Chapter 11. Tools for Restructuring the Economy: Subsidy Shifting
In 1997, the Earth Council published a study entitled Subsidizing Unsustainable Development. Its purpose was to identify and tabulate environmentally destructive governmental subsidies. It found an astonishing number of examples—at least $700 billion worth per year. The authors noted, "There is something unbelievable about the world spending hundreds of billions of dollars annually to subsidize its own destruction."11
In effect, governments were spending $700 billion of taxpayers' money a year to encourage the use of water, the burning of fossil fuels, the use of pesticides, fishing, and driving. The report documented countless examples of taxpayers subsidizing the use of water in countries where water tables are falling. Governments are spending billions of dollars each year to encourage the use of fossil fuels at a time when both atmospheric carbon dioxide levels and public concern about climate change are rising. Additional billions are being spent to expand the world fishing fleet when its capacity is already nearly double the sustainable catch.12
Just as we use taxes to discourage destructive activities, we can use subsidies to encourage environmentally constructive activities, financing them by shifting funds from environmentally destructive subsidies. If these subsidies of $700 billion per year were shifted into funding environmentally constructive activities, such as investing in renewable energy, tree planting, family planning, and the education of young women in developing countries, our future could be far brighter.13
In his seminal work on fiscal restructuring for environmental purposes, The Natural Wealth of Nations, David Roodman observes: "Few public policies are as unpopular in theory and popular in practice as subsidies. The very word can make economists shudder and taxpayers fume, turn the poor into cynics, and enrage environmentalists." Despite this common response, some of our greatest achievements—from ending the Dust Bowl to developing the Internet--were based on government subsidies.14
The principal activities worldwide that are subsidized are food production, automobile driving, and fossil fuel use. Within agriculture, governments subsidize the use of irrigation water, crop production, the use of fertilizers and pesticides, and the consumption of food itself. Almost all governments subsidize irrigation water, keeping the food produced with it artificially low in price. The Punjab, India's breadbasket state, went a step further when the chief minister gave farmers free electricity in return for their political support. In a state where irrigation pumps are powered by electricity, this dramatically lowered the price of water, encouraging its use at a time when overpumping was already lowering the water table. By accelerating aquifer depletion, the time in which to adjust to the eventual decline in the groundwater supply is reduced. Expanding food production by overpumping creates a false sense of food security. In contrast to India, China's recent decision to phase in a water price increase in steps over the next five years is a giant step toward reducing the subsidization of water use.15
Some countries subsidize food consumption. Iran subsidizes bread consumption to the tune of $4 billion a year, or $63 per person. The government buys wheat from farmers at roughly 70¢ per kilogram, makes it into flour, and then sells it to bakeries at 2¢ per kilogram. This across-the-board subsidy, which encourages consumption by the affluent as well as the poor, is also an indirect subsidy to the use of irrigation water, one of the country's scarcest resources.16
Another subsector of the world food economy that is heavily subsidized is oceanic fishing. Originally, coastal countries subsidized fishing to develop this basic industry and take advantage of a locally available supply of animal protein. More recently, subsidies have been designed to ensure that each country maximized its share of the oceanic fish catch. Over the last two decades, this practice has spread, until today the capacity of the world fishing fleet is roughly double the sustainable yield of oceanic fisheries. This leads to overfishing and the destruction of the fisheries themselves, an excellent example of the law of unintended consequences.17
Extraction industries, particularly in mining and forestry, are another major recipient of subsidies. Coal mining, for example, is now heavily supported in some countries because the cost of extracting coal from an ever greater depth in old mines has increased. But coal mining is declining sharply in a number of countries, including the United Kingdom, where the Industrial Revolution began, and China, the world's largest user of coal. Belgium has phased out coal mining entirely.18
Germany, however, continues to subsidize coal mining. German subsidies, designed to protect the jobs of miners, have reached levels that defy belief. From 1983 to 1991, subsidies climbed per miner from "a generous $21,700 to a lavish $85,800," as Roodman put it. He notes that it would be cheaper for Germany simply to close the mines and pay the miners not to work.19
This contrasts sharply with the situation in China, which abruptly cut its coal subsidies from $750 million in 1993 to $240 million in 1995. In addition, China has introduced a tax on high sulfur coals. China's largest cities—with some of the worst air pollution in the world, largely due to burning coal—are even banning coal use. Beijing, Shanghai, Lanzhou, Xi'an, and Shenyan are planning to phase out coal use entirely. The combination of bold subsidy reductions and the new tax on high sulfur coal cut China's coal use by an estimated 14 percent between 1996 and 2000. (See Figure 11-1.) This provides an excellent example of the effective use of fiscal policy to reach the environmental goals of reducing local air pollution and global carbon emissions. In addition, China is subsidizing an ambitious plan to develop its wind resources, generating electricity to reduce further its reliance on coal. In effect, it is shifting subsidies from coal to wind.20
Tree cutting is also subsidized by governments for various reasons. For example, the government of the Australian state of Victoria pays logging companies $170 million more each year to get timber out than the wood is worth. A similar situation used to exist in the United States, where for decades U.S. taxpayers financed the construction of roads into national forests to facilitate clearcutting by timber companies. In 1999, the U.S. Forest Service, the government agency responsible for the management of national forests, announced a moratorium on the construction of new roads in national forests.21
A study by the World Resources Institute indicates that U.S. government subsidies of automobile use, including construction and maintenance of highways, highway patrols, and other supports to motorists, exceed the taxes paid on motor fuel, vehicle purchases, and license plates by $111 billion per year. This means that automobile driving is being heavily subsidized by those who do not even own a car.22
The Earth Council's 1997 report observes, "The car has liberated individuals just as surely as it has enslaved societies. Every day vast reaches of prime agricultural land are paved and offered up as sacrifices. Every month the population equivalence of entire towns perish from road accidents and automobile pollution."23
These destructive subsidies are but a few of those that need to be eliminated. The challenge now is to shift subsidies from environmentally destructive activities to ones that will help build an eco-economy.
The use of subsidies for environmentally constructive purposes is not new. For example, in 1934 the U.S. Congress created the Soil Conservation Service, a nationwide agency with employees in every state whose responsibility was to protect the agricultural resource base for future generations. Farmers were paid to plant windbreaks, to strip-crop, and to adopt other cropping practices that would protect their soils from wind erosion. This reduced soil erosion, helping to bring the disastrous Dust Bowl era to an end.24
A more recent example of subsidies playing a strategic environmental role is tax credits for investment in wind electricity generation two decades ago. On the heels of the energy crisis of the 1970s, the U.S. government provided tax incentives for those investing in renewable sources of energy, such as wind. At the same time, California adopted a strong tax incentive for wind power. Together these led to a large investment in wind in California and the creation of a new industry, one that used advanced technologies to convert wind energy into electricity.25
When these two tax incentives were discontinued, progress on wind power in the United States came to a near standstill. Meanwhile, the large but short-lived U.S. market led Europeans to start investing in wind energy, including in a wind turbine manufacturing industry. The Danes, who had also introduced wind energy subsidies, continued to develop the technology and to expand their capacity. Ironically, the principal beneficiary of the California tax incentive was Denmark, which now leads the world in wind energy generation per person and in manufacturing wind turbines. It is an excellent example of how a modest subsidy can launch a new industry.26
In recent years, a new U.S. wind production tax credit has encouraged heavy investment in wind farms in Colorado, Iowa, Kansas, Minnesota, Oregon, Pennsylvania, Texas, Washington, Wyoming, and other states. Strong fiscal incentives to invest in wind energy encouraged the private development of more-efficient wind turbines. The resulting precipitous drop in costs of wind electric generation explains the 24-percent annual worldwide growth in wind electric generation from 1990 to 2000 and the projected 60-percent growth in the United States in 2001. As the industry has evolved and grown, it has reached the point where some investments in wind power are now being made without subsidies.27
Tax credits were also used to subsidize investments in energy efficiency beginning in the late 1970s. This, too, paid large dividends, but as a policy instrument it was neglected after oil prices dropped from their highs of the late 1970s and early 1980s. With the rise in oil prices during the last half of 2000, public attention is again shifting to efficiency and renewables.
The potential for building an environmentally sustainable economy by restructuring subsidies is enormous. The economics of shifting from destructive subsidies to constructive ones is as attractive as the logic is compelling. Today we should be subsidizing not mining but recycling, not fossil fuels but climate-benign energy sources, and not urban automobile dependency but state-of-the-art urban rail systems.
11. André de Moor and Peter Calamai, Subsidizing Unsustainable Development (San Jose, Costa Rica: Earth Council, 1997); authors quoted in Barbara Crossette, "Subsidies Hurt Environment, Critics Say Before Talks," New York Times, 23 June 1997.
12. De Moor and Calamai, op. cit. note 11.
13. Ibid., p. 1.
14. Roodman, op. cit. note 6, p. 31.
15. David Malin Roodman, "Reforming Subsidies," in Lester R. Brown et al., State of the World 1997 (New York: W.W. Norton & Company, 1997), p. 132; Roodman, op. cit. note 6, pp. 42, 81; David Gardner, "Farm Subsidies Under Attack 'for Causing Hunger'," Financial Times, 28 February 2001; "China to Reform Water Pricing System to Enhance Conservation-Vice Minister," Xinhua, 21 June 2001.
16. "Minister Says Iranian Bakery Must Be Revised to Improve its Nutrition Value," Islamic Republic News Agency, 31 May 2001; exchange rate of 1750 Iranian rials per U.S. dollar from Financial Times, 31 July 2001; per capita number based on United Nations, World Population Prospects: The 2000 Revision (New York: February 2001).
17. Anne Platt McGinn, Rocking the Boat: Conserving Fisheries and Protecting Jobs, Worldwatch Paper 142 (Washington, DC: Worldwatch Institute, June 1998), p. 7.
18. Seth Dunn, "King Coal's Weakening Grip on Power," World Watch, September/October 1999, pp. 10-19.
19. Roodman, op. cit. note 6, p. 73.
20. Subsidy cut figures in ibid., p. 109; U.S. Department of Energy, Energy Information Administration, China: Environmental Issues (Washington, DC: April 2001); Figure 11-1 based on BP, BP Statistical Review of World Energy (London: Group Media & Publications, June 2001), and on historical data from BP Amoco, e-mail to Janet Larsen, Earth Policy Institute, June 2001; 1996-2001 data based on John Pomfret, "Research Casts Doubt on China's Pollution Claim," Washington Post, 15 August 2001.
21. Victoria logging in "Worldwatch Proposes $2000 Tax Cut Per Family to Save the Planet," press release (Washington, DC: Worldwatch Institute, 12 September 1998); USDA, Forest Service, "Forest Service Limits New Road Construction in Most National Forests," press release (Washington, DC: 11 February 1999).
22. Study cited in David Malin Roodman, Paying the Piper: Subsidies, Politics, and the Environment, Worldwatch Paper 133 (Washington, DC: Worldwatch Institute, December 1996), p. 9.
23. De Moor and Calamai, op. cit. note 11, p. 39.
24. Douglas Helms, History of the Natural Resources Conservation Service (Washington, DC: Natural Resources Conservation Service, 31 May 2001).
25. History of wind power in California from Colin Woodard, "Wind Power Pays Well for Denmark," San Francisco Chronicle, 23 April 2001.
27. Christopher Flavin, "Wind Energy Growth Continues," in Worldwatch Institute, Vital Signs 2001 (New York: W.W. Norton & Company, 2001), pp. 44-45; 60-percent projection in American Wind Energy Association, "President's Energy Plan is Useful First Step, Wind Energy Association Says," press release (Washington, DC: 17 May 2001).
Copyright © 2001 Earth Policy Institute