Phasing Out Harmful Subsidies: China

Overview

Beginning in the 1960s, many governments around the world, including those in both developed and developing markets, introduced fertilizer subsidies to increase food production output and lower costs for consumers. However, the damaging externalities caused by the overuse of fertilizers, including added emissions and land degradation, are causing governments to reconsider the cost-benefit balance of providing fertilizer subsidies.

Fertilizers cause emissions both during their manufacturing process and after their application at the farm level, creating a double-bind emissions conundrum. Growing policy, corporate and farm pressures are driving interest in improving the efficiency of fertilizer use and avoiding over-application, to reduce emissions along the value chain.

In 2015, China’s Ministry of Agriculture and Rural Affairs implemented the Zero Growth Action Plan for Fertilizer Use by 2020, which rolled back its provision of subsidies and preferential tax policies to fertilizer manufacturers. Doing so has enabled the economy to lower greenhouse gas emissions without compromising food security.

Impact

Government support for fertilizers has been a key driver of China’s agricultural productivity growth and self-sufficiency in staple crops since the 1970s. Subsidies and tax policies across the value chain – including natural gas subsidies for production, preferential rail rates for transport, reduced value-added tax (VAT) rates, and reserve subsidies to help enterprises store fertilizers in the offseason – helped keep the cost of fertilizers down.

Yet these policies also led to the over-application of fertilizers, which reached an average of 409 kilograms of nitrogen fertilizer per hectare in 2015, or 3.4 times the global average. China’s total usage increased to 55 million metric tons in 2014, up from four million in 1970. The attendant increases in emissions, eutrophication – excess nutrients in bodies of water – and soil acidification prompted the government to commit to optimizing fertilizer supply through market-based reform and stepped subsidy removal.

The phaseout of subsidies that began in 2015 covered electricity prices, VAT exemptions and rebates, transportation costs and an off-season reserve. Under the initiative, subsidies to fertilizer manufacturers fell from over $10 billion per year in 2015 to zero in 2018, increasing per-unit fertilizer costs for farmers. These actions led to a 3.88 million metric ton drop in agricultural CO2-equivalent emissions compared with the baseline scenario, representing around 0.5% of the country’s total agri-food system emissions. The reduction is an important contribution from the sector for the market to remain on track to meet its net-zero-by-2060 commitment.

Critically, China was able to reduce its emissions with a negligible impact on the production volumes of major crops, reaping an ‘eighteenth consecutive bumper grain harvest’ in 2021. This was achieved through policies that boosted fertilizer-use efficiency, including the promotion of more-precise fertilization, adjustments to chemical composition, and new application methods.

Opportunity

Phasing out fertilizer subsidies from manufacturers improved the economic incentive for farmers to optimize fertilizer use and avoid over-application, without lowering their output.

To avoid one stakeholder in the value chain incurring the brunt of policy changes, governments can consider repositioning subsidies, rather than simply removing them, to avoid the harmful activity. This could look like removing subsidies from manufacturers while offering subsidies to farmers to ease the uptake of precision technologies, green fertilizer and more sustainable practices. Redirecting subsidies to improve domestic production and demand for clean agricultural technologies can also help stimulate the low-carbon economy.

Source

FAOSTAT, Zongyi Wu, Xiaolong Feng, Yumei Zhang, Shenggen Fan, Repositioning fertilizer manufacturing subsidies for improving food security and reducing greenhouse gas emissions in China, Journal of Integrative Agriculture, Volume 23, Issue 2, 2024