Biofuels and perverse subsidies: fuelling the wrong solutions?

Subsidies are an important feature of our economic landscape. Although there is no universally accepted definition of a subsidy, the one probably most widely used is that of the OECD (2005): ‘A subsidy is a result of a government action that confers an advantage on consumers or producers, in order to supplement their income or lower their costs’. All over the world it is common policy to subsidize to lower the cost of commodities or stimulate developments or breakthroughs that otherwise would not take off. From a purely economic viewpoint, all subsidies are potentially distortive, but in some cases they may be given for sound economic reasons, e.g. to create a level playing field or to compensate for unwanted external effects. If they result in unfair competition and a disadvantage for competitors they may be called distortive.