Are Environmental Subsidies the Right Tool for the Green Transition?

Economic subsidies have long been used by governments around the world to promote environmental sustainability and support the ecological transition. But how effective are they? Are they really the best tool to incentivize the necessary changes in industrial and economic sectors?

In an article published in Science, a group of economists, ecologists, geographers, psychologists, and other renowned scientists explores this complex and multifaceted issue, arguing that subsidies can lead to unintended consequences, both economically and environmentally.

UniboMagazine spoke with one of the authors: Alessandro Tavoni, professor at the Department of Economics at the University of Bologna and Principal Investigator of the ERC Green Tipping project, which explores large-scale solutions for promoting sustainable changes in individual and social behaviour.

Professor Tavoni, why are economic subsidies used to support the green transition?

To address the impacts of climate change and the risk of biodiversity loss, governments need tools that curb environmental damage and incentivize economic activities with sustainable goals. Subsidies are a simpler solution to implement compared to new taxes or regulations. However, they must be used with caution to avoid generating negative effects.

How can they produce negative effects?

It is essential to consider the potential market consequences of using subsidies, weighing both positive impacts and potential downsides. For example, we know that subsidies tend to lower market prices, leading to increased production and consumption. Applying this logic to renewable energy production could result in a higher energy demand, which would still have significant environmental impacts.

What about incentives for electric cars?

Subsidies that encourage greater electric car production can also have negative effects, such as increasing the need for lithium extraction to produce batteries. Furthermore, they could lower vehicle prices, leading to more cars on the road, and in turn, more traffic and accidents. These are issues that wouldn’t arise if subsidies were instead directed toward improving public transportation.

Does this apply especially to subsidies not tied to sustainability?

Yes, those too can have detrimental environmental impacts. For instance, globally, over $1 trillion is still spent on subsidies to support the fossil fuel industry, which accelerates climate change. We also know that agricultural subsidies contribute to deforestation and pollution, while subsidies for fishing deplete marine resources. Once implemented, these measures are very difficult to eliminate.

Why is that?

Once subsidies are established, they tend to create narrow and powerful groups of beneficiaries with a strong interest in keeping them in place. These groups form close relationships with policymakers to maintain the status quo. Moreover, eliminating subsidies can cause price hikes—at least in the short term—on essential goods like food or energy, potentially leading to public unrest. We saw this, for example, in Ecuador in 2019, when fuel subsidies were cut, and more recently with protests by farmers in Germany against proposed cuts to diesel subsidies.

So, what is the solution?

Subsidies can be useful tools to facilitate the green transition, but they need to be carefully designed, with mechanisms for their revision or elimination in the long term. From an economic efficiency perspective, it would be better to tax activities that generate negative effects, such as through a carbon tax. However, taxes are much harder to sell…