OECD Inventory of Support Measures for Fossil Fuels 2024

1. The fiscal cost of government support for fossil fuels and incentives for decarbonisation

Addressing support to fossil fuels has been recognised as a global priority

The importance of tracking and reporting government support for fossil fuels has been recognised by the international community. The Glasgow Climate Pact adopted at the United Nations Framework Convention on Climate Change (UNFCCC) COP26 in 2021 included a call, subsequently reiterated at COP27 and COP28, to “phase out inefficient fossil fuel subsidies”. G7 countries have also committed to phase-out inefficient fossil fuel subsidies by 20251, while the UN includes action on support to fossil fuels (using the OECD methodology, see below) in Sustainable Development Goal (SGD) 12 and target 12.c.1.

While support to fossil fuels can reduce the burden of high energy bills on households and firms, fossil fuel support can have a sizeable fiscal cost, increase carbon emissions and air pollution, undermine incentives for the net zero transition and thus longer-term growth. Moreover, as currently designed, they tend to disproportionately benefit higher-income households.

Support can be understood in terms of the fiscal cost of support measures…

Since 2013, in its Inventory of Support Measures for Fossil Fuels (hereafter the Inventory), the OECD has been collecting information on policies that likely encourage the production and use of fossil fuels through direct transfers and tax expenditures. The primary objective of the Inventory is to enhance transparency by casting a wide net and identifying public policies which may result in more production and consumption of fossil fuels than would have been the case absent government intervention. It therefore sheds light on government practices that may need to be reformed in the context of the net zero transition. Data on individual support measures for fossil fuels is collected from official government sources (e.g. budget reports, see Section 5).

Information documented in the Inventory includes the fiscal costs of the covered support measures, capturing the preferential treatment accorded to fossil fuels in terms of the cost of direct budgetary transfers to consumers and producers of fossil fuels, and the revenue forgone incurred by applying lower tax rates on fossil fuels. In addition, the International Energy Agency (IEA) measures price support to fossil fuels estimated from the volume of such fuels sold below market prices, thereby promoting fossil fuel consumption. The aggregate fiscal costs obtained by combining the OECD and the IEA data therefore includes the fiscal cost of support for fossil fuels through three support mechanisms: direct transfers, tax expenditures, and price support. The fiscal costs of support measures for fossil fuels thus shows how government support to fossil fuels impacts a country's fiscal position on both the revenue and expenditure sides, highlighting the fiscal resources that could be deployed to meet other policy objectives (Sections 2 and 5).

Government spending and revenue foregone are a measure of the fiscal costs of support policies which likely influence the incentives to decarbonize. Policies could, for instance, decrease end-user fossil fuel prices, thereby potentially increasing both their use and associated carbon emissions and air pollution. Moreover, fiscal costs are relevant from a budgetary perspective in terms of quantifying the fiscal cost of measures that provide favourable treatment to fossil fuels, and so can provide useful information for international efforts to address these underlying support measures (such as at the World Trade Organisation2).

And in terms of wider decarbonisation incentives as measured by the Net Effective Carbon Rate

The strength of incentives to decarbonise is in part captured by the OECD Net Effective Carbon Rates (hereafter, Net ECR). The indicator measures carbon pricing broadly including carbon pricing reducing support measures (OECD, 2021[1]). The Net ECR combines the fiscal costs of support measures recorded in the Inventory with the OECD Carbon Pricing and Energy Taxation (CPET) database to estimate the effective marginal carbon rates net of direct budgetary transfers that lower pre-tax prices for fossil fuels. That is, the Net ECR is a measure of the strengths of the decarbonisation incentives implemented through multiple carbon pricing policies: direct budgetary transfers for fossil fuels, fuel excise taxes, carbon taxes and ETS permit prices (Sections 3 and 5).

Together these provide a more comprehensive view of policies and incentives related to fossil fuels

These two metrics – the fiscal cost of support and Net ECR – provide two complementary perspectives on the impact of support for fossil fuels. First, a budgetary perspective, providing information about the fiscal cost of measures that appear to accord preferential treatment to fossil fuels. This can be useful in informing efforts to negotiate the reduction of such measures. Second, the Net ECR provides an economic perspective, measuring the strength of the incentives to decarbonise from carbon pricing policies and direct budgetary transfers for fossil fuels. This is useful for an assessment of the extent to which carbon pricing efforts support the net zero transition. This report summarises the main results stemming from the latest updates of these two datasets, thereby presenting a more comprehensive picture of the nature and magnitude of support to fossil fuels (Box 1).

Box 1. Two metrics to measure the impact of support for fossil fuels

This report is based on two complementary metrics to analyse the impact of support to fossil fuels. Each of them has some advantages and caveats that need to be noted:

Section 2 draws upon the 2024 update of the OECD Inventory of support measures for fossil fuels covering 48 countries.

• Aggregate numbers from the Inventory presented in the second section of this report all represent the fiscal cost of support measures for fossil fuels. They provide information about how government support to fossil fuels impacts a country's fiscal position on both the revenue and expenditure side, shedding light on government measures that may need to be reformed and which could free substantial fiscal resources that could be deployed to meet other policy objectives. However, the fiscal cost should not be interpreted as an indicator of the extent to which the considered policies are favourable or unfavourable to climate change mitigation.

• The Inventory reports tax expenditures as estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s own benchmark tax system) to the benefit of fossil fuel producers or users. Hence, (i) tax expenditure estimates can increase over time either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; and (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

• Individual support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether specific measures are inefficient or ought to be reformed. Moreover, while data collected in the OECD Inventory aim to be comprehensive, the Inventory is not exhaustive. In particular, the OECD Inventory contains more information for countries that provide greater transparency in their budget documentation. This does not necessarily imply that these countries provide higher levels of support than others but may reflect their greater transparency regarding the support they provide.

Section 3 draws upon the 2024 update of the net Effective Carbon Rates estimates (net ECR) covering 79 countries.

• Net ECR estimates aim to measure the extent to which countries price their GHG emissions via fuel excise taxes, carbon taxes, ETS permit prices, net pre-tax support to fossil fuels. They provide information about how direct government support for fossil fuels (as negative carbon prices), alongside with explicit carbon pricing instruments and specific taxes on energy use, impacts a country’s economic position in terms of efforts to price carbon emissions.

Section 5 provides further details, including country coverage, of both approaches.

Notes

← 1.  See G7 Climate, Energy and Environment Ministers’ Communiqué: https://www.meti.go.jp/press/2023/04/20230417004/20230417004-1.pdf.

← 2.  See, for example, https://www.wto.org/english/tratop_e/envir_e/fossil_fuel_e.htm.