Trillions of dollars of subsidies for fossil fuels, farming and fishing are causing “environmental havoc”, according to the World Bank, severely harming people and the planet.
Many countries spend more on the harmful subsidies than they do on health, education or poverty reduction, the bank says, and the subsidies are entrenched and hard to reform as the greatest beneficiaries tend to be rich and powerful.
Reforming subsidies would provide vital funding to fight the climate and nature crises at a time when public coffers are severely stretched, the bank says.
The “toxic” subsidies total at least $7.25tn a year, according to a major new report from the bank. The explicit subsidies – money spent by governments – account for about $1.25tn a year, or more than $2m a minute. Most of these are harmful, the bank says.
There are also implicit subsidies such as waived taxes and the cost of the damage caused by worsenening global heating and air pollution. These total $6tn a year, according to the World Bank, although a higher recent estimate that includes the costs of pollution and destruction of nature by farming pushes the figure to almost $11tn a year.
In total, the subsidies supporting environmental destruction could amount to $23m a minute. The bank said the estimates were conservative, as some countries did not fully record subsidies and they had risen since the Covid pandemic and had yet to be fully counted.
The bank also said the bulk of the subsidies were regressive, benefiting the rich more than the poor, and that direct aid to the poorest would be far more efficient.
“Environmentally harmful subsidies [are] one of the most toxic aspects of development that we have in the world,” said Richard Damania, the World Bank chief economist for sustainable development. “These are trillions that we are throwing away, trillions that are doing harm. And yet we need that money.”
“There’s something really quite strange about subsidising fossil fuels on the one hand, while we spend money to fight climate change on the other hand,” he said. At $577bn, the explicit subsidies for coal, oil and gas in 2021 were twice as large as those for renewable energy, and almost six times higher than the climate finance promised by rich countries to developing nations.
In 2021, UN agencies reported that almost 90% of agricultural subsidies harmed people’s health and the climate, and drove inequality, while the IMF found that trillions of dollars of fossil fuel subsidies were “adding fuel to the fire” of the climate crisis at a time when rapid cuts in carbon emissions were needed.
The World Bank report, titled Detox Development, says the subsidies are “driving the degradation of the world’s foundational natural assets – clean air, land, and oceans – [which] are critical for human health and nutrition”.
Fossil fuels are “vastly underpriced”, the report says, while subsidy reforms “save lives”. Pollution from fossil fuels causes 8.7m deaths a year, according to a 2021 study, one in five of all deaths globally.
Subsidies for agriculture are “unequal and unwise”, the report says. “Not only do these subsidies promote inefficiencies, but they also cause much environmental havoc.” The report found that subsidised fertiliser caused so much overuse in some regions that it reduced crop yields, while also causing huge nitrogen pollution.
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It also found farm subsidies were responsible for the destruction of 2.2m hectares (5.4m acres) of forest a year, about 14% of global deforestation, which leads to almost 4m extra cases of malaria a year.
Fishing subsidies amount to about $118bn a year and are a key factor in over-exploitation of marine life, which has sent the oceans into “a collective state of crisis”, according to the report.
The report says government subsidies today make up an “enormous share of public budgets worldwide, perhaps larger than at any point in human history”.
“Subsidy reform is extremely urgent – in fact it is essential – if we are to safeguard both people and planet,” said Morgan Gillespy, at the Food and Land Use Coalition. “The report makes a significant contribution to the conversation on agricultural subsidies. Repurposing inefficient and unsustainable subsidy spending is the most cost-effective and economically attractive way to achieve global climate and nature goals.”
Ipek Gençsü, at the ODI global affairs thinktank, said: “Government fossil fuel subsidies have ballooned due to the energy price crisis, at a time when governments should instead be providing financing to increase energy efficiency and to invest in clean technologies. Instead, they have locked consumers and the society further into fossil fuel addiction.”
The report acknowledges that cutting subsidies is politically difficult and presents a roadmap for successful reform. Communication is key, it says, to build coalitions of support
Compensation is also critical. “There will always be losers,” said Damania. “But compensation is an excellent way of putting money directly into the hands of poor people, rather than indirectly through some subsidy.” Lastly, reforms must be credible, he said; people must be convinced that governments will stay the course and not be pressured into reversals.
Higher levels of debt in many countries after the Covid pandemic and global economic problems resulting from the war in Ukraine and other factors meant subsidy reform could be a vital source of funding for environmental action, Damania said. “We have to find ways of spending the money that we have better, rather than arguing that we need to spend more when budgets are so tight. Look how close we are to so many planetary boundaries.”
The report says: “Although doing so will entail demanding policy reforms, the costs of inaction will be far higher.”