• An estimated USD 2.4 trillion flows globally in public subsidies each year to sectors that harm nature.
  • The EU’s Common Agricultural Policy (CAP) subsidies keep a livestock system afloat that could not financially sustain itself in many European states. The more a sector leans on public payments, the more it is banked on Brussels: the subsidies may make bank loans to livestock farmers more viable, pushing them to lock in existing farming systems.
  • By reforming harmful subsidies, governments can both generate funding for nature restoration and realign private financial incentives, avoiding the need to rely first on new instruments.

Following the Kunming-Montreal Global Biodiversity Framework, governments should evaluate whether their subsidy systems harm nature. Globally, UNEP has estimated that USD 2.4 trillion in public subsidies go to activities that harm nature. The Netherlands recently finished a two-year study and concluded that half of the 102 subsidies researched have negative effects on nature, with tax exemptions on aviation fuel and agricultural subsidies as major examples. 

Pjotr Tjallema

These subsidies work on two levels. First, they affect the real economy directly: by lowering costs or increasing revenues for certain activities, they make those activities more attractive for companies, even when they damage nature. Second, they influence private finance. If subsidies make an activity look more profitable and stable, banks are more likely to finance the assets behind it. In this way, public subsidies help determine which business models remain bankable.

This may be obvious, but it receives little attention in nature finance, where efforts to ‘fill the funding gap’ with private finance are focused on building market-based instruments like nature credits, treating market distortions such as harmful subsidies as a given. Such instruments will achieve little nature restoration if subsidies continue to pull private finance in the opposite direction at scale.

Banking on Brussels

The Common Agricultural Policy (CAP), through which the EU supports farms, is one of the largest subsidy systems in the world, worth around EUR 55 billion a year. This consumes about a quarter of the EU budget. Most of these subsidies are currently hectare-bound subsidies, while a smaller share reward green services that farmers deliver, like agricultural nature subsidies.

Many European farmers depend on CAP payments to make a decent living. Across the EU, the CAP accounted for 58% of total farm profit (a farmer’s income) in 20201. For many livestock sectors, the dependency runs deeper: subsidies made up 96% of beef and lamb farm profit and 71% of dairy sector farm profit, for example. An estimated 77% of the 2020 CAP budget went to animal-sourced foods like meat, poultry and dairy, both directly and through subsidies for growing animal feed.

Although those payments arrive as an annual flow, they also shape long-term investment decisions. Farmers and the wider food system need financial capital for the assets they rely on to earn an income, such as land, stables, and milking systems. In Europe, investment in such fixed assets totals EUR 42 billion per year.  Much of this investment is financed through bank loans.2

These loans are more readily available because large public subsidies to farmers are in place. Without setting out to, Brussels is running a credit policy that encourages banks to finance livestock farms.

Stranded subsidies

Depending on public payments is not a problem in itself. It can make sense to reward the public benefits farmers provide like landscape conservation or water management. Subsidies become a problem when they are a significant obstacle to necessary transitions in the food system, like meeting climate and food security goals.

Across their full lifecycle, animal products cause an estimated 84% of the greenhouse gas emissions from EU food production, while only providing an estimated 35% of calories and 65% of protein consumed in the EU. The CAP thus overfunds foods that disproportionately hurt climate goals and underfunds the foods that dietary guidelines tell us to eat more of, such as beans and nuts. Growing food for people directly on land now used for animal feed would use scarce land more efficiently, while it could also decrease our dependence on imported feed crops, serving food security.

Loans extended on the back of CAP subsidies, for capital assets like a milking robot or, further down the chain, a slaughterhouse, risk reinforcing a system that locks in the negative impacts of livestock farming. Serious CAP reform would depreciate the value of these assets in some member states. This is stranded asset risk: the risk that an asset falls out of use and turns into a liability before the end of its economic life or loan term. Coal plants and gas fields are often named as examples of stranded assets, but milking robots and slaughterhouses may be at risk too. For the meat processing sector alone, the value of assets that could strand globally is estimated at USD 227 billion.

Stranded assets can bring political problems. If farmers and agribusinesses hold a stake in the economy that was subsidised and financed a decade ago, they will defend it, and understandably so. As the Dutch nitrogen crisis showed: when farmers, who have invested in good faith often with borrowed money, face reforms that devalue those investments, many will resist.

Reprice and redirect

Subsidy reform can be managed in a way that avoids locking farmers and lenders further into an unsustainable system. A larger share of the CAP could gradually move away from general area-based income support and towards more payments for nature-inclusive, healthy and resilient food production. Phasing down harmful subsidies while phasing in support for sustainable practices would strengthen the long-term resilience of farming and create a clearer basis for financing nature management and restoration.

Because CAP payments shape farm income, they also influence what banks are willing to finance. Reform will therefore influence the next generation of agricultural assets: whether a farmer’s next loan supports agroforestry, rather than a milking robot or livestock facility. In this sense, subsidy reform can redirect private capital without first depending on uncertain new revenue streams such as nature credits.

Reforming the subsidies that a sector depends on is politically challenging. Yet, the food system needs to become more future-proof, as the EU itself acknowledges. The longer harmful subsidies continue, the more capital is locked into business models that may later become financially and politically harder to unwind. The same logic applies beyond agriculture: wherever public money keeps damaging activities bankable, reforming subsidies redirects both public and private finance.

 

(1) The picture varies by member state; the agricultural sector in the Netherlands, Italy or Spain relies far less on subsidies for a decent profit than in Germany or France.

(2) The amount of liabilities farmers have on their balance sheets also differs a lot between member states.