REFORMING SUBSIDY PRACTICES HARMFUL TO BIODIVERSITY IN MONGOLIA

Posted September 29, 2021

By GANBAYAR Javkhlan, Head of Macroeconomic Policy Division, Economic Policy Department, Ministry of Finance  

ERDENEBAT Erdenejav, BIOFIN II Project Coordinator, UNDP Mongolia

The World Economic Forum’s Global Risk Report identified biodiversity loss as one of the top five global risks in both likelihood and impact[1]. Paradoxically, governments annually spend five to seven times more on subsidies, some of which are directly harmful to biodiversity, than the estimated annual USD 124–143 billion of global financial flows to biodiversity conservation[2].

Any estimates on finance flows for biodiversity should be considered together with the available estimates on potentially environmentally harmful flows. Therefore, the threat of biodiversity loss should stimulate governments andbusinesses to identify and reform harmful policies, and subsidy practices in order to reverse biodiversity loss. 

Conventionally, a subsidy is a form of government support to an economic sector (or institution, business or individual) with the aim of promoting an activity that the government considers beneficial to the economy overall and to society at large. The subsidy can be supplied in the form of a monetary payment or other transfer, or through relief of an opportunity cost[3]. 

A subsidy harmful to biodiversity is one that harms biodiversity compared with the case where the subsidy does not exist[4]. 

Subsidies harmful to biodiversity not only result in production practices detrimental to plant and animal species, but they also create a vicious cycle in which human activity degrades the very natural capital assets upon which businesses’ profits depend. Subsidies contribute to this pattern of environmental degradation by devaluating the cost of natural resources, reducing incentives to innovate to more sustainable methods, creating a reliance on natural capital as opposed to other forms of capital, and the like[5]. 

The Government of Mongolia has been working actively and consistently on the development of green growth strategies and policies in line with the Sustainable Development Goals to create a socially inclusive and environmentally friendly economy. Consistent with its long-term developmental objectives and sustainable development aspirations, Mongolia adopted policies and strategies, that mainstream environmentally sound subsidies and green procurement into its development practices. Particularly, Vision 2050 and the National Biodiversity Programme (NBP) explicitly call on the Government of Mongolia to establish a legal environment, where any subsidies or incentives, that harm biodiversity, are prohibited for all sectors and to promote green procurement.

However, there are still a number of subsidy programs and discounts in agriculture and mining sectors that are potentially harmful to biodiversity and their impact on the environment are poorly documented and nontransparent in Mongolia[6]. Also, the lack of practical implementation of strategic environmental assessment becomes a loophole in ensuring the coherence of sectoral policies with the overall policies on green development, environmental protection and sustainable development[7].

The estimated annual financing gap for the national biodiversity goal by 2030 totals USD 10 million[8]. This means that required domestic biodiversity funding is not likely to be met, unless government prioritizes the reform of harmful subsidies, and businesses strengthen environmental and social risk management measures, including sustainable supply chain finance, and environmental and social impact assessments. 

Reforming subsidies that are potentially harmful to biodiversity will be a daunting challenge. Nevertheless,experience with reforms to date shows that the design of the reform process is a critical success factor. It needs to takeminimum criteria for subsidy design[9], and following phased approaches[10] into consideration.  

·   Greening subsidies approaches often retain the payment structure of the subsidy, but adjust the purpose, conditions, regulations and incentives to reduce negative environmental impacts  

·   Reducing the value of subsidies, which can lessen the biodiversity-harmful impact while saving significant public funds.

·   Eliminating subsidies, where subsidies are completely cancelled

A critical first step in the process is the development of transparent inventories of subsidies and their negative impacts on the environment and communicating the benefits of their reform. Transparency is a key precondition for a well-informed public debate on current subsidy programmes, and can provide a powerful motivating force for change. Dialogue and communication with stakeholders including the wider public are needed in order to develop a clear set of agreed objectives and a timetable for reform.

In this regard, the line Ministries and UNDP Mongolia are jointly implementing project “Biodiversity Finance Initiative/BIOFIN II” with the objective of re-designing existing environmentally harmful subsidy practices. The project will in turn contribute to meet goal 6.3.6. and 12 of Vision 2050 and NBP respectively as well as target 17.14 of Sustainable Development Goals.

The project will also provide the Government of Mongolia with opportunities to make existing production practices more sustainable both for social and environmental benefits, and mitigate future risks associated with continuous ecosystem degradation as well as will significantly reduce annual negative financial flows towards biodiversity.

[1] WEF (2020b). Half of World’s GDP Moderately or Highly Dependent on Nature, Says New Report. World Economic Forum.

[2] Tobin-de la Puente, J. and Mitchell, A.W. (eds.), 2021. The Little Book of Investing in Nature, Global Canopy: Oxford

[3] The Economics of Biodiversity: The Dasgupta Review, 2021

[4] OECD (2003). Environmentally Harmful Subsidies: Policy Issues and Challenges. OECD Publishing, Paris

[5] Tobin-de la Puente, J. and Mitchell, A.W. (eds.), 2021. The Little Book of Investing in Nature, Global Canopy: Oxford.

[6] Ministry of Environment and Tourism (2019), the Sixth National Report to the Convention on Biological Diversity

[7] UNECE (2018), Environmental Performance Reviews Mongolia.

[8] UNDP BIOFIN Mongolia, (2021), Finance Need Assessment for National Biodiversity Goals

[9] UNEP, 2008b, Reforming Energy Subsidies - Opportunities to Contribute to the Climate Change Agenda., Geneva.

[10] BIOFIN, 2018 Workbook