Improving the Environment through Reducing Subsidies

Substantial amounts of money continue to be spent in OECD Member countries on measures to support agricultural, energy, transportation and industrial activities. Many of these support measures encourage the emission of environmentally-harmful pollutants, the generation of waste, and the excessive use of natural resources, and constitute a large drain on government budgets. In addition, much of the money spent on support may not reach the intended recipients as it can leak away to other sectors of the economy instead. As such, it is likely that the reform or removal of these subsidies could lead to "win-win" benefits through increased economic efficiency, reduced government spending and improved environmental quality.

Building on the vast literature on the subject as well as on the available statistical data on subsidies, this publication summarises the results of an OECD study on how economic support measures actually affect the economy and, as a result, the environment. Although the effects of a given support measure on the environment will be determined by a number of different factors, this study finds that releasing market forces through support removal and increasing the effectiveness and efficiency of regulations can lead to significant environmental benefits.

The report develops an analytical framework which enables policy makers to identify those support measures whose removal is most likely to lead to "win-win" benefits. It also offers recommendations to implementing reductions in environmentally-harmful subsidies -- especially those that run counter to environmental objectives that are shared by OECD Member countries -- and to overcome the often exaggerated fear of a loss in competitiveness.