Reforming environmentally harmful subsidies

How to counteract distributional impacts

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Reforming environmentally harmful subsidies: How to counteract distributional impacts The report discusses the theoretical principles for an efficient environmental and distribution policy and offers a comprehensive survey of experiences from policy reforms in different countries. The reform survey forms a background to recommendations for implementation of sustainable policy reforms, taking care of environmental, economic and distributional concerns. It particularly brings in the Nordic experiences, both to enlighten the problems with environmentally harmful subsidies in these countries, and to discuss what can be learned from the experiences in a broader international context. The analysis has been carried out during the period October 2010 – May 2011. The study was carried out by Vista Analyse AS and commissioned by the Nordic Council of Ministers for the Environment.




Subsidies are justified in theory to promote overall increase in social welfare. Typically, subsidies are used to adjust for market failures and income distribution. In practical policy around the world, the use of subsidies does not follow economic theory. Many subsidies are inefficiently targeted at environmentally harmful activities rather than at the particular income groups needing support, and in some cases the effects counter the intention of subsidies. Typical examples are the subsidization of environmentally damaging energy production and consumption. Fuel subsidies are frequently used to support low income groups, and subsidies to coal extraction are given to support competitiveness in industries and employment. Exemptions from environmental taxes for industries out of competitiveness concerns are also common.


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