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Alternative Policy Study: Resource Use in North America

This study was carried out by the World Resources Institute (WRI), USA, in collaboration with the International Institute for Sustainable Development (IISD), Canada, as part of the preparation for UNEP's GEO-2000 report.

Summary

This study deals with policies that alter fiscal incentives - reducing or eliminating environmentally-perverse incentives and increasing incentives for constructive change. Subsidies on resource use in the United States in 1996 were estimated to be about US$30 000 million for energy and probably more than US$90 000 million for transport. Agricultural producer support in 1998 amounted to about US$47 000 million.

Reducing or eliminating direct and indirect subsidies for road transport, energy use, grazing and timber production could play a significant role in environmental improvement. The potential benefits of such reforms include reducing traffic congestion, improving urban air quality, increasing competitiveness, and slowing the increase of carbon dioxide emissions to meet climate goals.

Contents

Introduction

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Over the past three decades, North American environmental policies have been reasonably successful at dealing with conventional, mostly local, environmental problems such as air and water pollution. The scale of the region's economic activity has brought increased well-being and opportunities for the North American population.

The downside of this robust economy, however, is increased stress on environmental quality, with major impacts regionally and worldwide. Perhaps the most obvious example of such environmental stress is the fact that North America remains, on a per capita basis, the world's largest source of greenhouse gas emissions that alter the Earth's climate. Contributing to these emissions is heavy dependence on automotive transport and sprawling suburban residential patterns that put heavy demands on energy resources.

The region's robust economy also draws heavily on other natural resources - water, forest products, agricultural goods, fisheries and minerals - sometimes contributing to environmental degradation. Policies favouring low-cost energy and subsidies for natural resource extraction may encourage high levels of production and use and thus make it more difficult to attain environmental goals. Alternative policies are thus worth examining, both to enhance environmental quality locally, regionally and globally, and because North America's policies often provide a model for other regions.

Given that North American economic activity has both beneficial as well as harmful effects, alternative policies that change the pattern of economic activity in ways that reduce environmental harm without retarding overall economic growth are worth careful consideration. Policies that alter fiscal incentives - both reducing or eliminating perverse incentives and increasing incentives for constructive change - seem to offer particular promise. Such alternative policies are the focus of this paper.

Subsidy Reform

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Subsidies for natural resource extraction are one widely-used type of fiscal incentive. The United States, for example, indirectly subsidises logging in national forests by providing logging roads built with public funds, and grazing of livestock on federal lands by charging less than market rates for grazing permits (US Congress 1995). Similar subsidies support the use of water for irrigation in the arid, western portions of the country and mineral extraction on public lands. Until recently, the United States provided large direct subsidies to agriculture - about US$68 700 million in 1996 - although some of these are now being phased out; a corresponding figure for Canada is US$4 800 million (OECD 1996). Energy subsidies in the United States, according to one recent estimate, amount to perhaps US$30 000 million per year (Myers 1998). United States farmers using irrigation water from federally-supported projects pay on average only about 17 per cent of the actual cost; the total water subsidy in the western United States is estimated at about US$4 400 million (Repetto 1986, Pimental 1997).

Subsidies for road transportation are also large. The United States, with 190 million vehicles and more than 6 million kilometres of roads, has the world's largest road transportation system. Road transport accounts for 80 per cent of the energy used in transport in the United States and 25 per cent of the country's carbon dioxide emissions. Subsidies for road transport include those for road construction, oil extraction, automotive research and safety programmes, highway patrols, and related government programmes. They have been estimated at US$91 000 million per year (Roodman 1996). Other related subsidies include those for parking, estimated at US$50 000 million per year (Myers 1998). Subsidies for road transportation may compound the direct subsidies provided to agriculture or mineral extraction.

Natural resource and transport subsidies have many appropriate purposes, such as stimulating economic or social development, protecting communities, or reducing dependence on imported resources. But subsidies can become viewed as permanent entitlements that are difficult to eliminate, even after they no longer serve their original purpose. In some instances, natural resource subsidies can become perverse, encouraging uneconomic practices and leading to severe environmental degradation. Without subsidies for irrigated water that can run as high as US $500 per hectare, for example, farmers in the western United States would be less likely to grow rice and other water-intensive crops in arid regions. Without crop supports, farmers would be less likely to overuse fertilisers and pesticides, a major source of water pollution through run-off.

Conversely, reforming subsidies can have both economic and environmental advantages. The direct cost of natural resource subsidies can be very large, in excess of 2 per cent of GDP (de Moor and Calamai 1997, Myers 1998). Reforming unnecessary subsidies can thus reduce government expenditures. At the same time, reducing or eliminating subsidies can encourage more efficient use of a resource and help reduce pollution or other environmental degradation. Without energy subsidies, for example, energy prices would rise, encouraging the adoption of more efficient vehicles and industrial equipment and reducing pollutant emissions. And without road transport subsidies, traffic congestion, urban air pollution and carbon-dioxide emissions might well be significantly reduced. Reforming subsidies by reducing or eliminating governmental support for practices that undermine environmental quality is thus an important, if often controversial, area for policy action.

Timber production on United States government land is one area in which subsidy reform has been proposed. Although other factors contribute to the federal timber subsidy, roads figure prominently in below-cost sales (Mock 1995). Under the 1964 Forest Roads and Trails Act, the United States Forest Service can require purchasers of timber on the national forests to build roads specified in the timber sale contract (US Congress 1992). Through the use of 'purchaser road credits', the Forest Service essentially trades timber for roads, by allowing a purchaser to deduct the price of a logging road from the amount owed for timber (Mock 1995). The environmental costs of road construction within forests can include habitat fragmentation, stream sedimentation, soil erosion and more frequent and severe mudslides and flooding (Friends of the Earth 1997). An alternative United States policy could abolish purchaser road credits and eliminate taxpayer support for building logging roads for the timber companies.

Similarly, United States policy could eliminate subsidies for grazing livestock on public lands. The United States Forest Service and the Bureau of Land Management administer the country's livestock grazing programme. The two agencies charge ranchers a fee based on an 'animal unit month', or AUM, which is the amount of forage that one adult cow with a calf or five adult sheep require for one month. Studies show that the fees do not cover the costs of administering the programme, and that they are below the market rate for grazing on private lands (Maxwell 1995). Such subsidies are opposed by those who argue that low grazing fees and lax supervision have encouraged overgrazing and have led to soil erosion, watershed destruction, loss of native grasses and other vegetation needed as food for wildlife and livestock, and the elimination of forage reserves needed to withstand periodic drought (Friends of the Earth website, Hess and Holechek 1995). The most direct reform policy would be to raise grazing fees to cover the administrative costs, or to match estimates of market value (Maxwell 1995), thus eliminating subsidies.

Reducing or eliminating direct and indirect subsidies for road transport could play a significant role in reducing congestion, improving urban air quality, and slowing the growth of carbon dioxide emissions to meet climate goals. Without parking subsidies, for example, many people might choose mass transit alternatives where they exist. Subsidised investments in road construction can have enormous leverage, since they appear to have a significant influence on per capita automobile travel rates (Litman 1996).

Environmental Tax Reform

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In current industrial economies, there are visible costs that are paid by economic actors and external, hidden costs from environmental degradation that are paid by society as a whole or by other economic actors. In the case of air pollution from energy production, for example, those external costs might be born by the population at large in the form of health costs and by other economic sectors such as agriculture in the form of reduced productivity. If energy producers had to bear these costs too, then alternative, less-polluting energy sources might become more competitive. One way to internalise these hidden costs is through taxing pollution, resource depletion, or ecosystem degradation. The impact of taxes in the marketplace makes them potentially powerful policy tools to offset or reduce environmental costs.

Environmental taxes have already been used in a number of instances in North America by individual states in the United States, by Canadian provinces, and by national governments. Ontario, for example, has implemented a Tax for Fuel Conservation that taxes new car purchases based on their fuel efficiency and offers rebates for the most efficient vehicles. For more than a decade, California has offered state tax credits for renewable energy producers that have helped to stimulate the industry within the state. At a national scale, the United States tax on ozone-depleting chemicals is credited with helping to phase out production of these chemicals in a rapid manner, supporting United States commitments under the Montreal Protocol.

Taxes on greenhouse gas emissions such as carbon dioxide have been proposed as one policy measure to help the United States and Canada reduce these emissions and thus lower the high burden that North America places on the global climate (Dower and Zimmerman 1992). Such taxes, known as carbon taxes, are controversial, even though their ability to reduce emissions is not in doubt. There is strong resistance in North America to higher energy taxes, and some economic studies argue that taxes high enough to markedly reduce emissions would also slow economic growth. However, Scandinavian countries including Finland, Sweden and Denmark have introduced such taxes, providing a strong incentive for greater energy efficiency and for fuel-shifting to renewable energy sources or to less carbon-intensive fuels.

No one likes higher taxes. One alternative policy approach is to balance higher taxes on carbon emissions or other sources of environmental degradation with tax cuts of equal magnitude in other areas. Studies have suggested that such revenue-neutral tax shifts have far smaller overall economic impact while providing a strong economic incentive for progress on environmental goals (Repetto 1992). In the United States, for example, most federal tax revenues come from taxes on wages and personal income. Gradually reducing such taxes while comparably increasing taxes on carbon emissions is one approach that could help the country meet its climate goals and also - because employers pay part of the taxes on wages - encourage job creation by reducing the cost of labor. At present, however, a different approach, emissions trading, is central to United States policy proposals for meeting its commitments under the Kyoto Agreements on climate.

Emission Targets and Emission Trading

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Another alternative policy that potentially supports both economic growth and environmental integrity is emission targets coupled with emission trading. The Kyoto Protocol for implementing the United Nations Framework Convention on Climate Change proposes the use of binding emission targets for industrial countries, with the targets to be reached over a five-year period, 2008 to 2012. To help reach these targets with the lowest possible economic cost, the United States proposed establishing an international emission trading regime, under which countries or companies can purchase emission permits from other countries. This market-based strategy, pioneered in the United States, is expected to help countries find the most economical way to meet the targets (Kyoto Protocol Article 6). It is also expected to lower overall costs for the United States and other countries, while providing powerful economic incentives to cut emissions and allowing for flexibility in approach (USDOE 1998).

In such a system, emission allowances are allocated by formula or auction to emitters of greenhouse gases (Weathervane website). Emitters must hold allowances for all units they emit, and have several options: they can control emissions, buy additional allowances if their abatement costs are high, or sell allowances if their abatement costs are low (Weathervane website). This 'formal' emissions trading market is similar to the United States system, adopted in 1990, to control emissions of sulphur dioxide.

A second system, or 'informal' market, sets aggregate and national caps on emissions, but does not allocate formal allowances. Instead, each country may meet its cap through abatement services obtained both within and outside its territory (Weathervane website). This system would enable nations that can cut emissions at low costs to 'trade' emissions reductions for foreign financial and technological investments that generate more efficient growth (Repetto 1997). Although not used formally in the Kyoto Protocol, this mechanism, described above and in Article 6 of the Protocol, embodies the concept of 'joint implementation' (Global Environmental Change Report 1997). Joint implementation allows a private or public entity in one country to meet an emissions-reduction target by paying for the reduction to be engineered in another country, if it is to its advantage to do so (Repetto 1997). For example, a multinational company with headquarters in the United States could meet its obligation to cut overall United States emissions in part by improving energy efficiency in its plant in Brazil or by converting someone else's plant in Poland from coal to natural gas. One of the key advantages of emissions trading is its cost-effectiveness (Wiener 1997). Since abatement costs vary widely from country to country, joint implementation can substantially lower the global costs of attaining emissions reductions (Repetto 1997).

Benefits of greenhouse gas (GHG) emissions trading could be offset by difficulties in initiating, monitoring and managing the programme. General concerns with GHG emissions trading, which might apply generically to any climate treaty with or without emissions trading, include: free riders where countries benefit from emission reductions elsewhere without reducing their own; leakage, where emissions abatement achieved in one place may be offset by increased emissions in unregulated locations; baseline forecasts and monitoring, which could increase uncertainty in the evaluation of the likely costs and benefits; and allowance allocation leading to difficulties of control and cost responsibilities among countries (Wiener 1997).

Concerns specific to emissions trading include: high transaction costs in searching for trading partners and insuring against the risk of failure; the role of national governments, which may attempt to influence the GHG market to their advantage; and the influence of market power over GHG allowance, which may be used by large players in the market (Wiener 1997).

Several emerging-market countries could benefit from joint implementation and may be willing to accept binding emissions limits and effective monitoring and enforcement mechanisms (Repetto 1997). For example, Central Europe and Russia could improve energy efficiency while modernising their economies.

Carbon Sequestration

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Carbon sequestration is a new and controversial alternative approach to meet climate goals, one that relies on absorbing greenhouse gases from the atmosphere rather than on reducing emissions of such gases. Planting trees on abandoned or restored lands, for example, could increase the uptake of carbon dioxide and thus offset emissions of the gas from industrial activities. In principle, carbon sequestration provides another opportunity for joint implementation; for example, a company in an industrial country might finance reforestation in a developing country, because it cost less than reducing emissions at home. The potential benefit of such an approach is that it not only promotes emission reductions at lower cost, but it also helps to restore land, protect watersheds, and provide ecological and recreational benefits (Repetto 1997, Goodman 1998).

Much remains uncertain about carbon sequestration. Can forests be managed to enhance carbon storage? Which management regimes capture the most carbon? Short cycles that plant quick-growing trees and harvest them in 20 or 30 years, or long cycles characteristic of old growth forests? Can carbon storage in forests, and especially in forest soils, be reliably documented - a critical requirement for incorporation in a global climate control regime? The Earth's carbon cycle requires considerably more study before such questions can be fully answered, but the effort is worth making because forests might be able to sequester as much as 30 per cent of the carbon dioxide currently released by human activities (US DOE 1998).

Additional Alternative Policies

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The United States has proposed a US$6 300 million climate change technology initiative over five years to cut United States greenhouse gas emissions. This initiative calls for tax cuts coupled with research and development (R&D) - US$3 600 million in tax credits for energy-efficient purchases and renewable energy, and US$2 700 million in new R&D spending over five years. In 1995, a National Action Program on Climate Change (NAPCC) was approved by federal, provincial and territorial governments in Canada. Under the programme, more than 700 companies responsible for over one-half of total annual greenhouse gas emissions have joined a national Voluntary Challenge and Registry (VCR) and developed action plans to reduce their greenhouse gas emissions. One hundred and twenty energy efficiency and alternative energy initiatives now are under way throughout Canada. Thirty-seven Canadian municipalities have joined the 20 per cent club. Members of this club aim to reduce local greenhouse gas emissions by 20 per cent from 1990 levels. In 1997, Toronto was recognised by the United Nations as one of the world's leading cities in combating climate change.

The government of Canada also is doing its share to reduce greenhouse gas emissions in federal operations. It is expected to reduce emissions by 27 per cent from 1990 levels by 2005. In its 1998 budget, the government of Canada committed an additional US$150 million over three years to build momentum toward concrete action and results on climate change.

References

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Dower, R.C. and Zimmerman, M.B. (1992). The Right Climate for Carbon Taxes. World Resources Institute, Washington DC, United States

de Moor, A. and Calamai, P. (1997). Subsidizing Unsustainable Development. Earth Council and the Institute for Research on Public Expenditure, The Netherlands

Friends of the Earth (1997). Friends of the Earth Calls on Congress to Eliminate Timber Companies Road Subsidies. Forest Networking Project of Ecological Enterprises: http://forests.org

Global Environmental Change Report (1997). The Kyoto Protocol. GECE 9(24): 1-8. Cutter Information Corporation, Arlington, United States

Goodman, A. (1998). Carbon Trading Up and Running. Tomorrow:, Vol 8 No. 3

Hess, K. and Holechek, J.L. (1995). Beyond the Grazing Fee: An Agenda For Rangeland Reform. Policy Analysis 234. Website: www.cato.org/pubs/pas/pa-234.html

Kyoto Protocol (1997). Kyoto Protocol to the United Nations Framework Convention on Climate Change. Conference of the Parties, Third Session, December 1-10, 1997, Kyoto, Japan

Litman, T. (1996). Transportation Cost Analysis: Techniques, Estimates and Implications. Victoria Transport Policy Institute, Victoria, Canada

Maxwell, G. (1995). Grazing on the Public Range. In Munson, R. (ed). Reforming Natural Resource Subsidies. Northeast-Midwest Institute, Washington DC, United States

Mock, G. (1995). Harvesting Forests. In Munson, R. (ed). Reforming Natural Resource Subsidies. Northeast-Midwest Institute, Washington DC, United States

Myers, N. (1998). Perverse Subsidies. International Institute for Sustainable Development. Winnipeg, Canada

OECD (1996). Agriculture Policies, Markets, and Trade in OECD Countries. OECD, Paris, France

Pimental, D., Huang, X., Cordova, A. and Pimental, M. (1997). Impact of Population Growth on Food Supplies and Environment. Population and Environment, Vol 19, No. 1

Repetto. R. (1986). Skimming the Water: Rent Seeking and the Performance of Public Irrigation Systems. World Resources Institute, Washington DC, United States

Repetto, R. and Lash, J. (1997). Planetary Roulette: Gambling with the Climate. Foreign Policy 108

Repetto, R., Dower, R.C., Jenkins, R. and Geoghegan, J. (1992). Green Fees: How a Tax Shift Can Work for the Environment and the Economy. World Resources Institute, Washington DC, United States

Roodman, D.M. (1996). Paying the Piper: Subsidies, Politics and the Environment. Worldwatch Institute, Washington DC, United States

US Congress (1995). Taking from the Taxpayer: Public Subsidies for Natural Resource Development. Committee on Natural Resources, Subcommittee on Oversight and Investigations, Washington DC, United States

US Congress (1992). Forest Service Planning: Accommodating Uses, Producing Outputs, and Sustaining Ecosystems. Office of Technology Assessment, OTA-F-505. US Government Printing Office, Washington DC, United States

US Department of Energy (1998). Comprehensive National Energy Strategy. DOE/S-0124, Washington DC, United States

Weathervane. Digital Forum on Global Climate Policy. http://www.weathervane.rff.org/

Wiener, J. (1997). Designing Markets for International Greenhouse Gas Control. Resources for the Future (RFF) issues brief. http://www.weathervane.rff.org/research/wiener.html

 GEO-2000 Technical & regional reports 
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