Methodology

 

The estimates from the IEA and the OECD on this site are based on two different approaches, which provide distinct but complementary information. For that reason, the two sets of data are not directly comparable and cannot be added.

The IEA’s analysis of energy subsidies utilises the price-gap approach which compares the end-use prices paid by consumers, with reference prices (i.e. prices that would prevail in a competitive market). The difference between the consumer price and the reference price is the price gap, and subsidy removal amounts to its elimination.

For countries that import a given product, subsidy estimates derived through the price-gap approach are explicit. That is, they represent net expenditures resulting from the domestic sale of imported energy (purchased at world prices in hard currency), at lower, regulated prices. In contrast, for countries that export a given product – and therefore do not pay world prices – subsidy estimates are implicit and have no direct budgetary impact. Rather, they represent the opportunity cost of pricing domestic energy below market levels, i.e. the rent that could be recovered if consumers paid world prices. For countries that produce a portion of their consumption themselves and import the remainder, the estimates represent a combination of opportunity costs and direct government expenditures.

The OECD inventory addresses a broader range of measures used in OECD member countries, including many that do not reduce consumer prices below world levels. It uses a broad concept of support that encompasses direct budgetary transfers and tax expenditures that provide a benefit or preference for fossil-fuel production or consumption, either in absolute terms or relative to other activities or products. Such measures are classified as support without reference to the purpose for which they were first put in place or their economic or environmental effects. No judgment is therefore made as to whether or not such measures are inefficient or ought to be reformed.

Caution is required in interpreting the support amounts and in aggregating them. This is particularly the case as the majority of support mechanisms identified in the inventory are tax expenditures. These tax expenditures are relative preferences within a country’s tax system that are measured with reference to a benchmark tax treatment set by that country. Since the benchmark tax treatment varies from country to country, the value of this type of support is not comparable across countries. With respect to aggregation, the estimates generally do not take into account interactions that may be involved where multiple measures are removed at the same time.

These estimates are generally based on budgetary and tax-expenditure estimates published or otherwise provided by the responsible government. The OECD has allocated support amounts to the various fuels based on production and consumption volumes whenever such information was not otherwise available from government sources.

For more detail on the methods used by the OECD and the IEA, see:

  • OECD (2013), Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013, OECD Publishing, Paris.
  • World Energy Outlook, IEA, Paris: www.worldenergyoutlook.org/resources