PERVERSE SUBSIDIES

By Norman Myers Reprint | | Print |

This column is available for visitors to the IPS website only for reading. Reproduction in print or electronic media is prohibited. Media interested in republishing may contact romacol@ips.org.

OXFORD, Aug 8 2007 (IPS) - Since its inception in November 2001, the Doha Round of the WTO has been unable to take even one step towards the apparently shared goal of liberalising trade because of industrialised countries\’ subsidies of their own agricultural production, writes Norman Myers, who is completing, with Jennifer Kent, a book on institutional roadblocks. In this article, Myers writes that certain subsidies are bad not only for the environment but for the economy too and should be designated \’perverse\’ subsidies. These are especially prominent in agriculture, fossil fuels, road transportation, water, forests, and fisheries, and total a whopping USD 2 trillion a year. Eliminating perverse subsidies would do more than virtually any other measure to stimulate and streamline our economies and safeguard the environment. Moreover, governments would find that with the freed-up funds they could cancel their budgetary deficits, slash taxes, and boost their health and education budgets by unprecedented amounts.

It now appears that certain subsidies are bad not only for the environment, but –wonder of wonders– for the economy too, and so they deserve to be designated ‘perverse’ subsidies. These are especially prominent in six leading sectors: agriculture, fossil fuels, road transportation, water, forests, and fisheries. Worldwide, perverse subsidies total a whopping USD 2 trillion a year. They serve, by definition, to foster unsustainable development. In fact, we shall likely fail to accomplish the goal of sustainable development unless we phase out these perverse subsidies.

Agricultural subsidies lead to the overloading of croplands and in turn the erosion of topsoil, pollution from synthetic fertilisers and pesticides, and the release of greenhouse gases. Subsidies for fossil fuels aggravate pollution such as acid rain and urban smog, and aggravate global warming. Subsidies for road transportation promote some of the worst and most widespread forms of pollution. Subsidies for water encourage misuse and overuse of supplies that are increasingly scarce in many areas. Subsidies for ocean fisheries foster the overharvesting of fish stocks. Forestry subsidies encourage overlogging and other forms of deforestation.

Not only do these environmental ills carry significant economic costs; they are also a direct drag on economies.

At the Rio Earth Summit in 1992, a budget of USD 600 billion a year was presented for plans to establish sustainable development. Governments dismissed this figure out of hand: where could they possibly find funds of that order? Yet they could mobilise three and a half times as much if they eliminated the perverse subsidies.

Fortunately the political climate for reform of perverse subsidies is probably better than it’s been in decades. Many governments are espousing the marketplace gospel of reduced government intervention; those that are short on funds have an additional, fiscal incentive to reduce subsidies.

The best strategy for cutting subsidies is to highlight the costs of perverse subsidies to both taxpayers and consumers. The average American pays taxes of at least USD 2000 a year to fund perverse subsidies and pays almost another USD 2000 in increased costs for consumer goods and because of environmental degradation. Hence the rationale for projects like the recently-founded Global Subsidies Initiative in Geneva, a programme of the International Institute for Sustainable Development that puts a spotlight on perverse subsidies and the harm they cause.

There are success stories that governments can use as examples. New Zealand’s economy is heavily based on sheep farming, which until recently was massively subsidised. The subsidies were wrecking both the economy and, because of overgrazing, the environment. In 1984 the government bit the bullet and eliminated virtually all of these subsidies overnight. The sheep farmers howled and declared the country would be ruined and were forced to work more efficiently. The result: today there are more farmers, more exports, more profits, and less environmental damage.

Germany’s subsidies for coal mining are so large that it would be economically efficient for the government to close down all the mines and send the workers home with full pay for the rest of their lives. The environment would benefit too: less coal pollution such as acid rain and global warming. Fortunately Germany is in the process of phasing out its subsidies, which may be history by 2018. Countries cutting back on fossil fuel subsidies include the UK, France, Spain, Indonesia, China, India, Japan, the Eastern European EU countries and Russia. Mexico, South Africa, China and Australia are moving towards full-cost pricing of water. Much the same applies to forests and fisheries.

The biggest subsidies are found in road transportation. In the United States, gasoline is cheaper than bottled water, thanks to myriad subsidies. Gasoline subsidies create an energy policy by default — a policy that is the opposite of the government’s stated priorities. They prolong the country’s dependence on foreign oil, especially from the Persian Gulf. They discourage investments in cleaner technologies such as ultra-lean car engines. At the same time, traffic congestion in many major US cities reduces one third of vehicle travel to speeds averaging half of the free-flow rate; the annual cost of delays amounts to at least USD 100 billion per year.

Then there are the sizeable environmental costs. Some 100 million Americans live in cities where vehicle emissions push pollution levels above federal standards. If Americans don’t want to pay extra taxes for their gasoline, they might at least stop being effectively paid by their government and fellow citizens to burn the stuff. The covert costs of road transportation are well over USD 700 billion per year.

Eliminating perverse subsidies would do more than virtually any other measure to stimulate and streamline our economies and safeguard the environment. Moreover, governments would find that with the freed-up funds they could cancel their budgetary deficits, slash taxes, and boost their health and education budgets by unprecedented amounts – and have enough left over to throw a week-long party for the whole country. (END/COPYRIGHT IPS)