Subsidies: Under the Radar or Moving into the Spotlight?

May seems to be “the calm before the storm” for global environmental governance. Online subsidiary body meetings are underway for ozone and biodiversity (both bodies, SBI and SBSTTA) and soon for climate. This relative quiet led us to think more broadly about silence in global environmental discussions—what issues are mostly under the radar?

We landed on subsidies. 

(We’re sure there are many other issues that are emerging, overlooked, in need of a spotlight. Let us know your favourite and we’ll see if we can find it in our archive of negotiations, and feature it in a future Linkages.)

What are subsidies? Well, that is the first hurdle. Notoriously slippery to define, subsidies generally mean when public money—your taxpayer dollars, euro, etc.—go to supporting industries or consumption. Subsides can include loans, grants, or tax relief (among other financial and non-financial help).

The objectives behind subsidies often are not inherently bad. Subsidies can support job creation, market development, and innovation. Government support could even help industries reduce their impact on the environment. Such funding could help farmers change their practices to reduce run-off or emissions.

But subsidies can also create perverse incentives that prop up industries and activities that degrade nature, harm species, or cause climate change. For example, there are “zombie” oil wells only running because the companies received government (i.e. taxpayer) money. Otherwise, they would be shut down because they were not competitive. Harmful subsidies could also be economically inefficient and are notoriously difficult to remove once they are in place.

Given the key role of subsidies - for better and worse - the topic runs throughout the Sustainable Development Goals (SDGs). SDG target 14.6 addresses fishing subsidies, aiming to prohibit certain forms of fisheries subsidies which contribute to overcapacity and overfishing and refrain from introducing new subsidies. Target 12.c sets its goal as “rationalizing” and phasing out inefficient fossil fuel subsidies. In the context of Goal 2 (ending hunger), target 2.c is devoted to agricultural export subsidies.

The Convention on Biological Diversity (CBD) has recently set its sights on subsidies. Discussions for the post-2020 global biodiversity framework include a target to reduce harmful subsidies as a key driver of biodiversity loss. The updated “zero draft” of the framework includes Target 17: “By 2030, redirect, repurpose, reform or eliminate incentives harmful for biodiversity, including [X] reduction in the most harmful subsidies, ensuring that incentives, including public and private economic and regulatory incentives, are either positive or neutral for biodiversity.” The X is a placeholder, for negotiators to fill in (don’t let the brackets fool you - all the words are up for grabs).

The World Trade Organization is tackling fishing subsidies. The SDGs (and the agenda for the WTO’s 11th Ministerial Conference) had set 2020 as the end date for reaching agreement.  Despite intense negotiations at the end of 2020 (in the midst of the pandemic, no less), the deadline shifted to July 2021. In March, negotiators reported “fundamental differences” remain among WTO members. They are divided on how to ensure subsidies do not lead to overcapacity in the fishing sector (e.g., by propping up some companies or activities that otherwise might not be competitive), which in turn could lead to overfishing. And there is the age-old trade question of how to make sure rules are fair for all members, including developing and least developed country members.

Beyond biodiversity, other environmental conventions largely steer clear of subsidies. There are no discussions - rarely a mention even - of fossil fuel subsidies in the UN Framework Convention on Climate Change (UNFCCC) discussions. Instead, the G20 is where discussions take place and declarations made. Action may be too strong a word. In 2009, the G20 committed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.” But the promise only realized a 9% decrease in support for fossil fuels since 2014-2016. 

With pressure to increase spending after the pandemic, early evidence shows the fossil fuel sector may be set to win big. You can track governments’ fossil fuel subsidies in this interactive tracker. The climate impacts of this potential boom in government money could be significant.

Other forms of subsidies currently receive little attention and deserve more. Plastics are oil products. The fossil fuel subsidies that help develop fossil fuel infrastructure also help produce plastics. Fracking also unearths ethane, a key feedstock for plastic. The International Energy Agency estimates petrochemicals (which include plastics) will drive half of oil demand growth by 2050. These subsidies mean virgin plastics are incredibly cheap. These subsidies create market distortions. For companies, it is much cheaper to use new plastic than recycled plastics.

Why are discussions happening here and there, and not everywhere? In part because subsidies are a touchy issue. They can be tied to industries with powerful political voices. Governments prefer to control their national budgets. Including subsidies in a softer mechanism, like a G20 declaration, was seen as a significant achievement. It was also more palatable to countries than more legally binding alternatives.

Finally, subsidies are a cross-cutting issue… and sometimes global governance doesn’t know what to do with these types of issues. Is it a trade issue? An environmental one? An economic development one? A matter of fiscal policy? Without a measure of agreement on the framing, there will be little agreement on where to have the discussions. Global governance is siloed. It’s a well-known problem. There are calls for “change managers,” to support the energy transition and ensure affected communities are supported in the process. It’s a huge benefit of overarching, goal-oriented frameworks like the SDGs and the 2030 Agenda’s more holistic view on global challenges.

This article was originally distributed in the Earth Negotiations Bulletin Linkages Update enewsletter and was written by Dr. Jennifer Allan and Dr. Lynn Wagner.