Subsidies to fossil fuels between legend and facts

This article aims to answer the question of whether fossil fuels are subsidized and, if so, which countries subsidize them. First of all, it should be noted that there is no strict mathematical definition of "subsidies", however there are different approaches to quantify them under certain hypotheses. Furthermore, the complexity of the tax systems of the various countries makes a direct comparison difficult. However, the energy subsidies are rated in thanks from different International Agencies. The main, discussed in this article:

• IEA (International Energy Agency)
• IMF (International Monetary Fund)
• OECD (Organisation for Economic Co-operation and Development)

Here, I briefly explain the fundamental concepts before reporting the results of the studies of the International Agencies mentioned above. Obviously this article will be subject to revision and updates (at the bottom, I will indicate the date of the last revision). At the bottom of the page there are all the links of the sources mentioned.

Before analyzing the subsidy estimates of the aforementioned international agencies, it is illustrated global primary energy production and consumption by source.

Fossil fuels and global primary energy production and consumption by source

Primary energy is an energy form found in nature that has not been subjected to any human engineered conversion process. It is energy contained in raw fuels, and other forms of energy, including waste, received as input to a system. Primary energy can be non-renewable or renewable. Secondary energy is a carrier of energy, such as electricity. These are produced by conversion from a primary energy source. Total primary energy supply (TPES) is the sum of production and imports, plus or minus stock changes, minus exports and international bunker storage. The International Recommendations for Energy Statistics (IRES) prefers total energy supply (TES) to refer to this indicator. These expressions are often used to describe the total energy supply of a national territory.

A fossil fuel is a hydrocarbon-containing material formed naturally in the Earth's crust from the remains of dead plants and animals that is extracted and burned as a fuel. The main fossil fuels are three:

• oil
• natural gas
• coal

Fossil fuel production in 2021 is comparable to the volume of a cube with sides equal to 1.7 km for oil, 1.9 km for natural gas (assuming all production is liquefied), and 2.1 km for coal.

Fossil fuels contribute for the vast majority to satisfy the demand for energy, in all its forms (chemical, thermal, electric), to human civilization. Fossil fuels are the basis of industrialization which has dramatically improved living standards over the past 2 centuries. Derivatives are obtained from petroleum, such as liquid and gaseous fuels (petrol, diesel, kerosene, LPG), lubricants, asphalts, polymers (plastic), sulfuric acid (for the chemical industry), petroleum coke (used as solid fuel and for the preparation of electrodes), paraffin, tar, etc... Carbon coke (from coal) is an important industrial product, used mainly in iron ore smelting. Hence, fossil fuels provide energy in different forms and are a source of raw material. For example, when a road or railway infrastructure (asphalt and steel) is built, it is only possible thanks to fossil fuels. That said, the latest data from the IEA (2019), prior to the covid-19 pandemic, attributed 81% of the world's total energy supply to fossil fuels, equal to a total of 606 EJ (Exa-Joule, about 168,000 TWh). In 1973, World total energy supply was made up of 76.2% fossil fuels and in 2019 almost 81%.

In 1973, a substantial share of biofuels and waste, and oil covered almost half of World total energy supply. Nuclear power was starting to develop.

In 2019 we note the significant increase in natural gas, the decrease in oil, while the share of coal has a moderate increase. Furthermore, increase the share of nuclear and hydroelectric. Biofuels and waste suffer a slight decline. In the "other" share, there are geothermal, wind and solar (PV).

In 2020, global primary energy consumption decreased overall during the pandemic, before returning to pre-pandemic levels in 2021. This was reported by the Our World in Data website based on British Petroleum data (there is a slight discrepancy with IEA data). A multiple of Wh (watt-hour) is used in the graph below, however: 1 TWh = 3,600 TJ and 1 EJ = 10^6 TJ.

Obviously, the distribution of primary energy consumption varies according to individual countries and macro-regions. For example, OECD countries have less coal and more nuclear power than global consumption (y-axis in EJ).

Future estimates of fossil fuel production and consumption are not covered in this article, nor will the consumption and production of secondary energy, such as electricity, be analyzed.

Methodology, assumptions and price-gap approach

The price-gap approach, which is used by the IMF and IEA, measures a subsidy as the difference between the retail price and a calculated supply cost / reference price (i.e., the price of a fuel without any government intervention) there is a subsidy if the retail price is less than the supply cost. The inventory approach, which is used by the OECD, measures the nominal value of individual subsidy measures (i.e., accelerated depreciation for producers, loan guarantees, and direct financial support). The IEA estimates subsidies to fossil fuels that are consumed directly by end-users or consumed as inputs to electricity generation. The price-gap approach, the most commonly applied methodology for quantifying consumption subsidies, is used for this analysis: Kosmo (1987), Larsen and Shah (1992) and Coady et al. (2010), for example, have used this approach. It compares average end-user prices paid by consumers with reference prices that correspond to the full cost of supply. The price gap is the amount by which an end-use price falls short of the reference price and its existence indicates the presence of a subsidy. In a given economy, the basic calculation of subsidies for a product is:

Subsidy = (Reference price - End-user price) × Units consumed

Implicit subsidies (IEA):

For economies that export a given fossil-energy product but charge less for it in the domestic markets, the domestic subsidies are implicit; they have no direct budgetary impact so as long as the price covers the cost of production. The subsidy, in this case, is the opportunity cost of pricing domestic energy below international market levels, i.e. the rent that could be recovered if consumers paid world prices, adjusting for differences in variables such as transportation costs.

Explicit subsidies (IEA):

For net importers, subsidies measured via the price-gap approach may be explicit, representing budget expenditures arising from the domestic sale of imported energy at subsidised prices, or may sometimes be implicit.

Differences between IEA and IMF:

The IEA total subsidies can be directly compared to the IMF’s explicit subsidy estimate as these indicators use a similar methodology, with a small discrepancy—the IEA includes VAT in the supply cost while the IMF includes VAT when calculating the implicit subsidy but not the explicit. The disaggregation across fuel sources is more nuanced as the IEA accounts for underpricing of natural gas and coal for electricity generators as an electricity subsidy, while the IMF accounts for it as natural gas and coal subsidies, respectively. The IMF’s implicit subsidies include the cost of externalities and, therefore, is not comparable to those of the IEA. In other words, the IEA figures capture information on prices affected by government intervention or support. Later in this article, these differences will be explained in more depth.

IEA conclusion (update 2023)

Ultimately, subsidies to fossil fuels, countries analyzed by the IEA, are related to the global cost of net subsidies for the consumption of fossil fuels which, however, being net consumption subsidies, have nothing to do with countries such as our publication and concern in development in which fuels (but also natural gas and electricity) are sold at prices well below market prices by governments that consider that low-priced energy is a driving force for the economy or in some cases a benefit for the population. There are not Western countries that subsidize fossil fuels. Iran, the country with the highest subsidies, mainly subsidizes electricity (produced with fossil fuels), selling energy below the market price in the domestic market. This subsidy is quantified at 51.7 billion USD (2019) and overall direct subsidies to fossil fuels in Iran are 86 billion USD (electricity, oil and gas - 2019) and represent 18.8% of GDP (2019). China (total of 30.5 billion USD) and Saudi Arabia (28.4 billion USD) mostly subsidize oil, while the Russian Federation subsidize electricity and gas. India almost exclusively subsidizes oil for 21 billion USD. Indonesia with 19.2 billion USD subsidies exclusively oil. To follow, a country of North Africa, Latin America and other countries of the Middle East. In Venezuela and Libya, subsidies account for 16.7% of GDP (2019).

In the year of the pandemic, 2020, the main countries that have subsidized fossil fuels are essentially the same, namely the top 5: Iran, China, India, Saudi Arabia and Russia. However, subsidies have decreased in absolute numbers and as a percentage of national GDP.

In the following year, 2021, Russia became the country that subsidized the most fossil fuels with $78 billion, but this figure represented only 4% of GDP, while the country that subsidized the most fossil fuels to GDP is Uzbekistan with 19%. The list of top 5 countries has not changed from the previous 2 years analysed.

The energy crisis following the recovery of production and consumption in the post-pandemic period and above all the invasion of Ukraine by the army of the Russian Federation (from 24 February 2022), have triggered enormous volatility in the prices of raw materials. This has led to a historic rise in inflation (this aspect will not be covered in this article). Natural gas prices have had significant and rapid increases, as shown in the European Title Transfer Facility (TTF) and American Henry Hub (HH) Natural gas spot price.

The cost of the TTF is in euros per MWh, but in the graph above it is shown in USD/MBtu, while for the HH it is in dollars per MBtu (1 MBtu = 0.293 MWh).

Moreover, the prices for Brent, Urals crude and diesel in Northwest Europe experienced sudden price increases (graph below).

In this regard, the IEA states that:

"Prices for end-consumers rarely move in lockstep with international prices because of various buffers, contractual provisions or other mechanisms to smooth volatility. In many cases, estimated subsidy levels increased in 2022 simply because of the gap between fixed end-user prices and the international reference levels. This was the case in many countries in the?Middle East. But in the exceptional circumstances of 2022, governments found multiple ways to avoid passing on high and volatile prices to consumers. In some instances, these measures involved direct allocations from national budgets; in other cases (notably among the fossil fuel exporters), our subsidy estimates reflect income that is foregone by keeping domestic prices much lower than international benchmarks. Tax exemptions and reductions have a similar effect."

In addition, the IEA lists the measures used by individual countries regarding the fixing prices or capping price increases, exemptions from various taxes and levies, easing payment terms or banning disconnections for non-payment, compensation mechanisms for different affected groups of consumers, including households, businesses and industrial consumers. Here are some of the measures taken by several developed countries:

• Germany: the government implemented several additional payments to help vulnerable communities pay their heating bills (households on housing benefits, apprentices and students with student loans);
• Korea: vouchers for energy expenses, including electricity, gas, LPG and heating, were provided to around 1.2 million vulnerable households in 2022, and the voucher amounts were increased twice during the year;
• Japan:?has eased gas and electricity payment terms for those struggling to pay;
• Spain: a “vital minimum supply” obligation for utilities was enacted from September 2021, ensuring vulnerable households unable to pay their electricity bills would still get supplied for a period of 10 months;
• United Kingdom:?cut fuel duty;
• Belgium:?reduced the VAT on electricity bills from 21% to 6%.
• France:?enacted a "tariff shield" that initially froze electricity and gas retail tariffs for households and then limited the possibility for increases in price;

In Europe, Germany has decided to spend nearly EUR 100 billion to reduce energy bills for the first four months of 2023 with EUR 56 billion for gas and district heating as well as EUR 43 billion for electricity. Governments also spent considerable sums on recapitalisation, debt suspension and support for energy companies or key energy-intensive industries. France fully renationalised EDF to reinforce its financial position during the crisis and to ensure its ability to complete planned and unplanned maintenance work on its nuclear fleet. And Germany provided a EUR 13 billion credit line to Uniper, which operates thermal power generation assets, to secure the company's short-term liquidity.

Furthermore, the IEA admits that:

"High fossil fuel prices hit the poor hardest, but subsidies are rarely well-targeted to protect vulnerable groups and tend to benefit better-off segments of the population"

That said, the IEA has estimated a clear increase in fossil fuel subsidies in 2022 and explains that:

"In addition to these consumption subsidies, the IEA has tracked more than USD 500 billion in extra spending to reduce energy bills in 2022, mainly in advanced economies, with around USD 350 billion of this in Europe. This spending is not necessarily captured in our methodology as a fossil fuel consumption subsidy because average end-user prices are still sufficiently high to cover the value of the market fuel in question. In Europe, preliminary analysis shows that average end-user prices were close, in some cases, to the market reference values. Nonetheless, spending to bring down energy bills represents a significant fiscal burden for governments and, as is often the case with such measures, these interventions have not always been well targeted. Furthermore, it risks diminishing the incentive to use energy efficiently or to switch to cleaner fuels."

So, considering the government consumer measures to reduce energy bills during the energy crisis, subsidies are estimated for 2022 at USD 1,097 billion (graph below).

Government consumer measures to reduce energy bills during the energy crisis are quantified as shown in the graph below for EU, rest of advacend economies and for emerging markets and developing economies. Note the 349 billion USD spent by Europe to try to stem the negative effects on families and businesses, as the EU itself was (and still is) heavily exposed to imports of natural gas, oil and coal from the Russian Federation. In other words, the measures taken by the EU account for almost 56% (349 billion USD) of global measures in 2022 to reduce the effects of the (still ongoing) energy crisis, amounting to 626 billion USD.

In conclusion, the fossil fuel subsidies in 2022 estimated by the IEA, net of the extraordinary measures adopted by governments to reduce the negative effects caused by the energy crisis (due to post pandemic effect and war in Ukraine), are equal to 471 billion USD (1,097 minus 626).

IMF conclusion

In the working paper (WP/21/236) Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies , for IMF:

"the efficient price includes both the supply and environmental costs of fuel use. Underpricing leads to overconsumption of fossil fuels, which accelerates global warming and exacerbates domestic environmental problems including losses to human life from local air pollution and excessive and road congestion and accidents. This has long been recognized, but globally countries are still a long way from getting energy prices right.. No country is fully pricing all fuels in line with their full supply and environmental costs."

In other words, IMF adds environmental costs (local air pollution) and externalities (global warming, accidents, road damage, etc..). In this way, compared to the IEA, the components of the subsidies are obviously not the same, so the IMF estimate for fossil fuels subsidies is vastly larger (an order of magnitude more) than the IEA estimate. The conclusion of the IMF:

"Globally, fossil fuel subsidies are were 5,900 USD billion or 6.8 % of GDP in 2020 and are expected to increase to 7.4 % of GDP in 2025 as the share of fuel consumption in emerging markets (where price gaps are generally larger) continues to climb. Just 8 % of the 2020 subsidy reflects undercharging for supply costs (explicit subsidies) and 92 % for undercharging for environmental costs and foregone consumption taxes (implicit subsidies). Underpricing for local air pollution costs is the largest contributor to global fossil fuel subsidies, accounting for 42 percent, followed by global warming costs (29 %), other local externalities such as congestion and road accidents (15 %), explicit subsidies (8 %) and foregone consumption tax revenue (6 %)."

However, the IMF's approach which "broadens" the concept of "subsidies" considerably, evaluates that most of the global subsidies are nearly half in EAP (East Asia and Pacific, 48%) and then a 10% stake in MENA (Middel East and North Africa). Thus, almost 60% of the subsidies are from EAP and MENA. Europe (EU) with 9% and North America (USA and Canada) with 12%, represent only 21% of global subsidies.

IMF specifies that:

"the prices for coal and natural gas average over fuel consumption in the power generation, industrial, and residential sectors, while prices for gasoline and diesel are for road fuel consumption only (diesel averages over uses in light- and heavy-duty vehicles). Congestion, accident, and road-damage externalities are scaled by the fraction of fuel price elasticities reflecting changes in driving (as opposed to changes in fuel economy)."

These externalities and environmental costs explain the difference, compared to the IEA, in the quantification and distribution of overall subsidies. For coal and gas, the components are denominated in price on energy (USD / 10^9 Joule), while for automotive fossil fuels (gasoline and road diesel) in price on volume (USD / liter).

This is evident in the global fossil fuel subsidies by component and by end-user (IMF, 2020).

The approach followed by the IMF makes it possible to quantify subsidies for fossils also to developed countries.

This paper from 2021 titled The producer benefits of implicit fossil fuel subsidies in the United States of Matthew J. Kotchen (Proc Natl Acad Sci U S A. 2021 Apr 6;118(14):e2011969118. doi: 10.1073/pnas.2011969118. PMID: 33753554; PMCID: PMC8018594), based on the IMF methodology, assumes for simplicity that the marginal external costs (denoted MEC) are constant and indicates by PI the producer incidence and by CI the consumer incidence, for USA claims that:

"The first is a quantification of the financial benefits to fossil fuel producers of implicit subsidies already in place. Using data for the United States from 2010 to 2018, the estimates provide insight into the distributional consequences of implicit fossil fuel subsidies between producers and consumers during typical economic conditions. The analysis considers coal, natural gas, gasoline, and diesel, along with the implicit subsidies for each that arise because of the external costs borne by society due to environmental damages, public health effects, and traffic-related conditions. The producer benefits of interest, the producer incidence (PI) are based on the higher price that suppliers receive because of inefficient pricing compared to the counterfactual scenario where environmental and public health externalities are internalized. The direct financial benefit to fossil fuel producers of inefficient pricing across all four fuels is estimated at $ 62 billion per year on average, representing 11% of the total annual subsidy of $568 billion. The total subsidy is equivalent to an average of 3% of US Gross Domestic Product and equals the estimated value of the environmental, public health, and transportation-related externalities on an annual basis. To be clear, the focus here is not on direct subsidy payments that reduce the costs of fossil fuels, but rather on the implicit subsides that arise because of inefficient pricing that gives rise to social costs."

However:

"While direct subsidy payments are common in many countries, they are not in the United States"

and it admits that an explicit subsidy would be a direct government payment to reduce the producer or consumer costs of fossil fuels, but as mentioned previously, these are not common in the USA, and these subsidies are due solely to externalities borne by society or foregone government revenue from inefficient pricing (climate damages, adverse health effects from local pollution,?external costs for motor fuels also include the value of congestion-based travel delays and accident fatalities, along with wear and tear on the roadways from heavy-duty):

"a final piece of the model to consider is the possibility for preexisting subsidies or taxes. An explicit, preexisting subsidy would be a direct government payment to reduce the producer or consumer costs of fossil fuels, but as mentioned previously, these are not common in the United States" and "The results indicate a total subsidy across all four fuels of $ 592 billion in the most recent year, 2018. This number represents the external costs borne by society or foregone government revenue from inefficient pricing. Included in the external costs is the value of climate damages reflected in the social cost of carbon and adverse health effects from local pollution. The external costs for gasoline and diesel also include the value of congestion-based travel delays and accident fatalities, along with wear and tear on the roadways from heavy-duty, diesel fuel vehicles"

This approach is evident in the composition of implicit subsidies to fossil fuels which derive entirely from the external costs incurred by society due to environmental damage, public health effects and traffic-related conditions (see graph A below).

For the graph above, the author (Matthew J. Kotchen) explains that the PI and CI of the subsidy for all fuels. (A) The measures of PI and CI for all four fuels (coal, natural gas, gasoline, and diesel) for the most recent year, 2018. Each measure is further partitioned into the underlying externalities, which are proportionally the same between both measures of incidence for each fuel). (B) The trend in PI over time for each fuel. While the producer benefits to coal have decreased 33%, those for all other fuels have increased substantially: 42% for gasoline, 52% for diesel, and 63% for natural gas.

Now, taking Italy for example, the IMF attributes 41 USD billion (more or less € 41 billion) in subsidies to fossil fuels. This value is taken from the official report Catalogo dei sussidi ambientalmente dannosi e dei sussidi ambientalmente favorevoli 2016 (table 14, page 213), but in reality in this figure there are largely indirect subsidies (off-budget) that through tax exemptions or discounts aim to create different levels of taxation to favor less polluting technologies. The subsidies, defined in this report, harmful to the environment (SAD in the Italian acronym) instead amount to 16.2 billion euros out of 41 billion (for € 41 billion there are subsidies that do not concern fossil fuels) of which, the main:

• € 4.97 billion deriving from the different tax treatment between petrol and diesel;
• € 1.78 billion from VAT relief on electricity and gas when used for domestic and manufacturing purpose;
• € 1.55 billion deriving from the exemption from excise duty on energy products used as fuel for air navigation other than private pleasure boats and for educational flights;
• € 1.29 billion deriving from the reimbursement of the greater charge deriving from the increase in excise duty on diesel fuel used as fuel for road transport of goods and other categories of passenger transport;
• € 0.88 billion from the VAT deduction for water and mineral waters;
• € 0.83 billion from the application of a reduced rate for the use of energy products in agricultural and similar works (horticulture, animal husbandry, forestry, fish farming and horticulture);
• € 0.65 billion from the free allocation of emission allowances constitutes a form of subsidy a benefit of installations subject to ETS;
• € 0.63 billion from the exemption from excise duty on energy electricity used in the homes of residence with power up to 3 kW up to 150 kWh of monthly consumption;
• € 0.62 billion for tax credit for the purchase of goods new equipment for production plants in assisted areas located in the Southern Regions;
• € 0.46 billion for exempts energy products used as navigation fuels from excise duty in inland waters;
• € 0.36 billion from the reduced rates for natural gas; petroleum gas liquefied; diesel; fuel oil e natural energy raw materials; coal, lignite and coke. Self-production of electricity. Combined energy production electricity and heat.;
• € 0.31 billion for kWh produced by third parties and sold to the national electricity grid obtained from suitable plants for use coal or gas produced by the gasification of any fuel or residue;
• € 0.21 billion from diesel and LPG used heating in geographical areas or climatically disadvantaged;

The "subsidies" listed above are mainly due to the difference in taxes between diesel and petrol, the reduction in taxes for the transport of goods and people by land, sea and air and for agricultural production (4.97 + 1.55 + 1.29 + 0.83 = € 8.64 billion). In addition, a reduction in VAT for domestic heating and energy electricity (1.78 + 0.63 = € 2.41 billion). An further example is the 5.2 billion euros attributed to the different tax treatment between petrol and diesel or 1.7 billion euros for the transport sector, 6.6 billion euros for agriculture and fishing, etc.. in report 2018 (Ministero della transizione ecologica, 2018; Catalogo dei sussidi ambientalmente dannosi e dei sussidi ambientalmente favorevoli 2018 , table 3.15 – Tavola di confronto anni 2017 e 2018 - page 416). In these cases the national or local government waives the collection of part of the excise duty (or taxes) because it believes that the company that uses fossil fuels (for example) to produce agricultural products or because it transports passengers by plane, plays an essential role for citizens (this will be discussed in my next article on Linkedin in which I will talk about "subsidies" to fossil fuels in Italy, considering this to be an emblematic case in Western countries).

OECD conclusion

In the report Companion to the Inventory of Support Measures for Fossil Fuels 2018 (it's not open access) the OECD explains that (page 12):

"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. 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"

furthermore (page 13),

"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."

Regarding the approach adopted for the estimation of subsidies to fossil fuels (page 20):

"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."

This OECD report, similar to the IMF report, 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, so, ?the aggregate figure, or Total Support Estimate (TSE), incorporates three broad categories of support measures: price transfers, budgetary transfers, and revenue forgone. In practice, an aggregate figure for support to fossil fuels would be the sum of the following components (page 21):

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.

With the approach followed, the OECD quantifies subsidies to fossil fuels, especially Petroleum, for member countries, albeit in sharp decline from 2012 - 2013.

The composition of total support by indicator, for the main countries, is:

• CSE - Consumer Support Estimate
• PSE - Producer Support Estimate
• GSSE - General Services Support Estimates

In summary, the PSE-CSE framework distinguishes among those measures that benefit producers (PSE), consumers (CSE), and those that benefit producers collectively, or that do not support current production, such as industry-specific R&D (GSSE). This is represented in the graph below, with also the percentage composition by fossil fuel.

The most recent OECD estimate of fossil fuel subsidies, quantifies that overall government support for fossil fuels in 51 countries worldwide almost doubled to 697.2 USD billion in 2021, from 362.4 USD billion in 2020, as energy prices rose with the rebound of the global economy.

in addition, it states that:

"OECD analysis of budgetary transfers and tax breaks linked to the production and use of coal, oil, gas and other petroleum products in G20 economies showed total fossil fuel support rose to USD 190 billion in 2021 from USD 147 billion in 2020. Support for producers reached levels not previously seen in OECD tracking efforts, at USD 64 billion in 2021 – up by almost 50% year-on-year, and 17% above 2019 levels. Those subsidies have partly offset producer losses from domestic price controls as global energy prices surged in late 2021. The estimate of consumer support reached USD 115 billion, up from USD 93 billion in 2020."

Here, in the image below, are the trends of fossil fuel subsidies of the 38 member countries of the OECD. Currently, according to the estimate and the OECD approach, they are over 100 billion USD.

Differences between OECD and IEA

The OECD report itself provides an explanation of the differences between its conclusions and those of the IEA (page 23):

"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 (Market Price Support). 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 the definition of a support measure depends on a counterfactual “baseline” and analysts may differ over the appropriate baseline and 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."

Definitely, these two approaches (page 24):

"represent two ways of estimating consumer price support. The information gathered by both international organizations, when brought together can give a more complete and more accurate picture of support. When combining the two sets of data OECD and IEA 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. 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."

In summary, the difference between OECD and IEA is that the report (OECD inventory) includes 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 (page 21):

"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 PSE and CSE, casts a wider net and thus complements the IEA data on fossil fuel subsidies."

Final conclusions

Having analyzed the main reports on subsidies to fossil fuels, it is now possible to answer the original question. As the discrepancies between the reports already show, the answer cannot be simple. The estimates of subsidies to fossil fuels for the main international agencies are globally:

• IEA: 317.6 USD billion (2019, 180 USD billion in 2020, 531 in 2021 and 1,097 in 2022)
• IMF: 5,900 USD billion (2020, in 2021 the same contribution was estimated)
• OECD: 697.2 USD billion (2021, including the IEA estimate; 297.7 in 2019 w/o IEA estimate)

Importantly, in the IEA approach, the higher values in 2021 and especially in 2022 are due to the severe geopolitical and energy crisis backdrop, as governments have taken additional 626 USD billion (in 2022) measures to reduce the increase in energy costs for households and businesses.

The approach followed by the IMF also charges fossil fuels with externalities and environmental costs, treating all of this as subsidies. This leads to a monstrous estimate of subsidies to fossil fuels of 6.8% of global GDP (2020) and are expected to increase to 7.4 % of GDP in 2025. This approach is rather debatable because, for example, attributing accidents and road damage as a cost (health cost), therefore subsidy, to fuel for vehicles is tendentious: the causes of accidents can be attributable to road infrastructures (design errors and / or lack of maintenance), car fleet in circulation (old and / or not maintained) and / or the driver's level of driving ability. Another critical aspect is attributing pollution to fossil fuels, thus subsidies again, regardless of the purpose of use. Since fossil fuels represent the source from which most of the energy and goods are produced in the world, being the globally primary energy supply of 606 EJ (IEA, 2021 ) about 80% is satisfied by fossil fuels (oil 30.9 %, coal 26.8% and gas 23.2%), anything that represents a source of air pollution (or greenhouse gas) is probably made with fossil fuels. In this way, any country would greatly subsidize fossil fuels. The OECD report, not attributing environmental costs and externalities, estimates subsidies much lower than the IMF (about 10 times less), but considering as subsidies the reduction of taxes and excise duties for the use of fossil fuels in certain sectors (transport of goods and people or agriculture), provides roughly double the IEA estimate.

The IEA report, on the other hand, basically evaluates as a subsidy what costs the consumer less than the current market price. This approach is certainly more objective and allows us to establish whether national (or federal or local) economic resources are used to repay this cost difference, possibly defining this as subsidies. The IEA data shows that the countries that subsidize fossil fuels, with public resources, are the developing countries of the Middle East, Africa, Asia and Latin America. These countries, often large producers such as Iran, Saudi Arabia or Russia, offer oil, gas and coal at below market prices to stimulate the domestic economy (the effectiveness of this measure is not covered in this article).

On the contrary, the developed countries, North America (USA and Canada), the EU-UK, Norway (despite being a large hydrocarbon producing country), Australia, New Zeland, Japan and South Korea, do not offer fossil fuels at prices below market prices, rather fossil fuels are taxed enormously. A classic example is taxes and excise duties on fossil fuels for transport. Tax revenue represents several percentage points of total tax revenue. In the EU, in large countries such as Italy (official average monthly and weekly prices of fuels and combustibles), the turnover from the sale of fossil fuels is worth 5% of tax revenues as in Spain and the United Kingdom. In Germany and France it is 3% (Fuels Europe, 2020). In Italy, in 2020, taxes for fossil fuels were 35.2 billion euros, in Germany almost 48 billion euros, in the UK 39, in France 37.4 and in Spain 23.2.

Taxation on Euro-super 95 and diesel Oil in European countries in 2020 was between 47% and 66% (Fuels Europe, 2020). After the invasion of Ukraine by the armed forces of the Russian Federation on February 24, 2022, the cost of energy has risen and the serious crisis triggered by the war is still ongoing. In May 2022, in EU-27, the percentage taxation fell between 28% and 56% but in absolute value the taxation remained high (Fuels Europe, 2022). In Germany (May 2022) about 1 euro per liter of taxes and excise duties, out of a about 2 euros cost to the final user (citizen).

In the United States, both state and federal taxation on fossil fuels is lower than in the European Union, however the Motor Fuel Tax Revenue is almost USD 53 billion (2020) with a growing trend. The average of total state taxes (July 2022) is nearly USD 0.1 / liter (0.088) for diesel and USD 0.084 / liter for gasoline (1 U.S. gallon = 3.785411784 liters). Depending on the state considered, there are differences in taxation.

Receipts into the federal Highway Trust Fund (HTF) comes from a variety of taxes on highway fuel, tires, heavy vehicle use tax, truck / trailer sales taxes. The motor fuel excise tax, currently 18.4 cents per gallon for gasoline / gasohol, and 24.4 cents for special fuel (primarily diesel) raises the majority of the revenue. This revenue is then placed into the Highway Trust fund by the US Treasury Department, after collection by the Internal Revenue Service. These funds are then distributed to the States based on formulas provided in Federal legislation. On a monthly basis, each State is required to report to the Federal Highway Administration (FHWA), the amount of gallons taxed by that state. This data is analyzed and compiled by FHWA staff. The data on the amount of on-highway fuel use for each State is then used to attribute federal revenue to each State. Yearly, the FHWA, Office of Policy, provides data from the previous year's data for use in the attribution process. The previous year data is used to provide States added time to review, allowing them to verify that the data report is correct and ready to be used in attribution.

This chart (below) shows the fuel taxes on gasoline and diesel fuel in the Organization for Economic Cooperation and Development (OECD) countries. Switzerland, Iceland, Mexico, and the United States are the only countries with higher taxes on diesel than gasoline. In general, even before the Covid-19 pandemic, European countries tend to tax petroleum fuels at the highest level globally (DOE - United States Department of Energy).

In addition, the internal combustion engine (ICE) motor vehicle suffers additional taxes due for example to the ownership of the vehicle itself, motorway tolls, compulsory insurance taxes, maintenance taxes, taxes on the purchase of a new car or on the change of owner. Obviously there are differences between the developed countries, mentioned above, in the "modality" of these taxes (this aspect is not dealt with in this article).

Motor vehicle taxation brings in € 440.4 billion for governments in major European markets (ACEA, 2020). Motor tax revenues collected by governments have increased by almost 3% compared to the previous year, and the grand total of €440.4 billion is equivalent to more than two and a half times the total budget of the European Union. The top 5 countries with the highest motor tax revenues are:

1 - Germany € 93.4 billion

2 - France € 83.9 billion

3 - Italy € 76.3 billion

4 - United Kingdom € 54.1 billion

5 - Spain € 30.0 billion

The table above (ACEA, 2020) shows the composition of the fiscal income from motor vehicles of the 14 main countries. The item "Fuels & lubrificants", which in most cases represents the largest share, is the sum of the excise duties and VAT. Road tolls, for example, are included under "Others": in Italy (2018), tolls income from motorways (Alpine tunnels not included) amounted to € 8.309 billion, of which total taxes (ie VAT) amounted to € 1.498 billion (ACEA Tax Guide , page 126). Obviously, it is not the only fiscal income item for "Others".

Moreover, in summary, the IMF in 2020 by attributing a total of 41 USD billion of "subsidies" to Italy (which are ot public funds for fossil fuels), fails to report the 35.2 billion euros of taxes and excise duties on fossil fuels (Report Fuels Europe, 2020) in addition to taxes imposed on ICE vehicles in various ways (totaling € 76.3 billion in 2020, ACEA). In other words, if a part of the public opinion wants to equate the cost of diesel to gasoline by law (despite the lower cost of producing diesel) or to charge all excise duties to those who transport people and/or goods (by sea or by air) , it must be explained that we would see a generalized increase in prices: from airline tickets to agricultural products. In general, tax revenues from fossil fuels represent a source of financing for the (good) welfare state and/or current spending in Western countries (this aspect is not dealt with in this article).

In essence, the IMF report is very biased, as shown by the composition of the alleged fossil fuel subsidies for the USA and Italy, analyzed here and in general by the approach followed (by IMF) which considers externalities and environmental costs. This approach provides a abnormal estimate of subsidies, about 10 times what the OECD estimates and 20 times what the IEA estimates. A rhetorical question: for example, are the two IMF headquarters building in Washington to be considered externalities of fossil fuels as they were made of conglomerates (concrete and bitumen) and metals (steel)!?

The OECD report, on the other hand, also considers a reduction in taxes or excise duties on fossil fuels as a subsidy. This is questionable because such tax cuts (or reduction) are, for example, aimed at reducing the cost of transporting people or goods by air, ship or land. However, no externalities or environmental costs are added, unlike the IMF. In the end, the OECD estimate is the sum of the subsidies calculated by itself and the IEA; this leads to an overall estimate of subsidies more or less double than the IEA. The heavy taxation of fossil fuels in Western countries is not documented in the IMF and OECD reports. The IEA approach is certainly more objective because it evaluates as a subsidy what costs the consumer less than the current market price: it allows us to establish whether some state funds are used to repay this cost difference, possibly defining this as subsidies. Even the IEA does not mention the taxation on fossil fuels of Western countries but from its approach only developing countries subsidize fossil fuels, so this aspect is irrelevant.

That's not all, this paper (Why fossil fuel subsidies are so hard to kill , Jocelyn Timperley 2021) makes the mistake of considering, for example, reduced excise taxes (or tax rebates) or externalities as subsidies (from OECD and IMF estimates):

"Production subsidies are tax breaks or direct payments that reduce the cost of producing coal, oil or gas. These are common in Western countries."

This is the same approach followed by IRENA , which provides the same estimate as the OECD, in the report ENERGY SUBSIDIES Evolution in the Global Energy Transformation to 2050 (pag. 8):

"By combining existing estimates of subsidies to fossil fuels from the Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA), this analysis finds the global total, direct fossil-fuel subsidies in 2017 to be at least USD 447 billion. Subsidies to petroleum products dominated the total, at USD?220?billion, followed by electricity-based support to fossil fuels at USD?128?billion. Subsidies to natural gas and coal in 2017 were estimated to be USD?82?billion and USD 17 billion, respectively."

but in reality, these "subsidies" in western countries (Developed Countries) are largely indirect subsidies (off-budget) that through tax exemptions or discounts aim to create different levels of taxation to favor less polluting technologies; in other words, such tax cuts (or reduction) are, for example, aimed at reducing the cost of transporting people or goods by air, ship or land, or the use of mechanised agriculture (tractors, combine harvesters, etc..), as already stated. Obviously neither the Jocelyn Timperley's paper nor the IRENA report mention the high taxation on hydrocarbons. It is the same (and serious) omission of the IMF and the OECD .

Definitely, as already mentioned, full taxation on the transport of people and goods would lead to an increase in food products or airline tickets (just to give a couple of examples); overall the entire trade would suffer a price increase. Therefore the governments of developed countries (Western countries) use a reduced taxation on hydrocarbons in some contexts deemed essential for the community (transport of passengers and goods, agriculture, etc.). The enormous taxes on private transport and in general on passenger cars (excise duties and taxes on petrol and diesel), in Western countries themselves, represent a fundamental tax revenue with which to finance public spending (welfare state).

In conclusion, are fossil fuels subsidized? The answer is correct that fossil fuels are subsidized with public funds (total 317.6 USD billion, IEA 2019) exclusively in 40 developing countries, while in developed countries (Western countries) fossil fuels are not subsidized, on the contrary taxed in various ways. By quantifying (IEA, 2020):

"In 2020, the fall in fossil fuel prices and overall energy use brought the value of fossil fuel consumption subsidies down to a record low of about USD 180 billion, down 40% from 2019 levels. This is the lowest annual figure since we started tracking these subsidies in 2007."

but as has already been said, the severe geopolitical and energy crisis backdrop, due to the recovery of industrial production and post-pandemic private consumption since 2021 and especially since the invasion war of the Russian Federation against Ukraine (from 24 February 2022), as governments took additional 626 USD billion (in 2022) measures to curb rising energy costs for households and businesses. If you subtract this 626 USD billion from the amount of global subsidies for 2022, 1,097 USD billion, you get 471 USD billion (2022). An amount higher than the 371.6 in 2019 but still of the same order of magnitude but lower than the previous year's 531 USD billion, 2021. In 2020, the drop in consumption due to the various lockdowns reduced the consumption of energy and raw materials globally, reducing subsidies for fossil fuels to 180 billion dollars, from 317.6 in the previous year (2019). In any case, developing countries are the ones that benefit from fossil fuel subsidies and in the top 5 there are always Iran, China, Russia, India and Saudi Arabia.

Noteworthy is this description of the IEA:

"Fossil fuel consumption subsidies are in place in more than 40 countries around the world, according to the price-gap methodology used by the IEA in its assessment. There can be good reasons for governments to make energy more affordable, notably in pursuit of important social goals like universal access to modern energy. But in practice, many subsidies are often poorly designed and targeted creating structural risks to government budgets and the financial performance of the energy sector, encouraging wasteful consumption among wealthier segments of the population, and pushing up emissions across economies as a whole. These subsidies create a roadblock to a cleaner and more efficient energy future. That is why the IEA has consistently been shining a spotlight on this issue and continues to be a strong supporter of international efforts to get them removed. There has been only fitful progress on subsidy phase-outs in recent years. IEA tracking of subsidy-related policy announcements highlights good examples of countries (such as India, Tunisia and Egypt) reinforcing this pillar of sound energy policy-making, and other countries announcing their intention to follow suit. But they also show multiple examples of policy reversals or postponements, with the protection afforded to consumers coming at significant fiscal and environmental cost."

Update of February 25, 2023

#oil #petroleum #naturalgas #coal #energy #fossilfuels #IEA #EIA #OECD #IMF

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