What you need to know about environmentally harmful subsidies

Every year, governments around the world invest trillions of dollars in subsidies designed to support economic growth, strengthen key industries, and improve people's lives. But many of these public investments also have unintended consequences for nature.

At least US$2 trillion is spent annually on subsidies that contribute to environmental degradation, biodiversity loss, and climate change. Repurposing these harmful incentives represents one of the greatest opportunities to unlock finance for nature, without requiring governments to spend more.

Farooq Ullah, Associate at the International Institute for Sustainable Development (IISD), explains why subsidy reform is not about taking benefits away, but about making public spending work better for both people and nature.

Governments spend at least US$2 trillion every year on environmentally harmful subsidies

Subsidies are financial incentives provided by governments to achieve public policy objectives. They can help reduce the cost of living, support farmers, stimulate industries, or improve energy access.

However, many subsidies unintentionally encourage activities that degrade ecosystems and accelerate biodiversity loss.

Some of the largest examples include fossil fuel subsidies, which amount to an estimated US$1–1.3 trillion annually, and agricultural incentives that encourage intensive farming practices, excessive chemical fertilizer use, or land conversion.

These investments were never intended to harm nature, yet their cumulative environmental impacts are significant.

As countries search for ways to finance biodiversity conservation, repurposing existing public spending offers an enormous opportunity to redirect resources toward more sustainable outcomes.

Harmful subsidies were created to solve social problems, not environmental ones

Environmentally harmful subsidies were not designed with environmental damage in mind.

Most were created to address legitimate social and economic priorities, such as:

• supporting food production,
• making energy more affordable,
• reducing the cost of living,
• creating jobs,
• or stimulating economic development.

Environmental harm is largely an unintended consequence of policy designs that no longer reflect today's sustainability challenges.

Recognizing this distinction is essential. Rather than viewing subsidy reform as removing support, governments can focus on preserving the original social objectives while updating policies to avoid unintended environmental impacts.

How can governments continue supporting people and businesses while achieving better environmental outcomes?

The objective is to redesign public incentives so they continue delivering social and economic benefits while encouraging more sustainable practices.

Instead of subsidizing fossil fuels, governments can support renewable energy.

Instead of encouraging environmentally intensive agricultural production, incentives can promote sustainable farming, agroforestry, regenerative agriculture, and other nature-positive approaches.

In other words, subsidy reform is not about spending less; it is about spending smarter.

Positive incentives can improve livelihoods while protecting biodiversity

Repurposing harmful subsidies creates opportunities to replace outdated incentives with investments that generate multiple benefits.

Positive, well-designed incentives can:

• strengthen rural livelihoods,
• support local communities,
• improve food security,
• encourage sustainable businesses,
• restore degraded ecosystems,
• reduce greenhouse gas emissions,
• and protect biodiversity.

Nature and economic development do not have to compete.

Healthy ecosystems underpin agriculture, fisheries, tourism, water security, and many other sectors that depend directly on functioning natural systems. Investing in nature therefore also strengthens long-term economic resilience.

As Farooq Ullah notes, approximately half of global GDP depends directly on nature, making healthy ecosystems fundamental to sustainable development.

Harmful subsidy redesign is one of the biggest opportunities to mobilize finance for nature

Governments around the world face growing fiscal pressures and increasingly constrained public budgets.

In this context, biodiversity finance is no longer simply about finding new sources of funding. It is also about using existing public resources more effectively.

This is precisely where harmful subsidy reform becomes one of the most powerful finance solutions available.

Rather than requiring significant new public expenditure, reform enables countries to redirect existing government spending toward activities that support biodiversity while continuing to deliver social and economic objectives.

For countries developing and implementing National Biodiversity Finance Plans, this approach can help close financing gaps, improve policy coherence, and mobilize long-term investment for nature.

As governments prepare for the next phase of implementing the Global Biodiversity Framework, redesigning environmentally harmful subsidies offers one of the clearest opportunities to align public finance with biodiversity goals.

From harmful subsidies to positive incentives

The transition to nature-positive economies will require smarter public finance, not simply larger budgets.

By preserving the original social purpose of subsidies while eliminating their unintended environmental impacts, governments can transform existing public spending into a powerful driver of sustainable development.

Redesigning harmful subsidies is therefore not about taking benefits away, it is about creating better incentives that support people, strengthen economies, and protect the natural systems on which they ultimately depend.

Watch the full interview with Farooq Ullah to learn more about why environmentally harmful subsidy redesign is one of the world's most important opportunities for financing biodiversity.