Fossil fuel and agricultural subsidies should be redirected to climate action, Ajay Banga suggested at the bank’s annual meeting.
The World Bank’s new president has called into question the vast amounts of money that governments spend subsidizing fossil fuels.
Speaking at the bank’s annual meeting in Morocco on Wednesday, Ajay Banga said that the $1.25 trillion (€1.18 tn) that goes towards making fuel, fisheries and agriculture cheaper every year is too much.
These three sectors are responsible for up to $6 trillion (€5.7 tn) of environmental impact, and the bank wants to see climate change action prioritized instead.
“I’m not saying to get rid of all of those. I consider some of those subsidies mission-critical to the social contract with the government and its citizens. But I don’t believe that $1.25 trillion qualifies,” Banga told a panel at the annual meetings of the International Monetary Fund (IMF) and World Bank in Marrakech.
“I just believe that this topic of subsidies needs discussion,” he said, acknowledging that it was not a popular topic given the politics involved.
Why do governments subsidize fossil fuels?
Governments around the world spend nearly half a trillion euros a year on making the use of fossil fuels cheaper, according to an IMF report from 2021.
These subsidies come in different forms, including tax breaks, low-interest loans and petrol price caps. The latter, for example, helps limit the cost of fuel for people filling up their cars.
Getting rid of subsidies like these can be politically difficult, as it pushes up living costs. But most subsidies actually benefit the rich, according to a recent World Bank report.
The International Energy Agency (IEA) has also said that fossil fuel subsidies are ultimately an inefficient way of helping consumers.
“It is far better for governments to spend time and money on structural changes that bring down fossil fuel demand, rather than on emergency relief when fuel prices go up,” IEA analysts said earlier this year.
In its own ‘Detox Development’ report from June 2023, the World Bank notes that if the social costs of fossil fuels – like their impact on climate change and air pollution – were factored in, then the price would be even greater than their free market price.
Getting rid of fossil fuel subsidies will also make it easier for renewables to compete.
Comprising five institutions and 189 member countries, the World Bank aims to wipe out poverty in developing countries.
It is also increasingly committed to sustainable development solutions. The bank is pivoting to focus more on climate change, following calls from wealthy governments like the US and Germany that fund it, according to reports from Climate Home News.
The World Bank doesn’t have the power to force governments to get rid of fossil fuel subsidies; it can only advise and pressure them. But pressure is mounting on this system from numerous quarters.
“People will say that there isn’t money for climate but there is – it’s just in the wrong places,” said the World Bank’s senior managing director Axel Van Trotsenburg when ‘Digital Detox’ came out.
“If we could repurpose the trillions of dollars being spent on wasteful subsidies and put these to better, greener uses, we could together address many of the planet’s most pressing challenges,” he added.
Why are agricultural subsidies so controversial too?
Banga told reporters that the bank would “look at every other place where pools of money exist which could be used or redirected – whether it is subsidies in the world on fuel and agriculture that cause environmental issues or whether it is voluntary carbon markets.”
$500 billion (€474 bn) on agricultural subsidies might not sound so harmful on the face of it. However agriculture is the second largest contributor to global greenhouse gases, and industrial farming of livestock is tied to a range of environmental ills.
A recent report from ActionAid found that since the Paris Agreement, banks have provided 20 times more financing to fossil fuels and agriculture activities in the Global South than Global North governments have provided as climate finance to countries on the front lines of the climate crisis.
It called for an end to industrial agricultural subsidies, and more funding for just transitions to renewable energy and agroecology.