Government subsidies for business practices and processes should be approached with caution, even when they seem to be environmentally friendly, a team that includes a UC Santa Cruz researcher concludes in this week’s “Policy Forum” in the journal Science.
In the essay, "A cautious approach to subsidies for environmental sustainability," the authors argue that subsidies can alter market pressures, leading to unintended consequences that not only perpetuate harmful subsidies over time— but also diminish the overall effectiveness of those intended to promote environmental sustainability.
Therefore, when they must be used, subsidies should have clear end-dates, the authors advise.
“Subsidies are a double-edged sword: They’re speeding renewable energy to stop climate change, and they’re also causing massive overfishing and more fossil-fuel extraction than we need,” said essay co-author Malin Pinsky, associate professor of ecology and evolutionary biology at UC Santa Cruz.
The piece’s lead author is Kathleen Segerson, a distinguished professor of economics at the University of Connecticut. Segerson, Pinsky, and their co-authors are an international group of leading economists, ecologists, geographers, psychologists, and other scientists who convened for the 2022 Askö Workshop sponsored by the Beijer Institute for Ecological Economics in Stockholm, Sweden.
They assert that subsidies can be powerful motivators that further environmental and sustainability goals. For example, the United States’ Inflation Reduction Act of 2022 uses tax credits and incentives for things like electric vehicles (EVs), solar power, and wind power to meet its renewable energy and efficiency targets.
The essay also points how subsidies can be a politically easier approach to enacting change than creating new laws or taxes and are even sometimes viewed as political capital, to ensure support from particular interest groups.
“We've got this odd juxtaposition of trying to get rid of subsidies in some sectors, and then ramping up subsidies in others,” Segerson said. “The question that interested me was: Is this a good thing or a bad thing?”
Pros and cons
Some subsidies that appear to encourage sustainability are not so simple and can sometimes have negative spillover effects, the authors explained. They cite subsidies for EVs that aim to encourage consumers to drive those types of vehicles and thereby reduce greenhouse-gas emissions. But when subsidies for EVs and their technology create more inexpensive EVs, that market will expand, increasing overall vehicle use.
If subsidies instead went to increased infrastructure for and access to public transportation, the authors said, more people might get rid of their cars, making the net positive environmental impact much greater.
“We know our economy depends on the clean oceans and lands we live on. The question that interested me was whether, or how, subsidies could be used to maintain our quality of life and that of our kids,” said Pinsky, who leads the Global Change Research Group at UC Santa Cruz. The lab focuses on finding ways for marine conservation and fisheries to continue being effective and sustainable in the face of global warming. This research has helped reveal that economic incentives and regulations, like subsidies, strongly affect how people adapt to climate change.
‘Zombie’ policies
Many subsidies in place for decades have long been identified by economists and environmentalists alike as actively contributing to climate change and biodiversity threats. The authors cite that U.S. agricultural input subsidies have been shown to drive 17% of nitrogen pollution, while production subsidies account for 14% of global deforestation. In 2018, nearly 70% of $35.4 billion in fishing subsidies went to increasing fishing capacity through aid like fuel purchases, capital investment, and infrastructure, all of which contribute to overfishing.
Despite the leaders of the G20 committing to phasing out inefficient fossil fuel subsidies more than a decade ago, some sources estimate that there were still $1.3 trillion in global fossil fuel subsidies in 2022, owing to the considerable vested interest and political pressure from benefiting corporations to keep them in place.
In the United States, the Biden administration has tried repeatedly to repeal tax breaks for fossil fuels but hasn’t succeeded, leading a New York Times article to call the subsidies “zombies of the tax code: impossible to kill.”
From an economic-efficiency perspective, the authors conclude that it’s better to tax activities that generate negative effects, such as a carbon tax—but they are a hard sell. For Pinsky, his research has highlighted the importance of an interdisciplinary approach. “Maintaining our quality of life requires a tight integration between social science and biology, and this research on subsidies is part of a bigger effort to bring the two fields together,” he said. “We need more collaborations like this to achieve a healthy and just world for everyone.”
The authors’ collaboration was supported by the Beijer Institute of Ecological Economics, Royal Swedish Academy of Science.
