The more than US$7 trillion in subsidies that governments extend to fossil fuels, agriculture, and fisheries each year are causing widespread environmental degradation and worsening climate change—at the expense of human health and the global economy, the World Bank says.
That’s $13 million per minute driving the deterioration of natural assets like clean air, land, and oceans, or trillions in “inefficient subsidies that are making climate change worse—money that could be tapped to help solve the problem,” the Bank writes in a new report on “detoxing” international development.
“Fossil fuel usage—incentivized by vast subsidies—is a key driver of the seven million premature deaths each year due to air pollution,” it adds. “By underpricing fossil fuels, governments not only incentivize overuse, but also perpetuate inefficient, polluting technologies and entrench inequality.”
Agriculture subsidies promote excessive fertilizer use and are responsible for the loss of 2.2 million hectares of forest per year, or 14% of global deforestation, while “fisheries subsidies, which exceed $35 billion each year, are a key driver of dwindling fish stocks, oversized fishing fleets, and falling profitability,” says the World Bank.
These outcomes are driven by US$1.25 trillion of explicit subsidies—“around the size of a big economy such as Mexico”—and more than $6 trillion worth of implicit subsidies “measured as unpriced externalities.”
The Bank explains implicit subsidies as “the price difference between the “undistorted” (socially optimal) price and the actual price that emerges after the subsidy is paid.”
“Such gaps may arise when the subsidy encourages environmentally damaging behavior and often reflects inadequate regulation and policies that promote external damage.” For example, burning fossil fuels emits harmful pollution, which has huge impacts on health and climate change. “These externalities impose costs on others, which are often treated as an implicit subsidy accruing to the polluter.”
Poorly designed subsidies reflect “errors of commission,” states the study, “when government policies and transfers overtly encourage overuse and abuse of natural assets.”
The Guardian reports that explicit subsidies for fossil fuels alone equaled $577 billion in 2021, twice what renewable energy received, and almost six times more than the climate finance rich countries promised to developing nations—though in light of Oxfam’s recent report showing that wealthy countries are overstating climate contributions, six orders of magnitude may be an understatement.
The World Bank’s figures show that trends established in past research have not abated. A 2019 study by the International Monetary Fund (IMF) revealed that global fossil fuel subsidies in 2015 totaled $4.7 trillion. Subsequent IMF research found that amount increasing, with coal, oil, and gas industries receiving $5.9 trillion in worldwide subsidies in 2020. “A mind-bending $11.2 million per minute, every minute of every hour of every day in the year,” The Energy Mix wrote at the time.
Subsidies persist despite the harm for four main reasons. First, there is not enough information or visibility on the impacts, which are separated from causes by time or distance. Second, inertia against change takes hold when economies and people adjust to a subsidy’s presence.
Third, the damages subsidies cause do not affect any specific interest group. No individual or group of individuals has to maintain or pay for damages to the air, forests, waterways, or oceans distributed across regions and generations, the World Bank says.
And finally, though harms caused by the subsidies may not affect defined entities, many of the benefits, both explicit and implicit, “accrue to special interest groups and large corporations.”
Key to reform is understanding that simply removing subsidies is not an effective solution, the report says. The challenge for governments is to reverse present trends and reform subsidies to be more benign (or even beneficial), make them smaller, and find ways of lining up private sector investment to restore and reverse the decline of natural capital assets.
It will also be important to build public acceptance and credibility, and to support measures that protect environmental externalities when removing subsidies, the report says. Governments must also social protection and compensation for livelihoods that depend on subsidies and set sound strategies to ensure that reforms deliver on development priorities.
“Especially in an era of fiscal constraints and degrading natural capital, reform and repurposing of perverse and harmful subsidies offer an opportunity to promote greater sustainability, inclusion, and shared prosperity,” the Bank writes.
To protect vulnerable groups during subsidy reforms, the Bank says those who may suffer the most must be compensated, using measures like direct cash transfers. “Examples from the Middle East and North Africa show that cash transfers and in-kind assistance were successful in mitigating the impacts on the poor during energy subsidy reforms.”
