Why Reforming Incentives Is Key for Sustainability

Lever 1: Change Incentives

Part of the Levers and Leverage Points blog series.

Prevailing Thinking:

A widespread belief holds that the path towards positive environmental change is through a large scaling-up of positive incentives (i.e., increasing financial rewards for taking more ‘sustainable’ action). This way of thinking, however, can do more harm than good, as it ignores the ‘elephant in the room’, and many incentive programs are implemented in ways that can undermine sustainable development.


Transformed Thinking:

Existing subsidies have constructed a landscape of perverse incentives (e.g., encouraging firms and people to develop, transport and use fossil fuels; to use agricultural chemicals; to buy more fishing boats). Thus, sustainable resource use requires first restructuring existing subsidies so they directly address their negative impacts (e.g., requiring responsible use of agricultural chemicals and preventing their leaching into groundwater). On top of this, well-designed positive incentives can foster adaptive environmental stewardship, across all sectors.


Elaboration:

Despite many calls and existing international commitments promising to reform harmful subsidies, little progress has been made across many nations. Nations worry that changing existing subsidies will undermine competitiveness in a global market, and those industries that have received subsidies historically often enhance that perception by lobbying against changes. Often, this lobbying comes from only a portion of firms—those who have been most polluting, and who stand to lose revenues under well-targeted subsidies.


Paths Forward:

A critical first step towards sustainable pathways is taking stock of existing subsidies and their harmful effects. Many subsidies have harmful or perverse environmental effects, even when their intention or outcome is to increase resource use (e.g., fisheries subsidies that boost the number of fishing vessels and resulting catch). This systematic accounting of subsidies is necessary to then eliminate the perverse effects.


Positive incentive programs can also have a range of perverse effects, e.g., by sending the signal that firms and individuals have a right to pollute unless paid otherwise. Given this, governments can ensure that incentive programs (1) are intended to promote relational values instead of ‘buying’ behaviour change, (2) target harmful ‘unchanging’ behaviour by implementing suitable pricing programs and regulations, including progressive carbon pricing mechanisms, and (3) redirect public funds towards sustainable development.


Further, there is a crucial necessity for diplomacy—using international agreements, backed by trade measures—to push for international consistency. This would minimize the threat of nations losing their competitive edge in global markets when reforming subsidies, as all nations will be required to do so.


Clarification:

While it is often assumed that reforming perverse subsidies will broadly harm workers, it need not. Many workers can actually benefit from these changes. If subsidies are reoriented away from quick and damaging extraction and production, and towards small-scale ecologically restorative practices, this can in turn support many workers and stimulate ongoing innovation towards a circular economy (see Leverage Point 7, Technology, Innovation, and Investment).



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