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A new World Bank report highlights the negative consequences of inefficiently subsidising agriculture, fishing, and fossil fuel sectors, both implicitly and explicitly, by spending trillions of dollars, exacerbating climate change.
In total, the report calculated that subsidies in the three areas exceeded $7 trillion, equivalent to eight per cent of the global gross domestic product.
Instead, these subsidies which are generally considered to bail out economies in crises, could be repurposed to finance just transition activities or to provide a better quality of life, the authors advised, as they have far-reaching impacts on the environment.
In 2021, countries shelled out $577 billion to actively lower the price of polluting fuels such as oil, gas, and coal. These measures amounted to incentivising the overuse of fossil fuels. Consequently, fossil fuel usage leads to air pollution in industrialising middle-income countries which have a high health burden, the World Bank report indicated.
Most countries spend six times the money on subsidising fossil fuel consumption in comparison to the financial allotments made towards commitments made under the 2015 Paris Agreement. Redirecting these subsidies can unlock significant funds for sustainable purposes, the report said.
The report suggested, “that a US$0.10 per liter increase in the average annual retail price of common transport fuels (for example, diesel) may be associated with a decrease of 2.2 μg/m3 in the average annual concentration of PM2.5 in capital cities.”
However, the report draws attention to the limited effectiveness of reducing the incentives to use polluting fuels as the demand for energy is only sluggishly responsive to prices, as cleaner alternatives are not easily accessible and are sometimes not affordable.
“For instance, ensuring the availability and affordability of clean technologies, addressing information and capacity constraints, and addressing behavioral biases are ways to increase the effectiveness of subsidy reform,” the report added further.
When it comes to the agricultural sector, explicit subsidies amount to $635 billion per year, in most countries with accessible data. By other estimates, the subsidies exceed $1 trillion globally. These are targeted at farmers for buying specific inputs or growing particular crops.
According to new research published in the report, subsidies tend to favour wealthier farmers, even when programs are designed to be targeted to reach the poor.
“For instance, in Malawi and Tanzania, input subsidy programs designed to reach the poor pay US$5 to the top income quintile for every US$1 paid to the bottom income quintile. Nevertheless, the subsidies make up a substantially larger percentage of the bottom quintile’s income, so eliminating these subsidies without compensation would be very harmful,” the report said.
“Inefficient subsidy usage is responsible for up to 17 percent of all nitrogen pollution in water in the past 30 years, which has large enough health impacts on reducing labor productivity by up to 3.5 percent,” the report added.
According to some estimates, the fisheries sector receives 35.4 billion per year in subsidies and about $22.2 billion contributes to overfishing.
“Subsidies are a key driver of excess fishing capacity, dwindling fish stocks, and lower fishing rents. The negative impact of subsidies is even greater when fisheries are not managed sustainably and already severely depleted,” the report said.
“Repurposing subsidies without incentivizing increased fishing capacity is of paramount importance to safeguarding remaining stock,” the report added.