Financial instruments
Green subsidies may have hidden costs, experts warn

Switching from gasoline-powered cars to EVs reduces greenhouse gas emissions. But if subsidies instead went to public transportation, the net positive environmental impact could be much greater. Photo: Kindel Media via Canva.
An international group of economists and scientists say government subsidies risk locking in unsustainable practices.
- Subsidies can be powerful motivators that further environmental and sustainability goals
- But they should be approached with caution, even when they seem to be environmentally friendly
- Subsidies can alter market pressures, leading to unintended consequences that not only perpetuate harmful subsidies over time but also diminish the overall effectiveness
Government subsidies for business practices and processes should be approached with caution, even when they seem to be environmentally friendly, writes a group of scientists and economists in this week’s Policy Forum in the journal Science.
They argue that subsidies can alter market pressures, leading to unintended consequences that not only perpetuate harmful subsidies over time but also diminish the overall effectiveness of those intended to promote environmental sustainability.
Therefore, when they must be used, subsidies should have clear end-dates, advise the authors.
“We've got this odd juxtaposition of trying to get rid subsidies in some sectors, and then ramping up subsidies in others,” says lead author Kathleen Segerson, Board of Trustees Distinguished Professor of Economics at the University of Connecticut. “The question that interested me was: is this a good thing or a bad thing?”
Long-term perspective needed
Carl Folke, co-founder of Stockholm Resilience Centre and co-author of the article, emphasizes the long-term perspective of subsidies:
"Subsidies are often viewed as quick solutions, but they can entrench unsustainable practices if not carefully designed. The real challenge is to ensure that they promote genuine resilience and sustainability, rather than locking us into the very problems we are trying to solve."
Kathleen Segerson, Carl Folke, Centre researcher Beatrice Crona, and their co-authors are a group of internationally leading economists, ecologists, geographers, psychologists, and other scientists who convened for the 2022 Askö Workshop sponsored by the Beijer Institute for Ecological Economics in Stockholm, Sweden.
Subsidies are often viewed as quick solutions, but they can entrench unsustainable practices if not carefully designed.
Carl Folke, co-founder of Stockholm Resilience Centre and co-author of the article
Subsidies can be powerful motivators that further environmental and sustainability goals, say the authors. For example, the United States’ Inflation Reduction Act of 2022 uses tax credits and incentives for things like electric vehicles (EVs), solar power, and wind power to meet its renewable energy and efficiency targets.
They can also be a politically easier approach to enacting change than creating new laws or taxes and are even sometimes viewed as political capital, to ensure support from particular interest groups.
Folke highlights the complexity of addressing environmental issues through economic tools:
"We must recognize that while subsidies can be useful tools, they can also mask deeper systemic issues. It's crucial to move beyond short-term fixes and instead focus on transformative approaches."
Costs that greatly exceed benefits
But some subsidies that appear to encourage sustainability are not so simple, the authors explain. Sometimes they can have negative spillover effects.
Take the case of EVs: Switching from gasoline-powered cars to EVs reduces greenhouse gas emissions. When subsidies for EVs and their technology create more inexpensive EVs, however, that market will expand, increasing overall vehicle use.
But if subsidies instead went to increased infrastructure for and access to public transportation, more people might get rid of their cars, making the net positive environmental impact much greater.
“A subsidy that might have initially been viewed as beneficial for society might eventually be recognized as having costs that greatly exceed benefits,” the authors write.
Many subsidies in place for decades have long been identified by economists and environmentalists alike as actively contributing to climate change and biodiversity threats.
Despite the leaders of the G20 committing to phasing out inefficient fossil fuel subsidies more than a decade ago, some sources estimate that there were still $1.3 trillion in global fossil fuel subsidies in 2022, owing to the considerable vested interest and political pressure from benefiting corporations to keep them in place.
From an economic efficiency perspective, it’s better to tax activities that generate negative effects, such as a carbon tax —but they are a hard sell.
Segerson, K. Polasky, S., Scheffer, M., Sumaila, U.R., Cárdenas, J.C., Nyborg, K., Fenichel, E.P., Anderies, J.M., Barrett, S., Bennett, E.M., Carpenter, S.R., Crona, B., Daily, G., de Zeeuw, A., Fischer, J., Folke, C., Kautsky, N., Kremen, C., Levin, S. A., Lindahl, T., Pinsky, M.L., Tavoni, A., Walker, B. & Weber, E.U. 2024. A cautious approach to subsidies for environmental sustainability. Science, 386 (6717).