Road to Resilience: Greening Agricultural Subsidies

The agribusiness sector, with over 5,600 different traded commodities[i] valued at more than $5 trillion annually, contributes 37 percent to global Scope 1, 2 and 3 greenhouse gas (GhG) emissions. According to the OECD, 61 countries – including all EU and OECD countries and ten key emerging economies – disbursed $620 billion between 2015 and 2017 as agriculture subsidies, with 80 percent of this funding going to agriculture producers.[ii]

Yet despite the clear need for subsidies to focus on environmental performance considering numerous natural capital risks, the OECD also reported that “most agricultural policies today are not well-aligned with these objectives”.[iii]

If the status quo remains, with forecasts shown in Figure 1, by 2050 food related GhG emissions will rise by 80 percent, cropland use by 70 percent, bluewater use by 70 percent, nitrogen application by 60 percent and phosphorus application by 60 percent.[iv]

Picture 2

Figure 1: Environmental Pressures on GhG Emissions, Cropland and Bluewater Use, and Nitrogen and Phosphorus Application, 2010–2050E. [v]

The 2019 outbreak of the virus African Swine Fever cost the Chinese economy $141 billion.

One of the various reasons why the outbreak occurred was the transition to intensive animal husbandry practices, including the use of hormones and antibiotics that may erode animal resistance to pathogens.[vi]

Climate change does not help.

The increasing intensity and frequency of the cycle of drought and floods is triggering rural loan defaults on an annual basis in major agricultural producing nations.

In India, during fiscal year 2019, farm loan non-performing assets increased 12.4 percent from 8.6 percent in fiscal year 2016, now equalling $14.7 billion of out $117 billion of India’s total non-performing loans.[vii]

The Indian central government and state governments often write off significant portions of non-performing assets each year to placate constituencies. Yet, as the negative impacts of intensive agriculture and animal husbandry become more acute, sovereigns will have no choice but to transition intensive agricultural practices towards a sustainable agricultural paradigm through policy and subsidy design changes.

Food security cannot be achieved at the risk of destroying the natural systems which make food and public health systems resilient and make this planet habitable.

It’s just a matter of time, which is running out.

Governments are continuing to incentivize intensive agricultural and livestock management practices through their agricultural policies and subsidy regimes. Beyond the environmental impacts of intensive agriculture and livestock rearing, agricultural subsidy regimes distort markets and drain fiscal resources in three ways.[viii]

  1. Market price support occurs via trade or border measures such as tariffs or quotas.
  2. Governments provide direct subsidies, also called coupled subsidies, on outputs or as subsidies on inputs that create incentives to increase production.
  3. Governments provide direct income support to farmers, also called decoupled subsidies, to change production levels.

Between 2015 and 2017, according to the OECD, while 61 countries spent an annual total of $620 billion in agriculture subsidies, these same countries only funded $68 billion of annual investments in agriculture and agriculture innovation as a public good.[ix]

In other words, governments are being short-sighted as they invest $9 in short-term farm-level agricultural returns that diminish each farm’s ecological solvency for every $1 they invest in agriculture systems and innovation that would improve long-term returns and sustainability.

To overcome and mitigate intensive agriculture related sovereign risks, governments must urgently reframe agricultural subsidies as payments for ecosystems services. A thriving planet and the sustainability of the global capital markets depend on this.

With the growth of the green bond market, ESG investors are now asking for sovereigns to use their agricultural subsidies to scale up nature-based solutions and address the climate and environmental challenges head on. Colombia Threadneedle, an asset manager, and Insight Investments, the UK’s second largest asset manager, are urging British politicians to issue green sovereign bonds to finance climate resilient infrastructure in the country.

The time for environmental fiscal reforms, related to agriculture, is now.

[i] Bloomberg L.P. and Planet Tracker (2020).

[ii] OECD (26 June 2018). More progress needed on reducing and redesigning agricultural support policies.

[iii] OECD (26 June 2018). More progress needed on reducing and redesigning agricultural support policies.

[iv] Springman et al, Nature (October 2018). Options for keeping the food system within environmental limits.

[v] Springman et al, Nature (October 2018). Options for keeping the food system within environmental limits.

[vi] Wanqing, Chinadialogue (26 October 2018). Swine fever highlights need to reform meat production.

[vii] Economic Times (12 January 2020). With new Maha offer, farm loan write-offs touch Rs 4.7 lakh cr in last 10 yrs.

[viii] Mamun et al, International Food Policy Research Institute (6 September 2019). Reforming Agricultural Subsidies for Improved Environmental Outcomes.

[ix] Mamun et al, International Food Policy Research Institute (6 September 2019). Reforming Agricultural Subsidies for Improved Environmental Outcomes.

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