Government subsidies and the environment: balancing between support and sustainability

May 22, 2024
Photo: UNDP Uzbekistan

Did you know that government subsidies, direct or indirect, can lead to unintended negative consequences for the environment and biodiversity? And that with the right approach, these subsidies can become nature-positive?

Understanding subsidies

Subsidies are financial support allocated from the state or local budget, as well as from special funds for individuals and legal entities, local authorities or other government institutions. This support can take many forms, ranging from tax breaks for construction to the provision of free chemical fertilizers in agriculture.

Subsidies often have unintended and costly consequences for the environment, including biodiversity. The Organization for Economic Co-operation and Development (OECD) estimates that more than US$500 billion is spent annually on supporting agricultural production alone in 54 countries, much of it directed towards environmentally harmful activities. At least half of these funds could be repurposed to at least reduce damage to nature and, at best, make these subsidies nature-positive. Unless governments take urgent action, the rate of loss of species’ natural habitat, land degradation and nutrient pollution will continue to increase as the global population grows.

For example, subsidies for mineral fertilizers directly affect soil quality: soil has its own biodiversity, consisting of many different microorganisms that ensure its fertility. With the intensive use of certain chemicals in pursuit of ever-increasing productivity, the natural balance in the soil that is vital for these microorganisms is disrupted, and they die. As a result, natural fertility decreases, and the soil becomes dependent on fertilizers. Over time, even with intensive use of expensive fertilizers, productivity decreases and environmental pollution with chemicals increases. At the same time, positive subsidies for organic or regenerative farming can not only improve soil quality, restore the health of the topsoil ecosystem, but also provide environmentally friendly yields in quantities that are comparable to those obtained using chemicals.

Photo: UNDP Uzbekistan

Environmental cost of subsidies

An environment-friendly product has a positive effect on the food security of society, and, most importantly, such products do not harm human health. This is because such products produced or grown with natural materials or organic ingredients. Thanks to this, the state will spend less money on health care, and today this is a huge part of budget expenditure. Accordingly, the introduction of sustainable practices in agriculture, such as proven to be effective no-till farming, can have not only a direct positive effect on product quality, but also save significant financial resources from the state budget, which can be redirected to solving other social problems.

Another example of harmful subsidies is subsidies for the production and consumption of fossil fuels. Such subsidies harm the economy by inefficiently allocating resources and distorting the true market value of these fuels. Besides, burning fossil fuels increases emissions of CO2 and other greenhouse gases, leading to air pollution and public health problems.

Transforming Subsidies for a Sustainable Future: BIOFIN's Approach

Despite the factual data and strong economic arguments in favor of reforming subsidies, their number is still significant. To change the situation, it is necessary to chart a course towards redistributing public resources from revisiting of at least ten potential harmful subsidies to more nature-positive spending in Uzbekistan. To ease the process of implementing new policies on harmful subsidies, the United Nations Development Programme (UNDP) Biodiversity Finance Initiative (BIOFIN) has developed step-by-step guidelines for studying, monitoring and transforming large subsidies into positive changes for nature. Using this guide, countries can examine the full range of their subsidies and determine what they impact.

Photo: UNDP Uzbekistan

For example, in the Philippines, UNDP-BIOFIN helped fill a gap in protected area legislation (2018) and supported the formulation of a new budget proposal, contributing to a budget increase of US$ 53 over multiple years for protected areas, which was adopted in late 2019 for the 2020 budget. A new app ‘GCash Forest’ was launched with the tpayment platform GCash/Alipay, combining subsidies for sustainable behaviour with payments for tree planting, resulting in over 1,000,000 trees planted.

New legislation was formally adopted on multiple finance solutions in Kazakhstan in 2017, and a new Environmental Code followed in 2021, including a host of mechanisms that will help protect and restore the country’s nature: biodiversity offsets, voluntary payments for ecosystem services, principles of sustainable ecotourism, and the development of methods and approvals for calculating greenhouse gas emissions, including in the forestry sector.These led to finance results exceeding US$ 30 million.

At a BIOFIN session on repurposing harmful subsidies for a sustainable future, Rebecca Pow MP, Parliamentary Under-Secretary of State for Nature (Minister for Nature) in the United Kingdom, highlighted the benefits of the guidance for all countries: “Repurposing subsidies has always been a very complex issue, but thanks to BIOFIN's guidance, governments will now see a clear path". She is confident that leadership will play an important role in achieving global biodiversity goals. Minister Pow elaborated on her country's initiatives, saying: “We believe that agriculture and nature must go hand in hand when redistributing subsidies. Where farmers used to be supported just because they had land, we are now incentivizing positive environmental action along with sustainable food production. We are coordinating subsidies and schemes with our farmers.”

In conclusion, taking effective measures to reform government subsidies can lead to more sustainable and environmentally responsible use of natural resources, conservation of biodiversity and improved environmental quality for future generations in Uzbekistan.

You can familiarize yourself with the methodology at the link:

Link to the recording of the webinar with the participation of experts on the launch of this methodology: