Subsidies are one of the clearest areas of shared interest for the trade and environment communities. Both oppose so-called perverse subsidies—subsidies that are harmful to the environment and the economy. And there may also be scope for co-operation on allowing new subsidies that benefit the environment without unduly distorting trade.

Depending on the definition, perverse subsidies worldwide range from $500 billion to $1.5 trillion a year. This is a powerful force for environmental damage and economic inefficiency. At the environment-trade nexus, a number of sectors are of interest, with agriculture, forestry, energy, transportation and fisheries being the most obvious.

Environmentalists and advocates of free trade dislike perverse subsidies because they distort prices. From an environmental perspective, they artificially lower the costs of doing business in an environmentally unsustainable way. Subsidies in the fisheries sector, for example, include low-interest loans to fishermen, fuel tax exemptions, and outright grants to purchase gear, boats and other infrastructure. These measures all lower the cost of fishing and lead to overexploitation of the resource—too many fishermen and too many boats chasing too few fish. In other sectors the story follows the same basic plot. Agriculture, energy production and transportation are all hard on the environment, and most of the environmental damage they entail is not built into the market price of the goods they produce. The consumer buying bread, for example, is not paying for any of the environmental costs incurred in growing the wheat. Subsidizing wheat growers may therefore increase environmental damage, by increasing their scale of operations. To add insult to injury, subsidizing polluting sectors or technologies reduces incentives to develop greener alternatives. The $145 billion a year given in subsidies to the fossil fuel and nuclear energy sectors worldwide diverts physical, financial and intellectual capital from research and development for alternatives like solar energy.

From an economic perspective, distorted prices reduce one of the main potential gains from trade—increased efficiency (see chapter 4). If Iceland, for example, devoted enough subsidies to the production of coffee in greenhouses it could become a competitive exporter. But most people would agree that this would be a staggering waste of resources for the Icelandic economy.

It is important to remember that not all subsidies are perverse. A subsidy that pays for previously unpaid environmental benefits may be socially desirable. For example, it may make sense for governments to subsidize developing and disseminating solar technologies as alternatives to fossil fuels since it could lower emissions of greenhouse gases. If environmental costs are factored in, such subsidies actually move prices closer to their true level. The WTO recognizes that some sorts of subsidies are desirable, and has provided an exception in the Agreement on Subsidies and Countervailing Measures that allows for certain subsidies to firms to meet new environmental regulations (up to 20 per cent of the costs of a one-time expenditure). As well, a number of proposals for WTO rules have been made to allow subsidies to encourage the spread of environmentally sound technologies.

Even those subsidies that are perverse deserve careful analysis. Dismantling them can cause hardship in the short run to those least able to absorb the shock. Cutting fossil fuel subsidies in cold climates, for example, may hurt the poor who depend on such subsidies to heat their homes. Cutting fisheries subsidies may mean an initial loss of needed revenue for countries that sell the rights to fish their territorial waters. These types of considerations argue for bridging measures to accompany subsidy removal.

It remains to be seen whether the WTO can play a major role in dismantling perverse subsidies. A number of proposals have been put forward to have the WTO help reduce perverse fisheries subsidies, and the question of how to design appropriate agricultural subsidies is being informed by environmental concerns (see section 5.6). But building consensus on such changes will not be an easy task—for every perverse subsidy there is a host of beneficiaries keen to see things stay as they are.

5.6 Agriculture