Government support for business practices and processes, while potentially beneficial for the environment, should be handled thoughtfully, as per a collective of scientists and economists. They highlight that such subsidies can distort market dynamics, causing unintended outcomes that not only sustain detrimental subsidies over time but also reduce the effectiveness of those aimed at fostering environmental sustainability.
A group of scientists and economists emphasize a cautious approach towards government subsidies for business activities, even if they appear environmentally beneficial, in this week’s Policy Forum published in the journal Science.
The authors contend that subsidies can change market incentives, leading to unforeseen results that might not only extend harmful subsidies but also undermine the success of those meant to encourage environmental sustainability.
As a result, they suggest that when subsidies are necessary, they should have specific expiration dates.
Lead author Kathleen Segerson, who is a Board of Trustees Distinguished Professor of Economics at the University of Connecticut, remarks, “We have this peculiar situation where some sectors are trying to eliminate subsidies while others are increasing them. I’m curious whether this is beneficial or detrimental.”
Segerson and her colleagues are well-respected economists, ecologists, geographers, psychologists, and other scientists who gathered for the 2022 Askö Workshop organized by the Beijer Institute for Ecological Economics in Stockholm, Sweden.
The authors recognize that subsidies can effectively drive environmental and sustainability objectives. For instance, the Inflation Reduction Act of 2022 in the United States employs tax credits and incentives related to electric vehicles (EVs), solar, and wind energy to achieve its renewable energy goals.
Furthermore, Segerson suggests that subsidies can sometimes present a simpler approach to implement changes compared to enacting new laws or taxes, and they can even serve as political leverage to gain support from specific interest groups.
However, the authors clarify that some subsidies aimed at promoting sustainability can have complex implications, sometimes leading to adverse effects.
For example, although switching from gasoline vehicles to EVs is beneficial in curbing greenhouse gas emissions, the introduction of subsidies that make EVs cheaper can generate increased vehicle usage.
“By subsidizing any industry, you’re essentially endorsing that industry,” states Segerson.
Alternatively, if subsidies were directed towards enhancing infrastructure for public transport and making it more accessible, it could lead to reduced car ownership, resulting in a significantly more positive environmental impact.
“A subsidy that might once have seemed advantageous for society could later be seen as imparting costs that far outweigh the benefits,” the authors assert.
Numerous long-standing subsidies have been recognized by both economists and environmentalists as contributing to climate change and threats to biodiversity.
The authors point out that U.S. agricultural input subsidies have been linked to 17% of nitrogen pollution, and production subsidies are responsible for 14% of global deforestation. In 2018, approximately 70% of the $35.4 billion in fishing subsidies contributed to increased fishing capabilities, which exacerbates overfishing.
Although G20 leaders pledged over a decade ago to phase out inefficient fossil fuel subsidies, estimates suggest that about $1.3 trillion in such global subsidies existed in 2022, primarily due to significant political and corporate pressures to maintain them.
The Biden administration has made repeated efforts to eliminate fossil fuel tax breaks but has faced challenges, leading a New York Times article to describe these subsidies as “zombies of the tax code: impossible to kill.”
From an economic efficiency viewpoint, imposing taxes on activities that produce negative outcomes, such as a carbon tax, would be preferable, according to Segerson. However, she notes that these taxes are challenging to enact.
“Environmental taxes are tough to pass; thus, having a subsidy is better than having nothing,” she explains.
Consequently, subsidies aimed at mitigating negative environmental impacts are regarded as a second-best option. Segerson emphasizes the importance of implementing time limits on these subsidies to ensure they can be phased out when more effective solutions emerge.
“We can support greener production methods, but we must do so cautiously and avoid long-term reliance on these subsidies,” concludes Segerson.
