Chapter 1 uses the data compiled for the 2017 edition of the OECD Inventory to derive a few results and indicators on the magnitude and nature of support for fossil fuels in OECD countries and selected partner economies. The first section looks at broad trends in aggregate support and relates the observed evolution to recent policy changes and reforms. Section 1.2 discusses efforts to track and reform fossil fuel support in multilateral fora, such as the G20, APEC, and the UN. Section 1.3 makes the case for providing a joint database of IEA and OECD estimates and introduces a method to combine this data. The chapter concludes by suggesting that not only further action be taken by policy makers to continue reforming measures that support fossil fuels, but that data consolidation among different repositories is needed to minimise confusion in the policy debate.
OECD Companion to the Inventory of Support Measures for Fossil Fuels 2018
Chapter 1. Tracking progress in reforming support for fossil fuels
Abstract
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law
1.1. Global momentum for reform of support to fossil fuel strengthens
The downward trend in support for fossil fuels persists
The Inventory of Support Measures for Fossil Fuels 2017 now covers Latvia, which joined the OECD in 2016, and two additional partner economies, Argentina and Colombia. This brings the total number of countries covered by the Inventory to 43. The Inventory contains descriptions of more than 1 000 individual measures across 35 OECD countries and eight partner economies (Argentina, Brazil, the People’s Republic of China, Colombia, India, Indonesia, the Russian Federation, and South Africa), summing up to an aggregate estimation ranging from USD 151 billion to USD 249 billion for the years 2010 through 2016 (Figure 1.1). Support in OECD countries has flattened over the past two years, hovering around USD 82 billion annually. For partner economies, the situation has changed dramatically as support continues its downward trend, from a peak in 2013 at USD 142 billion to USD 69 billion in 2016. While the recent low oil price regime has played a significant role in shrinking the size of support to fossil fuels, policy reforms have, although on aggregate to a lesser extent, also contributed to this trend.
Figure 1.1. Support overall remains high at USD 151 billion despite signs of decline
Total support for fossil fuels in OECD countries (left) and selected partner economies (right) by year and type of fuel (billions of current USD)
Note: The above charts are based on the arithmetic sum of the individual support measures identified in the Inventory. Along with direct budgetary support, it includes the value of tax relief measured under each jurisdiction’s benchmark tax treatment. The estimates do not take into account interactions that may occur if multiple measures were to be removed at the same time. Because they focus on budgetary costs and revenue foregone, the estimates for partner economies do not reflect the totality of support provided by means of artificially lower domestic prices.
For an in-depth analysis on benchmark tax treatments and the methods that lie behind the estimations of tax expenditures, the earlier edition of this report elaborates on this topic (OECD, 2015[1]).
Petroleum products remain the biggest beneficiaries of government support in both OECD and partner countries, but the picture is starkly different for natural gas and coal for which according to the Inventory, support is more significant in OECD countries, representing about 20% and 13% of total support respectively; in partner economies both add up to around 13% of total support to fossil fuels. Taking a closer look into changes since the last edition of the Companion, by disaggregating the data at the country and fuel-type levels, the trend for support varies greatly across countries (Figure 1.2).
Figure 1.2. Growth rate in fossil fuel in OECD and partner economies, 2014-16
Notes
1. This chart reports the change between 2014 and 2016 for the 43 countries covered in the Inventory. The data are clustered at the country level and disaggregated by fuel. The numbers on the vertical axis represent by how much the 2016 estimates for each fuel type have changed since 2014. Changes could be due to new legislation that either modifies an existing law or introduces a new one, or to changes in consumption or production, or it could be due to structural changes in the economy (e.g. in the energy market, the industrial sector, or residential sector).
2. After the introduction of the carbon tax component in fuel taxation in 2015, the tax rate on energy products increased in France. Energy-intensive sectors that are not under EU ETS and are at risk of carbon leakage pay pre-2015 tax rates (i.e. they are exempt from paying the carbon tax component of the excise tax on energy products). The increase in support to fossil fuels, in particular to coal, in France is in large part due to the increase in the benchmark tax rate following the new policy.
While most reported changes in fossil fuel support between 2014 and 2016 are reductions in support, there are a few cases where support has actually increased. These increases can be linked to modified taxation rules on energy products, or to changes in consumption or production patterns. The most notable positive spikes in Figure 1.2 represent, for example, substantial growth in support for coal that can be attributed to the introduction in France of an excise tax reduction for energy intensive industries exposed to carbon leakage risks and that are not part of the EU Emissions Trading System (ETS),1 to the reinstated subsidy to cover the costs incurred by Store Norske, an operator of coal mines in Norway, and to an increase in the tax expenditure granted to the use of coal in the production of electricity and CHP in Portugal.
Disaggregating further the Inventory, consumer support remains the main form of support representing 80% of the total support for fossil fuels measured by the OECD, followed by producer support at 13%, and support to general services at 8% (which is not targeted specifically to producers or consumers). Support is granted mostly via tax expenditures; about two-thirds of the individual measures contained in the OECD database are tax reductions, exemptions, or credits, which altogether account for 64% of the total value. As OECD and partner economies are responsible for 70% of global fossil fuel production and 75% of fossil fuel-based final energy consumption, these support measures apply to a sizeable portion of global fossil fuel production and use.
Reform efforts in OECD countries and partner economies forge ahead
Several countries make it a priority to end price controls on fossil fuels
Several countries, galvanized by global action against climate change and the sharp decline in fuel prices, have begun to reform their energy taxation system and more broadly to reshape their energy markets. Since the last edition of this Companion, energy pricing reforms have been well underway in Mexico (Arlinghaus and van Dender, 2017[2]). The government introduced a floating excise tax known as the IEPS (Impuesto Especial sobre Producción y Servicios por Enajenación de Gasolina y Diesel) with the goal to eliminate support to diesel and gasoline fuel consumption (OECD, 2015[1]). Starting in 2016, prices of gasoline and diesel were bounded within a band of +/- 3% of the 2015 price and on 1 January 2017, the regulation authorities allowed the maximum price for gasoline to rise by as much as 20%, but diesel remained bounded by a maximum increase of 3%. At the same time, regions for which the energy market is sufficiently competitive were allowed to fully liberalise their fuel prices. The market for liquefied petroleum gas (LPG) was fully opened to competition at this juncture. As a result, fossil fuel support amounted to about 0.4% of Mexico’s GDP in 2016, compared with 1% in 2014. While a carbon-tax was introduced in 2014 to internalise the external costs of fuel consumption, tax exemptions or reductions are granted to certain categories of users, including public transport and industry.
Indonesia, like Mexico, has undertaken substantial fuel pricing reforms by greatly reducing fiscal pressure associated with its subsidies to the consumption of fossil fuels. Several policy reforms over the past decades have modified fuel prices. In 2015, gasoline subsidies were completely phased out and a cap on diesel subsidies was implemented to limit outlays on support of diesel consumption. The Indonesian government has continued to develop its energy-market reforms in an effort to rein in expenditure on fossil fuel support. In 2016, it reduced its cap on diesel subsidies by half, from USD 0.08 per litre to USD 0.04 per litre, and began a pilot programme to better target subsidies for 3-kg LPG cylinders used by households as cooking fuel with the objective of lowering the number of beneficiaries from 57 million to 26 million households. As a result of these fiscal consolidation efforts, projected fiscal savings from fuel subsidy reforms are around USD 15 billion a year. The 2017 budget allocation for fuel subsidies is only 12% of its 2014 value (Figure 1.3).
Figure 1.3. Fossil fuel government support in Indonesia
Note: This chart is based on information by the Fiscal Policy Agency of the Central Government of Indonesia. It reports estimates of fossil fuel subsidies converted into US dollars using annual market exchange rates for rupiahs.
Source: Indonesia Fiscal Policy Agency, Ministry of Finance (2017).
India continues to pursue its fossil fuel subsidy reforms after the complete deregulation of diesel prices in 2014. Following a trial period beginning in December 2012, the Indian government, pushing for the use of cleaner fuels, launched the Direct Benefit Transfer Scheme (PAHAL), which went into effect on 1 January 2015. Under PAHAL, consumers pay the non-subsidised prices for LPG cylinders and eligible consumers receive a cash transfer directly into their bank account.2 At the same time, the government launched a widespread campaign, known as “Give it Up”, to encourage wealthier households to voluntarily opt-out of the scheme. A similar scheme will be rolled out for kerosene, for which a pilot programme is still underway. As a result, consumer support estimates (CSE) for kerosene and LPG have dropped from INR 653 billion (USD 10 billion) in 2014 to about INR 197 billion (USD 2.9 billion) in 2016.
In Colombia and Argentina, fuel prices continue to be set by costly pricing mechanisms, whereby prices either follow an automatic formula as in Colombia, or a discretionary rule that is set by the government (Argentina). In both cases, pricing policies offer consumers a buffer from international price volatility. After the 2008 oil shock, Colombia established the FEPC (Fondo de Estabilización de Precios de los Combustibles), a fuel-price-stabilisation fund which smoothes prices monthly by the difference between export parity price and a 60-day moving average of the export parity price (Garcia Romero and Calderon Etter, 2013[3]).3 FEPC was designed as a self-funding mechanism, but since fuel prices continued to increase, it soon generated a deficit and relies on government financing.
Argentina applies ad hoc price-fixing rules to its petroleum products, especially since the economic crisis of 2002 when the peso was largely devalued. Residential and industrial natural gas prices are subsidised and liquid fuel prices such as gasoline have been mostly managed through export taxes. Argentina used export taxes as a policy instrument to keep domestic prices low and insulate them from international fluctuations. Argentina reviewed its export tax policy in 2012 and lowered its tax rate from 45% to 14%, and then again in 2014. These rates apply when oil prices fall below USD 80 per barrel (Bella et al., 2015[4]).
In addition to its discretionary energy pricing, the government pays universal subsidies for gas and electricity that are fraught with distributional inequity issues, since wealthier households benefit the most from subsidised energy prices. In September 2016, the government put in place measures to close the gap between the cost of imported LNG and its injection and what distributers pay, thus phasing out the outlays it needs to transfer to natural-gas producers to cover their operational losses. This price convergence plan is set to be completed by 2019 for most regions with the exception of Patagonia, which will continue to benefit from subsidised gas prices up to 2021. In parallel, the government has created a federal social tariff to better target its subsidies to vulnerable populations. Similar reforms are taking place in the electricity sector with progressive price adjustments.
Consumption support-related reforms in industrial, residential, and transport sectors proliferate in OECD countries
Several OECD countries have made progress in recent years in phasing out fossil fuels subsidies or reforming tax expenditures. Several of these reforms relate to policies that affect fossil-fuel consumption. In 2015, both Belgium and France initiated plans to remove the tax differentiation between gasoline and diesel. Belgium implemented a Rachet system to progressively close the gap between these prices, by increasing the tax rate on diesel and lowering it for gasoline. France plans to bring the difference down to EUR 0.10 per litre from EUR 0.18 per litre by the end of 2017, and eventually close the gap over five years (Ministère de l'environnement, de l'énergie et de la mer, 2017[5]). OECD in the past has suggested to realign the diesel taxation upwards at the level of gasoline taxation as a recommendation in its Environmental Performance Reviews; the additional revenue could be used for reducing the tax burden, e.g. income taxes, or public debt.
In Greece, a pilot means-tested guaranteed minimum income (GMI) programme was launched in November 2014 and is meant to be generalised in 2017 to replace some of the emergency ad hoc programmes that subsidise food, energy, and rent (OECD, 2016[6]). Korea introduced an energy voucher system for low-income households in December 2015 as part of its transition away from support to coal production.4 In Italy, the Government proposal for the new National Energy Strategy (SEN) includes the two options (realignment half the way or alignment of diesel taxation at the gasoline level) (Ministero dello Sviluppo Economico, 2017[7]).
Sweden phased out two of its consumption support measures, providing reductions on a CO2 tax for energy-intensive companies and the agricultural sector at the end of 2014. The revenue forgone since the implementation of these measures in 1997 is approximately USD 3 billion. In France, the excise tax exemption for fuels used in combined heat and power (CHP) generation came to an end in 2017. This concession applied to plants built before 2008 and accumulated a cost of USD 290 billion since its inception.
Several measures relating to heating in the residential sector came to an end. In May 2015, Estonia removed its excise duty exemption for heating fuels used by households, a support measure that averaged USD 15 million over the past decade. In the same year, Finland phased out the reduced energy tax rate for natural gas used in heating, representing forgone revenue totalling almost USD 800 million between 2008 and 2014. At the sub-national level, the Canadian province of Newfoundland and Labrador ended its rebates on the Harmonised Sales Tax (HST) levied on electricity, heating oil, propane, and wood in 2015, and the following year, the state of Alaska in the United States terminated its Affordable Heating Program.
Production support-related reforms are limited
As for support to the production of fossil fuels, Germany continues to wind down its domestic hard coal production, located in North-Rhine-Westphalia, which is dependent on large budgetary transfers to compensate the industry for the shortfall between its high production cost and the market price of its coal. Currently, two hard coal mines remain open and support will cease by the end of 2018, but decommissioning-related support will continue until 2027. Although support to the industry has been declining since 1998, recent fluctuations can be explained by changes in the import price of coal.
In 2016, the Bureau of Land Management (BLM) in the United States issued the Waste Prevention, Production Subject to Royalties, and Resource Conservation rule to reduce waste of natural gas from venting, flaring, and leaks related to oil and natural gas production activities on onshore Federal and Indian (other than Osage Tribe) leases.5 In doing so, it also aims to reduce support to fuel that qualifies as royalty-free by replacing provisions related to royalty-free use of oil and gas that were put in place more than three decades ago. Although the implementation of sections concerning the requirements and targets for waste reduction have been postponed, some elements of the rule that control wasteful use of royalty-free oil and gas, such as the provision requiring operators to submit a “waste minimization plan” with their drilling applications, became effective as of January 2017. Reduced use of royalty-free oil and gas as a result of more stringent rules around waste management could lead to revenue savings.
New measures benefitting production of fossil fuels are added
The Inventory identifies 21 new measures that were added in 2015 and 2016. New incentives have been introduced to bolster the development of commercially marginal oil fields (small fields, ultra-heavy oil fields, ultra-high pressure and high temperature field, and remote deep water gas field) in the United Kingdom as of 2015. Fiscal reform in the oil and gas sector has resulted in additional allowances that aim to increase post-tax profits in the sector (HRMC, 2015[8]). The UK government also funded a temporary seismic surveys programme in order to foster the exploration and appraisal of new under-explored potential sites, which would not be surveyed otherwise. In total, GBP 40 million (USD 65 million) was allocated from the budget to this Programme over two years (2015-16), of which 35 million has been reported as being spent.
The Russian Federation introduced two support measures to oil production that lower the extraction tax in order to stimulate the exploitation of hard-to-get hydrocarbon deposits. These measures were introduced in 2015 and will remain valid for 12 to 15 years after exploitation of a field has started. Korea’s coal mining sector has benefitted from government deficiency payments of around KRW 30 billion (USD 30 million) in 2015 and 2016, to recover the shortfall between the cost of production and the market price, after this measure was phased out in 2010.
In Argentina, the Secretariat of Energy endorsed an outlay of temporary financial aid to companies distributing natural gas through networks, arguing that such support would cover the costs and investments associated with the normal operation of the public distribution service of natural gas through networks. This measure entailed a government outlay of ten consecutive instalments of up to ARS 2.6 billion (USD 150 million), as of its implementation in March 2015.
Pricing reforms for fossil fuels pick up in other countries
Many oil-exporting MENA countries have undertaken significant steps to reform their energy-pricing policies. In 2015 and 2016, Algeria, Bahrain, Kuwait, Oman, Qatar, and the Kingdom of Saudi Arabia (KSA) raised their gasoline prices by 20% to 60% (IEA and OECD, 2017[9]). These countries, which are heavily dependent on oil or gas-derived export receipts, have made it a priority to diversify their economies away from oil- and natural-gas-related activities. For example, the KSA included a Fiscal Balance Programme in its Vision 2030 programme, whereby energy price reform will be the primary means for balancing the national budget. The abundance of oil and gas resources in the MENA region transformed the economies of this region over the last century, but the opportunity costs of maintaining current policies are rising (Oxford Energy Institute for Energy Studies, 2017[10]). The KSA Vision 2030, for example, lays out a complex web of interrelated reforms that will be needed to reconfigure an economy founded on the exploitation of non-renewable resources.
Malaysia began reforming its energy pricing policy close to a decade ago and completed the phasing out of its diesel and gasoline consumption subsidies at the end of 2014, but the government maintains its LPG subsidises to households. Thailand has an equally long history of energy pricing reform that began with the harmonisation of LPG prices across sectors to reflect supply costs, and in January 2015 it imposed a uniform wholesale price that tracks closely the import parity price. These reforms have resulted in budgetary savings of USD 1.3 billion.6 Low-income households and businesses can still benefit from subsidies for LPG purchases provided they are registered with the government. Thailand has continued to work on unshackling natural gas prices, by first implementing several price hikes, and then completely ceasing its price controls at the beginning of 2015 and allowing CNG prices to follow market trends (IEA, 2017[11]).
1.2. Developments in tracking and monitoring fossil fuel support
G20 peer reviews of inefficient fossil fuel support is a salutary experience
G20 countries are committed to periodically reporting their fossil-fuel subsidies following the 2009 summit in Pittsburgh, where the G20 leaders agreed to “rationalise and phase-out inefficient fossil fuel subsidies that encourage wasteful consumption over the medium term while providing targeted support to the poorest”. In February 2013, G20 Finance Ministers committed their countries to developing a framework for voluntary peer reviews that focussed on inefficient fossil fuel subsidies leading to wasteful consumption.
The countries reviewed agree to a set of terms of reference (ToR) to establish the scope of the measures reviewed and the timeline of the review process. They then produce a report in which they enumerate the measures to be reviewed, and provide some context and background on their implementation and possible reform (or phasing-out). The review team submits questions and comments on this report, which are examined at a meeting attended by country representatives from both the review team and the country under review. A final report which is agreed to by all parties is prepared and issued.
The People’s Republic of China (hereafter “China”) and the United States were the first countries to undergo this process. In 2015, they each prepared reports describing existing support measures, and reviewed these measures on the basis of their inefficiency and the extent to which they encouraged wasteful consumption. Both countries proposed a timetable for reform, and submitted reports for review to a designated team of experts. Review teams were comprised of representatives from Germany, Indonesia, the United States, the IMF, and the OECD for the review of China; and of Germany, Mexico, and the OECD for the review of the United States. The OECD was also asked to chair the reviews and to act as co-ordinator. Following meetings in Beijing and Washington, D.C. in, respectively, April and May 2016, peer-review reports were finalised and published in September 2016.
Subsequent to the first successful round of reciprocal peer reviews under the auspices of the G20, Germany and Mexico agreed to a review of their fossil fuel subsidies in 2016. In addition to mutually reviewing each other’s measures, the two countries invited China, Indonesia, Italy, New Zealand, the United States, and the OECD to take part. The OECD also chaired these reviews and acted as co-ordinator. A meeting of the review panel was held in Berlin in February 2017 and published in the autumn of 2017. A third round of peer reviews began in the summer of 2017 with Indonesia and Italy; the peer review process for these countries should conclude by end of 2018.
Figure 1.4. G20 Peer review process of inefficient fossil fuel subsidies
Note: Starting from the left side of the chart, the process begins with an agreement on the ToR and ends with a final report. This was the process for the first four peer reviews but could change at the request of member countries.
These peer reviews bring to the fore the issues around fossil fuel support and the formidable task of undertaking successful reforms. Several lessons can be learned. First, participation in peer reviews encourages a country to look thoroughly at their support policies – how and why they were implemented, and how they can be reformed or eliminated. Second, preparation of the country reports and peer reviews often generate more information about policies than what is covered in countries’ annual reports to the G20. Third, preparing for the reviews can be a salutary learning experience for the countries under review (including across ministries) and the peer reviewers. There has been an element of precedent-setting in the structure and conduct of these reviews, as well as in the types of policies discussed and how these were examined. Last but not least, the process revealed differences between how countries interpret such terms as “subsidy” and “inefficient”.
APEC peer reviews
A similar peer review process is taking place in the context of Asia-Pacific Economic Cooperation (APEC). Peru, New Zealand, the Philippines, and Chinese Taipei underwent peer reviews of their inefficient fossil fuel subsidies in, respectively, 2014, 2015, 2016 and 2017, while Viet Nam is expected to have completed its peer review in 2017. Brunei Darussalam is also expected to undergo a review by the end of 2017. Participants in this exercise have derived similar lessons learned.
SDG indicators on fossil fuel support are being developed
On 25 September 2015, the General Assembly of the United Nations adopted a set of 17 Sustainable Development Goals (SDGs) related to ending poverty, protection of the planet, and prosperity for all as part of a new agenda for sustainable development. Each goal has specific targets to be achieved by 2030. In order to monitor progress it created an Inter-agency Expert Group on SDG Indicators (IAEG-SDGs), which is composed of 28 member states and regional and international agency. This group has been tasked with developing and implementing the global indicator framework for the goals and targets agreed to by UN member states.
Target 12.C calls for UN members to
rationalise inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking fully into account the specific needs and conditions of developing countries and minimizing the possible adverse impacts on their development in a manner that protects the poor and the affected communities.
Work is underway to develop an agreed upon set of indicators and sub-indicators to quantify fossil fuel subsidies and guidelines for countries on how to report their FFS estimates. All countries, starting in 2020, would then start reporting these data on an annual basis.
1.3. A joint IEA-OECD estimation of global fossil fuel support
The case for developing a joint IEA-OECD estimate of fossil fuel support
The IEA has provided estimates of fossil-fuel consumption subsidies since 1999 as part of its annual World Energy Outlook (WEO). This report estimates the cost of fossil-fuel subsidies that result from under-pricing by comparing observed domestic energy prices with international reference prices (either import-parity or export parity). The difference between prices yields “price gap” estimates that, when multiplied by the associated volume of consumed fuel or electricity, quantifies the extent to which fossil fuels consumers benefit from lower domestic prices. In this sense, the IEA estimates convey full information about the magnitude of policies that reduce domestic fuel prices, hence subsidising their consumption.
The IEA estimates that fossil fuel subsidies in 2015 were around USD 221 billion, down from USD 376 billion in 2014.7 The fall in oil prices has triggered various policy shifts in the energy sectors that, together with a lower international reference price, have brought down the level of fossil fuel subsidies. Their estimates identify 41 countries, which account for half of global energy consumption, that subsidise fossil fuel consumption. Eleven of these countries, mostly located in the MENA region, make up around half of total consumption subsidies.
While the IEA estimates quantify the extent of fossil-fuels subsidies to consumers that affect domestic prices, they do not necessarily capture all the transfers generated by other policies that also confer benefits to consumers, such as direct budgetary transfers to consumers or reduced excise taxes, or policies that provide support to the production of fossil fuels without directly affecting end-user prices. Given the specific scope of the “price gap” approach, the OECD Inventory of budgetary transfers and tax expenditures, which is nested in the well-established framework of Producer Support Estimate (PSE) and Consumer Support Estimate (CSE), casts a wider net and thus complements the IEA data on fossil fuel subsidies.
The IEA and the OECD estimates of these subsidies are prepared separately, but together they provide an even fuller assessment of the magnitude of fossil fuel support for the countries that they both cover. The IEA figures capture information on prices affected by government intervention or support. The OECD Inventory takes stock of individual policies that lower domestic end-user prices, thus translating into price support to consumers. In addition, the Inventory includes other consumption-side support and producer support. These two approaches represent two ways of estimating consumer price support. The information gathered by both organisations, when brought together can give a more complete and more accurate picture of support.
The complementarity between the two sets of estimates is used for the first time in this report to develop a single figure on support for fossil fuels and to track progress on their reform. The aggregate figure, or Total Support Estimate (TSE), incorporates three broad categories of support measures: price transfers, budgetary transfers, and revenue forgone (i.e. tax expenditures) (OECD, 2016[12]). In practice, an aggregate figure for support to fossil fuels would be the sum of the following components:
where BOT for budgetary and other transfers to producers, GSSE for general services support estimates, TCT as transfers to consumers from taxpayers, TCP as transfers to consumers from producer, and OTC as other transfer to consumers. Estimates of consumer price support are equivalent to the sum of TCP and OTC estimates in the PSE-CSE framework. Calculating the TSE for fossil fuels using both IEA and OECD estimates broadens the scope and coverage of the IEA FFS database and the OECD Inventory, alleviating confusion over apparent differences between the two datasets.
Country coverage in the IEA and the OECD combined data
Since domestic fuel prices are higher than international reference prices in most OECD countries, the calculations on consumer support that are based on the difference between an international reference price and the domestic price estimation is not that relevant, and thus there is little overlap between OECD and IEA country coverage.8 However, other transfers are more prevalent in OECD countries and their partner economies and should be accounted for when examining fossil fuel subsidies. There are eight countries for which data have been reported in both datasets: Argentina, China, Colombia, India, Indonesia, Korea, Mexico, and the Russian Federation. The IEA identifies 41 countries with fossil-fuel consumption subsidies and the OECD reports on 43 countries. In total, the combined data from the IEA and OECD cover 76 countries (Figure 1.5), which are responsible for 94% of global CO2 emissions.9
Figure 1.5. Fossil fuel support country coverage by the IEA and the OECD
Note: This chart illustrates coverage by the IEA in grey, by the OECD in light blue, and represents the overlapping countries in dark blue. Where there is no colour, this signifies that the country is either not covered by the IEA or the OECD, or that it has not been identified as giving substantially large support to fossil fuels.
Aggregating IEA and OECD estimates
Providing a combined IEA and OECD estimate for fossil fuel support requires reconciling the estimates for countries covered by both organisations; for the other countries covered by only one of the two, taking the available estimates suffices. Estimates from these two databases, except for the overlapping countries, are complementary. However, IEA data do not capture support to producers of fossil fuels, thus the combined database would still be missing information on producer support for countries not covered by the OECD Inventory.
Since the OECD Inventory methodology rests on collecting individual figures for budgetary transfers and tax expenditures, finding the price-gap equivalent necessitates identifying which of the measures in the Inventory translate into reduced consumer prices. Because the benefits conferred to producers and consumers of fossil fuels by a support policy are specific to each country, identifying which measures result in price transfers must be done on a case-by-case basis. There are common features of fiscal measures that qualify as price transfers and hence this would result in under-pricing of fossil fuel products. Reductions in value-added taxes (VAT) and direct budgetary transfers to compensate producers for the opportunity cost of selling their products at a low domestic price instead of at its export-parity or import-parity price are considered to overlap with “price-gap” estimates.
Once the appropriate measures are identified and their corresponding amounts are summed up to give an OECD equivalent of a price-gap estimate, the latter is compared with the IEA figures. Conceptually, an OECD estimate derived from individual measures that capture transfers to consumers from producers and taxpayers should match the IEA price-gap estimates.10 Empirically, however, there can be several sources of discrepancies between OECD and IEA numbers. First, as OECD numbers are derived from individual policy measures, it could be that some measures that can affect domestic fuel prices have not been included in the Inventory, or have not been included when calculating the OECD estimate for the MPS. Another source of discrepancy could arise from measurement errors in either the OECD or IEA estimates, as well as VAT exemptions for certain consumer categories that are not captured by the IEA estimates. A third possible source of discrepancy is differences in opinion about the exact nature of the support measure. This issue arises both because (i) the definition of a support measure depends on a counterfactual “baseline” and analysts may differ over the appropriate baseline and (ii) the support policies may be quite nuanced and not all details can receive the same level of analytical attention. Lastly, given that OECD estimates are based mostly on figures released on a fiscal-year basis, the reporting of transfers (e.g. refunds for qualifying fuel consumption) could be delayed. The presence of reporting or time lags for fuel price pass-through could explain some of the divergence in the numbers.
To begin merging the two datasets, the exercise is limited to the years 2010 to 2015, the period during which data coverage is the best for most countries in both databases. In order to provide a single set of OECD and IEA estimates for this edition of the Companion, OECD estimates were compared to total IEA estimates over the six-year period and the larger of the two estimates for consumer price support was used in the combined dataset.11 While it serves as a rule-of-thumb, summing up the estimates over six years minimises the risk of double counting by addressing issues of budgetary reporting lags and time lags related to fuel price pass-through.12 Measurement errors can also be reduced by comparing total estimates over several years since data are often revised and improved retroactively.
When combining the two sets of data using the rule-of-thumb approach, the TSE amounts to USD 373 billion in support for fossil fuels in 2015, a decrease from USD 551 billion in 2014 (Figure 1.6). Over the period 2010-2015, the difference between the IEA and OECD estimates averages USD 42 billion, approximately 8% of the total number. Coal support estimates are dwarfed by support to petroleum products and natural gas, 72% and 25% respectively. The decline in total support in the form of subsidies is driven in large part by the decline in oil prices that shrink the distance between domestic and international market prices in non-OECD countries, and therefore the support needed to compensate the shortfall. The decline in consumer price support across countries ranges anywhere from an 80% to 3% decrease between 2014 and 2015.
Figure 1.6. IEA-OECD joint estimate of support for fossil fuels USD billions
Note: This figure is based on a rule-of-thumb to combine the IEA estimates of consumer price support with OECD Inventory estimates. Since the IEA quantifies the price transfers resulting from under‑pricing fossil fuels or foregone revenue stemming from selling products at prices lower than international prices, individual support measures in the OECD Inventory are sorted according to whether they lower the domestic price and then used to estimate an equivalent price transfer estimate. The rule-of-thumb then instructs to choose the estimates for which the six-year period total is the larger of the two. This rule-of-thumb addresses the potential sources of discrepancies between the two estimates that can stem from budgetary reporting rules, measurement errors, or time lags in the price pass-through.
Source: (IEA, 2016[13]), (OECD, 2015[1]).
1.4. Conclusions and policy implications encouraging collaboration and co-ordination to support reform
Data show there is a downward trend in support to fossil fuels among OECD countries and partner economies, but country-level information indicates there are large differences in the progress made towards reducing support. The modest global cyclical upturn coupled with the prolonged slump in fuel prices point to structural challenges that can have implications for long-term economic growth. In this context, the future role of fossil fuels is uncertain, with consumption preferences beginning to shift away from fossil fuels even while other parts of the energy sector continue to lock in long-lived capital assets and infrastructure.
Strong efforts to reduce GHG emissions are needed, as the current low oil price regime could render investment in new, cleaner technologies less profitable, thus setting back the momentum towards decarbonisation that has been building. New technologies have been deployed and several incentives have been created, revolutionising an energy sector that has experienced little fundamental change over the last century. Yet government-support for investment in the production of fossil fuels forges ahead (Piggot et al., 2017[14]). This inconsistency in energy policy is a source of a serious misalignment and can be attenuated by reducing inefficient support to fossil fuels.
Transparency is central to international and domestic initiatives focusing on FFS reform. OECD efforts to track support measures across an increasing number of countries contributes to this end. Other institutions, such as the IEA, IMF, the World Bank, the European Union, and more recently Oil Change International (OCI), the Overseas Development Institute (ODI), and the Inter-American Development Bank (IADB), develop complementary information that can further improve the collective knowledge about fossil-fuel support. The OECD collaborates with many of these institutions, where practicable, to identify efforts that do not overlap. The present effort to highlight the complementary between the IEA and OECD data is a step in providing a fuller and more accurate picture of fossil fuel support.
Co-ordination among institutions is valuable. Without it, inconsistencies in the data can be used as an excuse to postpone action. Efforts to harmonise, to the extent possible, international and national-level data under the Sustainable Development Goals (SDG) indicator 12.c.1 are underway to track progress in reducing government support to fossil fuels. This effort may also involve attention to concepts like “inefficiency” that are at the core to the G20 and G7 call to phase-out inefficient subsidies. The G20 voluntary peer review process has revealed definitional differences within countries, i.e. across ministries, and across countries for terms such as “inefficient” and “subsidy”. A broader understanding of these concepts would strengthen transparency on resource allocation and reform processes.
Notes
← 1. In 2015, with the addition of a carbon tax to the taxation of energy products in France, exemptions to energy-intensive industries that are not part of the EU ETS and are exposed to the risk of carbon leakage were introduced to shield concerned sectors from increases in excise tax rates on fossil fuels. The resulting positive growth in support to fossil fuels between 2014 and 2016, as illustrated in Figure 1.2, is directly linked to the exclusion of energy-intensive industries from the new carbon tax on fossil fuels.
← 2. The government limits the LPG subsidy to twelve 14.2 kg cylinders annually.
← 3. This formula was introduced in 2011 and limits price changes to 3% per month. The FEPC has been designed as a self-funding mechanism replenishing when the reference price is higher than the parity-export price (Garcia Romero and Calderon Etter, 2013[3]). Conversely, when the reference price is lower than the parity export price, the fund draws upon its resources to compensate producers for higher international prices without passing them on onto final consumers. The fund was initially financed through savings from Ecopetrol, the national oil company and the Fondo de Ahorro y Estabilización Petrolera (FAEP), to which Ecopetrol transfers a share of its annual dividends but it ran out of resources in 2010 as prices continued to increase (OECD, 2014[26]).
← 4. The last two developments are not yet reflected in the Inventory as they are still in the process of implementation.
← 5. A more comprehensive and precise discussion of the rule and royalty-free oil and gas use can be found at: www.blm.gov/programs/energy-and-minerals/oil-and-gas/operations-and-production/methane-and-waste-prevention-rule.
← 6. This figure is obtained from a representative of the Energy Policy and Planning Office of the Ministry of Energy in Thailand.
← 7. These figures do not include subsidies to fossil-fuel generated electricity.
← 8. Most OECD countries do not apply price controls on their energy products and tend to levy excise taxes that result in a domestic price that is higher than its import-parity (or export parity) price.
← 9. This calculation is based on data from the European Commission Emissions Database for Global Atmospheric Research (EDGAR).
← 10. Technically, there is a possibility that IEA estimates capture the impact of cross-subsidies from producers to consumers that are not funded by the government. However, the OECD price-gap equivalent is can be a close approximation of the IEA price-gap estimates.
← 11. Estimates are disaggregated by fuel type: coal, oil, gas, and electricity.
← 12. A shortcoming of this rule-of-thumb is its inability to deal with the cross-subsidies from producers to consumers that are not publically funded and included in the IEA estimates, but not the OECD estimates. Should IEA estimates prevail as the larger of the two, then the possibility of counting these as consumer price support could result in overestimation of support.