Environmental harm of hidden subsidies: Global warming and acidification

We investigate environmental impacts of off-budget or indirect subsidies, which, unlike on-budget subsidies, are not visible in government budgets. Such subsidies have received little attention in economic and environmental research, even though they may be at least as important from an environmental perspective as on-budget subsidies. We offer a typology of indirect subsidies. Next, we estimate the magnitude of these subsidies and their impact on greenhouse gas (GHG) and acidifying emissions for the agriculture, energy, and transport sectors in The Netherlands. The calculations are based on a model approach that translates a particular subsidy into price and quantity changes using empirical elasticities, followed by environmental effect estimates using pollutionintensity parameters. The various environmental pollution effects are aggregated into environmental indicators. The results show, among others, that GHG emissions caused by off-budget subsidies contribute to more than 30% of the policy targets specified by the Kyoto Protocol for CO2 emissions reduction by The Netherlands. Reforming or removing off-budget subsidies may thus be an important strategy of effective climate policy. © 2009 Royal Swedish Academy of Sciences.