Approaching Government Subsidies for Business Practices with Caution: Scientists and Economists Warn of Unintended Consequences

The debate over government subsidies for business practices and processes, particularly those aimed at promoting environmental sustainability, has been reignited by a group of scientists and economists in a recent Policy Forum published in the journal Science.

The authors caution that while subsidies can be powerful motivators to achieve environmental and sustainability goals, they can also have unintended consequences that may perpetuate harmful practices over time. Lead author Kathleen Segerson, a distinguished professor of economics at the University of Connecticut, emphasizes the need for clear end-dates for subsidies to prevent them from becoming entrenched.

The group of experts, who gathered at the 2022 Askö Workshop sponsored by the Beijer Institute for Ecological Economics in Stockholm, Sweden, includes economists, ecologists, geographers, psychologists, and other scientists. They point out that subsidies can sometimes be a politically expedient way to drive change, but they stress the importance of carefully evaluating their long-term impacts.

One example highlighted by the authors is the case of subsidies for electric vehicles (EVs). While these subsidies may initially appear to promote sustainability by reducing greenhouse gas emissions, they can also lead to an overall increase in vehicle use if they make EVs more affordable. This unintended consequence could offset the environmental benefits of the subsidies.

The authors also point to longstanding subsidies in sectors such as agriculture, fishing, and fossil fuels that have been linked to negative environmental impacts, including nitrogen pollution, deforestation, and overfishing. Despite commitments from global leaders to phase out inefficient fossil fuel subsidies, political pressure and vested interests have kept many of these subsidies in place.

Segerson suggests that while environmental taxes, such as a carbon tax, would be a more economically efficient way to address negative environmental impacts, they are often difficult to implement. As a result, subsidies that reduce these impacts can be seen as a second-best solution, but they should be implemented cautiously and with clear time limits.

In conclusion, the authors advocate for a cautious approach to government subsidies for business practices and processes, particularly those aimed at promoting environmental sustainability. By recognizing the potential unintended consequences of subsidies and imposing time limits on their use, policymakers can ensure that subsidies are used effectively and do not become a long-term crutch for industries.