Fiscal Subsidies and Environmental Sustainability: What does the Cross-country Empirical Estimates Suggest?
| Author | Debashis Chakraborty,Sacchidananda Mukherjee |
| DOI | 10.1177/0015732513496619 |
| Published date | 01 August 2013 |
| Date | 01 August 2013 |
| Subject Matter | Articles |
Fiscal Subsidies
and Environmental
Sustainability: What
does the Cross-country
Empirical Estimates
Suggest?
Debashis Chakraborty
Sacchidananda Mukherjee
Abstract
A number of developed as well as developing countries provide subsidies to
domestic players, leading to overproduction and over-exploitation of natural
resources, which pose a serious threat to environmental sustainability. The anal-
ysis in this article attempts to understand the role of government budgetary sub-
sidies on the overall environmental performance index through panel data model
estimation for a set of 74 countries over an 11-year period (2000–2010). The
empirical findings confirm the theoretical prediction that subsidies lead to envi-
ronmental degradation, which is of particular concern for developing countries.
JEL: H23, Q53, Q56, Q58
Keywords
Budgetary subsidy, environmental performance index, environmental sustainability,
human development, urbanization, government policy, environmental Kuznets curve
Introduction
Provision of fiscal subsidies by national governments to local players for giving
them a competitive edge over their foreign counterparts is often motivated by the
infant-industry argument (Chang, 2001). Subsidies may be provided either for
Article
Foreign Trade Review
48(3) 383–397
©2013 Indian Institute of
Foreign Trade
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/0015732513496619
http://ftr.sagepub.com
Debashis Chakraborty, Assistant Professor, Indian Institute of Foreign Trade (IIFT),
New Delhi, India. E-mail: debchakra@gmail.com
Sacchidananda Mukherjee, Assistant Professor, National Institute of Public Finance
and Policy (NIPFP), New Delhi, India. E-mail: sachs.mse@gmail.com
Foreign Trade Review, 48, 3 (2013): 383–397
384 Debashis Chakraborty and Sacchidananda Mukherjee
boosting domestic production (domestic subsidy) or for promoting global exports
(export subsidy), or both. Delivery of subsidies may take different routes, for
example, direct transfer of financial resources (per unit production subsidy) or
indirect support (for example, revenue foregone by offering tax and other conces-
sions, fuel subsidies, provision of concessional credit lines, etc.). Such subsidies
may negatively influence the environment through overproduction and exploi-
tation of resources (Unisféra International Centre and Centro Mexicano de
Derecho Ambiental [UIC-CMDA], 2003; Van Beers and Van den Bergh, 2001).
Furthermore, indirect support extended through the continuation of lax environ-
mental standards at home reduces the cost of production and the associated over-
production harms environmental sustainability (Kelly, 2009).
There exists a rich literature on the adverse effects of fiscal subsidies on the
environment. For instance, agricultural subsidies lead to input overuse and con-
sequent biodiversity loss (Steenblik, 1998), carbon dioxide (CO2) emission
(Atici, 2009), deforestation, water and soil pollution (Robin et al., 2003), etc. In
addition, major industrial sectors like iron and steel are recipients of energy sub-
sidies, which significantly harm environmental sustainability. Estimation of the
value of the annual global energy subsidy is however a critical question due to
under-reporting. It has been noted that annual global energy subsidy level is huge
in the United States, and in excess of US$ 300 billion (Templet, 2001; Victor,
2009). Existence of huge fuel subsidies has been reported in Poland and Russia
(World Trade Organization [WTO], 2006), China (Chow, 2007), and several
developing countries and emerging economies (United Nations Environment
Programme [UNEP], 2008).
The implications of aggregate subsidies on overall sustainability in a cross-
country time series framework has revealed mixed results. Rise in government
spending generally worsens environmental sustainability (Mukherjee and
Chakraborty, 2013). However, a shift in government spending towards public
goods may reduce pollution, owing to greater benefits realized by human capital–
intensive sectors vis-à-vis physical capital–rich polluting segments and the asso-
ciated growth dynamics (Lopez et al., 2011).
The comparison of the subsidy–sustainability relationship for the developed
and developing countries is however a less researched area. Nevertheless, the
relationship may offer a deeper insight on the sustainability question, which
follows from the environmental Kuznets curve (EKC) hypothesis. EKC notes
that growing income at initial stages of development leads to environmental
degradation, as the development may come at the cost of deforestation, increase
in manufacturing output, etc. However, beyond a threshold level growing income
may reduce pollution as the same might be associated with the demand for better
environment and consequent adoption of better environmental governance (for
example, adoption of effective pollution abatement practices), etc. (Cole, Rayner
and Bates, 1997; Mukherjee and Chakraborty, 2010; Stern et al., 1996). Subsidies
may fuel the aforesaid pattern predicted by EKC and part of the subsidies offered
in developing countries and least developed countries may lead to adverse
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