Negative Impact of Subsidies

Negative Impact of Subsidies

• 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.

Highlights of the Report

• In 2021, countries shelled out $577 billion to actively lower the price of polluting fuels such as oil, gas, and coal.
• Agricultural subsidies (over $1 trillion globally) are targeted at farmers for buying specific inputs or growing particular crops. However, these subsidies tend to favour wealthier farmers, even when programs are designed to be targeted to reach the poor.
• The fisheries sector receives 35.4 billion per year in subsidies and about $22.2 billion contributes to overfishing.

Negative Impacts

• Impact on Climate :
  • Fossil fuel subsidies incentivize overuse of fossil fuels, air pollution and health burden.
  • Dwindling Fish Stocks.
• Inefficiency in subsidy usage :
  • It is responsible for ~17% of all nitrogen pollution in water in the past 30 years.
  • Health impacts reducing labour productivity by up to 3.5%.
• US$0.10 per litre increase in the average annual retail price of diesel may be associated with a decrease of 2.2 μg/m3 in the average annual concentration of PM2.5.

Problems with Subsidy Reduction

• Little Impact on Consumption Patterns : Demand for energy is less responsive to prices(fuel is an inelastic good). Hence, reduction in subsidy would have little impact on consumption.
• Substitutes are not easily available : Cleaner alternatives are not easily accessible and are sometimes not affordable.

Way Forward

• These subsidies could be repurposed to finance just transition activities or to provide a better quality of life, as they have far-reaching impacts on the environment.
• Diverting these subsidies to the financial allotments made towards commitments made under the 2015 Paris Agreement.
• Ensuring the availability and affordability of clean technologies, addressing information and capacity constraints, and addressing behavioural biases are ways to increase the effectiveness of subsidy reform.

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