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A New Year of Subsidy Reform

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By Scott Vaughan, January 26, 2016

We begin 2016 with two historic global achievements in place to reform subsidies that harm the poor and damage the environment.

The highlight is the Paris Agreement on climate change. Alongside this agreement, in 2015, 40 countries—led by New Zealand, Denmark and Sweden—joined a call for action to put an end to fossil fuel subsidies. Significant reductions of greenhouse gas emissions have resulted from removing fossil fuel subsidies just to consumers. IISD’s Global Subsidies Initiative has estimated that removal of fossil fuel subsidies to consumers across twenty countries could reduce greenhouse gas emissions by an average of 11%. By taking 30 per cent of subsidy savings, and investing in renewable energy and energy efficiency, national emissions are reduced further to an average of 18 per cent by 2020. 

A week after the Conference of the Parties in Paris, trade ministers from 164 countries agreed to end agricultural export subsidies. The Word Trade Organization (WTO)—hamstrung for over a decade by the doomed Doha Round—met in Nairobi and adopted the Nairobi Agreement, which will see an end to some of the most harmful agriculture subsidies.

So, are we now entering the era of subsidy reform? And what lessons can be transferred from the agriculture sector to fossil fuels and vice versa?

The End of Agricultural Export Subsidies

The World Bank, among others, has estimated that over USD 100 billion is spent annually on agricultural export subsidies, mostly from rich countries to the detriment of developing counties that depend far more on the agricultural sector for jobs, GDP and community development. A more recent and disturbing tendency has included the dumping of agricultural commodities on world markets, depressing world prices and undermining the ability of poor farmers to get a fair price for their goods. Thus, the Nairobi Agreement is welcome to claw back these practices that wreak havoc on developing countries.

But the Nairobi Agreement is not enough. Trade practices that harm the poor and damage the environment extend well beyond export subsidies: an estimated USD 1 billion is spent daily around the world on different types of domestic subsidies, tariffs and non-tariff measures. Food aid, for example, is sometimes used to dump surplus agricultural commodities onto world markets, further depressing prices. All together, these elements play havoc with agricultural markets and are especially harmful to the 70 per cent of poor people who live in rural areas and depend on agriculture for their survival.

Equally worrying, agricultural commodity prices are characterized by sharp volatility. That roller coaster is forecast to continue in 2016, as the impacts of the unprecedented multi-year droughts in the western United States, Australia and elsewhere result in the periodic sky-rocketing of fruit, vegetable and beef prices. Climate change is now having significant, and often unpredictable, impacts on global agriculture, with consequential financial impacts for producers and consumers.

Lessons from Fossil Fuel Subsidy Reform

In recent years—and especially in the lead-up to Paris—there has been growing momentum to identify fossil fuel subsidies and begin action to reduce and eliminate them. Countries across the developing and emerging worlds have reduced or removed subsidies that fix fuel prices at artificially low levels (“consumer” subsidies), and the debate is now concerned with “when and how” rather than “if.” Progress came through evidence of the scale and impact of subsidies, in an evaluation of how ineffective subsidies were at reaching their targets (notably the poor or key industries) and an understanding that the constraints were political rather than purely economic.

Less than one-tenth of the value of fuel subsidies reaches the poorest 20 per cent anywhere in the world. The impact? Those subsidies stifle innovation and drain national budgets. In fact, in several countries, more money is spent to prop up the production and use of fossil fuels than national spending on health and education. Reforms are already underway in several countries, including Egypt, India, the Philippines, Indonesia, Morocco and Vietnam.

Most of these reforms continue to tackle consumer subsidies. More attention is needed to identify and eliminate fossil fuel production subsidies. We already burn far more fossil fuels than the atmosphere can withstand.

Where Do We Go from Here?

The lessons from fossil fuel subsidy reforms in developing countries could help guide the ongoing agricultural subsidy reform at the WTO, particularly the focus on the poor. The Nairobi Agreement to cut export subsidies is an important step, but much more is needed. The challenge is to conclude an agreement that allows the right mix of policies and regulations at the national level to achieve sustainable development objectives. For agriculture, these objectives include: an end to hunger; improved access to healthy and affordable food for consumers; a decent wage for farm workers; fair and remunerative prices for farmers; a framework to encourage investment, innovation and the transfer of technology; and a more equitable distribution of wealth along the food chain.