OECD Inventory of Support Measures for Fossil Fuels: Country Notes

Methodology and glossary

Methodology

The OECD uses a bottom-up method of estimating government support to fossil fuels by identifying and quantifying individual policy measures. Fossil-fuel support measures compiled in the Inventory include direct budgetary transfers and tax expenditures that provide a benefit or preference for fossil-fuel production or consumption.

The Inventory casts a wide net in line with its objective of promoting the transparency of public policies. The OECD definition follows the subsidy definition in the Agreement on Subsidies and Countervailing Measures (ASCM) under the World Trade Organization (WTO), see the Glossary below.

The OECD’s broad definition of support was adopted in 2019 to track and measure the Sustainable Development Goal Indicator 12.c.1 on fossil-fuel subsidies, in a joint publication by UN Environment, IISD and the OECD, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development.

The data in the Inventory are obtained from official government sources. They are as comprehensive as possible, but not exhaustive. There is, in particular, more information presented in the Inventory for those countries that are relatively more transparent in their budget books. The measures captured in the Inventory 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.

Comparability and interpretation of data

Tax expenditure accounting was not designed with international comparability in mind. Unlike direct budgetary transfers, where outlays can usually be readily measured, tax expenditures are estimates of revenue that is forgone due to a particular feature of the domestic tax system that reduces or postpones tax relative to some benchmark tax system. Thus, the estimates reported in the Inventory provide useful information about the relative treatment of different products within national tax systems, and the economic incentives created for actors within these systems. In the absence of a common benchmark, however, caution is required in interpreting and comparing tax expenditure estimates in an international context. The fact that a particular country reports higher tax expenditures relating to fossil fuels does not always mean that this country effectively provides a higher level of support. The higher tax expenditures may also be due to factors such as:

• A higher benchmark tax rate against which tax expenditures are measured

• A stricter definition of the benchmark tax system that results in more features being singled out as tax expenditures

• A more complete set of tax expenditure accounts

• Greater consumption of the fossil fuel in question. As revenue forgone is usually calculated per physical or energy unit, estimates are sensitive to a country’s fossil fuel consumption patterns.

The online metadata associated with the Inventory describe details of data transformation or calculation made by the OECD. For example, several measures contained in the Inventory benefit more than one type of fossil fuel. The metadata document the transformation of the data needed to allocate support to individual fuels based on derived proportions from the IEA Energy Balances sectoral consumption data, when official government sources do not provide such a breakdown.

Glossary

General definitions

Support: budgetary transfers and tax expenditures that provide a benefit or preference for fossil-fuel production or consumption.

Subsidy (WTO definition): in the Agreement on Subsidies and Countervailing Measures (ASCM) under the World Trade Organization (WTO), a subsidy shall be deemed to exist:

1. if there is a financial contribution by a government or any public body within the territory of a country, i.e. where:

• a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

• government revenue that is otherwise due is forgone or not collected (e.g. fiscal incentives such as tax credits);

• a government provides goods or services other than general infrastructure, or purchases goods;

• a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments.

2. Or if there is any form of income or price support in the sense of Article XVI of GATT 1994.

3. And if a benefit is thereby conferred.

Support Mechanism

Direct budgetary transfers: payments made by governments, or bodies acting on behalf of governments, to individual recipients. This includes direct spending, e.g. for specific support programmes, and government ownership (fully or through equity shares) of energy-related enterprises.

Tax expenditures: tax concessions that are typically provided through lower rates, exemptions, or rebates of consumption taxes on fossil fuels (mainly value-added taxes and excise taxes) or measures to reduce the cost of the extraction of fossil fuels (including accelerated-depreciation allowances for capital expenditure, investment tax credits, deductions for exploration and development expenses, and preferential capital-gains treatment). Tax expenditures can also take less visible forms such as the special treatment of income from state-owned enterprises, tax relief for income earned on industry sinking funds (e.g. for site remediation), tax exempt bonds, the use of foreign tax credits for what may be considered royalty payments, or preferential tax rates on fuels used as inputs in fossil-fuel production. Tax expenditures are often premised on providing government support to activities or entities deemed to be socially beneficial; or on concerns relating to risk and uncertainty, energy security, capital intensity, high upfront costs, and long project timelines. Various approaches of varying levels of difficulty are used to derive estimates of the cost of tax expenditures. The revenue forgone approach is the most straightforward and the most commonly used in OECD countries.

Revenue forgone: the difference between the tax revenue raised with and without the tax expenditure, all else being equal. The revenue forgone approach is a static measure. In other words, it does not account for behavioural responses related to the removal of the tax expenditure.

Beneficiaries

Producer Support Estimate (PSE): transfers or expenditures from consumers and taxpayers to producers of fossil fuels. Fossil-fuel production encompasses the following activities along the supply chain: exploration and extraction; bulk transportation and storage; and refining and processing.

Consumer Support Estimate (CSE): transfers or expenditures in favour of consumers of fossil fuels. Consumption of fossil fuels refers to the stage at which fuels are combusted or used as raw materials by various end-use sectors, whether it occurs in motor vehicles, stationary engines, heating equipment or power plants. Consumption encompasses the following activities: the use of fossil fuels in power and heat generation; their use in industrial processes and activities outside of the energy sector; and all other final uses of fossil fuels, whether in the transport sector, the residential sector, or primary industries outside of the energy sector (e.g. agriculture and forestry).

General Services Support Estimate (GSSE): transfers or expenditures arising from policy measures that create enabling conditions for the fossil-fuel sector through the development of private or public services, institutions and infrastructure (regardless of their objectives and impact on fossil-fuel production and or consumption). It includes policies where fossil fuels are the main beneficiaries, but does not include any payments to individual producers. GSSE transfers do not directly alter producer receipts or costs, or consumption expenditures, although they may affect production or consumption of fossil fuels in the long term.

See the OECD’s PSE-CSE accounting framework for more details.

Fuel type

The range of fuels covered by the Inventory comprises both primary fossil-fuel commodities (e.g. crude oil, natural gas, coal, and peat) and secondary refined or processed products (e.g. diesel fuel, gasoline, kerosene, and coal briquettes). Primary fuels include in particular those fossil fuels that are extracted from unconventional sources, such as oil extracted from bituminous sands, shale-based natural gas, or coal-bed methane. Measures supporting the production or use of biofuels are not, however, included in the Inventory.

Coal: including hard coal and briquettes, and peat.

Natural gas: both liquefied and in the gaseous state.

Petroleum: petroleum oils and oils obtained from bituminous minerals, crude oil as well as secondary refined or processed products (e.g. diesel fuel, gasoline, kerosene).

End-use electricity: electricity for end-user consumption of fossil-fuel origin. Support under end-use electricity includes measures providing electricity tariffs below cost recovery or annual average-cost pricing for electricity end-users and only includes the fossil-fuel component of the support (i.e. renewables and other non-fossil-fuel sources are excluded). Amounts related to cross-border power exchanges are also excluded due to the technical difficulties in determining the traded electricity’s ultimate generation origin. Support amounts benefiting fossil fuels as power generation inputs are aggregated under their respective fuel type, i.e. petroleum, coal or natural gas.