A new World Bank report examines how subsidy reform can help safeguard the world’s foundational natural assets – clean air, land, and oceans. These assets are critical for human health and nutrition and underpin much of the global economy. But subsidies for fossil fuels, agriculture, and fisheries are driving the degradation of these assets and harming people, the planet, and economies. This money -numbering in the trillions – could instead be used to finance much-needed climate action in countries across the world.
Subsidies for fossil fuels, agriculture, and fisheries exceed $7 trillion in explicit and implicit subsidies, which is around 8% of global GDP. Explicit subsidies – direct government expenditures – in agriculture, fishing, and fossil fuels total about $1.25 trillion, around the size of a big economy such as Mexico. Implicit subsidies – a measure of the subsidies’ impact on people and the planet – amount to over US$6 trillion a year and the burden fall mostly on the poor.
Governments are spending trillions on inefficient subsidies that are making climate change worse – money that could be tapped to help solve the problem. Agriculture subsidies are responsible for the loss of 2.2 million hectares of forest per year – or 14% of global deforestation. Fossil fuel usage—incentivized by subsidies—is a key driver of the 7 million premature deaths each year due to air pollution. Fisheries subsidies, which exceed $35 billion each year, are a key driver of dwindling fish stocks, oversized fishing fleets, and falling profitability.
Repurposing these wasteful subsidies will help ensure a green and just transition that can provide jobs and opportunities for all. Annually, countries spend six times more on subsidizing fossil fuel consumption than their commitments made under the Paris Agreement to tackle climate change. Redirecting these subsidies can unlock significant funds for sustainable purposes.
The consequences of inaction are costly. We are running out of time to deal with the climate crisis. In times of strained budgets, growing public debts, increasing inequalities, and worsening environmental degradation, governments should prioritize comprehensive subsidy reforms that build public acceptance, protect the vulnerable, and show how the money is being spent.
Subsidy reform is pro-poor. The belief that subsidy reforms disproportionately affect the poor is not always supported by data. In some cases, such as energy subsidies, the wealthy benefit more due to their higher consumption. To protect vulnerable groups during subsidy reforms, the report recommends compensating those who may suffer the most, 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.
The report was written by Damania, Richard, Balseca, Esteban, de Fontaubert, Charlotte, Gill, Joshua, Kim, Kichan, Rentschler, Jun, Russ, Jason, and Zaveri, Esha.
Click here to access the full World Bank report.
