Subsidies Factsheet

Background

Legal definition of subsidies

There is no unique single definition of the term “subsidy.” According to the OECD, a subsidy is a government action that confers an advantage on consumers or producers, to supplement their income or lower their costs. Subsidies allow consumers to purchase goods and services at prices lower than those offered by a perfectly competitive private sector, or raise producers’ incomes beyond those that would be earned without this governmental intervention. The German Environmental Agency defines subsidies as a preferential treatment for enterprises which is provided by the public sector at lower than normal market prices, or even free of charge, thus affecting consumer decision-making. Assistance for private households also constitutes a subsidy if it favours specific consumer habits and thereby indirectly influences economic activity.

Different types subsidies

There are different methods for granting subsidies. For instance, governments often distinguish between on-budget subsidies and off-budget subsidies. “On-budget subsidies” refer to direct transfer of funds such as grants; potential direct transfers of funds, such as insurance schemes; and governmental services and provision of goods. “Off budget subsidies” refer to indirect transfer of funds, which produce no direct budgetary impact. They can include activities such as price reductions for required goods or services that can be government-supported; income support; tax exemptions; and market measures such as tariffs and quotas.

Harmful subsidies

Subsidies are harmful if they have adverse impacts on the environment (climate, air, soil, water, and biodiversity), on public health, animal welfare, or any other negative social impacts. The public opinion and governments increasingly criticise government subsidies to industrial activities that cause negative externalities. For instance, at the COP 26, the international community called on phasing out harmful subsidies for fossil fuels, considering that fossil fuel production was harming the climate, and that governments should not encourage such activities by granting them subsidies.

The need to reform agricultural subsidies

Farm animal production industry also benefits from subsidies, despite causing significant negative externalities on the climate, public health, and animal welfare. The livestock industry contribution to global GHG emissions ranges from 14.5 up to 51%, in terms of life cycle analysis. Furthermore, it is estimated that increase GHG emissions from food and agriculture will increased by up to 80% by 2050 due to population growth and dietary changes. Livestock production is also a key factor in biodiversity loss. Furthermore, high consumption levels in animal-source food have negative effects on human health. For these reasons, the IPCC's 2019 Special Report on Land and Climate Change, presented a shift to more plant-based diets as a major opportunity for reducing GHG emissions and improving health outcomes, as well as an adaptation means to achieve better food security.

When negative externalities are factored in the price of animal-source food products – such as the cost of environmental and human health of animal agriculture and meat consumption, as well as animal welfare implications – the true cost of animal agriculture is much higher than what most consumers currently pay. For instance, a comprehensive 2018 study found that if healthcare costs were included in the price of meat, the price of processed meat would increase by 25% on average (and by over 100% in high-income countries). Similarly, the price of red meat would increase by 4% on average (up to 25% in high-income countries).

However, not only do the prices of animal-source products not include the costs of externalities they cause, government also subsidise the production of animal-source products. Governments usually grant indirect subsidies to animal agricultural producers, under the form of incentives to engage in good agricultural practices, or by subsidizing the investment in farm infrastructure, as it is the case in the EU. Furthermore, governments assist private households in ways that favour consumption of animal-source foods. After sugar and rice, animal products are the third most subsidized food groups in OECD countries, and studies indicate that subsidies for GHG emissions-intensive agricultural products like meat have risen since the early 1990s. As a result of these subsidies, the prices of animal-source food are artificially low, and have the effect of distorting consumer demand, as low prices incentivise consumers to buy of these products.

Key Considerations

1. Phasing Out Harmful Subsidies

Governments should end the allocation of subsidies in support of industrial farm animal production, which disproportionately harm climate, biodiversity, and entail significant animal suffering. Similarly, governments could redirecting subsidies away from animal feed production towards producing nutritious, sustainable crops (such as fruits, vegetables, whole grains and legumes) for direct human consumption.

So far, however, no government has specifically excluded industrial farm animal production systems, or crops used for animal feed purposes from receiving agricultural subsidies.

2. Subsidies as an Incentive to Engage in Best Practices

Government should afford subsidies to producers who engage in good social, environmental, and animal welfare practices. For instance, the EU’s Common Agricultural Policy provides payments to farmers who abide by animal welfare standards above legal minimum, or engage in organic farming.

Furthermore, governments should enact measures that support humane and healthy consumption habits. Such measures could include the reduction in VAT on plant-based products, as implemented in Spain.

3. Subsidies as an Enforcement Tool

In situations where governments still grant subsidies to animal agricultural producers, these subsidies should be used a tool to improve the enforcement of animal welfare legislation. For example, the EU’s Common Agricultural Policy, by way of its “conditionality” rules, provides that farmers who are found to be in breach of the legislation on farm animal welfare should receive a reduced amount in the subsidies they receive.

4. Subsidies to Support the Research and Development of Alternative Proteins

Governments should also support the development of humane foods by way of subsidizing research and food companies working to develop alternative proteins. For instance, In 2019, the state of Maharashtra in India, funded the Centre of Excellence in Cellular Agriculture. This centre is the world’s first government research center for developing cultivated meat. Denmark also invested 177 million dollars in plant-based proteins in 2021, to be distributed over nine years.

5. Policy Coherence

Agricultural policies should further be consistent with other policies, such as public health policy, by ensuring that agricultural policies remain consistent with the national nutritional guidelines, or environmental policy, by ensuring that subsidies are granted based on the environmental footprint of the agricultural products and their impacts on biodiversity.

References

References

Alice Di Concetto, “Animals in the EU Agricultural Policy,” The European Institute for Animal Law & Policy (2019).

German Environment Agency, “Technical Brochure: Environmentally Harmful Subsidies In Germany” (2014).

Institute for European Environmental Policy, “Reforming Environmentally Harmful Subsidies”

A Report to the European Commission’s DG Environment (2007).

Niki A. Rust et al., How to Transition to Reduced-Meat Diets That Benefit People and the Planet, Science of the Total Environment (2020).

The Good Food Institute, 2021 State of Global Policy Report With Highlights from the First Half of 2022 (2022).

Gerd Schwartz and Benedict Clements, Government Subsidies, Journal of Economic Survey (1998).

Marco Springmann et al., Health-Motivated on Red and Processed Meat: A Modelling Study on Optimal Tax Levels and Associated Health Impacts, Plos One (2018).

Further Readings

Dwayne Holmes, David Humbird, Jan Dutkiewicz, Yadira Tejeda-Saldana, Breanna Duffy, and Isha Datar, “Cultured Meat Needs a Race to Mission, Not a Race to Market.” Nature Food (2022).

Raychel Santo, et al., “Considering Plant-Based Meat Substitutes and Cell-Based Meats: A Public Health and Food System Perspective.” Frontiers in Sustainable Food Systems (2020).