A Hairy Unintended Consequence of Removing Environmentally Harmful Subsidies

A new report by Business for Nature found that - as of 2024 - the world is spending at least $2.6 trillion a year on environmental harmful subsidies (EHS), an increase of $0.8 trillion from the 2022 estimate.

I applaud the growing push across the public and private sector to reduce and ultimately cease environmentally harmful subsidies.

But one major question has come up for me that I think we really need to think through before we take action. ?? Will removing environmentally harmful subsidies inevitably raise the costs of food and other basic costs of living?

I worry that if we simply remove environmentally harmful subsidies without addressing this likely byproduct, then we'll see the low and middle class suffer from what is essentially a regressive tax. Possibly leading to nature becoming politicized like climate and ultimately the bulk of the general public not supporting these policy reforms. ? For those who have thought about this much more than me, how can we remove environmentally harmful subsidies in a manner that doesn't raise the basic costs of living especially for low and middle class?

Off the top of my head, one potential approach to mitigating increases in prices is to repurpose environmentally harmful subsidies to subsidize food and other basic goods that are produced in a nature positive manner, but I think we may need to go beyond just this approach.

I’ve never done this before, but I figured I’d ask ChatGPT and Google’s Generative AI and see what they come up with.

Here’s the compilation removing duplicates across the two:

• Price adjustment mechanisms: Governments can use price adjustment mechanisms to protect consumers from price shocks while reducing spending on fossil fuel subsidies. For example, Tunisia introduced a formula that adjusts domestic fuel prices based on international fuel prices.?
• Gradual Phase-Out: Instead of eliminating subsidies all at once, gradually reduce them over time. This allows businesses to adjust and find alternative strategies.
• Rational pricing policies: Rational pricing policies can encourage energy conservation and mitigate the environmental impact of energy use.?
• Targeted social spending: The revenue gained from removing subsidies can be used for targeted social spending, such as reducing inefficient taxes and making productive investments.?
• Commodity targeting: Commodity targeting limits price subsidies to items that are considered necessities for low-income families.?
• Promoting transparency: Governments can promote transparency by disclosing information on subsidies and sharing feedback on their effects.?
• Scaling up clean alternatives: Governments can scale up sustainable, clean alternatives to fossil fuels.?
• Public-Private Partnerships: Collaborate with businesses to develop sustainable alternatives that can be economically viable without relying on subsidies.
• Encourage Efficiency Improvements: Invest in programs that help businesses improve operational efficiency. This can lower costs and offset any increases caused by subsidy removal.
• Support Transition Programs: Provide financial support or incentives for companies to transition to more sustainable practices. This could include grants for renewable energy investments or tax incentives for sustainable sourcing.
• Promote Competition: Foster a competitive market environment to encourage innovation and efficiency, which can help keep prices down.
• Consumer Education: Educate consumers about the benefits of sustainable products. Increased demand for greener options can help offset price increases through economies of scale.
• Invest in Research and Development: Support R&D for sustainable technologies that can replace subsidized, harmful practices, potentially leading to lower long-term costs.
• Implement a Just Transition Framework: Ensure that the transition away from harmful subsidies considers the needs of vulnerable communities and industries, providing them with the necessary support to adapt.

Some of these approaches seem plausible and some less so, but I think that a gradual phase-out targeting specific commodities and in parallel delivering investment and tax incentives for alternatives, repurposing subsidies to reduce the price of alternatives could be a winning combination to keep prices from significantly increasing and deliver the environmental benefits that we critically need.

If we want nature to be a mass movement supported by folks across the political and socioeconomic spectrum, then we need to make sure that our movement works for all people, not just those who have the economic privilege to buy regenerative organic.

I’ve just started to dig into environmentally harmful subsidies and excited to learn more and continue the conversation with you all, lots of good to be done and lots of ways we could do it wrong. So let’s work together to get it right!

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- Eric