The OECD Inventory of Support Measures for Fossil Fuels identifies, documents, and estimates government support measures that encourage fossil-fuel production or consumption through direct transfers and tax expenditures. It is based on a bottom-up approach that collects detailed information from official government sources (e.g. budget reports) for individual support measure for fossil fuels. The latest edition of the Inventory includes 1 921 support measures in 51 OECD, G20, and EU Eastern Partnership economies.1 The fiscal cost of support measures for fossil fuels provides information about how government support to fossil fuels impacts a country's fiscal position on both the revenue and expenditure sides.
The fiscal costs recorded in the Inventory are direct expenditures and foregone revenue reported by countries in their national budget reports, the latter being based on their own benchmark tax system (and therefore their own objective function). Tax expenditures record the extent to which a government does not collect revenue that it would have in the absence of the measure. The fiscal cost of a tax expenditure is therefore measured as the difference between a preferential tax treatment and the national benchmark tax system. In this vein, tax expenditure estimates deliver similar information as estimates of direct budgetary transfers, i.e. the extent to which such government policies reduce government fiscal surpluses or increase fiscal deficits and reduce available funding for other programmes, given each country’s national circumstances and preferences (OECD, 2019[21]). Consequently, a change in support due, for instance, to an increase in the benchmark tax rate, recorded as an increase in tax expenditures in the Inventory, would reflect the change in government resources foregone because of the change in the degree of preferential treatment from which the targeted recipients are benefitting (OECD, 2019[21]). The measures included in the Inventory and their fiscal cost therefore shed light on government practices that may support fossil fuel production or consumption and that may need to be reformed, thereby freeing substantial fiscal resources that may be deployed to meet other policy objectives.
In this report, the fiscal costs of support measures from the Inventory are also presented combined with the IEA estimates of fossil fuel support. The IEA estimates the support to fossil fuels that are either consumed directly by the end user or used as an input in the production of electricity. The IEA estimation method uses the price gap approach, in which the average end user price paid by the consumer is compared to a reference price that corresponds to the full cost of supply, adjusted for the costs of transportation and distribution and value-added tax. The price gap is the amount by which an end-user price is below the reference price, the existence of such gap indicating the presence of a support for fossil fuel consumption. A price gap can be created through various government interventions, including price controls or direct budget transfers (such as grants) that result in (end or intermediate) users paying prices below market levels. The joint OECD-IEA estimate is computed by identifying and removing overlapping support measures – i.e. measures documented in the Inventory that could directly lower domestic energy prices and would therefore be included in the IEA estimates – for each country covered in both databases (OECD, 2018[22]). However, there is limited overlap between the OECD Inventory and the IEA fossil fuel support database because of the differing country coverage of the two datasets, with most OECD countries showing domestic prices higher than the reference prices considered by the IEA.2