The removal of direct financial subsidies; the identification of hidden subsidies through the assessment of full environmental costs; the realistic pricing of goods and services to reflect full environmental cost, and the end of state support for industries and production practices harmful to the environment and health.
Alongside the identification and introduction of incentives to support conservation and sustainable use of biodiversity, it is necessary to consider removing incentives which have a negative impact. This includes reviewing certain systems of property and use rights, contractual mechanisms, international trade policies, and economic policies.
Perverse incentives are found in the transport, agriculture and energy sectors and comprise grants and subsidies which directly favour activities that have an excessive impact on the environment.
The real environmental and health costs of the transport sector are far greater than the additional taxes paid by road transport (through fuel tax, registration, etc.). In other words, road traffic does not pay for the social costs it generates, which is tantamount to its being subsidized. This favours a pattern of transport development, and especially that of road transport, which is accompanied by excessive impacts on the environment and health.
Subsidies for natural resources are widely used to stimulate economic development. All have the effect that the user pays less than the market price for commodities such as energy, land, water and wood. While some subsidies are useful for stimulating economic or social development, protecting dependent communities or reducing dependence on imported resources, they can also encourage uneconomic practices and lead to severe environmental degradation. Some subsidies established long ago for sound economic or social reasons no longer serve their original purpose. Subsidies can take many forms and are often hidden so that even the beneficiaries may be unaware of the adverse environmental impacts they are having.
Without subsidies for irrigated water, for example, farmers in the western United States would be less likely to grow rice and other water-intensive crops in arid regions. Without crop supports, farmers would be less likely to overuse fertilizers and pesticides, a major source of water pollution. Without road transport subsidies, traffic congestion, urban air pollution and carbon dioxide emissions could be significantly reduced worldwide. And without energy subsidies, energy prices would rise, encouraging the use of more efficient vehicles and industrial equipment, and reducing pollutant emissions.
In 1996, the UN General Assembly's Programme for the Further Implementation of Agenda 21 called specifically for government action towards "a socially responsible process of reduction and elimination of subsidies to environmentally harmful activities".
In its 1998 Human Development Report, the UN Development Programme called for governments to "remove perverse subsidies" (especially in the OECD countries, where they are twice as large as the rest of the world) "and restructure taxes to shift incentives from consumption that damages the environment to consumption that promotes human development." The European Environment and Health Committee recommended in Economic Perspectives on Environment and Health (June 1999), that: European Member States should, so far as is practicable: (a) advance the internalization of environment and health costs, and the preparation of strategies for achieving this; (b) screen and revise the subsidies that encourage practices detrimental to the environment and health; and (c) coordinate their efforts in these directions through the relevant intergovernmental and international bodies, such as the European Commission and the European Environment and Health Committee (EEHC).
In the case of transport, economic instruments such as fuel taxes, urban tolls and parking fees can be used to modify the price of road transport, so that it reflects more accurately the full social costs of the impact on environment and health. For instance, the United Kingdom introduced a fuel tax "escalator" that has increased the tax on road fuels by 5% every year since 1993. In the Netherlands, constitutional barriers have been lifted to allow for a national road toll system, which could be operating in a few years. These initiatives could help the economic actors adapt their behaviour and make structural changes that would support a sustainable transport system.
Energy is a major source of pollution (both local and global) and a potentially stable source of tax revenue. Restructuring energy taxes and prices is one of the most promising paths to environmental fiscal reform. A first step is the removal of subsidies. The Intergovernmental Panel on Climate Change's Working Group III recommends phasing out existing distortionary policies and practices that increase greenhouse gas emissions, such as some subsidies and regulations, as well as the noninternalization of environmental costs and distortions in transport pricing.
Calculations suggest that energy subsidies in developing countries and Eastern Europe have fallen by about half (from around $200 billion per year) since the early 1990s. A growing number of countries, led by Bangladesh and Indonesia, have eliminated pesticide subsidies; and a number of countries, including China and India, have begun to reduce subsidies on irrigation water, which accounts for more than 80 percent of all water use.
Policy packages that reduce distorting subsidies without causing hardship, particularly to poor sectors of the population and small-scale industry, are badly needed. Cutting the link between support measures and resource use, leaving the support intact but removing the perverse incentive, is a first step. It is also important to raise awareness, amongst the general public and others, of the linkages between subsidies and environmental degradation, and of the impact of subsidy size.
The removal of subsidies is extremely difficult politically. There are strong political pressures applied by industry groups opposing subsidy removal.