World Bank report 2023: How subsidy reform can help safeguard the world’s foundational natural assets
A new report from the World Bank examines the importance of subsidy reform in protecting our essential natural assets such as clean air, land, and oceans. These assets play a crucial role in human health, nutrition, and the global economy.
In the World Bank report, however, subsidies for fossil fuels, agriculture, and fisheries are causing their degradation, harming both people and the planet. The enormous amount of money spent on these subsidies, which exceeds trillions of dollars, could instead be used to finance climate action worldwide.
The explicit and implicit subsidies for fossil fuels, agriculture, and fisheries amount to over $7 trillion, roughly 8% of global GDP. Explicit subsidies, which are direct government expenditures, reach approximately $1.25 trillion, equivalent to the size of a major economy like Mexico. On the other hand, implicit subsidies, which measure the impact of subsidies on people and the environment, surpass $6 trillion annually, with the heaviest burden falling on the poor.
Governments are investing trillions of dollars in inefficient subsidies that exacerbate climate change, funds that could be better utilized to address the issue. Agriculture subsidies, for instance, are responsible for the loss of 2.2 million hectares of forests every year, accounting for 14% of global deforestation. Fossil fuel subsidies, by incentivizing their usage, contribute significantly to the yearly occurrence of 7 million premature deaths due to air pollution. Fisheries subsidies, exceeding $35 billion annually, lead to depleted fish stocks, oversized fishing fleets, and declining profitability.
Repurposing these wasteful subsidies will contribute to a green and equitable transition that creates employment opportunities for everyone. Countries currently spend six times more on subsidizing fossil fuel consumption than their commitments under the Paris Agreement to combat climate change. Redirecting these subsidies can unlock substantial funds for sustainable initiatives.
The consequences of inaction are costly. Time is running out to address the climate crisis, especially considering strained budgets, mounting public debts, increasing inequalities, and worsening environmental degradation. Governments should prioritize comprehensive subsidy reforms that garner public acceptance, protect vulnerable populations, and ensure transparent spending.
According to the World Bank report, Contrary to popular belief, subsidy reforms can actually benefit the poor. Data does not always support the notion that subsidy reforms disproportionately affect the less privileged. In some cases, such as energy subsidies, the wealthy benefit more due to their higher consumption. To safeguard vulnerable groups during subsidy reforms, the report suggests compensating those who may face the most significant hardships through measures like direct cash transfers.
The success of energy subsidy reforms in the Middle East and North Africa provides examples of how cash transfers and in-kind assistance effectively alleviate the impacts on the poor.
According to recent research by the UN Development Programme (UNDP), the world spends a staggering $423 billion each year on subsidies for fossil fuels like oil, gas, coal, and electricity generated from fossil fuels. This amount is four times greater than what is required to support developing nations in combating the climate crisis, which has become a major point of contention leading up to the upcoming COP26 global climate conference.
To put it into perspective, the direct expenditure on these subsidies alone could cover the cost of COVID-19 vaccinations for every person on the planet or fund efforts to eradicate extreme poverty more than three times over. When we consider the indirect costs associated with these subsidies, such as the environmental damage they cause, the total figure skyrockets to nearly $6 trillion, as reported by the International Monetary Fund (IMF).
Shockingly, these funds, which come from taxpayers’ pockets, actually worsen inequality and hinder progress in addressing climate change. The UNDP’s analysis emphasizes that in a world where hundreds of millions of people live in poverty and the climate crisis is escalating, continuing to allocate billions of dollars to subsidize fossil fuels is an outdated practice that demands critical examination.
Achim Steiner, the Administrator of UNDP, highlights the glaring disparities exposed by the COVID-19 pandemic and questions whether it is rational to allocate public funds to support fossil fuel subsidies under these circumstances. It is essential to reevaluate our priorities and consider alternative uses for public money that align with addressing poverty, climate change, and the urgent need for sustainable development.
In addition to the points mentioned, let’s explore more detailed considerations related to the issue of fossil fuel subsidies:
- Health Impacts: Fossil fuel subsidies contribute to air pollution, leading to adverse health effects for millions of people worldwide. The burning of fossil fuels releases pollutants such as particulate matter, nitrogen oxides, and sulfur dioxide, which can cause respiratory diseases, cardiovascular problems, and other health issues. The resulting air pollution is a major public health concern. By reducing subsidies and promoting cleaner alternatives, governments can improve public health outcomes and reduce healthcare costs.
- Renewable Energy Transition: Redirecting funds from fossil fuel subsidies towards renewable energy sources can accelerate the transition to a clean energy future. Investing in renewable energy technologies, such as solar and wind power, can drive innovation, create green jobs, and reduce greenhouse gas emissions. This shift towards renewables also enhances energy security, as it reduces dependence on imported fossil fuels and mitigates the risks associated with price volatility.
- Energy Access and Affordability: Subsidy reform can help ensure equitable access to energy resources. By targeting subsidies towards energy access for low-income households and underserved communities, governments can promote affordability and reduce energy poverty. This approach supports social welfare by providing vulnerable populations with access to clean and affordable energy sources, thereby improving their quality of life and enabling socio-economic development.
- Sustainable Agriculture and Fisheries: Subsidy reform in the agriculture and fisheries sectors can promote sustainable practices. Redirecting subsidies towards environmentally friendly farming techniques, conservation efforts, and responsible fishing practices can safeguard natural resources, protect biodiversity, and ensure the long-term viability of these industries. Sustainable agriculture practices can enhance food security, reduce water usage, and mitigate soil degradation. Fisheries subsidies can be redirected towards improving surveillance and enforcement to combat illegal, unreported, and unregulated (IUU) fishing practices, leading to the conservation of marine resources and the protection of livelihoods dependent on fishing.
- Green Infrastructure and Transport: Repurposing subsidies can facilitate investments in green infrastructure and sustainable transportation systems. Funding sustainable urban development, public transit, and electric vehicle infrastructure can reduce emissions, enhance mobility, and create more livable cities. Green infrastructure projects, such as renewable energy-powered public transportation and cycling infrastructure, can contribute to reduced greenhouse gas emissions and improved air quality. This transition can also lead to economic growth and job opportunities in the clean energy and transportation sectors.
- International Climate Commitments: Redirecting funds from fossil fuel subsidies aligns with countries’ commitments under international climate agreements, such as the Paris Agreement. By phasing out these subsidies, countries demonstrate their commitment to reducing greenhouse gas emissions, limiting global warming, and transitioning to a low-carbon economy. It also enhances their credibility and leadership in international climate negotiations, encouraging other nations to follow suit and facilitating collective global action to address climate change.
Addressing the issue of fossil fuel subsidies requires a comprehensive approach that considers environmental, economic, health, and social factors. By reforming these subsidies, governments can promote sustainable development, combat climate change, improve public health, enhance energy access, and support the transition to a greener and more equitable future. These measures are crucial for creating a sustainable and resilient world that benefits both current and future generations.
In conclusion, the World Bank report 2023 sheds light on the critical importance of subsidy reform in safeguarding our foundational natural assets and addressing pressing global challenges. The report highlights how subsidies for fossil fuels, agriculture, and fisheries, which exceed $7 trillion, are driving the degradation of clean air, land, and oceans—essential resources for human health, nutrition, and the global economy.
These subsidies, amounting to around 8% of global GDP, not only contribute to environmental harm but also hinder efforts to combat climate change and deepen inequality. Redirecting these substantial funds towards climate action and sustainable initiatives could have a transformative impact. The report emphasizes that the trillions of dollars currently spent on inefficient subsidies could instead be used to finance much-needed climate action, aligning with countries’ commitments under the Paris Agreement.
The consequences of inaction are costly, with time running out to address the climate crisis. Amid strained budgets, increasing public debts, growing inequalities, and worsening environmental degradation, comprehensive subsidy reforms become paramount. Governments must prioritize these reforms, building public acceptance and protecting vulnerable populations, while ensuring transparency in how funds are spent.
Crucially, the report dispels the misconception that subsidy reforms disproportionately affect the poor. In fact, in some cases, the wealthy benefit more from energy subsidies due to their higher consumption. To safeguard vulnerable groups during reforms, compensatory measures such as direct cash transfers can be implemented, as demonstrated successfully in the Middle East and North Africa.
The World Bank report underscores that repurposing wasteful subsidy is pro-poor, green, and just. By reallocating these funds, we can facilitate a green and equitable transition, providing jobs and opportunities for all. It is time for governments to prioritize subsidy reform, ensuring that public resources are effectively utilized to address the climate crisis, protect natural assets, and promote sustainable development. The report’s findings serve as a call to action for policymakers, urging them to seize the opportunity to create a more sustainable and prosperous future for all.
Reference
Fuel Subsidy Situation in Nigeria: An Assessment of Current Challenges and Prospects – NEDES
Nature Assets – UN Capital Development Fund (UNCDF)
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