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Harmful subsidies are government payments, tax breaks, price supports, or similar incentives that make environmentally damaging activity more profitable or less expensive. In agriculture, that can change land-use decisions: support for commodities such as soybeans, palm oil, or beef may encourage production to expand into forest frontiers. The World Bank’s 2023 report materials associate agricultural subsidies with an estimated 2.2 million hectares of forest loss each year, described as 14% of global deforestation. That is an association reported by the World Bank, not a claim that every subsidy causes deforestation or that the figure measures the forest effect of fossil-fuel support.
What makes a subsidy harmful?
A subsidy is usually described by its policy purpose: helping farmers, keeping food affordable, supporting energy users, protecting jobs, or developing a region. Its environmental character depends on what the incentive causes in practice. A payment intended to support farm income can be environmentally harmful if it encourages clearing forests, draining wetlands, exhausting soil, polluting water, or replacing diverse habitat with a single crop.
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For this article, a harmful subsidy is any government transfer, tax preference, price support, subsidized loan, input discount, or comparable incentive that encourages activity whose effects damage climate, biodiversity, forests, water, soil, or another environmental good. The label does not depend on whether policymakers intended the damage.
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Accounting choices matter. A narrow inventory may count only explicit budget expenditure. A broader estimate may also value foregone tax revenue, regulated prices, cheap credit, and environmental or social costs that are not shown in a government budget. Two studies can therefore report different totals while examining the same policy system.
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European Commission categories
The European Commission groups environmentally harmful subsidies into three broad categories:
| Category | What it covers | Environmental relevance |
|---|---|---|
| Fossil-fuel subsidies | Support that lowers the cost of coal, oil, or gas for producers or users | Can increase greenhouse-gas emissions and other pollution |
| Other energy-related subsidies | Energy support outside fossil fuels that nevertheless creates environmental harm | Effects depend on the technology, fuel, location, and conditions attached to support |
| Non-energy subsidies | Support in agriculture, transport, industry, water, or other sectors | Can drive biodiversity loss, forest conversion, pollution, soil damage, or excessive resource use |
A subsidy is therefore not automatically harmful because it is large, popular, or directed at a particular sector. The relevant questions are which behavior it rewards, where that behavior occurs, and what environmental effects follow.
How agricultural subsidies can damage forests
The forest pathway is an economic chain rather than a claim that every farm-support program clears trees.
- Support changes the economics. A payment per hectare, guaranteed price, cheap fertilizer, subsidized irrigation, tax concession, or low-interest loan can raise the return from producing a commodity or lower the cost of inputs.
- Higher returns affect land decisions. Existing farms may intensify, but producers may also seek additional land when output prices and support make expansion attractive.
- Expansion reaches a frontier. Where roads, land tenure, and enforcement permit, the most accessible new land can be forest. Clearing may be legal, illegal, or occur in a regulatory gap; the incentive can still alter the expected payoff.
- Conversion removes forest values. Clearing eliminates habitat and can impair biodiversity, carbon storage, water regulation, soil protection, and the livelihoods or rights of people who depend on forests.
The World Bank’s 15 June 2023 discussion of subsidy reform names soybeans, palm oil, and beef as examples of products for which subsidies can push farmers into the forest frontier. The mechanism is not that these commodities are inherently harmful. It is that support can make additional production profitable in places where expansion means converting forest.
Why the same payment can have different effects
Location and program design determine the result. A yield-improving payment on already cleared land may raise output without requiring more area, while a broad area payment can reward bringing new land into production. A subsidy paired with strong forest-protection rules may have a different outcome from an identical subsidy where monitoring and enforcement are weak. Roads, land prices, credit access, commodity demand, and customary or Indigenous land rights also shape whether producers intensify, move, or stop.
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Leakage is another risk. If a policy restricts clearing in one district but raises the profitability of the commodity across a region, expansion may shift elsewhere. Assessments therefore need to examine the whole market and the places where production can move, not only the parcels receiving money.
What the World Bank’s forest estimate means
In its 2023 report materials, the World Bank associates agricultural subsidies with:
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|---|---|
| 2.2 million hectares of forest per year | An estimated annual amount of forest loss associated with agricultural subsidies, as reported by the World Bank in 2023 |
| 14% of global deforestation | The share the same World Bank materials associate with agricultural subsidies |
These figures are the World Bank’s reported association and depend on its definitions, data, geographic coverage, and modelling. They should not be presented as a universal estimate independent of methodology. They also do not mean that every agricultural subsidy causes deforestation, that every hectare is cleared because of a single payment, or that the 14% share applies to fossil-fuel subsidies. The forest-specific figures concern agricultural subsidies.
The scale matters because a policy can have a small effect per recipient but a large cumulative effect when it applies across millions of hectares, farms, or commodity transactions. It also shows why looking only at conservation budgets can miss a major part of the land-use picture: a government may spend money to protect forests while another program makes clearing more profitable.
“People say that there isn’t money for climate but there is – it’s just in the wrong places,” said Axel van Trotsenburg, Senior Managing Director of the World Bank, in a 15 June 2023 press release.
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Harm is broader than forest clearing
The European Commission uses biodiversity as a central reason to identify and reform environmentally harmful support. Fossil-fuel subsidies are its clearest energy example because they can increase emissions and pollution. Other energy incentives can also create harm depending on their design and location. Non-energy programs may affect forests, rivers, soils, fisheries, or species even when their immediate objective is economic development.
Do not turn this broader point into a forest statistic that the evidence does not establish. The World Bank’s 2.2-million-hectare and 14% figures are specifically associated with agricultural subsidies. The European Commission’s energy categories show why subsidy assessment must cover more than farming, not that fossil-fuel support has been measured at the same forest-loss rate.
Why harmful subsidies are difficult to measure
Incentives are spread across ministries and levels of government. A farm may receive a direct payment from a national agriculture department, discounted water from a regional authority, a tax preference, a guaranteed purchase price, and a road built through a development program. A list that counts only one of those instruments will understate the incentive facing the producer.
The OECD’s 2022 working paper, Identifying and assessing subsidies and other incentives harmful to biodiversity, describes identification and assessment as the necessary first step and notes that few countries had completed it. That finding is important: uncertainty often reflects fragmented programs and inconsistent data, not proof that impacts are negligible.
The German Environment Agency’s Environmentally Harmful Subsidies in Germany: Update 2021, published in 2022, illustrates a national approach. It examines several sectors but focuses mainly on federal subsidies. Its scope demonstrates both the value and the limitation of an inventory: a multi-sector review can reveal interactions, while a federal focus may not capture every regional or local incentive.
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A practical assessment sequence
- Build the inventory. List transfers, tax expenditures, price controls, credit guarantees, public services supplied below cost, and regulations that function like support. Record the responsible agency, legal basis, recipients, amount, duration, and geographic reach.
- Map the behavior. Specify whether the instrument changes the price of land, labor, fertilizer, water, energy, transport, or output. Identify the commodity or activity that becomes more attractive.
- Trace land and environmental outcomes. Test for links to forest conversion, biodiversity loss, emissions, pollution, water withdrawals, soil degradation, or habitat fragmentation. Use spatial data where expansion could reach intact ecosystems.
- Check additionality and leakage. Ask whether support increases production, shifts it between regions, displaces other producers, or merely raises returns on activity that would have happened anyway.
- Measure who gains and who pays. Separate benefits to landowners, tenants, processors, consumers, and workers from costs borne by rural communities, taxpayers, and people exposed to environmental damage.
- Publish assumptions. State whether totals include only budget spending or also tax expenditure and external costs; identify the year, price basis, and government levels covered.
How to compare a subsidy or reform proposal
A useful comparison needs more than a headline cost. Apply the same questions to the existing policy and each alternative.
| Comparison axis | Questions to ask |
|---|---|
| Incentive and sector | What behavior or commodity changes? Who receives the support, and through which instrument? |
| Environmental effect | Is there evidence of forest conversion, biodiversity loss, pollution, emissions, or another harm? Over what area and time? |
| Measurement and scope | Does the estimate count direct spending only, or also tax preferences and external costs? Are national, regional, and local programs included? |
| Distributional impact | Which groups gain under the current policy, and who bears costs if it is changed? |
| Safeguards and use of savings | Are vulnerable people protected, and is freed revenue visibly reinvested in public priorities? |
This framework prevents a reform from being judged solely by the money it saves. Removing a harmful incentive without an alternative can create abrupt losses for workers, small producers, or consumers. Conversely, retaining a large payment because it is politically familiar can preserve environmental costs that are not shown in the budget.
What responsible subsidy reform looks like
The World Bank says reform has distributional and political dimensions. Its recommendations include social assistance such as cash transfers for vulnerable groups, transparent communication, time for people and businesses to adjust, and clear evidence of how recovered revenue is reinvested.
Protect people who cannot adjust quickly
Targeted assistance can cushion households facing higher food, transport, or energy costs and help workers or producers move to different activities. The design should identify actual beneficiaries rather than assume that a broad subsidy reaches the poorest. The World Bank notes that subsidy burdens are not always progressive: in some energy cases, wealthier households benefit more because they consume more. That pattern cannot be assumed for every country or every sector, so distribution should be measured before and after reform.
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Phasing changes, publishing a timetable, and offering technical or financial support can reduce sudden shocks. Businesses need to know whether rules will change once or repeatedly; farmers need time to alter planting, livestock, or equipment decisions. Clear eligibility rules and independent monitoring make it harder for temporary assistance to become a permanent version of the harmful incentive.
Make the use of savings visible
People are more likely to accept reform when they can see where the money goes. Governments can report the amount recovered, the programs funded with it, and the groups reached. Forest restoration, enforcement, rural services, health, or targeted income support may all be legitimate uses, but the allocation should be stated rather than implied.
“Much is already known about best practices for subsidy reform, but implementing these practices is no easy feat due to entrenched interests, challenging political dynamics, and other barriers,” said Richard Damania, Chief Economist of the World Bank’s Sustainable Development Practice Group, in the World Bank’s 15 June 2023 press release.
International biodiversity commitments
The Kunming–Montreal Global Biodiversity Framework’s Target 18 calls for eliminating, phasing out, or reforming incentives harmful to biodiversity by 2030. The European Commission describes work on a method for identifying non-energy harmful subsidies and says a first reporting exercise was scheduled for 2025 alongside energy-subsidy data collection. That is the Commission’s stated plan; it should not be treated as proof that the reporting had been completed.
The target does not require every subsidy to disappear. It points governments toward identifying harmful incentives, reforming those with the greatest impact, and redirecting support toward outcomes compatible with biodiversity protection. Forest policy is one part of that broader task.
Common mistakes when discussing harmful subsidies
- Equating purpose with outcome: calling a program environmentally safe because it was created to help farmers or consumers.
- Calling every subsidy harmful: ignoring differences in design, location, conditionality, and enforcement.
- Mixing sectors: using an agricultural forest-loss estimate as though it measured fossil-fuel or all energy subsidies.
- Hiding the accounting boundary: comparing a budget-only total with an estimate that includes external environmental costs.
- Ignoring distribution: assuming removal helps everyone equally or that the existing subsidy reaches the poorest households.
- Counting announcements as results: treating a planned reporting exercise or reform timetable as evidence that implementation occurred.
Bottom line
Harmful subsidies are incentives whose real-world effects damage environmental goods, regardless of their stated social or economic purpose. Agricultural support can raise the profitability of expanding soy, palm oil, beef, and other production into forest frontiers. The World Bank’s 2023 materials associate such subsidies with 2.2 million hectares of annual forest loss, or 14% of global deforestation, while cautioning readers to understand those numbers within their reported methodology. Sound policy starts by identifying every relevant incentive, measuring its land-use and biodiversity effects, protecting people who would otherwise bear the adjustment costs, and showing where the savings go.
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