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The no-win madness of catch-22 subsidies

Published in the Financial Times, 28 July 2003.

This article was co-written with Norman Myers, fellow of Green College, Oxford.

Economists and environmentalists are not always best friends. But on one issue they can and should unite. That is to oppose the propensity of governments to misuse fiscal instruments. Few contest that such instruments, whatever their form, should be designed to promote good policies and discourage bad ones. Instead almost every government has created, almost without realizing it, an encrusted apparatus of subsidies which, once established, proves almost irremovable. Worse, many of these subsidies are harmful to our economies as well as our environments. In different ways such perverse subsidies bedevil all our economies. The public interest, which was their justification, has been lost.

To take some examples. German coal mines are so heavily subsidized that it would be economically efficient for the government to close down all the mines and send the workers home on full pay for the rest of their lives. That would also reduce coal pollution in the form of acid rain, urban smog and global warming. Here both the economy and the environment are the losers.

So too with marine fisheries. The annual global catch, well above sustainable yield, is worth around US$100 billion at dockside, where it is sold for some US$80 billion, the shortfall being made up with government subsidies. The result is that more and more fishermen chase fewer and fewer fish until stocks collapse and fishing businesses go bankrupt. In 1992 one of the richest fisheries in the world, that of the Grand Bank in the North Eastern parts of the United States, had to be closed because of sheer shortage of fish. Dozens of businesses went bankrupt as a result.

Elsewhere in the United States, one government agency subsidizes irrigation for crops that another agency has paid farmers not to grow. To cite the economist Paul Hawken,

"The government subsidizes energy costs so that farmers can deplete aquifers to grow alfalfa, to feed cows that make milk, that is stored in warehouses as surplus cheese, that does not feed the hungry."

In Britain the government continues to subsidize the fossil fuel industries in spite of diminishing reserves of oil and gas in the North Sea, and the government's own policies on the need to switch to clean renewable sources of energy. The figures are astonishing. Every year the government gives some 6 to 8 in fossil fuel subsidies for every 1 to support clean and renewable energy.

Worldwide perverse subsidies are prominent in six main sectors: agriculture, fossil fuels, road transport, water, forestry and fisheries. In all cases the subsidies serve to undermine national economies as well as environments. Subsidies for agriculture foster over-loading of croplands, leading to erosion of topsoil, pollution from synthetic fertilizers and pesticides, and release of greenhouse gases. Subsidies for fossil fuels are a prime source of pollution. Subsidies for road transport also promote pollution, plus such other ills as road congestion. Subsidies for water encourage misuse and over-use of supplies. Subsidies for forestry encourage over-logging and other forms of deforestation. Subsidies for fisheries foster over-exploitation of fish stocks.

It is hard to calculate the value of such subsidies worldwide, but they probably amount to at least US$ 2 trillion a year. On both economic and environmental grounds, they defer the time when we can achieve the holy grail of sustainable development. The total of US$2 trillion is three and a half times as large as the Rio Earth Summit's proposed budget for sustainable development, a sum that governments then dismissed as simply not available.

The OECD countries account for two thirds of perverse subsidies, and the United States over one fifth. A typical British taxpayer pays at least 1,000 a year to fund perverse subsidies, then pays another 500 through increased prices for consumer goods and through environmental degradation.

Yet perverse subsidies persist virtually untouched. This is because subsidies tend to create powerful interest groups and political lobbies. Were just half of these perverse subsidies to be phased out, the funds released would help many governments to reduce or abolish their budget deficits, to reorder their fiscal priorities in the true public interest, and to repair environmental damage. There are a few success stories. New Zealand has eliminated virtually all its agricultural subsidies, even though - or perhaps because - its economy is heavily dependent on agriculture. Today the country has more farmers, more sheep, and a healthier environment. In similar style Russia, China and India have greatly reduced their fossil fuel subsidies. Australia, Mexico and South Africa are moving towards more intelligent pricing of their water supplies to reflect their true cost.

Our present mode of exploiting the Earth and its environmental resources - unsustainable exploitation for the most part - suggest that we view our planet as a business liquidating its capital, rather than one profiting from the interest on it. Should we not live on our planet as if we intended to stay, rather than as if we were visiting for a weekend?

By Norman Myers & Crispin Tickell

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