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Policy Analysis

World Trade Organization Talks on Agricultural Subsidies Should Consider Trade-Offs Among Trade, Food Security, and the Environment

The issue of agricultural subsidies has largely been approached at the WTO from both a trade and a food security angle. Facundo Calvo, agricultural policy analyst for IISD, argues that the environmental angle of agricultural subsidies has largely been overlooked until now, and discusses possible avenues to address this environmental angle at the WTO
By Facundo Calvo on September 26, 2022

Need to Look Beyond Impacts on Trade and Food Security

The issue of agricultural subsidies has largely been approached at the World Trade Organization (WTO) from two angles. The first is a trade angle. The WTO Agriculture Agreement distinguishes between agricultural subsidies that distort production and trade and those that do not (or do so minimally). The former are categorized as so-called Amber Box subsidies, while the latter go into the WTO’s Green Box. When it comes to WTO agriculture negotiations, conversations on subsidies revolve around the way trade-distorting subsidies can be reined in while still leaving room for governments to support their farming sectors.

The second angle relates to food security. Negotiation issues such as domestic support for cotton feature an important food security component. A WTO report notes the significance of cotton for the livelihoods and food security of millions of people in Africa. Discussions on public stockholding for food security purposes (PSH) programs seek to tackle the food security concerns of a large number of WTO members, mainly developing countries. PSH programs can be used to stabilize domestic prices and reduce consumers’ exposure to food price volatility, as well as to distribute food to vulnerable groups.

There is, however, a third angle that has until recently been largely overlooked when addressing agricultural subsidies at the WTO: the environment. This angle is important. A recent report by the Food and Agriculture Organization of the United Nations (FAO), the United Nations Development Programme (UNDP), and the United Nations Environment Programme (UNEP) shows that coupled subsidies—those linked to the production of a specific agricultural commodity—can lead to negative environmental outcomes by promoting the overuse of agrochemicals and natural resources and by incentivizing monoculture.

The Organisation for Economic Co-operation and Development (OECD), meanwhile, finds that payments based on unconstrained variable input use, are particularly environmentally harmful. By reducing the cost of agricultural inputs, these payments give farmers an incentive to increase the use of inputs such as fertilizers. This is particularly problematic in the case of nitrogen-based fertilizers, which emit nitrous oxide, a gas that is around 300 times more harmful than carbon dioxide. The use of these fertilizers is also linked to water pollution at both surface and ground levels.

However, subsidies can also be designed to promote better environmental outcomes. This is certainly the case of payments for ecosystem services, which provide financial incentives to farmers in exchange for the protection, preservation, and maintenance of natural environments. Some examples of ecosystem services include reducing water runoff and soil erosion, offsetting greenhouse gas emissions, and helping communities adapt to the impacts of climate change. Compensating farmers for helping to mitigate climate change, increasing water quality, or enhancing biodiversity are among the many ways public support for agriculture can be used to promote environmental sustainability.

Discussions Start to Examine Impacts on the Environment

More in-depth discussions at the WTO on the environmental impacts of agricultural subsidies began in early 2022 via the Trade and Environmental Sustainability Structured Discussions (TESSD). This is a welcome development.

TESSD is intended to complement the work of the WTO Trade and Environment Committee to advance discussions on trade and environmental sustainability. It also supports the objectives of the Marrakesh Agreement Establishing the WTO, which envisages a global trading system that protects and preserves the environment in accordance with sustainable development. TESSD involves 74 WTO members from all regions of the world and all levels of development. In December 2021, TESSD members adopted a ministerial statement setting out areas of future work. One of these areas is subsidies, including agricultural subsidies.

The Committee on Agriculture in Special Session (CoASS), the WTO body in charge of agriculture negotiations, is already tackling the trade effects of agricultural subsidies. But TESSD offers a complementary forum to discuss the environmental impacts of agricultural subsidies.

TESSD can also be used to explore possibilities for repurposing agricultural subsidies. This involves phasing out the most distorting and environmentally and socially harmful agricultural subsidies, such as coupled subsidies, and repurposing the freed fiscal resources toward promoting more sustainable outcomes—for instance, toward research and development, productivity-enhancing infrastructure, and payments not tied to agricultural production or that do not promote the overuse of agricultural inputs such as fuel, water, fertilizers, and pesticides.

Such discussions are crucial given that current agricultural policies, including agricultural subsidies, are heavily biased toward measures that are distorting and harmful to the environment and human health. Given the potential benefits of repurposing agricultural subsidies in a more sustainable way, as well as the trade-related implications of repurposing, it is worth asking to what extent the WTO is prepared to address this issue.

TESSD offers a good entry point to discuss repurposing agricultural subsidies at the WTO. Indeed, TESSD members have already heard two presentations on this topic this year. The first, by the International Institute of Sustainable Development, focused on both the environmental impacts of agricultural subsidies and on some policy tools where these subsidies could be repurposed more sustainably. A second presentation discussed the findings of the joint report by FAO, UNDP, and UNEP.

TESSD offers a good entry point to discuss repurposing agricultural subsidies at the WTO.

WTO members could eventually use TESSD as a forum to share their own experiences with phasing out environmentally harmful agricultural subsidies (or their plans to do so). This information sharing can feature concrete examples of how members have made better use of the freed resources by allocating part of them to nature-based infrastructure, payments for ecosystem services, agricultural extension services, or other sustainability-enhancing practices.

As already noted, the objectives of repurposing agricultural subsidies (and agricultural support more broadly) go well beyond protecting the environment or biodiversity. For example, a recent FAO report discussed how repurposing agricultural support can contribute to healthier diets. Having said that, tackling the environmental angle of agricultural subsidies at TESSD (in parallel with their trade and food security dimensions) could be a good starting point to bring the repurposing agricultural subsidies discussion into the WTO.

Tackling Agricultural Subsidies Means Addressing Trade-Offs

WTO talks on farm support must acknowledge that tackling these subsidies involves trade-offs. The International Food Policy Research Institute and the World Bank have written about this (see here and here). Their research demonstrates, for instance, that coupled subsidies contribute to higher greenhouse gas (GHG) emissions, but also to higher levels of agricultural production. Thus, removing coupled subsidies can result in trade-offs between lower GHG emissions and less agricultural production.

Similarly, the joint report by FAO, UNDP, and UNEP underlines that removing all agricultural subsidies worldwide would lead to a drop in CO2 emissions, but at the expense of markedly lower agricultural output.

Efforts at the WTO to promote the idea of repurposing agricultural subsidies must also address trade-offs among trade, food security, and environmental dimensions.

Efforts at the WTO to promote the idea of repurposing agricultural subsidies must also address trade-offs among trade, food security, and environmental dimensions. This could be done, for instance, by ensuring that subsidies repurposed to the Green Box (those that were previously notified to the WTO as agricultural subsidies that distort production and trade and that are now being notified as Green Box subsidies) do not in practice distort production and trade or at most cause minimal distortion.

The WTO can also host discussions on how members can monitor the repurposing of agricultural subsidies. Transparency and monitoring of how these subsidies are being repurposed would not only help to tackle the trade, food security, and environmental concerns of all WTO members but would also increase the political buy-in and support for the repurposing agricultural subsidies agenda at the WTO.

Because of these inherent trade-offs, discussions on agricultural subsidies need to address the impacts of agricultural subsidies (and their removal) across multiple dimensions, including trade, food security, and the environment. They should also do so in relation to agricultural production, rural livelihoods, farmers’ income, consumer welfare, and impacts on healthy diets. In so doing, WTO members can avoid discussing agricultural subsidies in silos: trade and food security at the CoASS, environmental impacts at the TESSD, and so on. In this regard, a more fluid dialogue between different committees and initiatives at the WTO could facilitate a better understanding of these trade-offs.

Need to Address the Environmental Impacts of Market Price Support

Subsidies are not the only form of support for agriculture. The OECD’s latest Agricultural and Policy Monitoring Evaluation report finds that subsidies accounted for slightly less than half (48%) of the USD 611 billion in support provided to farmers from 2019 to 2021. The balance was provided in the form of market price support, which in OECD jargon refers to policy measures such as import tariffs that entail a transfer of resources from consumers and taxpayers to farmers. Market price support is the dominant form of support for agriculture in most countries.

WTO members should address the link between market price support and environmental outcomes.

Like subsidies, market price support affects trade and production decisions and distorts agricultural markets. It also generates environmentally harmful outcomes by creating strong incentives for increased production, which leads to greater use of inputs—including agrochemicals, land, and water—in turn contributing to more GHG emissions and nitrogen runoff from agriculture.

The WTO Ministerial Statement on Trade and Environmental Sustainability supports “continued discussions on the environmental effects and trade impacts of relevant subsidies [emphasis added] and the role of the WTO in addressing these” (paragraph 5). However, given the significance of market price support and its potential to generate harmful environmental impacts, WTO members should address the link between market price support and environmental outcomes.

As with agricultural subsidies, efforts to discuss market price support to agriculture at the WTO should also acknowledge trade-offs between trade, food security, and the environment.