Impact on inequality
But there are drawbacks. Consider energy subsidies, which are often intended to help low-income households. These can be a drain on government resources if they are available to everyone, including those who are relatively well-off. A targeted cash transfer aimed at poor households costs far less. Subsidies can also exacerbate inequality if they disproportionately benefit those producing or consuming the most. For example, across Africa, Asia, Latin America, and the Middle East, the top 20 percent of households capture on average seven times as many of the benefits of energy subsidies as do the bottom 20 percent (Coady, Flamini, and Sears 2015).
Another drawback: subsidies that do not address market imperfections can distort prices, causing a misallocation of scarce labor and capital that undermines growth. Propping up petroleum prices, for example, may artificially keep firms afloat in energy-
intensive sectors and damp investment in alternative energy. Producer subsidies in agriculture, which increase prices received by farmers above prices for imported food products, also reduce incentives for improving efficiency. In the European Union, these subsidies averaged 20 percent of gross farm receipts in 2014–16, according to a 2017 report by the Organisation for Economic Co-operation and Development.
Some subsidies can be harmful, such as those for fossil fuels. They are not only expensive but also at odds with environmental objectives, such as reducing deaths caused by local air pollution or meeting commitments under the 2015 Paris Climate Change Agreement to reduce emissions of carbon dioxide and other heat-trapping gases. In a broad sense, energy can be considered subsidized whenever its price does not fully reflect not just production costs, but also the full range of environmental costs. Using this more expansive measure, global subsidies in 2015 are estimated at a whopping $5.3 trillion, or 6.5 percent of global GDP (Coady and others 2017)—more than governments spend on health care throughout the world. These subsidies are pervasive across both advanced and developing economies. Subsidies were largest in China, at $2.3 trillion, followed by the United States, at $700 billion, and Russia and India, at about $300 billion each.