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Environmental impact of indirect subsidies
Development and application of a policy oriented method
Cees van BeersJeroen C.J.M. van den BerghAndré de Moor Frans OosterhuisReport number TU 0202IVM E02/06RIVM 500004001December 2002
 Technische Universiteit DelftFaculteit Techniek, Bestuur en ManagementSectie Economie van InnovatiePostbus 50152600 GA DelftIVMInstituut voor MilieuvraagstukkenVrije UniversiteitDe Boelelaan 10871081 HV AmsterdamRIVMRijksinstituut voor Volksgezondheid en MilieuPostbus 13720 BA Bilthoven
Copyright © 2002, Ministry of Housing, Spatial Planning and the Environment
 No part of this publication may be reproduced and/or published in print, as a photocopy,on microfilm or in any other form, without the prior written permission of the copyrightholder.
 Environmental impact of indirect subsidiesi
The government uses all kinds of policy instruments to intervene in the economic process. The standard reason given for government intervention is market failure due toso-called external effects. If the external effects are
, the market tends towardsunder-investment or underproduction compared with the social optimum. With
 external effects the result is precisely the opposite, namely over-investment or overproduction. For example, investment in R&D is characterised by knowledge‘leakage’ to competitors who profit from it without having to pay for it. If thegovernment wants to prevent under-investment in R&D, then it must provide subsidiesto compensate for these ‘leakage’ effects. Looked at from the other direction, the theoryof prosperity says that tax should be levied in the case of 
external effects.This study shows that well-intentioned public policy can have unintended (andunnoticed) side effects on the environment. Scientists, policy-makers and the public atlarge seem insufficiently aware of this problem.This report has been compiled in response to the request from the Minister of Housing,Spatial Planning and the Environment for a methodological study of the environmentaleffects of policy measures in the Netherlands. The study has produced a scientificmethod for charting first order environmental effects in a transparent, rapid and flexibleway. Application of the method to a number of subsidies in the energy, agriculture,transport, and tourism sectors shows that there can be significant first order effects on theenvironment. In principle the method can be applied more broadly, e.g. for questionsrelating to the lack of a public policy. As long as it is applied responsibly the method is auseful aid for policymakers.The following research team carried out the study:
Dr. C.P. van Beers (project leader) on behalf of the Department of Economics of Innovation, Faculty of Technology, Policy and Management of Delft Universityof Technology;
Prof. dr. J.C.J.M. van den Bergh and drs. F.H. Oosterhuis on behalf of theInstitute for Environmental Studies at the Vrije Universiteit Amsterdam;
Drs. A.P.G. de Moor on behalf of the National Institute for Public Health and theEnvironment.The research was supervised by a committee under the chairmanship of drs. R.E.Weenink of the Strategy and Policy Directorate, Directorate-General for EnvironmentalProtection, Ministry of Housing, Spatial Planning and the Environment. The finalresponsibility for the content of this report lies with the researchers.Prof. dr. A.H. KleinknechtDepartment of Economics of InnovationDelft University of Technology

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