Perverse subsidies

Many subsidies are "perverse" in that they are harmful to both the economy and the environment. In Germany, for instance, subsidies for coal mining are so large 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. The environment would benefit too: less coal pollution such as acid rain and global warming.

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 aggravate pollution such as acid rain, urban smog and global warming. Subsidies for road transportation promote some of the worst and most widespread forms of pollution. Subsidies for water encourage mis-use and over-use of supplies that are increasingly scarce in many lands. Subsidies for ocean fisheries foster over-harvesting of fish stocks. Forestry subsidies encourage over-logging and other forms of deforestation.

Not only do these environmental ills entrain economic costs, but the subsidies serve as direct drags on economies overall.

Of course certain subsidies are worthwhile. They overcome deficiencies of the marketplace, and they support disadvantaged segments of society. Despite their distortionary effects in many instances, we sometimes need a bit of positive distortion if we are to get as much as we want of e.g. non-polluting and renewable sources of energy (all the more when fossil fuels with their many problems are often subsidized several times more than alternative sources of energy). The same applies to support for materials recycling and agricultural set-asides.

Perverse subsidies in just the six sectors listed total at least $2 trillion per year. Plainly, perverse subsidies can exert a highly distortive impact on the global economy, and promote grandscale injury to environments and natural resources. Consider, for instance, road transportation.

In United States, gasoline is cheaper than bottled water, thanks to myriad subsidies. In real terms it is cheaper than at any time since Americans started to dig it out of the ground. What economists call the "full social cost" of gasoline—covering costs of whatever sort, including traffic congestion, road accidents and environmental pollution—amounts to at least $7 per gallon. Gasoline subsidies create an energy policy by default, a policy that is the opposite of the government's priorities. They prolong the country's dependence on foreign supplies of oil, especially from the Persian Gulf. They discourage investments in cleaner technologies such as ultra-lean car engines. At the same time, traffic congestion in many major U.S. cities reduces one third of vehicle travel to speeds averaging half of the free-flow rate; the annual cost of delays amounts to at least $100 billion per year. Then there are sizeable environmental costs. Some 100 million Americans live in cities where vehicle emissions push pollution levels above federal standards.

If Americans don't want to pay extra taxes for their gasoline, they might at least stop being effectively paid by their government and fellow citizens to burn the stuff. The covert costs of road transportation are well over $450 billion per year, equivalent to $1500 per American.

The political climate for reform of perverse subsidies is probably better than for decades. Many governments are espousing the marketplace gospel with its reduced government intervention; and many governments are so hard up that they have special reason to reduce subsidies. In fact, several governments have reduced some of their perverse subsidies: New Zealand, with an economy more dependent on agriculture than any other developed country, eliminated virtually all its agricultural subsidies in the mid-1980s when its government budget was finally over-burdened to the breaking point. Mexico, South Africa and Australia are moving towards full-cost pricing of water. But there are formidable obstacles. Special-interest groups proliferate with their financial clout. There are dozens of lobbyists for each Congressman in Washington, and they spent over $200 million a month on their campaigns in 2005.

The best counter-measure is to highlight the costs of perverse subsidies to both taxpayers and consumers. An average American pays taxes of at least $2000 a year to fund perverse subsidies, and pays almost another $2000 through increased costs for consumer goods and through environmental degradation.

Note: This article is based on Norman Myers and Jennifer Kent, 2001, "Perverse Subsidies: Tax $s Undercutting Our Economies and Environments Alike" Island Press, Washington DC.

This Informational Box is an excerpt from An Introduction to Ecological Economics by Robert Costanza, John H Cumberland, Herman Daly, Robert Goodland, Richard B Norgaard. ISBN: 1884015727



Myers, N. (2007). Perverse subsidies. Retrieved from


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