); fauna and flora bio-diversity effects; human health effects from application methods.

Impacts are associated with effects of other farm practices (land-clearing, over stocking, and tillage).

Competitive neutrality policies, regulation, environmental charges.

Promotion of alternative pest control and fertilisation methods and optimal use of pesticides and fertilisers.

Sustainable agriculture (Landcare, etc.) programs.

7. Use of natural attractions for recreation and tourism Low/no user charges, public agency costs. Biodiversity (fauna and flora) impacts, degradation of areas. Higher access charges, regulation, environmental charges.
8. Extraction from public fisheries (Covers fishing operations but not on-shore fish processing plants) Access fees/tax treatment, public agency costs. Intergenerational externalities (unsustainable stocks); effects of fishing activities on non-target species (by-catch) and other wildlife. Competitive neutrality policies, restructured access charges, licensing regulation, environmental charges.

Note: CO2 = carbon dioxide, SOx = oxides of sulphur, NOx = oxides of nitrogen,CH4 = methane, CO= carbon monoxide, VOCs = volatile organic compounds.

 

Table ES2: Summary of subsidies to the resource activities studied


Activity element Financial subsidies ($ millions, 1994) Environmental subsidies ($ million, 1994) Subsidy removal instruments Fiscal implications ($ millions, 1994)
1. Energy
- Production. primary sources (fossil fuels, renewables) and electricity

$0.795 billion
Not estimated for coal,oil, gas, renewables due to data gaps.

$2.505 billion (electricity) $1.371 billion (non-electricity greenhouse)

Pricing to include externalities, removal of subsidies, tradable permits. Effect depends on:
  • level of government considered
  • impact on revenue base e.g. industry profits).
- End-use (transport fuels/roads, other uses) $1.200 billion $200 million to $1.320 billion. Removal of subsidies,
externality pricing. Direct road pricing in urban areas. Regulation. Information (e.g. Iabelling) programs.
$6.071-$7.191 billion.
Total $1.995 billion for production and use (see Table 8).

Further revenue foregone of $1.17 billion would be added if the Diesel Fuel Rebate Scheme were treated as a subsidy.

$4.076-$5.196 billion (see Table 8). $6.071-$7.191 billion.
2. Water Low returns on capital and inappropriate pricing structures, particularly in rural areas

$3,322 billion (see table 11).

Not estimated.

Water over-use contributing to salinity and other problems, e.g. in Murray-Darling Basin.

Raise prices/charges and change revenue/price structures. Changes to water system charges would reduce State budget expenditures on water departments/agencies.

$3,332 billion

3. Waste water Difficult to seperate out from water authority finances, hence forms part of the water subsidies Substantial costs involved in reducing waste water impact on all aspects of water quality

$3,500 billion (see table 14)

Raising charges and prices and change structures.

Tradeable
Regulation
Waste agreements
Tradeable permits

See water above; higher prices/charges would provide more control/restoration funds to treatment and other agencies.
4. Solid waste disposal $70 million (see Table 15) $140 million (see Table 15) Raise charges to:
-waste producers and
-waste disposers

Regulation of waste production and disposal.

Tradeable waste permits.

Could raise government (mainly local) revenues by over $100 million on present disposal patterns and practices.

$210 million

5. Extraction of forest products $100 million (see Table 16) Not estimated User charges based on real resource cost estimates, including damage and/or restoration (reforestation, etc) costs.

Regulation of forest use.

Removal of high conservation value areas would result in reduction of revenues, but could be offset by higher use charges elsewhere and revenues from non-timber activities.
6. Natural attractions Low on no user fees; management costs substantial.

$160 million (see Table 19)

Very difficult to value damage caused by direct users.

-

Higher direct user fees (access, activities) but exclusion costs may be higher.

Regulation of use.

Increased revenue - mainly to State governments, but also to Commonwealth and tribal owners; amount depends on public goods considerations.

$160 million

7. Agricultural chemicals $515 million is allocated to the agricultural sector under the diesel fuel rebate scheme (DFRS) of which $40 million might be attributed to agricultural chemical application. This estimate is contentious and not included in the total as the primary rationale for the DFRS is the non-use of road by off-road vehicle activities. Not estimated Internalise subsidies.

Regulate use.

Transferable chemical use quotas.

Introduce chemical use charges to reflect use damage.

8. Extraction from public fisheries. Extraction/access fees appear low on basis of management costs and potential returns to fishing operations, i.e. both management and pricing can be improved.

$85 million (see Table 27).

Sustainability a major issue but adequate technical knowledge lacking; improved control/management costs to enhance sustainability estimated. Impacts of by-catch, fishing operations.

$30 million (see Table 27).

Higher extraction/access fees, auction of access/extraction licences.

Tradeable permits.

Environmental charges.

Regulation of access and use.

Fisheries sector revenue collections by government could be substantially increased.

$120 Million.

TOTAL subsidies estimated from all activities studied where quantified estimates have been made $5.732 billion $7.746 - $8.866 billion $13.478 - $14.598 billion.
3.1 - 3.5 % of GDP

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