Most OECD countries, with the excep

Most OECD countries, with the exception of the United Kingdom and Australia, have provided some
financial assistance for environmental investments by the private sector in the form of grants, soft loans, or tax allowances. The main objectives of such subsidies are:
(a) to speed up the enforcement of direct regulations;
(b) to assist firms, especially small ones, that face cash flow problems or financial difficulties
caused by capital investments required by compliance to new regulations;
(c) to support the research, development, and introduction of pollution control equipment and
cleaner technologies.
Subsidies are financed from charges, revolving funds, and the general budget. The use of user
charges to finance collective pollution-control and treatment facilities is not considered a subsidy; only the part of the expenditures not covered by user charge revenues is considered a (hidden) subsidy. It has been estimated that environmental subsidies in Europe range between 5% and 20% of total environmental investments.
In France, most environmental subsidies are closely linked to charge systems: polluters pay for their emissions, but as much as 90% of the revenues is returned to them as refunds for environmental investment and other improvements that they make. About 10% goes to finance research and development of new technologies. Subsidies financed from the general budget are found mainly in industrial and household waste-collection and treatment.
In Germany, subsidies are financed mainly from the general budget with the aim of assisting small firms during the transition period and speeding up implementation of new environmental regulations. Revolving funds provide an additional source of financing. Subsidies are given in the form of soft loans to polluters facing strict environmental standards are being held fully accountable for their environmental costs. There is conflicting evidence as to the environmental effectiveness and economic efficiency of these subsidies. While the responsible Federal Ministry claims 100% success in emission reduction, others argue that “subsidies have no incentive impact…, but may only give rise to `windfall profits”' (OECD, 1989). The function of subsidies in speeding up the enforcement of regulations is also disputed. The economic efficiency of subsidies—that is, their contribution to optimal pollution reduction—is also reported to be low, not only because of the windfall profits they give rise to but also because subsidies are not tied to specific environmental outcomes; non-environmental criteria play a role as well. Finally, subsidies are a violation of the polluter-pays principle to the extent that part of the environmental costs are not borne by the polluters, although OECD accepted that subsidies to target groups facing difficulties, especially during well-defined transitional periods, are not
in conflict with the principle.
The United States has limited experience with environmental subsidies, which are applied mainly in waste treatment and noise abatement. The government subsidy to investment in waste water
treatment facilities was initiated in 1956 and has varied over time between 30% and 75%. The U.S. experience indicates that:
(a) with the exception of a few financially strapped communities, subsidies were not
indispensable to the waste water treatment programs;
(b) the variation in the level of subsidies over time induced a postponement of investment and
of compliance with regulations in expectation of higher subsidies; and
(c) the high subsidy share of investment costs has induced capital-intensive treatment plants
with excess capacity (OECD, 1989).
The developed country experience with environmental subsidies suggests the following lessons for
developing countries:
(a) the use of subsidies should be minimized, targeted, and of limited duration during the
transitional phase;
(b) subsidies should not be escalated, but rather, phased down over time to create incentives
for accelerated rather than delayed compliance;
(c) subsidies should not be tied to a particular technology or investment but to specific
environmental outcomes (improvements);
(d) for subsidies to be compatible with the polluter pays principle, they should be financed
from charges on polluters and given in connection with specific environmental improvements;
partial refunding of charges may help secure the industry's cooperation and willingness to pay
the charges; and
(e) subsidies from the general budget may be justified for cleaning accumulated hazardous
waste prior to the introduction of control policies, for abatement of non-point pollution or waste generated by large numbers of small and dispersed units, and for support of research and
development of new pollution abatement and cleaner production technologies.
Environmental subsidies are relevant to developing countries because their industry is dominated by a large number of small, unregistered, dispersed, and fugitive firms that cannot be easily regulated and monitored; nor can effluent charges be collected at reasonable administrative costs. Indirect instruments such as product charges, differential taxes, refundable deposits, and subsidized collection and treatment of residual waste are superior instruments under these circumstances.
Similarly, user charges may not fully cover the costs of sanitation and solid waste collection
services making subsidies unavoidable. Every effort, however, should be made to finance such
subsidies from surcharges on related public utilities and property taxes approximating as much as possible the polluter pays and beneficiary pays principles. Finally, in developing countries with little experience in pollution charges, subsidies in the form of refunded charges for environmental improvements might be indispensable for obtaining the agreement of the industry to the introduction of such charges. The great danger with subsidies in developing (as in developed) countries is that they become institutionalized in public policy and capitalized in the value of economic assets (such as land), resulting in windfall profits or capital gains with little influence on behavior towards more environmentally benign activities and practices.