Dirty Subsidy

A dirty subsidy is a payment or incentive by a government to a private corporation (or another level of government) that encourages waste of raw materials, natural resources, or energy, or results in pollution or other human health hazards.

Green economics often focuses on the impact of eliminating such subsidies, and implementing what is sometimes called full-cost accounting. Subsidization research suggests that negative externalities within resource extraction should be factored into the pricing, subsidization and taxation of all products subsidised by the government. Under this recommendation, resource extraction would be taxed at a rate that would account for inefficient market outcomes and equalize social and environmental impacts of dirty fuels (oil, coal etc.). This theory falls under the Pigovian tax which attempts to limit the impact of negative externalities on societies and governments . Common Pigovian taxation systems within society include sugar, alcohol and tobacco taxes to offset social costs and burdens on the healthcare system. An exemplary rate of tax or subsidy according to green economists should result in a net private product being equal to the net marginal social product (I.e. products created through private industry should cost them the same as the social and environmental impacts of that product). Some theorists suggest that taxation should affordably offset negative externalities while simultaneously paying for increasing return industries, rather than promoting liberalist economics. As stated by Cheng and Zhang “The tax on the dirty good serves to both correct the externality from pollution and direct more resources to the increasing return industry, thus it is higher than the Pigovian tax”.

Industries affected by dirty subsidy

Fossil fuels

Fossil fuels now provide about 90 per cent of the world’s primary commercial energy, and their combustion is the largest anthropogenic source of air pollution. A large literature, theoretical and applied, and basic economic arguments, suggest that the instruments that governments use such as emission taxes and green energy subsidies have an impact on Pigouvian carbon emissions and green energy production. The emission-reducing effect of the carbon tax is direct while that of the green subsidy is indirect and the opposite holds for the green-energy promotion effect. Both instruments serve to fight climate change by reducing the global carbon emission externality. Ideally, the emission tax does so in a cost-effective way, there is significant evidence and theoretical support for the proposition that subsidizing green energy is less cost-effective as a means of reducing carbon emissions than emission taxes. Economically, green energy subsidies are not an appropriate as a means for fighting climate change.

Pharmaceuticals

Pharmaceuticals play a critical role when analyzing examples of dirty subsidies. Often referred to as ‘Big Pharma’ the subsidizing of pharmaceuticals habitually leads to corruption among global citizens.According to Martin de Holan et. of the Journal of Management Inquiry “Pharmaceutical companies interact with governments as regulators (e.g., agencies that monitor drug safety), as clients (e.g., state hospitals or healthcare trusts), and as distributors to end-users (e.g., physicians who prescribe drugs to patients). The number and character of interfaces with the state vary considerably from country to country, but they are always significant and there is frequently scope for state officials to exercise discretion, which means that they are potential targets of influence.” Therefore, companies that operate in emerging markets— where corruption risks are thought to be higher, are at greater risk than companies which operate in more mature and less corrupt markets. Many pharmaceutical companies are global, but most see emerging markets. Finally, Lassman et. al suggest that pharmaceutical companies rely heavily on third parties and agents are at risk, as these laws make them liable for bribes paid by such actors on their behalf. Moreover, they suggest that third parties may be difficult to monitor and control.

Tobacco

The biggest exporters of tobacco are currently China, India and Brazil.

For the 2017-18 year, Brazil has decided to increase a subsidized credit line to farmers exporting certain crops, including tobacco. In India, there have been many policies put into place with the purpose of promoting the production of tobacco, which include credit subsidies. The Transitional Tobacco Payment Program has also greatly helped farmers in the US grow tobacco until recently, when the government ended the program.

According to the World Health Organization (WHO), policies such as having picture warnings on cigarette packs, ad bans and higher taxes on cigarettes discourage lower tobacco use. However, these policies would also reduce the revenue made in taxes from the sale of cigarettes. As such, very few countries have made significant efforts in curbing the tobacco epidemic.

China, for example, is home to the world’s largest cigarette maker, known as The China National Tobacco Corp. Despite the rising tobacco-related deaths, the government is reluctant to negatively affect the sales of cigarettes due to the possible job and revenue losses this would cause.

These subsidies lead to higher production and sales of tobacco, which in turn causes problems. Tobacco results in a a number of human health hazards and pollutions. In terms of health hazards, tobacco causes 6-7 millions deaths each year from the use of and exposure to cigarettes.

It causes losses in terms productivity and healthcare expenditure. The production of tobacco causes a health hazard known as “green tobacco sickness” which comes from working with wet tobacco leaves. Tobacco farming causes pollution towards air, land and wildlife. According to Dr. Armando Peruga, who previously coordinated the WHO's Tobacco Free Initiative, “The combination of greenhouse gasses from combustion is equivalent to 1.5 million vehicles being driven annually.” Tobacco farming also requires a lot of wood which causes deforestation, and since the production of tobacco strips soil of its nutrients, it causes the land to dry up and be less fertile.

Alcohol

The global annual alcohol industry, or Big Alcohol, is an industry fraught with heavy subsidization in the form of government payouts and subsidies that are engineered to promote industry growth and in-turn drive profits. Big Alcohol is considered to be any individual, company, or organization that is involved in the production, distribution, retailing, and marketing of alcoholic products . In the US, annual sales of the alcohol industry have most recently been reported as 223.2bn USD . An industry of such massive scale has accumulated sufficient financial and political power to enable players to continuously ignore human rights in the pursuit of profit. Alcohol consumption has many scientifically proven health risks, these can be in the form of both short-term and long-term effects that negatively affect the quality of life of the consumer .

It is clear that subsidization from this industry has resulted in acceleration of the industrial epidemic caused by alcohol harm . Growth of the alcohol industry is evident, and can be seen from the fact that the top 10 global breweries control over 66% of the global market share . A similar global market share of over 59% is controlled by the top 10 global liquor corporations . In 2010 the top 6 global alcohol producers spent 2bn USD on alcohol marketing and promotion . These facts combine to highlight the continued and increasing human cost that is directly related to the growth of this industry.

Impact of Contemporary Subsidisation Policy

Although no real global databases for fossil-fuel subsidies exist on a global scale, researchers suggest that dirty subsidies are allowed by governments through political pressure from beneficiaries of subsidies and complexity within subsidy programs globally. Stefanski’s work on fossil fuel subsidisation estimates that worldwide subsidisation of fossil fuel resources equalled 983 billion dollars (US) in 2010 . According to researchers of government public policy, subsidisation of biofuels makes a few incorrect assumptions. Firstly, government subsidisation does not provide incentives to reduce utilisation of polluting technology; therefore this form of subsidisation contains no mechanism for progressive change in the future. Secondly, dirty subsidies and tax credits can require a vast amount of public expenditure and allow for people to use these products without subsidising it themselves (known as free-rider problem). Green economists argue that contemporary forms of taxation which focus on offsetting social and environmental costs have not reached a sustainable rate within the biofuel industry. The argument instead suggests that governments are actively subsidizing and incentivizing biofuels that waste resources, as they do not accurately account for these negative externalities and do not incentivize companies to be more efficient. Stefanski concludes that real GDP in 2010 was 3.8 percent lower due to subsidization of fossil fuels. As he suggests, this subsidization on fossil fuels are potentially more damaging than climate change’s effect on real GDP.

References

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