Money Talks

When is it OK to have subsidies, and how can they be structured so that they automatically go away when no longer productive? Isn’t the real problem that subsidies get embedded and promoted by a powerful, market-dominating group that doesn’t want to change, not the subsidies themselves?    – Rick Sellers, Paris, France

Ron Steenblik, director of research for the Global Subsidies Initiative.

Responding from an economic and not a legal perspective, subsidies work best when they are addressed to the root causes of market failures, or social inequalities. If the net social benefit of the subsidy exceeds its social costs (e.g., public goods are produced or protected, such as through the creation of a nature reserve), then a subsidy may be warranted on efficiency grounds. Whether the subsidy is socially desirable depends on the distribution of those benefits, and how it is funded.

There are many devices used by policy makers to reduce the chance that subsidies will continue to be provided long after they have served their public purpose — an all-too-common occurrence. Setting time bounds on subsidies is a commonly used approach. But for sunset clauses to work as intended, the duration or other limit criterion must be credible, and enforced. Otherwise the subsidy will create expectations that the limits are not serious and can simply be extended or expanded indefinitely.

A case in point is the Clean Coal Technology Program; originally authorized for only five years, its funding was reauthorized again and again. Many farm programs were introduced following the 1930s Dust Bowl and were intended to be temporary. Today not only many farmers, but also many well-intentioned environmental groups, regard farm subsidies as an entitlement. Once a subsidy program gets to that point, it becomes very, very hard to dislodge.

I agree that the capture and defense of policies by special interests is what makes reform so difficult. The principles of political economy suggest that the narrower the recipient base, and the more broadly sourced the funding, the more likely a subsidy will become entrenched. But I would not go so far as to say that subsidies themselves are not often a problem in and of themselves. There are plenty of one-off subsidies that are poorly designed and implemented. A frequently cited example (at least in Europe) was a Dutch policy in the 1970s that provided an incentive to purchasers of double-glazed windows. The problem was that there was no spare domestic capacity to increase the supply of such windows. The result was that prices rose on increased demand, and most of the increased business went to Belgian producers.

As a delegate to the World Summit on Sustainable Development in 2002, I learned, to my horror, that the U.S. was spending $30 billion per year subsidizing the fossil-fuel and nuclear industries. Was this $30 billion figure correct, and what are the current figures for subsidies for fossil fuels and for nuclear?    – Hollister Knowlton, Philadelphia, Pa.

Frankly, I do not know if the $30 billion estimate is correct — we haven’t run the numbers (yet). But it may well be in the ballpark. The European Environment Agency estimated a couple of years ago that subsidies to fossil fuels and nuclear energy provided by the E.U. during 2001 were worth at least 24 billion euros. That is within the same order of magnitude as the estimate of U.S. subsidies you cite. More than half of those subsidies went to support coal mining.

Aggregate figures are useful, but they mask the different ways in which subsidies to various energy sources are provided. Some support R&D, some help reduce production or pollution-control costs, and some are simply pure wealth transfers. Many of the tax breaks granted to oil and gas producers fall into the latter category.

Thanks to federal protection of the domestic sugar industry, ethanol subsidies, subsidized grain exports, and various other programs, Archer Daniels Midland has cost the American economy billions of dollars since 1980 and has indirectly cost Americans tens of billions of dollars in higher prices and higher taxes over that same period. What environmental strategy with any chance of success might you or others have under current consideration which could overturn this kind of entrenched corruption in order to try to salvage the environment in time?    – Careleah Snowdon, Hornby Island, British Columbia, Canada

Good point. Our strategy at the moment is to provide analysis to help inform the debate, and to challenge some of the more dubious claims made by the defenders of subsidies. That means engaging with academics and other NGOs, and trying to catch the attention of policy makers and their staff. Of course, to be enduring, the most effective change is that which permeates society. Think of public attitudes toward smoking in restaurants today, compared with 30 years ago.

We are also starting to organize regional workshops to help train journalists to investigate and report on subsidies more effectively. Our first workshop will be in Mumbai, India, in March 2007.

Opponents of wind power often claim that the subsidies it receives from governments are unfair. True? Is this an area where a subsidy is aiding sustainability?    – Erik Hoffner, Great Barrington, Mass.

It would take a couple of pages to do this question justice. Fairness, strictly speaking, is in the eye of the beholder. Nonetheless, I realize that there are some people who feel that past subsidies to other energy forms have skewed the market in favor of fossil fuels and nuclear power, and therefore it is only “fair” that renewable energy be given its turn to dip into the public purse. Others feel that subsidies to wind power are a waste of money, or reduce the subsidies available to competing energy forms, renewable or otherwise.

Whether subsidies to wind turbines are cost-effective is an easier question to answer than whether they are fair. I can’t give a general answer to that question, but I would point out that how subsidies are provided matters a great deal. Subsidies from general taxpayers that simply bring down the cost of generating electricity by wind turbines into line with the cost of generating electricity from fossil fuels simply expand the amount of electricity available at a given cost, and provide no incentive to conserve. Moreover, to the extent they raise taxes on service industries that are not energy-intensive, they create market distortions. Renewable-energy certificates, or other policies that create cross-subsidies within the electricity market, raise the price of electricity to consumers, and in a sense “internalize” the costs of the policy.

Finally, don’t forget the trade angle. Back in the 1980s, while California was subsidizing wind-generated electricity, European governments were subsidizing production of wind turbines. Many of those European subsidy programs were poorly designed and, as a result, a lot of fly-by-night companies formed just to take advantage of the generous incentives on offer. Denmark was cleverer, and pursued an aggressive infant-industry policy that was so successful that its producers now dominate the world market. However, it is fair to ask whether Danish subsidies, by creating such dominance, thereby kept companies elsewhere — including in developing countries (whose pockets are not very deep) — from being able to compete as effectively in this rapidly growing market.

Where are you and your organization going to start to approach the irrigation issue, and why? Will you focus on commercial, industrial, agricultural, recreational, residential, or all at once? And do you believe we can break our addiction to lawns?    – Deborah Hopkins, Fort Myers, Fla.

If you mean “where” geographically, we are still working that out with other organizations that will also be looking into irrigation subsidies over the next year. But our initial focus will probably be on countries in which irrigation subsidies (including the underpricing of water) are having a significant impact on what crops are planted and how much is grown, and are discouraging sustainable use.

You are right that most water projects ultimately distribute water to several categories of users. To the degree to which we can isolate agricultural uses, we shall be focusing on those, however. Crop farming is the largest consumptive use of water in most countries.

Regarding lawns, some anthropologists suggest that our fondness for them is hardwired into our brains, from the days when our ancestors emerged from the African savannahs. If people were charged the opportunity cost of water, there would be fewer watered lawns maintained in hot, dry climates.

How do we go about researching what subsidies and tax breaks our elected officials are doling out to corporations? What would be the best methods of confronting them to make changes?    – Rebecca Ryan Hamilton, New Bern, N.C.

My short answer is contact your local or state-level taxpayers’ group. In North Carolina, for example, there is the North Carolina Budget and Tax Center, in Raleigh, and the North Carolina Smart Growth Alliance, in Carrboro.

But if you want to do some investigating on your own, my recommendation depends on what level of government you want to check out. At the local level, property taxes are usually a matter of public record. But finding information on what your local elected officials are offering corporations — before the deal is done — is not always easy. The level of transparency across states is pretty uneven. The same goes for state-level subsidies. For more information, including a number of useful online resources, I would highly recommend the Corporate Subsidy Watch section of the Good Jobs First website.

Ideally, informed, vigilant voters would hold their elected officials to account, and vote the profligate and corrupt among them out of public office. Given the high rate of reelection of sitting senators and representatives, however, and the natural tendency of voters to expect that their congressional representatives “bring home the bacon,” the likelihood that there will soon emerge a majority of candidates pledged to subsidy reform seems remote. The alternative is to convince officials to place constraints on their collective spending behavior, or at least to make their spending decisions more transparent. In that regard, there has been some important progress of late.

Thanks to the pioneering efforts of Sens. Barack Obama (D-Ill.) and Tom Coburn (R-Okla.), the country will soon have a searchable database that will track federal spending by the U.S. government. The web-based search engine, which is expected to come online by 2008, will provide access to all federal funding to public and private organizations. For each entity receiving federal funding, the database will show the amount of money received in the last 10 years and an itemized breakdown of each transaction. Users should be able to search a particular company and be shown all the grants, contracts, subcontracts, loans, awards, and other forms of financial assistance paid out to it by the federal government. Initially, the database will cover data for the 2006 and 2007 fiscal years. By 2009, the data are supposed to stretch back to 1999.

Should the government subsidize sugar ethanol as it is a national crop in Australia?    – Jan Dash, Vale Park, Australia

Australia is one of the lowest-cost producers of sugar in the world. Why it feels it needs to subsidize sugar-based ethanol is a puzzle. The policy, in my view, runs contrary to its more general and principled position in international negotiations on trade in agricultural and energy products, which has always called for reducing subsidies and lowering tariffs. Currently, Australia’s tariff on ethanol is among the highest in the world.

Can you discuss the role of emerging ecosystem markets and how they can eventually compensate landowners for public benefits accrued from their management system? How do we generate the buyers’ demand?    – Daniel Kaiser, Washington, D.C.

This is another question that merits a several-page answer. There are several organizations, such as the American Farmland Trust, that are working to develop local programs to purchase easements from farmers and ranchers to keep land from becoming developed for housing or other uses.

I assume by “generate buyers’ demand” you mean overcome whatever market failures make it difficult for people’s preferences to be reflected fully in market transactions. Already certification systems help people identify products of organic agriculture, for one. America could also develop a stronger “agri-tourism” network, as exists already in countries like France, Ireland, and Italy.

What kind of change do you see happening in the field of solar energy? There are several possibilities for this commodity; do you think the United States will grow more dependent on its uses?    – Patrick Font, Lewisville, Texas

I’m not sure what you mean by “dependent” on solar energy. The citizens of the United States, like people everywhere, depend on solar energy for their warmth, their food, and their light. But I gather that’s not what you mean.

I think as energy prices rise, architects and homeowners will pay more attention to the design of buildings and window fittings to take better advantage of the sun in the winter, and to shade themselves from it in the summer. The market for solar-thermal water heaters should also continue to grow. As for photovoltaic systems, I am not a physicist, but I would not be surprised (from talking with my brother, who is an inventor) if we see some important breakthroughs in materials science within the next few years that could reduce the costs of PV electricity considerably.

If only those who can afford to can be “environmental,” won’t social chaos become inevitable as oil scarcity escalates?    – Leah Carrie, Victoria, British Columbia, Canada

People can adapt, though the adjustment may be painful for some people. If city planners pay more attention to alternatives to the automobile, there is no reason why rising oil prices need lead to social chaos. In Europe, prices of petroleum fuels are already far higher than in North America, and fuel economy is an important selling point for cars. Public transport is good, and many cities have extensive bicycle systems. Not everybody can or wants to commute to work or school on a bicycle, but in places like the Netherlands, a lot of people like the freedom, exercise, and economy their bicycles provide!