Globally, governments subsidise things like fuel for general consumption and fertiliser for agricultural use. They do it so that the steep price rises don’t make it hard for people to buy these commodities. Economies, especially developing ones like ours thrive on this after all. But a couple of days ago, the World Bank suggested that if governments stop spending trillions of dollars in subsidies, it could actually help fight climate change. So in today’s Finshots, we talk about the practicality of this premise.
The Story
Before 2010, petrol prices in India were regulated by the government. They’d revise the price every week depending on how much it cost to import the fuel, the cost of transportation and taxes. And on occasions when prices skyrocketed they would simply bear the loss themselves without burdening consumers. In simple words, they subsidised petrol. The same goes for diesel before 2014.
But after the government decided to deregulate the market, fuel prices danced to the tune of the global price movements. Prices were updated on a daily basis. And consumers had to pay market-determined rates. But there was a catch still.
For instance, in 2022, Russia’s invasion of Ukraine choked fuel supplies and drove global prices higher. And even though prices were market-determined, the government asked state-owned fuel retailers like Bharat Petroleum or Indian Oil to freeze fuel prices. They promised to compensate the retailers afterwards. It was an indirect fuel subsidy.
Likewise, India also subsidises fertilisers so farmers can bear the cost of crop production. It helps them make ends meet. And like us, many other countries subsidise commodities. Countries like Denmark, Netherlands and Sweden also heavily subsidise fishing vessels and other fishing equipment simply because fishing is important to their economies.
Now, if you were to put all these subsidies together, you’d get a sum of about $1.25 trillion every year. To put things in perspective, that’s the size of an economy like Mexico. And organisations like the World Bank and the IMF (International Monetary Fund) believe that these subsidies need to go.
Because here’s the thing. The figure we quoted above only considers how much global governments directly spent subsidising fuel, fertiliser and fisheries. But add to that the implicit cost of environmental harm, and you’d be sitting on a gargantuan figure of over $7 trillion a year. That’s over twice India’s GDP and 8% of the world’s GDP.
And the relationship between subsidies and climate change is simple. The more accessible you make these commodities, the more they pollute. Take fossil fuels for example. Countries around the world actively spent nearly $577 billion in 2021 to lower the price of oil, gas and coal. Meaning, we indirectly encouraged air pollution — which happens to be one of the leading causes of 7 million premature deaths every year worldwide.
Most of it naturally affects the poor because they’re the ones that struggle to access affordable healthcare. Ironically, subsidies are considered essential tools to alleviate poverty. But they cut both ways as we illustrated above.
And while fertiliser subsidies do help aid crop output, overuse of fertilisers can actually backfire. Not just that, harmful chemicals can seep into the soil and water and ultimately lead to resource depletion. Besides, subsidising fishing equipment can lead to overfishing and ultimately affect food security. In fact, according to the UNCTAD (United Nations Conference on Trade and Development), nearly 57% of fishing subsidies worldwide directly contribute to overfishing.
So, what if we could do away with these subsidies once and for all?
Well, it would be difficult but the World Bank believes it is possible. According to them, governments need to do 3 things.
First, build public acceptance. If people believe that governments could use the money to improve sustainable infrastructure then the public is likely to be more amenable to change. In fact, a paper published by Nature Climate Change has found that removing subsidies on fossil fuels may not generate more public resistance than introducing a carbon tax. And many governments have already implemented varying degrees of carbon tax.
Second, reduce subsidies gradually. Dumping subsidies completely or all at once can be a burden to everybody. So if we could slowly reduce the expenditure, while protecting the poor that are actually affected, it wouldn’t pinch as much.
Finally, governments need to figure out how they want to use the savings from not spending on subsidies.
The only problem is that the World Bank makes it seem very easy. But it’s not.
Imagine this. The Indian government decides to remove subsidies on fertilisers. What do you think will happen to crop output? Yes, farmers will suffer. But they’ll also move away from agriculture. This could push food prices higher and it will affect everyone. Inflation could ruin us.
Similarly, if coal or fuel subsidies are discontinued, energy costs go up and developing economies like India will suffer immensely. There are no two ways about it. If international organisations believe subsidies must go, then they must start with countries that have the provision to do so. Adopting a one-size-fits-all approach could be detrimental.
Until then…
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