Step 3.4D: Supportive and harmful subsidies
In general, a subsidy is the result of “a government action that confers an advantage on consumers or producers, to supplement their income or reduce their costs”. Subsidies are designed to address a market failure or achieve a specific social or environmental objective. The government action may consist of direct cash payments, relief from a tax burden, protection from competition, or a variety of other policies. Subsidies aim to lessen some type of financial burden, and/or encourage an action. Subsidies can be used to change behaviour at an individual, business or industry level.
The PIR should aim to answer the following questions:
- What are the most prominent subsidies that have an impact on biodiversity (both positive and negative)?
- In which sectors are these subsidies (e.g. agricultural sector, energy sector, biodiversity conservation)?
- If considered harmful to biodiversity, which aspects are harmful and why?
- Who are the primary, secondary or other beneficiaries?
Subsidies can have a positive or negative impact on biodiversity and ecosystems in a wide variety of ways, depending on how they are designed and implemented. Positive impacts include agricultural payments for operating organic farming systems, or grants for investment in equipment with lower biodiversity impact (e.g. fishing gear that reduces seabird bycatch). Many subsidies have an unintended harmful impact on biodiversity, most frequently where they reduce the cost of a harmful activity, increasing its scale and thus its damage. Examples of subsidies include:
Direct transfers of funds (e.g. government spends money on fossil fuels, roads)
Potential direct transfers (e.g. government guarantees emergency response)
Income or price support (e.g. agricultural goods and water)
Tax credits (e.g. for land donation or land-use restrictions)
Exemptions and rebates (e.g. reductions on property taxes for protected areas)
Low interest loans and guarantees (e.g. fishing fleet expansion/modernization)
Preferential treatment and use of regulatory support mechanisms (e.g. demand quotas, feed-in tariffs)
Implicit income transfers by not pricing goods or services at full provisioning cost (e.g. water, energy) or value (e.g. access to fisheries, minerals)
Table 3.3: The Value of Harmful Subsidies to Biodiversity Exceeds Global Investments in Biodiversity
| Description | US$Billion/Year | Source |
|---|---|---|
| Support measures for fossil fuels (Global) | 373 (2015) | OECD (2018a) |
| Water use and treatment (Global) | 450 (2012) | IMF (2015) |
| Support to agricultural production considered potentially environmentally harmful (OECD countries) | 100 (2015) | OECD (2016) |
| Support to Fisheries – including associated fuel subsidies (OECD countries and Global) | 7 (OECD countries in 2018), 35 (Global in 2009 dollars) | OECD (2018b) and Sumaila et al. (2016) |
| Global investments in biodiversity | 52 (2010) | Parker et al. (2012) |
The OECD defines environmentally perverse subsidies as “all kinds of financial supports and regulations that are put into place to enhance the competitiveness of certain products, processes or regions, and that, together with the prevailing taxation regime, (unintentionally) discriminate against sound environmental practices”. In the case of environmentally When examining subsidies, a careful review of vested interests and socio-economic benefits is required. Regardless of effectiveness, once a private company or interest group benefits from a subsidy, they often lobby to maintain these benefits. As such, subsidy reforms always face sociopolitical challenges. Despite challenges, several phased approaches are possible. • Greening subsidies approaches often retain the payment structure of the subsidy, but adjust the purpose, conditions, regulations and incentives to reduce negative environmental impacts (for example maintaining fisheries subsides while not allowing the use of certain hooks/nets that harm fish and other species). Harmful subsidies may even be turned into biodiversity-neutral or positive subsidies. perverse subsidies, this would mean that the negative economic costs of the environmental harm (including externalities, see Box 3.10) outweigh the positive social and financial impact of the subsidy. In addition to economic costs, other negative social and environmental losses can be also assessed, in particular when looking at biodiversity.
Box 3.10: Reforming Harmful Rice Subsidies in Sri Lanka
In Sri Lanka, 1.8 million people depend on paddy cultivation for rice. A fertilizer subsidy was introduced in 1962 to shift to high-yielding varieties. Later, studies showed no significant correlation between productivity and the use of chemical fertilizers. However, the subsidy was shown to support the livelihoods of many paddy farmers and is considered an assurance over food security. The subsidy cost 2.24 percent of the total public expenditures.
Excessive use of subsidized fertilizer led to heavy metal contamination in soils and waterways (and therefore biodiversity loss) and suspected cases of chronic kidney disease. This was the main argument used to push for reform of the subsidy.
The subsidy’s reform process aims at reducing the negative impact on health and the environment as well as public spending, without harming poor farmers’ livelihoods. The new policy directive (2015) also supports ecological agriculture by converting in-kind subsidies (chemical fertilizers) into cash transfers, and offering alternative options, including organic fertilizers, to improve productivity and alignment to markets. As a result, public spending on rice subsidies went down almost 50 percent.
When examining subsidies, a careful review of vested interests and socio-economic benefits is required. Regardless of effectiveness, once a private company or interest group benefits from a subsidy, they often lobby to maintain these benefits. As such, subsidy reforms always face sociopolitical challenges. Despite challenges, several phased approaches are possible.
Greening subsidies approaches often retain the payment structure of the subsidy, but adjust the purpose, conditions, regulations and incentives to reduce negative environmental impacts (for example maintaining fisheries subsides while not allowing the use of certain hooks/nets that harm fish and other species). Harmful subsidies may even be turned into biodiversity-neutral or positive subsidies.
Reducing the value of subsidies, which can lessen the biodiversity-harmful impact while saving significant public funds. For example, a 5 percent reduction in a large subsidy can help save millions of US dollars.
Eliminating subsidies, where subsidies are completely cancelled.
The PIR list of subsidies should include biodiversity-supportive and biodiversity-harmful (or potentially harmful) ones. In addition to listing, any information useful to determine how effective these schemes are should be collected. Table 3.4 shows the information to record in the list of subsidies. An example of subsidy reform is provided in Box 3.10.
Table 3.4: Template to Record Information on Subsidies
| Heading | Description |
|---|---|
| Existing subsidy | Name of the subsidy analysed |
| Responsible stakeholder/ organization/agency | Stakeholders/organization and agency involved or related to the subsidy |
| Sector | Relevant sector(s) |
| Drivers | Describe the motivations explaining the introduction and continuation of the subsidy |
| Direct or indirect | Is it a direct or indirect subsidy? |
| Financial value | Financial value of the subsidy (if this information is already available) |
| Description - intended objective and beneficiaries | Describe the main objectives of the subsidy and the intended beneficiaries |
| Benefits (social, environmental, economic) | Describe the different benefits that the subsidy has and will have on social, environmental and economic aspects. Example: Agriculture subsidy to support rural employment |
| Biodiversity benefits | How does the subsidy benefit biodiversity? |
| Biodiversity-harmful impacts | What harmful impacts on biodiversity can be expected or are known? |
| Is this potentially a “perverse” subsidy? | See definition above |
| Describe related legislation | Describe the main laws and regulation creating the subsidy |
| Additional notes | Additional notes |
| Links to related studies including CBA, economic valuation | Describe different sources of analysis related to the subsidy (e.g. any economic justification) |
