Making subsidy reform work for nature, climate and people

While governments provide subsidies to keep prices low for domestic consumers, they are increasingly supporting business models that have negative impacts for people and planet.

Current subsidies – including in the energy, agriculture and fisheries sectors – incentivise destructive practices and make it harder for poor communities, sustainable businesses and least developed countries to transition to more sustainable practices while undermining livelihoods, food security and climate resilience.

The need to reform environmentally harmful and socially regressive subsidies is well evidenced, and the political will for reforms has been expressed in several global agreements such as Target 18 of the Kunming-Montreal Global Biodiversity Framework (GBF), sector-specific agreements such as the World Trade Organization (WTO) Agreement on Fisheries Subsidies, and plurilateral agreements such as the Agreement on Climate Change, Trade and Sustainability (ACCTS).

Despite an urgent need and commitments, progress has been slow, including due to current beneficiaries lobbying against change.

There are, however, promising examples of subsidies being phased out or repurposed by governments seeking to reduce public spending and to achieve national climate or nature targets, even in the context of rising fuel prices and an uncertain global economy.

Building evidence of reform

IIED is working in partnership to build evidence on what leads to reform, what has previously worked well, what the challenges were, and how environmentally harmful subsidies (EHS) can be repurposed to better serve nature, climate and people. This work includes:

Building an evidence base for policymakers on how to engage with subsidies repurposing that is socially progressive, economically rational and environmentally ambitious: the evidence on the need for EHS reform is well developed and internationally supported through the GBF (Target 18). But there is less information on cases of successful reform, especially those that reinvest or repurpose money that was being spent on EHS in incentives that can have positive environmental and socioeconomic outcomes.

IIED is evaluating case studies of EHS reform to understand in more detail what led to the reform and what were the challenges and successes of repurposing.
Identifying how subsidies can be reformed so that public budgets can better align with country objectives and global agreements: this includes identifying what to invest in using public expenditure that was previously spent on EHS, such as positive incentives for environmental stewardship and protecting consumers and producers.

Further, IIED is building evidence on how EHS repurposing can be implemented. This includes collaborative action from government ministries, businesses and the academic community, as well as co-designing positive incentives with people whose livelihoods and spending power may be affected, while ensuring public spending aligns with countries’ commitments to National Biodiversity Strategy and Action Plans (NBSAPs), Nationally Determined Contributions (NDCs), and global agreements such as the GBF and WTO Agreement on Fisheries Subsidies.

In fisheries, our work connecting social protection with fisheries management and conservation shows how reform can move beyond simply removing damaging subsidies. Done well, it can redirect public finance to small-scale fishers and fish workers, to support sustainable livelihoods and strengthen environmental stewardship.
Analysing subsidies reform in the context of geopolitical instability, including rising fuel prices and trade protection, as well as the climate and biodiversity crises.

The macroeconomic context facing countries can be a driver as well as a barrier to subsidies reform. During times of economic stress, shrinking fiscal space and unfavourable exchange rates, countries may choose to repurpose subsidies to more efficiently allocate government budgets to target social protection and market stimulus interventions that have proven to be more effective than blanket subsidies.

However, this must be done with extreme attentiveness to local contexts and adaptive management. A key objective of IIED’s work is to unpack how macroeconomic forces are factored into countries’ ambitions to reform and repurpose subsidies and to achieve environmental goals, and where there may be tensions, trade-offs or ‘win-wins’.
Developing a deeper understanding of the roles that business can play in advocating for subsidies reform, including working with networks such as The B Team, a global collective of business and civil society leaders who advocate for systemic social, environmental and economic change rather than just corporate profit.

EHS distort markets, creating unfair market conditions for enterprises that have sustainability objectives. Additionally, EHS are already increasing climate and nature risks in supply chains and business operations.

Subsidy reform is central to IIED’s nature finance strategy, as well as our wider research and advocacy for a fairer international financial architecture, which calls for trade and financial systems to support countries’ climate, nature and development priorities rather than reinforce harmful incentives.