Government support for business methods and operations should be handled with care, even if they appear to benefit the environment, according to a group of scientists and economists. They contend that subsidies might influence market dynamics, resulting in unintended effects that not only prolong harmful subsidies but also hinder the effectiveness of those designed to encourage sustainability.
Government support for business methods and operations should be handled with care, even if they seem to benefit the environment, according to a group of scientists and economists in this week’s Policy Forum published in the journal Science.
They assert that subsidies can change market dynamics, leading to unexpected outcomes that may not only extend damaging subsidies but also reduce the overall effectiveness of those aimed at fostering environmental sustainability.
Thus, when necessary, it is recommended that subsidies have specific deadlines, according to the authors.
“We have this peculiar situation where we’re trying to eliminate subsidies in certain areas while simultaneously increasing them in others,” says lead author Kathleen Segerson, a distinguished professor of Economics at the University of Connecticut. “This led me to wonder whether this dichotomy is beneficial or detrimental.”
Segerson and her collaborators include a team of top economists, ecologists, geographers, psychologists, and other scientists who gathered for the 2022 Askö Workshop, supported by the Beijer Institute for Ecological Economics in Stockholm, Sweden.
The authors opine that subsidies can significantly motivate progress toward environmental and sustainability objectives. For instance, the U.S. Inflation Reduction Act of 2022 incorporates tax incentives for initiatives like electric vehicles (EVs), solar energy, and wind energy to meet renewable energy and efficiency goals.
They also indicate that subsidies can be a politically more feasible means of implementing change compared to enacting new laws or taxes, and they may be perceived as a form of political leverage to garner support from specific interest groups.
However, the authors clarify that some subsidies that claim to promote sustainability can have more complex effects.
Consider the example of electric vehicles: Transitioning from gasoline cars to EVs lowers greenhouse gas emissions. Yet, when subsidies for EVs make them more affordable, this can expand the market, resulting in increased overall vehicle use.
“By subsidizing any industry, you are essentially endorsing that industry,” explains Segerson.
However, if subsidies were redirected toward enhancing public transportation infrastructure and accessibility, it might encourage more individuals to give up their cars, yielding a much larger net positive impact on the environment.
“A subsidy that might initially seem advantageous could later be recognized as having disadvantages that far outweigh the benefits,” the authors note.
Numerous subsidies, some in place for decades, have been identified by economists and environmental advocates as contributors to climate change and threats to biodiversity.
The authors highlight that U.S. agricultural subsidies are responsible for 17% of nitrogen pollution, while production subsidies are linked to 14% of global deforestation. In 2018, approximately 70% of the $35.4 billion allocated to fishing subsidies was aimed at enhancing fishing capacity through funds for fuel, capital investments, and infrastructure—all of which exacerbate overfishing.
Although G20 leaders pledged over a decade ago to phase out inefficient fossil fuel subsidies, reports suggest that approximately $1.3 trillion in global fossil fuel subsidies remained in 2022, largely due to significant political pressure and vested interests from corporations benefitting from these subsidies.
In the U.S., the Biden administration has made multiple attempts to eliminate fossil fuel tax breaks but has faced challenges, prompting The New York Times to describe these subsidies as “zombies of the tax code: impossible to kill.”
From an economic efficiency standpoint, it is preferable to tax actions that produce negative consequences, such as implementing a carbon tax, states Segerson—but these can be hard to implement.
“It’s quite challenging to pass environmental taxes, so having subsidies as an alternative is better than nothing,” she explains.
Thus, subsidies aimed at reducing environmental harm serve as a second-best alternative, she notes. Setting time limits is crucial to ensure that these subsidies can be phased out as better solutions become available.
“We can support these greener production practices, but we must do so cautiously, keeping in mind our goal to avoid long-term dependence on these subsidies,” Segerson concludes.
