Sunday, March 3, 2013

Negative Influence of Fiscal Subsidies on the Environment: Empirical Evidence from Cross-Country Estimation

It has been observed that a number of developed as well as developing countries provide subsidies to their resource-intensive sectors like agriculture, fisheries, manufacturing etc. However, overproduction and consequent pollution as well as overexploitation of natural resources resulting from the provision of input and output subsidies have been a serious threat to environmental sustainability. An area of concern is that subsidies with potentially harmful environmental impacts are not declining in the recent period, despite the ongoing negotiations through the WTO framework and the UN forums. The present analysis attempts to understand the role of government budgetary subsidies on the overall environmental performance through panel data model estimation for a set of seventy four countries over an eleven year period (2000-2010). The empirical findings confirm that a positive relationship between subsidies and environmental degradation exists in a cross-country framework. The analysis notes that the failure to contain provision of subsidies through timely conclusion of the Doha Round negotiations is also posing a serious threat to the global climate change related concerns.
Myers (1998) estimates that globally environmentally perverse subsidies in five sectors - agriculture, fossil fuels and nuclear energy, road transport, water and fisheries - total $1.1 trillion per year. The problem is further compounded by underreporting of subsidies by WTO Member countries (WTO, 2006)....

 The environmental implications of subsidies, especially reflected through loss of biodiversity, are particularly evident in case of marine fisheries. Huge devolution of funds to domestic players can lead to fishing with over-capacity, which may in turn result in overexploitation of the fish stocks owing to increased fishing intensity (Porter, 2000; WWF, undated). One additional problem is that in presence of subsidies, the economic signals of overcapacity and overexploitation (e.g. reduced productivity, lower catches) might go unnoticed (Chakraborty and Kumar, 2010). Moreover, subsidies through price support measures may increase the number of players, which compounds the problem of resource overexploitation. WTO (1999) estimated the annual volume of trade-distorting fishing subsidies at around US $54 billion, and reported overcapitalization and overfishing as a consequence. A decade later, persistence of the problem led WTO Director-General Pascal Lamy to caution that:
“[T]oday, we run the risk that over-fishing will so deplete fish stocks in our oceans that many species will disappear forever. . . . It is bad news for the world’s 43.5 million full time fishers. Governments have contributed to this problem by providing nearly $16 billion annually in subsidies to the fisheries sector. This support keeps more boats on the water and fewer fish in the sea…” - WTO (2009)....
It has been noted that annual global energy subsidy level is greater than US $300 billion (Victor, 2009). Although developed countries are among the major providers of energy subsidy, the developing countries are also coming up in recent period on this front. On one hand, Templet (2001) has reported presence of huge volume of energy, pollution and tax subsidies across US states. On the other, UNEP (2008) has noted that:
“.. the twenty largest non-OECD countries amount to around US$220 billion based on 2005 data, of which subsidies to fossil fuels account for around $170 billion…Russia has the largest subsidies in dollar terms, amounting to about $40 billion, most of which go to natural gas... Iran’s energy subsidies are almost as large, at an estimated $37 billion. Six other countries – China, Saudi Arabia, India, Indonesia, Ukraine and Egypt – each have subsidies in excess of $10 billion per year.”...

by Sacchidananda Mukherjee * and Debashis Chakraborty **
National Institute of Public Finance and Policy, New Delhi

Working Paper No. 2013-117; January, 2013
*Assistant Professor, National Institute of Public Finance and Policy (NIPFP), 18/2, Satsang Vihar Marg, Special Institutional Area, New Delhi – 110 067, India. Telephone: +91 11 2656 9780; +91 11 2696 3421; Mobile: +91 9868421239; Facsimile: +91 11 2685 2548. E-mail:
**Assistant Professor, Indian Institute of Foreign Trade (IIFT), IIFT Bhawan, B-21, Qutab Institutional Area, New Delhi 110016, India. Telephone: +91 11 2696 6563; +91 11 2696 5124; Mobile: +91 9818447900; Facsimile: +91-11-2685-3956. E-mail:
Keywords: budgetary subsidy; environmental performance index, environmental sustainability; per capita CO2 emission; human development; urbanization; government policy.

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