Phasing Out Fossil Fuel Subsidies

Traditional calculations account for two kinds of energy subsidies. Production subsidies lower the cost of energy generation through preferential tax treatments and direct financial transfers (grants to producers and preferential loans). Consumption subsidies lower the price for energy users, usually through tax breaks or underpriced government energy services. While production subsidies predominate in OECD countries, consumption subsidies are favored in developing countries to reduce the burden on poor households’ income, as poor people have to use a greater share of their income to buy fossil fuel products.

The IEA estimates coal, electricity, oil, and natural gas consumption subsidies in 38 developing economies at $523 billion in 2011. Using a price-gap approach, the IEA figure includes subsidies that bring the price of fossil fuels below the international benchmark. Subsidies that lower the price just to the international level or slightly above it are not captured. In a parallel study by the OECD, support measures for the production and consumption of fossil fuels in its 24 member countries were inventoried. Using a broader definition than the price-gap method (including direct budgetary transfers and tax expenditures), support for fossil fuels in OECD countries alone averaged $55–90 billion per year between 2005 and 2011.