YESTERDAY, A SCIENCE POLICY FORUM RAISED the matter of how governments encourage beneficial activity through subsidies or taxation. No easy answers here, but in Parts 1 and 2 there’s plenty to think on. Continuing Part 1’s format, all quoted comments are gleaned from “A Cautious Approach to Subsidies for Environmental Sustainability.”
Subsidies—How Important? “A key consideration when using public funds is ensuring that they are used wisely, which in the context of subsidies means that they incentivize additional investments or purchases in activities that generate positive spillover effects beyond what would have occurred in the absence of the subsidy (a concept known as ‘additionality’).”
“A recent study estimated that more than half of the carbon offset subsidies approved for a sample of wind farms in India went to projects that would likely have been built without the subsidy. Similarly, a study of sales of EVs in the U.S. found that 70% of the federal income tax credits for EV purchases went to households that would have purchased an EV anyway.”
Unintended (and Unexpected) Consequences. “Unanticipated consequences are almost inevitable given the complexities, interactions, and uncertainties in the ecological and socioeconomic systems in which policies operate. As a result, the impacts of subsidies, as well as our understanding of their adverse impacts, will likely change over time, and a subsidy that might have initially been viewed as beneficial for society might eventually be recognized as having costs that greatly exceed benefits.”
“Zombies of the Tax Code.” “Although unforeseen and negative environmental effects may arise from any government policy, the problem is especially important for subsidies because it is often difficult to remove subsidies once they are in place. For example, in the U.S., the Biden administration has made repeated proposals to repeal tax breaks for fossil fuels but so far has been unsuccessful in this repeal effort, leading a recent New York Times article to refer to these subsidies as the ‘zombies of the tax code: impossible to kill.’ ”
To Avoid “Lock-in.” “However, because impacts and policy goals evolve over time, when subsidies are used, policy-makers should incorporate plans to avoid possible lock-in. These should include plans for ongoing assessment and reevaluation to facilitate revision, repurposing, or possible termination. Policy-makers can employ time limits or explicit phase-outs or sunsetting (such as the 10-year timeframe for EV subsidies under the IRA) or suspension provisions conditional on meeting certain criteria (e.g., market penetration goals).”
The Forum’s Conclusion. “Although subsidies can be justified in some cases, their potential adverse environmental, social, and economic costs suggest that they should be used with caution, and only after considering alternative feasible ways to achieve policy objectives. The imperative to address climate change and biodiversity loss, however, highlights the urgency of policy reforms.”
“Properly designed subsidies can play an important role in promoting the needed transformational change. A cautious approach to the use of subsidies, with mechanisms built in for possible reform or termination over time, would be an important step toward addressing pressing environmental concerns while at the same time avoiding long-run lock-in of inefficient government subsidies.”
Heady stuff, this. Thanks, AAAS Science, for provided the format for this Policy Forum. ds
© Dennis Simanaitis, SimanaitisSays.com, 2024