Global Subsidies' Reformation Unleashing New Avenues for Climate Solutions

Subsidies have been recognized as a pivotal instrument in the global response to climate crisis. These mechanisms have the capacity to mobilize considerable resources and provide an alternative approach to devising solutions within the climate financing paradigm. A recent analytical report from the The World Bank, explores the scope of global subsidies, along with their advantages and disadvantages.

Current subsidies for fossil fuels, agriculture and fisheries have been found to promote inefficiency, endorse unsustainable activities, and cause adverse side effects on human health and the natural environment.The report underscores a concerning disparity, highlighting that expenditure on these harmful subsidies often surpasses the funding allocated to critical areas such as health and education. Remarkably, these subsidies amount to more than $7 trillion annually, equivalent to roughly 8% of the world's GDP. Explicit subsidies, which are direct public expenditures, are around $1.25 trillion, while implicit ones surpass $6 trillion. The report concludes that the unintended adverse side effects of subsidies outweigh the benefits of maintaining them.

These adverse side effects include reinforcing spatial inequalities, land degradation, air and water pollution, overfishing, resource depletion, misallocation of resources across sectors in the short term, and impacts on human health, livelihoods, and long-term growth and competitiveness.
To repurpose harmful subsidies, the report lays out six principles:

✅ Assessing subsidies: Define and evaluate the costs and benefits, and potential impacts of reshaping subsidies.
✅Building public acceptance and credibility: Effective communication and transparency are key to gaining public trust, especially when political opposition threatens repurposing efforts.
✅Complementary measures: When price-based instruments (such as subsidy reductions) are insufficient to solve environmental externalities, complementary measures become necessary.
✅Social protection and compensation: These are necessary in all contexts where subsidy removal may threaten the livelihoods of vulnerable groups and increase poverty.
✅Carefully sequenced reforms: Gradually phased reforms can reduce disruption from price shocks, allowing households and firms to adjust.
✅Sound strategies for reinvesting reform revenue: This can ensure that subsidy reforms help achieve development goals such as infrastructure, health, and education, while also legitimizing the public good of subsidy reform.

In Cairo, Egypt, the government, eliminated fossil fuel subsidies and introduced new regulations. This led to a reduction in vehicular traffic and a 4% decrease in PM10 concentration The launch of Cairo’s Metro Line 3 further reduced air pollution by 3%.

In Mexico, the government tackled the rise in int'l oil prices between 2005 and 2013 by adopting a policy of monthly increases in fuel prices, while liberalizing the fuel market and introducing a carbon tax.