1. Tracking progress in reforming support for fossil fuels
Chapter 1 draws on data compiled for the 2020 edition of the OECD Inventory to describe broad trends in the magnitude and nature of fossil-fuel subsidies in 50 OECD, G20 and European Union Eastern Partnership (EaP) economies, and how these relate to recent policy changes and reforms in-country. The chapter discusses the implications of the COVID-19 crisis, and resulting oil price crash, for reform. It includes sectoral breakdown of support measures, as well as an assessment of support measures in EaP countries and measures related to ocean sustainability, as part of ongoing efforts to enhance transparency of government support. Section 1.2 discusses efforts to track and reform fossil fuel subsidies in multilateral fora, including in the context of the G20’s framework for voluntary, reciprocal peer reviews and the Sustainable Development Goal fossil-fuel subsidy indicator 12.c.1. It looks at recent efforts to enhance the interpretation of tax expenditure data given the prevalence of tax expenditures in the measures documented by the Inventory.
1.1.1. Support for fossil-fuel production rose 30% in 2019
The OECD Inventory of Support Measures for Fossil Fuels records government spending that provides a benefit or preference for the production or consumption of fossil fuels over alternatives. The latest edition of the Inventory documents more than 1 300 budgetary transfers and tax expenditures in 50 countries (OECD, 2020[1]).1 The Inventory countries include the OECD member countries,2 Argentina, Brazil, the People’s Republic of China (hereafter “China”), India, Indonesia, the Russian Federation, South Africa and the European Union (EU) Eastern Partnership (EaP) countries: Armenia, Azerbaijan, Belarus, Georgia, Republic of Moldova and Ukraine. Total fossil-fuel support across these 50 countries rose by 5% year-on-year to USD 178 billion in 2019, reversing a five-year downward trend (OECD, 2018[2]), (OECD, 2015[3]).
This increase was driven by a 30% rise in direct and indirect support for fossil fuel production, primarily in OECD member countries (Figure 1.1, Figure 1.3). In 2019, oil and gas sectors in several countries received additional assistance. Most of this was direct budgetary support to alleviate corporate debt and help finance fossil-fuel infrastructure investments, as well as tax provisions providing preferential treatment for capital expenditures for fossil-fuel production. Producer support estimates (PSE) across Inventory countries increased by 9% compared with 2017 levels. General services support estimates (GSSE), which the Inventory methodology attributes in majority share to production, doubled.3 Together, these estimates amounted to USD 53 billion in 2019, sufficient to drive the overall increase documented by the Inventory – even though 70% of support measures continue to go to fossil-fuel consumption (Figure 1.1).4 Total OECD country support for fossil fuels rose by 9% from 2017 levels in 2019, to reach USD 105 billion. The increase deepens the cleavage in overall support figures between OECD member countries and the 13 non-OECD G20 and EaP partner economies included in the Inventory, in which support levels hovered at around USD 75 billion per year between 2017 and 2019 (Figure 1.1).
Note: CSE = consumer support estimates. GSSE = general services support estimates. PSE = producer support estimates. The OECD Inventory Methodology attributes GSSE support as benefiting producers at a 3:1 ratio when compared with consumers, so increases in both PSE and GSSE are relevant. Figure 1.1 sets out the arithmetic sum of the individual support measures identified in the Inventory. . Because they focus on budgetary costs and revenue forgone, the estimates for G20 and EaP economies do not reflect the totality of support provided by way of fuel price control measures (see Figure 1.3).
Source: (OECD, 2020[1]).
North American countries were responsible for 51% of the hike in OECD member country production support measures. Mexico’s fossil-fuel support more than tripled between 2017 and 2019 after the administration that assumed office in December 2018 sought to shore up Pemex, the heavily indebted, majority state-owned petroleum company. The administration’s assistance has included direct transfers to absorb Pemex debt and pension liabilities, and to support infrastructure such as a new oil refinery in the state of Tabasco, as well as steps to enhance tax deductions for Pemex’s shared profit rights (Webber, 2019[4]). Mexico’s measures are the main source of the USD 6 billion increase in total Inventory figures from 2017 to 2019. They raise Mexico’s proportion of total Inventory support levels to 10%, and its share of OECD member country support to 16%. They contrast with significant progress in previous years through energy price liberalisation reform, aimed at eliminating support for gasoline and diesel fuel consumption provided through the country’s floating excise tax (IEPS, or Impuesto Especial sobre Producción y Servicios por Enajenación de Gasolina y Diesel) (OECD, 2018[2]), (OECD, 2015[3]).
The United States increased its total support for fossil fuels by 28% between 2017 and 2019, principally through pre-existing measures enhancing federal support for oil and gas exploration and development. The country now represents 5% of total Inventory support levels, although US support as a share of GDP remains among the lowest in the Inventory. Three measures contributed strongly to the increase. A 1990 tax credit amounting to 15% of investment costs related to enhanced oil recovery is triggered when the reference price of oil fell below a specified level. A 1986 mechanism enables tax deduction of certain exploration and development costs associated with successful domestic oil and gas well investments. And a measure introduced in 1926 allows producers to claim a fixed percentage of revenue as a depletion allowance (i.e. rather than deduction of capital expenses in step with the depletion of resources over time), to help recover capitalised costs at an accelerated rate. These measures show how steps taken in different economic, political and environmental contexts – and which may or may not be suited to current circumstances – can continue to have a material impact several decades on.
Beyond North America, production support measures also rose significantly in the United Kingdom, by 37% between 2017 and 2019. This increase was principally due to the operation of two existing measures. “Ring-fence” corporate income tax relief for oil and gas extraction activities in the North Sea, which enables a 100% first-year capital allowance for capital expenditures to be deducted from corporate profits, rose by 22%. An accompanying measure, income tax relief for the decommissioning of fields by allowing capital expenditures to be deducted in full from corporate profits in the year in which they are incurred, rose by 55%. Together, the two measures represented 11% of OECD member countries’ production support for 2019.
European efforts to scale back the solid fossil-fuel industry continue
Efforts to reduce the coal industry in Europe provide some relief to the otherwise bleak picture on support for production of fossil fuels, albeit with limited impact on overall support figures. Ireland and Norway have decreased their support for solid fossil-fuel production since publication of the last Companion to the Inventory in 2018 (OECD, 2018[2]). Ireland decided in 2019 to close two peat-fired power stations by the end of 2020 as part of its commitment to phase out peat power generation by 2028, ceasing support for purchase of peat-generated power by its Electricity Supply Board (its Public Service Obligation levy) (Lee, 2019[5]).5 This support cost the Irish government EUR 65.5 million (USD 73.3 million) in 2019, a figure already reduced from previous years. At the end of 2017, Norway ceased providing an operating subsidy to prop up its flailing state-owned Store Norske coal-mining company operating in the Arctic territory of Svalbard, with no support registered under this measure in the Inventory from 2018 on (although support for decommissioning was set to continue through 2020).6 NOK 144 million (USD 17 million) was spent on this measure in 2017.
Building on its successful phase-out of budgetary support for domestic hard-coal production in North Rhine-Westphalia in 2018, Germany closed its last black coal mine in December 2018, and plans to phase out its already diminishing lignite production (The Associated Press, 2018[6]), (Steenblik and Mateo, 2020[7]). Spain achieved its target of closing all of its coal mines by the end of 2018 and shut down more than half of its coal-fired power plants in mid-2020, with these operations said to be unprofitable (CGTN, 2020[8]).7
Most Western European countries are now members of the Powering Past Coal Alliance, which commits them to phase out by 2030 coal power that is unabated, i.e. without carbon capture and storage (PPCA, 2021[9]). Western Europe’s retreat from coal and shift to cleaner sources of electricity generation has helped reduce the share of coal in the electricity mix of OECD member countries (Figure 1.2). Coal’s share of gross OECD electricity production fell from 34% in 2010 to 22% in 2019, while the share for renewables rose from 18% to 28% and the share for natural gas from 24% to 30%. These shifts reflect decreasing levels of support for coal in OECD member countries, as coal-fired power plant closures have reduced both producer and consumer support, including due to reduced coal demand (Figure 1.2). Support for coal in OECD member countries – which nevertheless continue to provide the bulk of support to coal as documented by the Inventory (76%) – fell to USD 9 billion in 2019, from over USD 16 billion in 2010.
Source: Aggregations from (OECD, 2020[1]) and (IEA, 2020[10])
1.1.2. Inventory shows stable support for fossil-fuel use, but combined OECD-IEA numbers show a significant decline
Support estimates for the consumption of fossil fuels documented in the Inventory hovered between USD 125 billion and USD 131 billion annually from 2017 to 2019 (Figure 1.1). This stability was maintained despite fluctuations in average fuel prices, especially for oil, and despite the fact that that crude oil and petroleum products continue to attract the bulk of government support both in OECD and partner economies: 75% of the consumer support estimate, compared with 11% for natural gas, 10% for electricity and 4% for coal.8 Inventory countries tend to support fossil-fuel consumption in ways other than under-pricing fuels – such as through preferential tax treatments of select fuels or usage – blunting the impact of international oil price fluctuations on Inventory estimates (see Section 1.2.3). The effects of oil price shifts are more evident when support is broken down between OECD member countries and the partner economies covered in the Inventory (Figure 1.1).
The picture of consumption support changes considerably when combined OECD-International Energy Agency (IEA) data are taken into account. The OECD and the IEA have been producing an annual joint estimate of support for fossil fuels since 2018, to facilitate a fuller assessment than that enabled by either the Inventory’s cataloguing of budgetary and tax expenditure measures or the IEA’s “price gap” approach.9 The IEA derives its estimates of consumption subsidies by comparing observed, in-country energy prices with international reference prices (import- or export-parity). As a result, IEA estimates (and hence combined OECD-IEA figures) are closely tied to global oil price fluctuations.
The OECD-IEA combined estimates of government support for fossil fuels across 81 economies fell by 19% year-on-year in 2019, to USD 468 billion, with support for consumption representing 89% of the overall figure (Figure 1.3). Support fell principally because of the mechanical effect of the drop in average fuel prices on consumption subsidies, as governments spent less subsidising energy costs for end users. The 2019 estimates reverse a three-year upward trend in support numbers. Between 2016 and 2018, mounting oil prices prompted some countries to fully or partially reinstate, maintain or strengthen fossil-fuel price controls, and in other countries hampered energy price liberalisation and taxation reform efforts (OECD/IEA, 2019[11]). Policy changes played a limited role in the reduced estimates of consumption support in 2019, with few reforms announced.
China’s consumer support estimates in the Inventory declined by 10%, driven by reductions in support for fuel use in domestic fishing after the government announced in 2015 that it intended to reduce these subsidies to 40% of 2014 levels by 2019, to help prevent overfishing and enhance industry efficiency (Zizhu, 2021[12]).10 China now represents 13% of total consumer support documented in the Inventory. Support also fell in Egypt, Iran, Kazakhstan, Libya, Ukraine and Zimbabwe (Gould, Adam and Walton, 2020[13]). Egypt committed to reduce fuel subsidies by 40% and electricity subsidies by 75% in the 2019-20 financial year; it had eliminated electricity subsidies by the second half of 2019 (Middle East Monitor, 2019[14]). Iran raised petrol pump prices by 50% in November 2019, with drivers then paying twice as much per litre after the first 60 litres they buy each month (France 24, 2019[15]). Kazakhstan approved new cap rates for electricity, although the new rates still fall below the market cost of electricity production (IEA, 2020[16]). The Libyan government implemented price increases on kerosene for industrial and commercial end users to reach production cost, including to combat rampant international smuggling of subsidised kerosene (Lewis and Elumami, 2019[17]).
Conversely, countries such as Argentina, India and Indonesia increased support for fossil-fuel consumption in the period 2018-19. Argentina imposed a 90-day fuel price freeze in the retail fuel market from September 2019, with accompanying producer support, after the Argentine peso plunged in August 2019 (Duranona et al., 2019[18]). As a result of the COVID-19 pandemic, the price freeze was extended into 2020, with a slight price increase enabled in December 2019 (Diamante, 2020[19]). India continued to expand the number of beneficiaries of its means-tested Pradhan Mantri Ujjwala Yojana liquefied petroleum gas (LPG) scheme, which was introduced in 2016 to support clean cooking facilities for families living below the poverty line. An additional 80 million households were added to the scheme (Pandey, 2019[20]). This jump made a major contribution to the record increase in India’s LPG demand in 2019. Indonesia halted progress on the major fuel pricing reforms that have been implemented since 2015, freezing domestic fuel and electricity prices in 2018 to protect purchasing power from international oil price increases and a weak rupiah. The government increased its expenditure to compensate state-owned petroleum and electricity companies accordingly (OECD, 2019[21]).
The tendency for progress in deregulating fossil-fuel prices and rationalising subsidies to fluctuate in concert with global oil prices (Figure 1.3) underscores the need for governments to identify and pursue ways to effect truly durable reform, so that progress made in periods of low fuel prices endures when market, social or political parameters shift (see Chapter 2).
Source: OECD Inventory (2020), IEA Energy Subsidy data (2020).
End-use electricity support is substantial and rising
The Inventory documents substantial end-use electricity support – the fossil-fuel component of support enabling electricity companies to sell domestically generated electricity below market prices – in both the OECD and partner economies covered. Such support rose to USD 14 billion in 2019 up 7% from 2017.11 Data on output-based support to the electricity sector have been included since the 2019 edition of the Inventory. The data complement information in previous editions on support for input fuels used in power generation, which continues to be counted under the relevant input fuel.12 The data show that, unsurprisingly, support to end-use electricity is tied to a country’s electricity generation mix (Figure 1.4).
Output-based support to the electricity sector in OECD member countries decreased by 13% from 2017 to 2019, mirroring the shift away from power generation fired by fossil fuels, particularly by coal, most notably in Europe (Section 1.1.1). OECD member countries’ support for end-use electricity represents the least significant level of support across the four energy products covered in the Inventory. At USD 7 billion, it accounted for 7% of total support, compared with USD 72 billion for crude oil and refined petroleum products, USD 17 billion for natural gas and USD 9 billion for coal.
Nevertheless, several OECD member countries continue to provide support for fossil-fuel sourced electricity (Figure 1.4). Mexico, for example, has an electricity subsidisation programme that provides lower electricity prices for residential consumers, with direct budgetary transfers to its national electricity operator, the Comisión Federal de Electricidad (CFE). These transfers rose 21% between 2017 and 2019. Preliminary data for January-May 2020 indicate that this figure is likely to increase by around 60% in 2020 because COVID-19 mobility restrictions increased residential electricity consumption (Cantillo, 2020[22]). Mexico’s direct subsidisation programme for electricity represented 27% of OECD member country end-use electricity support in 2019.
Italy and the United States (at state level) grant preferential value-added tax or sales tax rates for residential electricity consumption. The Netherlands provides end-use electricity support through direct budgetary transfers for its steel, aluminium, fertiliser and paper sectors, as indirect compensation under the European Union Emissions Trading System. Austria and Finland provide tax refunds for consumption by energy-intensive industry. Australia and Canada provide means-tested support for low-income residential consumers in sub-national jurisdictions, while measures in Greece target the Public Power Corporation’s pensioners.
In contrast with the trend in OECD member countries, output-based support to the electricity sector in partner economies rose 47% between 2017 and 2019. This increase consisted mainly of direct budgetary outlays to compensate electricity operators for keeping electricity prices artificially low for end consumers. Indonesia and South Africa, in particular, have major electricity subsidisation programmes for predominantly coal-fired power generation (at least 75% of the national electricity generation mix). Together, they account for 80% of end-use electricity support in partner economies.
Note: ARG: Argentina, ARM: Armenia, AUS: Australia, AUT: Austria, AZE: Azerbaijan, BEL: Belgium, BLR: Belarus, CAN: Canada, COL: Colombia, ESP: Spain, FIN: Finland, FRA: France, GEO: Georgia, GRC: Greece, IDN : Indonesia, ITA: Italy, LTU: Lithuania, MDA: Moldova, MEX: Mexico, NLD: Netherlands, UKR: Ukraine, USA: United States, ZAF: South Africa. No end-use electricity support for fossil fuels was recorded for the other 27 economies covered in the Inventory.
Sources: (OECD, 2020[1]), (IEA, 2020[10]).
1.1.3. The COVID-19 crisis and resulting oil price crash represent both a threat and an opportunity for reform
The COVID-19 crisis has led to a massive upheaval in the global energy system, both in terms of fuel prices and consumption. This upheaval is jeopardising reform of support for fossil fuels in some countries and strengthening reform in others.
The historic plunge in fossil-fuel prices will deepen the consumer support reductions of 2019 in countries that intervene to keep end-user prices artificially low, as the gap with market-based prices shrinks. Consumption subsidies are expected to fall to USD 181.9 billion in 2020 across the 42 economies covered by IEA price gap data (IEA, 2020[23]). This is down 43% from 2019 estimates and more than USD 100 billion from the previous low in 2016 (USD 287.2 billion).
Lower consumption also plays a role in reducing the estimate. Mobility restrictions introduced in response to COVID-19 significantly reduced transport activity and hence fuel consumption. Global energy demand is expected to fall by 5% in 2020, with oil consumption anticipated to decline by 8% and coal by 7% (IEA, 2020[24]). Lower fuel use will reduce in turn the consumption support reflected in the OECD Inventory, given that this support predominantly takes the form of preferential tax expenditures calculated per volumetric unit of fuel consumed; the lower the consumption, the less revenue forgone.
Low fuel prices also provide favourable socio-political conditions to pursue pricing reform – and therefore in theory more lasting reductions in support for fossil-fuel consumption than those resulting from international oil price reductions. Low prices minimise the impact of reform on consumers in net importing countries. In producer economies, declining government revenues can add impetus to reform, as pressure on public finances mounts. Yet governments’ focus on providing immediate support to economies, firms and households affected by the COVID-19 response does not appear to have translated into widespread, additional momentum to use the opportunity that low fuel prices offer to advance pricing reform. Countries have taken diverging paths.
Nigeria, Africa’s biggest producer of crude oil, announced in June that it would phase out petrol subsidies, saving USD 2 billion annually – a welcome boost as government coffers dwindle from the oil price crash and the country struggles to combat COVID-19 (Bala-Gbogbo, 2020[25]). Costa Rica and India have increased taxes on transport fuels, earmarking the increased revenue for measures to respond to COVID-19 (Wooders and Moerenhout, 2020[26]). Tunisia introduced a monthly price adjustment mechanism for gasoline and diesel in April 2020, to align pump prices with international fuel prices (Al Arabiya, 2020[27]).
However, other countries are enhancing price support, in particular for electricity consumers, including Armenia, Indonesia, Kazakhstan, Thailand and several African countries (IEA, 2020[23]). In response to the crisis, Indonesia committed IDR 15.4 trillion (Indonesian rupiahs) (USD 1.07 billion) from July through December 2020 to subsidise electricity use by lower-income households, small and medium-sized enterprises (SMEs) and certain industry categories (Suharsono and Lontoh, 2020[28]).
In addition, revenue decline from record low fuel prices can increase pressure on governments to intervene to bolster ailing industries, and in particular the fossil-fuel production sector, serving as a competing pull to reform efforts. The 2019 rise in support for fossil-fuel production is set to continue in 2020. Many countries are using stimulus measures for economies battered by the COVID-19 crisis to shore up fossil-fuel and related industries rather than prioritise sustainable investments and broader well-being objectives (OECD, 2020[29]) (Table 1.1). In doing so they are turning down major opportunities to align themselves with long-term emissions reduction goals (including those outlined in their own Nationally Determined Contributions to the Paris Agreement on climate change); to build resilience to climate change impacts; and to reduce the rate of biodiversity loss (OECD, 2020[30]).13
According to the Energy Policy Tracker initiative, a consortium of think tanks and universities, G20 governments have committed USD 428 billion14 in energy support via new policies or policy amendments since the onset of the COVID-19 pandemic, with at least USD 235 billion going to fossil-fuel industries. Of that amount, USD 199 billion is characterised as “fossil unconditional” support, meaning that no climate change or pollution reduction requirements accompany policy measures. The Energy Policy Tracker consortium cautions that its estimates of support are necessarily only partial, extracted from only 3-5% of total government response commitments – those set out in official government sources (Energy Policy Tracker, 2020[49]). Incomplete government reporting represents a major obstacle to estimating support. Estimates are notably unable to routinely isolate and capture support to fossil-fuel industries delivered through “industry-neutral”, cross-sector measures.15 A more complete view of support is also hindered by difficulties in accessing quantitative estimates of tax expenditure measures and in putting a monetary figure on benefits conferred by regulatory roll-backs.
Broader studies confirm that recovery programmes or strategies have so far been weighted in favour of measures with a likely negative impact on the environment, rather than those promoting positive environmental outcomes (OECD, 2020[29]). For example, the Greenness of Stimulus Index compiled by the consultancy Vivid Economics identifies USD 3.7 trillion in G20 country stimulus support (of a total of USD 12 trillion) in favour of sectors with a significant and ongoing impact on nature as of October 2020, including the energy, transport and industry sectors. It finds that announced measures will have a “net negative” impact on the environment in 16 G20 economies.
The OECD supports and tracks COVID-19 recovery measures related to the environment
The OECD is helping governments to recover from the COVID-19 pandemic in ways that protect the environment and benefit everyone. This includes building resilience to future economic shocks and to accelerating environmental challenges (OECD, 2020[50]), and ensuring coherence between recovery measures and a broader set of economic, social and environmental goals (OECD, 2020[30]), (OECD, 2021[51]). The OECD has proposed 13 indicators to help governments measure the environmental impact of recovery measures and ensure recoveries are sustainable, including an indicator on reform of support for fossil fuels based on Inventory data (OECD, 2021[52]). The intention is to ensure recovery measures avoid entrenching market distortions that promote inefficiencies in energy production and use – along with polluting technologies – and that increase fossil fuel-intensive infrastructure and electricity (OECD, 2020[53]), (OECD, 2020[54]).
The OECD Inventory relies on official government documentation, like the Energy Policy Tracker, and is likely to face similar challenges in documenting support for fossil fuels channelled through economic recovery and stimulus packages. A majority of OECD country budgetary publications on revenue and expenditure are already published with a significant time lag, of two years or more. Mobility and work disruptions caused by the pandemic risk further increasing this delay, disrupting the operation of global statistical and data systems. The UN Sustainable Development Goals Report notes that out of 122 countries surveyed, 65% of national statistical offices are partially or fully closed, and 96% have partially or fully halted data collection (UN, 2020[55]). Furthermore, several COVID-19-related disbursements are of a limited, one-time nature, so there is a risk that they will not be recorded in official budgetary documents. The OECD is considering how best to address these risks, to ensure that future editions of the Inventory capture government support for fossil fuels as part of COVID-19 recovery and stimulus packages as comprehensively as possible.
1.1.4. Production and transport sectors dominate support measures
The transport and fossil-fuel production sectors received the largest shares of fossil-fuel support in OECD and partner economies taken as a whole in 2019, at around 30% of total support each (Figure 1.5). The 2020 Inventory includes sectoral breakdown of fossil-fuel support measures for the first time, across production and supply, energy transformation, and final consumption in transport, residential, and industry end-use sectors.16 The intention is to provide an additional lens through which to assess government policies and budgets that include support for production and use of fossil fuels, consistent with the Inventory’s objective to enhance transparency of the magnitude and nature of support policies (OECD, 2015[3]).
In OECD member countries, support for the fossil-fuel production sector represented 28% of total support. This large share reflects the considerable increase in support to fossil-fuel producers in 2018-19 (Section 1.1.1). Support to the production sector was also significant in partner economies (31%, compared with 32% for transport), reflecting the fact that fossil-fuel production forms a significant part of many of their economies. Azerbaijan, Brazil, Indonesia, the Russian Federation and South Africa are all net exporters of fossil fuels; Brazil, China and the Russian Federation fall among the top ten global oil producers and accounted for 20% of global production in 2019 (IEA, 2020[56]). Production sector support in partner economies mainly benefited petroleum (82%). Major contributing measures included:
in Brazil, preferential tax treatment for fossil-fuel exploration and extraction;
in India, customs duty exemptions on petroleum products sold at preferential domestic rates;
in Indonesia, support to compensate SOEs for artificially low domestic prices;
in the Russian Federation, a lower coefficient applied on the taxation of extracted crude oil.
China, India, Indonesia, the Russian Federation and South Africa are also prominent coal-producing countries, accounting for 72% of world coal production in 2019. Of partner economy producer support, 4% went to coal in 2019.
Note: (i) USD in nominal value. (ii) Other sectors includes measures that support the use of fossil fuels in energy transformation other than electricity and heat generation: industrial and manufacturing; commercial and public services; agriculture, forestry and fisheries; and non-energy use.
Source: (OECD, 2020[1])
In OECD member countries, the high level of support for the transport sector might be expected, given that fuels used in road transport tend to be taxed at significantly higher rates than energy used in other sectors (OECD, 2019[57]) and that OECD member countries deliver 98% of their support in the sector through tax expenditures (Figure 1.6).17 High nominal fuel excise taxes can translate into larger tax expenditures if tax concessions are in place, because preferential rates may then be well below benchmark rates (thus resulting in significant revenue forgone per measure). The OECD publication Taxing Energy Use 2019, which tracks progress in using energy and carbon taxes to encourage clean rather than polluting energy sources, finds that fuel excise taxes in the road sector drive effective carbon rates – that is, the sum of specific taxes on fossil fuels, carbon taxes and prices of tradable emission permits – in all 44 OECD and partner countries assessed (OECD, 2019[57]).
Across OECD member countries, however, the impact of nominal fuel excise taxes as a price signal is weakened by significant government support for the transport sector (29% of total government support). This suggests that it could be beneficial to undertake systematic, parallel analysis of nominal energy and carbon rates, and of country support for different users and fuels (including as documented in the Inventory), to integrate pricing and support measures. This would help to reveal the extent to which pricing signals represent a genuine boost to low-carbon incentives, as well as the coherence of government policy on meeting environmental goals (see Section 1.2.3). For the countries covered, Taxing Energy Use 2019 undertakes much of this exercise, as it calculates energy tax rates net of tax expenditures and exemptions related to energy and carbon taxes. Future research would benefit from integrating relevant exemptions to broadly applicable taxes such as VAT or sales taxes, i.e. where they affect the difference in prices between energy sources.18
Non-OECD countries, for their part, support the transport sector more through direct budgetary outlays (57% in 2019) than through tax expenditures (43%) (Figure 1.6). The considerable fluctuations in partner economy support for the sector reflect in large part variations in transport fuel prices over time. Brazil, China and Indonesia made significant direct transfers to the road transport sector in 2018-19. Some of this was targeted support, such as preferential petroleum pricing in China for urban and rural passenger transport, or an emergency measure in Brazil in favour of the trucking sector. Indonesia, by contrast, directly subsidised diesel and petroleum to maintain artificially lower prices for general public consumption. Future research could usefully decompose price gap estimates to identify which shifts are due to genuine policy reform and which to price movements.
Source: (OECD, 2020[1])
The “other” sectors category, comprising industry and manufacturing, commercial and public services and energy transformation other than electricity and heat generation, also represents a large share (26%) of overall fossil-fuel support in OECD member countries. For EU member states, this reflects the fact that the EU Energy Taxation Directive enables imposition of preferential tax exemptions on the industrial, manufacturing and commercial sectors (European Commission, 2019[58]). With the notable exception of China, partner economies have smaller manufacturing and heavy industry sectors, so these sectors receive a smaller share of support. In addition, these countries tend to cross-subsidise household energy-use, with industry paying higher rates for energy than households.
The share of support for the residential sector has remained stable over the past decade, at 14%. In OECD member countries, the most significant measures are preferential fuel, sales or value-added taxes levied on residential heating fuels (e.g., natural gas, fuel oil, LPG), or on residential electricity end-use. Partner-economy support tends to take the form of direct budgetary outlays to compensate state-owned energy companies for losses resulting from artificially low energy prices, or for specific fuels destined for household use.
1.1.5. Support is declining in a majority of EU Eastern Partnership countries, but remains high relative to GDP
The inclusion of EU EaP countries as part of ongoing efforts to enhance the coverage of the Inventory enables assessment in the Companion for the first time of support in Armenia, Azerbaijan, Belarus, Georgia, Republic of Moldova and Ukraine.19 Sixty-five direct budgetary transfers and tax expenditures were identified across the six countries, enhancing transparency on support for fossil fuels in a region where data availability on this issue has been limited.20 The largest number of measures were identified in Ukraine (26), the fewest in Armenia (6).
The data reveal significant fluctuations in support levels across EaP countries in the past decade, as a considerable number of measures were eliminated and new ones introduced. Belarus terminated its VAT exemptions for natural gas, electricity and heat for residential consumers in early 2016, a measure with an annual worth of USD 200 million. Georgia introduced budgetary transfers to support natural gas for residential consumers in selected border regions, as well as an electricity subsidy programme for targeted residential groups (e.g. families with four or more children and other socially vulnerable groups). Ukraine recently eliminated several budgetary transfers, which will be replaced by measures to deal with emergencies and arrears in the energy sector.
Support is generally declining in Armenia, Georgia and Ukraine. Fossil-fuel support in Armenia peaked in 2013 and 2014 at USD 42 million and fell to USD 5 million in 2019 as a substantial number of support measures were removed. In Georgia, despite the implementation of new measures, support for fossil fuels fell to USD 15 million in 2019 from a peak of USD 33 million in 2013. In Ukraine, total support declined in 2019 by more than 50% from previous highs, but remained significant relative to GDP, at USD 2.2 billion (around 1.2% of GDP). No clear trend is discernible in Moldova, with support fluctuating over the past decade. In Azerbaijan and Belarus, data gaps prevent a clear assessment of general support trends, but in Azerbaijan, quantified support measures constituted almost 2% of GDP in 2018.
Support for fossil fuels in most EaP countries takes the form of direct budgetary transfers. Moldova, by contrast, applies reduced VAT rates for natural gas, electricity and heating provided to households and public institutions, as well as LPG consumption. Because energy pricing is highly regulated in EaP countries, most direct budgetary measures provide compensation to national energy companies for maintaining artificially low domestic energy prices, or aid in corporate debt restructuring. Some major measures target the end-use electricity sector, providing lower consumer electricity pricing on a means-tested basis or in selected geographic areas. The dominance of support for the residential sector implies that further analysis of support provided through below-market tariffs (i.e. induced transfers) is merited.21
Note: USD in nominal value. (i) Support for electricity consumption refers to support for fossil-fuel powered electricity end-use (i.e. support for renewables and trade excepted). It excludes support to input fuels for electricity generation. (ii) PSE = production support estimate; CSE = consumer support estimate; GSSE = general services support estimate. (iii) Other sectors include measures that support the use of fossil fuels in energy transformation other than electricity and heat generation; industrial and manufacturing; commercial and public services; agriculture, forestry and fisheries; and non-energy use.
Source: (OECD, 2020[1])
1.1.6. A majority of countries provide ocean-related fossil-fuel support
Ocean-related fossil-fuel support measures have been put in place by at least 30 countries covered by the Inventory through 119 specific measures,22 identified through a combination of automated and manual keyword searches on programme name, description and sector.23 The 2020 Inventory identifies and tags support measures directly related to ocean sustainability as part of OECD efforts to mobilise expertise across policy fronts to support the transition to a more sustainable ocean economy. This new, OECD-wide initiative aims to meet the demands of the international community for a better evidence base to support decision making related to the sustainability of the ocean economy, the well-being and resilience of coastal communities, and the health of marine ecosystems. These measures are also reflected in the OECD’s new Sustainable Ocean Economy database (OECD, 2020[59]), which brings together the OECD’s ocean-related datasets and indicators, including through adaptations to existing datasets (such as the Inventory). Identifying ocean-related fossil-fuel support can help governments seeking to prioritise reform that promotes ocean sustainability.
Unsurprisingly, countries with extensive coastlines and maritime economic activities tend to have more ocean-related measures (Figure 1.8). Offshore oil and gas extraction are the main beneficiaries of ocean-related support in countries with significant fossil-fuel production, such as Australia, Brazil, the Russian Federation, the United Kingdom and the United States. Most of this is producer support (e.g. preferential tax treatment for offshore oil and gas extraction) and general services support (e.g. support for offshore research and exploration, or port infrastructure upgrades to increase trade capacity, Figure 1.9). The laying of pipelines, installation of offshore drilling rigs and discharge of contaminated water during the petroleum extraction process are all detrimental to marine ecosystems, as are potential oil spills and noise generated by drilling stations.
Norway stands as an exception among producer economies: despite being a major offshore oil and gas producer, most of its ocean-related support measures are targeted at the transport sector and the fisheries and aquaculture sector. Countries with little or no domestic fossil-fuel production tend to follow a similar pattern to Norway, providing support via preferential tax rates on fuels used in fisheries and aquaculture, or support for fossil-fuel consumption in maritime transport (Figure 1.8). Such measures potentially exacerbate overfishing and encourage excessive marine fleet traffic, and increase the risk of coral reef destruction by ship anchors and stranded ships.
Note: Includes measures for which disbursement of funds were observed at least once between 2015 and 2017 as well as ongoing fossil-fuel support measures for which no data were available. Only active measures are included, with measures terminated by 2017 excluded. For federated countries, most of the identified ocean-related support measures are sub-national and applicable only in certain coastal regions of a country (e.g., Alaska, California, Louisiana and Texas in the United States; British Columbia, Labrador, New Brunswick and Newfoundland in Canada). Figures for Canada, China and the United States include both federal (central government) and sub-national measures.
Source: (OECD, 2020[1]).
Note: The proportion of support benefiting end-user sectors is calculated using the median of ocean-related fossil-fuel support measures with active fund disbursements in 2015-2017. These disbursements (targeting specific known fuels) are allocated to sectors using country-level sectoral energy consumption data from the IEA World Energy Balances. See Annex A.
Source: (OECD, 2020[1]).
1.2.1. G20 peer reviews are generating lessons about good practice in reform of fossil-fuel subsidies
G20 leaders reaffirmed their joint commitment to rationalise and phase out “inefficient fossil-fuel subsidies that encourage wasteful consumption” over the medium term, while ensuring targeted support for the poorest, in the Riyadh Leaders’ Declaration of 22 November 2020 (G20, 2020[60]). First made at the Pittsburgh G20 summit in 2009, this commitment has been reiterated at subsequent summits.24 Nevertheless, support levels remain similar to 2010 levels, having increased substantially to 2013 then receded in the interim (Figure 1.10). Since 2013, G20 countries have developed and implemented a framework for voluntary, reciprocal peer reviews of inefficient fossil-fuel support “as a valuable means of enhanced transparency and accountability” (G20, 2013[61]).
Three sets of paired peer reviews have been conducted so far: China and the United States (completed 2016), Germany and Mexico (completed 2017), and Indonesia and Italy (completed 2019). Argentina and Canada announced their intention to undertake a reciprocal peer review in conjunction with the G20 Energy Transitions Ministerial Meeting in June 2018 in Bariloche, Argentina; this process is still under way. France and India signalled their intent to follow suit as the next peer review pair during an official visit to France by Prime Minister Narendra Modi in August 2019. G20 energy ministers have encouraged all G20 members yet to initiate a peer review process to do so as soon as feasible (G20, 2018[62]).25 Several economies have undertaken similar peer reviews under the umbrella of the Asia-Pacific Economic Cooperation (APEC) forum.26
Note: USD in nominal value. (i) The graph above represents the arithmetic sum of the following partner G20 economies: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, South Africa, Turkey, the United Kingdom and the United States. Saudi Arabia is omitted due to absence of data. (ii) Support for electricity consumption refers to support for fossil-fuel powered electricity end-use (i.e. support from renewables and trade excepted). It excludes support to input fuels for electricity generation. (iii) PSE = production support estimate; CSE = consumer support estimate; GSSE = general services support estimate. (iv) Other sectors include measures that support the use of fossil fuels in energy transformation other than electricity and heat generation; industrial and manufacturing; commercial and public services; agriculture, forestry and fisheries; and non-energy use.
Source: (OECD, 2020[1]).
The G20 peer reviews complement periodic self-reporting by G20 countries on fossil-fuel subsidies that they deem inefficient. Neither process has produced a common definition of the meaning of “inefficient fossil-fuel subsidies that encourage wasteful consumption”, but a degree of precedent on the process for conducting the peer reviews has emerged from those reviews undertaken so far (OECD and IEA, 2019[63]) and (OECD, 2018[2]). Preliminary steps include agreeing to the terms of reference on the scope of measures to be reviewed and the review timeline, and selecting a review panel. Panels have traditionally been composed predominantly of G20 member economies, along with the OECD. In subsequent steps, the country under review produces an initial self-report to provide context on the implementation of the measures under review and potential avenues for reform or phase-out. Exchanges with the review team on the draft, by written comment and in-person meetings, are followed by development and agreement of a final report, which includes suggestions by the peer review panel.27 The OECD Secretariat has chaired the review process and led drafting of the final report for all six completed peer reviews.
The terms of reference developed by peer review countries have explicitly flagged sharing lessons and experience of relevant reform as a main purpose of G20 peer reviews. The reviews shine a light on the economic and environmental motivations for reform of support for fossil fuels (OECD and IEA, 2019[63]) (OECD, 2018[2]). They provide examples of successful reform and of challenges associated with it, underscoring the importance of complementary social support policies to cushion any adverse impacts on vulnerable populations or on industry competitiveness. The process encourages countries under review to carefully dissect the rationale behind support policies and determine whether that rationale still holds, whether it could be met more effectively or efficiently by other means, and how support policies might be reformed or phased out. The peer review process tends to generate more information about country support policies than periodic self-reporting, encouraging countries to improve their ability to measure and track support policies, and signalling a commitment to transparency. It can also be a beneficial learning experience for the countries under review and for the peer reviewers, and represents an important vehicle for knowledge exchange. Finally, the peer reviews promote cross-ministerial co-ordination and reflection on policy coherence and complementarities.
Over 100 government policies have been evaluated across the peer reviews conducted to date, two-thirds of which benefit end users of fossil fuels. They comprise predominantly tax expenditures, but also direct budgetary measures and, in a couple of instances, risk transfer mechanisms (Table 1.2).
“Scalable” lessons are emerging from G20 voluntary peer reviews
A common issue that emerges from the discussion in the peer reviews is the challenge of defining what constitutes an “inefficient fossil-fuel subsidy that encourages wasteful consumption” for the purposes of the overarching G20 commitment. The G20 has not adopted a formal definition of any of the three elements of the reform mandate – what constitutes a fossil-fuel subsidy, what kind of measures might be deemed inefficient or what can be considered wasteful consumption.28 The peer-review process is country-led, which means that reviewed countries themselves identify which policies to subject to review and which support measures they propose to reform – and therefore which measures might be considered inefficient and encouraging wasteful consumption. Nevertheless, the process provides an important first step towards a possible future common definition by shedding light on differences in interpretation between reviewed countries on what should be considered an inefficient subsidy.
For example, Germany and Mexico adopted different definitions of subsidies for their peer review process. Germany’s definition covered direct budgetary transfers and tax expenditures (Steenblik et al., 2017[64]), while Mexico’s referred only to direct budgetary transfers – although its self-report nevertheless included discussion on tax expenditures (Steenblik et al., 2017[65]). China (Steenblik et al., 2016[66]), Germany and Italy (Steenblik et al., 2019[67]) included in fossil-fuel subsidies those providing support to fossil fuel-based electric power production and consumption; Mexico and the United States did not. Italy classed every subsidy to fossil-fuel production and consumption as inefficient, including 39 measures in its self-review. China and the United States signalled their intent to phase out specified measures benefiting fossil-fuel production, recognising that the reduction in prices resulting from these measures encouraged “wasteful consumption”. Germany offered a similar motivation for reform of measures propping up domestic hard-coal production.
Peer review panels have also provided commentary on countries’ definitions of the terms, interpreting their mandate as going beyond merely documenting those definitions. For example, the panel in the German review questioned Germany’s assertion that industry support measures were efficient because they were aimed at maintaining the competitiveness of German industry and avoiding carbon leakage to countries with less-stringent environmental regulations. The panel noted to properly distinguish subsidies that might enhance the well-being of an economy from inefficient subsidies, it would be necessary to weigh their social costs and benefits, assessing not only the design of relevant fuel-tax exemptions and reductions compared with alternatives, but also whether they were periodically adjusted to reflect changing priorities and circumstances. The panel recommended that Germany assess the sensitivity of industry competitiveness and carbon leakage to fossil-fuel subsidy reform and possible (potentially less distortive) alternatives, to test the assertion of the “efficiency” of these measures, and set out a number of potential steps to this end. The panel highlighted a lack of consensus in international literature on the impact of environmental regulation on firm and industry performance.
The panel for the Mexican review noted that Mexico did not consider any of its tax exemptions and reductions in support of consumption as inefficient (and therefore in need of reform), because they did not decrease prices below marginal costs. The panel pointed to the fact that the term “inefficient” as used by many G20 members covers such measures. China and the United States, for example, reported “mainly features of their tax codes that favoured fossil-fuel producers” as inefficient measures for reform. The panel noted that by taking into account solely the burden on welfare of taxing energy products, Mexico failed to take into account the welfare impact of environmental consequences of fossil-fuel consumption, or the impact of the reductions or exemptions in question on the overall efficiency of the tax system. Panel members urged Mexico to review fuel-tax concessions to see whether they were increasing consumption and pollution levels, and leading to other distortions. They also encouraged Mexico to include support for the use of fossil fuels for electricity generation when assessing electricity subsidy reform priorities. The overarching conclusion of peer review panels has been that further dialogue on definitions could help G20 member states reach agreement on what should be considered an inefficient subsidy for the purposes of the G20 reform commitment.
Analysis in the peer reviews also provides insight into how countries might go about the reform process. The peer review on Italy, for example, provided several suggestions for the structuring and sequencing of reform, and possible reform measures, after the Italian government requested help in identifying priorities for phasing out subsidies. The review team canvassed literature on international experience with reform and noted that identifying subsidy measures, their intended objective and whether this is being met, and how measures are delivered (e.g. direct transfers, tax incentives, transfer of risk to government, induced transfers), are first steps to formulating a comprehensive and coherent reform effort. Determining the quantitative value of support measures is also essential, ideally through a complete cost-benefit analysis or, if that is not feasible, through estimates or qualitative discussion of budgetary cost, as well as impacts on households, firms, the environment and public health. The panel commended existing efforts by Italy to enhance transparency on environmentally related subsidies and their impact through a regularly updated Catalogue of Environmentally Harmful and Environmentally Friendly Subsidies, specifying budgetary cost and rationale for implementation of measures in most cases, as well as the inclusion in Italy’s self-review of a model-based macroeconomic assessment of the impact of possible phase-out of support measures. The reviewers nevertheless made several suggestions to enhance the value of the catalogue. The panel proposed that the results of the macroeconomic assessment be widely publicised to support public debate on reform.
Once fossil-fuel support measures have been identified and quantified as much as possible, measures for reform need to be prioritised. Eliminating all measures in a single “big bang” reform could have major economic and social impacts, and be technically and politically difficult. The review panel suggested ways to set reform priorities. These ranged from removing measures that no longer serve a valid policy objective or efficiently meet their intended objective, to searching for more effective, alternative measures to reach intended policy aims, and assessing and addressing possible impacts of reform on equity or poverty. The review team then tailored these approaches to the Italian context, to make specific recommendations on possible measures for reform.
The Italian example is unusual. Reviewed countries generally propose reform options in their self-reports to frame review panel discussions. This approach reflects the recognition of reform as a sovereign issue tied to country-specific circumstances and priorities. However, other peer review reports also touch on ways reviewed countries might enhance and accelerate reform processes. For example, the China review team praised the notable transparency of the China self-review report as an “unprecedented, government-led look at policies supporting the production and consumption of fossil fuels in China”. It nevertheless highlighted several ways China could build on that progress to further improve reporting on subsidies, their effects and their beneficiaries, and thereby make it easier to identify needed reforms and enhance policy efficiency. Similarly, the panel in the United States review (Steenblik et al., 2016[68]) made several suggestions about how the country might improve existing processes, including by seeking to enhance understanding of support measures not addressed in the peer review, and improving efforts to convince citizens of the need for reform as a means to help steer reform measures through Congress. Chapter 2 of this report builds in part on the advice in G20 peer reviews to set out in detail how governments might adopt a robust sequential approach to designing fossil-fuel subsidy reforms.
A further lesson arising from G20 peer reviews is that reform processes can be vulnerable to the prevailing political environment. The panel reviewing Indonesia, for example, commended the Indonesian government for 2014-17 reforms to fuel and electricity subsidies, noting that they brought the country’s energy prices more into line with international oil price movements and generated significant savings for reallocation to other government priorities (e.g. social and infrastructure programmes) (OECD, 2019[21]). But the team also noted recent erosions to fuel pricing reform efforts, including a 2018 presidential order to hold prices stable despite rising international oil prices, to preserve purchasing power and sustain growth (Suzuki and Nakano, 2018[69]). The review panel said the pending presidential election was “not inconsequential” to the policy revisions, and cautioned against possible renewed fiscal pressure, reinforced energy price distortions and further encouragement for wasteful consumption, noting a jump in energy subsidies for kerosene, LPG and electricity of almost IDR 50 trillion (USD 3.5 billion) from 2016 to 2018 (IDR 106.8 trillion to IDR 153.5 trillion). The panel team observed that these developments underlined the political environment as a “major deciding factor for the resilience of reforms”. The peer review report on China also flags the risk of subsidy reinstatement spurred by fuel-price increases (or conversely that of enhanced support for producers in times when crude-oil prices slump), noting the need for continued monitoring by the G20 and other organisations, and ongoing efforts to improve transparency of support.
Examples of good practice in reform: transitioning industry, “pro-poor” reform, fuel price liberalisation
In addition to setting out several “scalable” lessons emerging from country experience, the peer review reports highlight examples of good practice that could inform efforts to phase out fossil-fuel support in other countries. The team reviewing Germany, for example, identified the country’s experience in phasing out subsidies to the hard-coal mining industry over several decades as a notable successful reform. The team pointed to several elements of the German process that could be of interest to other countries, including consolidation of industry under a single umbrella company to manage legacy debts and liabilities, and restoration efforts; a series of industry stakeholder meetings conducted over several years to plan the scale-back of industry; and successful workforce retraining and relocation. A strong emphasis on retraining younger workers for relocation meant that no lay-offs resulted from mine closures, which greatly assisted the social acceptability of reform.
The panel reviewing Indonesia highlighted efforts to better target electricity subsidies as a good example of “pro-poor” subsidy reform. The government had been subsidising electricity prices for a majority of consumers as a means to help alleviate poverty, address inequality and enhance energy access, with support reaching a high of USD 9 billion in 2013-14, as international oil prices spiked. The rising costs of the electricity subsidy scheme and an acknowledgement of poor targeting led the government to begin reform in 2013, to try to focus support on low-income households. As a first step, the government phased out support for 12 consumer classes across industry, business, government and residential groups between 2013 and 2016, focusing on consumers with the largest power connections. Then, the government sought to better target support for the two most vulnerable residential classes at the end of 2016, to isolate “poor” 450 volt-ampere (VA) and 900 VA households (the bottom 40% of households) from “non-poor”, by using a new united poverty database of socioeconomic information on vulnerable households. The number of supported 900 VA consumers dropped dramatically, from 23 million to 4 million, yielding significant savings for government. The cost of electricity subsidies fell to USD 3.4 billion in 2017, from USD 8.6 billion in 2014.
The review team praised Indonesia’s accomplishment in reducing electricity subsidy expenditure and developing the tools needed to better target subsidies, in the form of the united poverty database and a smart card system for both electricity and LPG subsidies. It nevertheless pointed out that Indonesia could further improve the targeting of support and remedy distributional problems raised by universal subsidies by decoupling subsidies from consumption, for example by favouring means-tested cash transfers .
The team reviewing Mexico, for its part, championed the country’s achievement in fuel pricing and taxation reform as “remarkable” and holding “valuable lessons for other emerging economies wishing to carry out a broad-based reform of the energy sector” (Steenblik et al., 2017[65]). The review team noted the fundamental shift in fuel pricing policies starting in 2013, from heavy support for gasoline, diesel and LPG to net positive taxes through reform of the IEPS, a floating excise tax (Impuesto Especial sobre Producción y Servicios por Enajenación de Gasolina y Diesel). The market for LPG became fully liberalised at the beginning of 2017. The panel urged Mexico to build on this success by continuing on its path towards full liberalisation of diesel and gasoline prices.
Building on progress to date
To build on progress to date, G20 countries could track and share more systematically the lessons and experience of reform generated by the peer review process. A more structured platform could better disseminate outcomes and follow-up of review processes and a compendium of good practice arising from peer reviews could be developed. More systematic follow-up would support reform efforts not only within the G20 but also beyond.
The Netherlands is an example of a country that recently underwent a peer review of its efforts to phase out support for fossil fuels inspired by the G20 reviews, as an Invited Guest Country under G20 presidencies and having sat on the peer review panel for the Italian review (2019). The outcome of the process, which was facilitated by the OECD and the IEA, was presented to the Dutch Parliament on 14 September 2020 as an important resource to shed light on support for fossil fuels, enhance accountability on public expenditure and identify opportunities for reform (Elgouacem and Journeay-Kaler, 2020[70]). It was also used to expand the scope of fossil-fuel subsidies referenced in the final National Climate and Energy Plan of the Netherlands delivered to the European Commission at the end of 2019.29 A more systematic approach to self-reporting and enhanced focus on the politics of reform could also help spur progress.
1.2.2. Progress in measuring support for fossil fuels in the context of the Sustainable Development Goals
The United Nations General Assembly adopted in July 2017 a global indicator framework to help monitor progress towards the 2030 Agenda for Sustainable Development. The agenda’s 17 Sustainable Development Goals (SDGs) comprise 169 associated targets and 231 indicators (UN, 2020[71]). SDG 12, “ensure sustainable consumption and production patterns”, includes a target to rationalise inefficient fossil-fuel subsidies that encourage wasteful consumption.30 The target is tracked by SDG indicator 12.c.1, “Amount of fossil-fuel subsidies per unit of GDP (production and consumption)”. UN Environment, the custodian agency for the indicator, released a methodology for measuring fossil-fuel subsidies in the context of the SDGs in June 2019, to help countries to report on the indicator and underpin measurement of support domestically and globally (UN Environment, OECD and IISD, 2019[72]) .
The methodology, “Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals”, was developed with the OECD and the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD). It recommends a phased shift from using existing OECD, IEA and IMF global datasets to incorporating national figures as they become available (Figure 1.11), while recognising that reporting and monitoring capacity, and data availability, differ from country to country. Adopting the OECD Inventory approach, countries are invited to report disaggregated information on individual support measures, covering direct transfers and induced transfers (i.e. price regulation). Countries may also report on tax expenditures, other government revenue forgone and under-pricing of goods and services. Reporting on the final category of support is optional, given current data availability and the complexity of identifying and quantifying these support measures in a harmonised way.
Countries are nevertheless encouraged to start compiling these estimates and reporting existing information, in anticipation of a possible decision to fully integrate reporting on tax expenditures, other government revenue forgone and under-pricing of goods and services in 2025. Particularly for OECD member countries, which deliver the majority of support to fossil fuels through tax expenditures – or in some cases, all support (see Section 1.2.3) – tax expenditure data are intrinsic to a detailed understanding of overall support and therefore an accurate picture of progress towards the SDG indicator. The same can be said for at least the partner economies included in the Inventory, in which 43% of the total value of support is provided by tax expenditures. For the countries included, the Inventory is a significant tool that countries can use to identify and report on tax expenditures relevant to SDG indicator 12.c.1. The methodology developed by UN Environment, OECD and IISD acknowledges that more detailed, country-led guidance on measuring and monitoring support categories may also be required to integrate SDG indicator 12.c.1 reporting into national statistical systems, which could further support country reporting on tax expenditures.
Countries are additionally encouraged to provide data to assist in calculating the “price gap” where price regulation is in place, qualitative data on the scope of reported measures to provide context, and information on any reform efforts. Information on transfer of risk to government may be integrated into future national SDG monitoring, for example if a methodology for calculating such support is agreed internationally.
The national data collection process for SDG indicator 12.c.1 was anticipated to start at the end of 2020 with the launch of an “SDG 12 hub” web platform on the global SDG database website (UN, 2020[71]), but at publication the platform had yet to be launched. Data will be released in US dollars, as a percentage of GDP and on per capita. The proposal is to retain the OECD, IEA and IMF datasets as a complement to national figures even when country reporting is fully operational, to enhance comparability across economies.31 The OECD is exploring with member countries how to ensure consistency between OECD Inventory figures (for which the primary country interlocutors are generally in ministries of finance) and national data on indicator 12.c.1 (to be reported by national statistical offices), including the possibility of the OECD playing an intermediary role in the SDG reporting process.
Source: (UN Environment, OECD and IISD, 2019[72])
1.2.3. Enhancing the interpretation of tax expenditure data
The 2015 Companion to the Inventory (OECD, 2015[3]) included significant discussion on how to understand tax expenditures relating to fossil fuels as documented in the Inventory. That discussion covered the types of tax expenditures, for example through lower rates, exemptions, or rebates for value-added taxes or excise taxes. It gave examples of more targeted tax expenditures, in the form of measures aimed at final consumption in favour of specific groups of consumers (e.g. preferential tax rates for residents of geographically or economically disadvantaged regions), specific types of fuels (e.g. lower tax rates or exemptions for diesel fuel used for transport, relative to gasoline), or related to how fuel is used (e.g. favourable tax rates for fuel use in primary industries). It also pointed to several caveats to bear in mind when interpreting Inventory tax expenditure data, or seeking to compare tax expenditure data across countries, particularly given that revenue forgone is generally calculated with reference to country-determined tax benchmarks (which also often differ between sectors and types of fuels).
Those caveats relate to both what is considered to be a tax expenditure – because there are different ways to set the benchmark tax treatment against which deviations are to be measured – and how to determine its size. Countries take different approaches to calculating tax expenditure estimates, and sometimes do not provide estimates of revenue forgone at all.32 Countries might determine the benchmark regime through a conceptual assessment of “normal” taxation of income and consumption based on structural features of the tax system; by adopting a “reference-law approach” focused on expenditures that appear as such in law (e.g. tax credits, as opposed to differential tax treatment of two products); or based on tax reliefs squarely analogous to public spending (e.g. refundable income tax credits). In terms of calculating tax expenditures, the revenue-forgone method (rate of tax concession multiplied by base or uptake) is the most straightforward and common, but it is not universal. Different approaches to estimating tax expenditures associated with tax deferrals also cause valuations to differ (OECD, 2015[3]).
The range of possible approaches to defining country benchmarks, and the complexity of calculating tax expenditure data, can lead to higher estimates in several ways, affecting the international comparability of these data: higher benchmark tax rates; a more encompassing definition of the benchmark tax system, reflecting a greater number of measures; or simply more complete or up-to-date data, rather than higher levels of support. Nevertheless, country-defined benchmarks provide policy makers with considerable value as they allow the tracking of what countries themselves consider to be a tax expenditure measured as a deviation from their tax benchmark system. They also provide information on revenue that could be gained from policy reform.
The OECD has undertaken further work on how to improve the interpretation of tax expenditure data, prompted by exchanges with member countries on how to enhance the measurement and comparability of tax expenditure data and the prevalence of tax expenditures in the measures documented by the Inventory. OECD member countries deliver the bulk of their support to fossil fuels through the tax code, accounting for 75% of both the estimated value of support and the number of support measures.33 While partner economies generally favour direct budgetary transfers, tax expenditures provide 43% of the total value of partner-economy support (Figure 1.12). In some countries (e.g. Austria, Azerbaijan, Belarus, Czech Republic, Denmark, Estonia, Finland, Luxembourg, Portugal, Sweden and the United Kingdom), virtually all support amounts for 2019 documented in the Inventory are provided through tax expenditures (Figure 1.12). Overall, 63% of total measures documented in the Inventory are tax expenditures, representing 62% of total support by value.
Note: Users of tax expenditure estimates should bear in mind that the Inventory records tax expenditures as estimates of revenue that is forgone due to a particular feature of the tax system that reduces or postpones tax relative to a jurisdiction’s benchmark tax system, to the benefit of fossil fuels. Hence, (i) tax expenditure estimates could increase either because of greater concessions, relative to the benchmark tax treatment, or because of a rise in the benchmark itself; (ii) international comparison of tax expenditures could be misleading, due to country-specific benchmark tax treatments. Support estimate figures represent 2019 preliminary data.
Source: (OECD, 2020[1]); OECD National Accounts database (2020)
Analysis carried out by the OECD in 2019 that was shared with the OECD Joint Meeting of Tax and Environment Experts’ country delegates revisited the 2015 Companion’s discussion on the benefits and challenges in using tax expenditure estimates as a measure of fossil-fuel support. By casting the common benchmark for estimating tax expenditure data as the country-determined baseline tax code, the Inventory proposes an internationally comparable method for reporting revenue forgone through tax expenditures in support of fossil fuels, irrespective of the fact that a range of approaches can be adopted to determine and calculate those benchmarks. Nevertheless, limitations are imposed by the calculation of tax expenditure support data against country-specific benchmarks; their interpretation could be enhanced in several ways.
Enhancing interpretation of tax expenditure data to complement Inventory data and support national-level reporting on SDG Indicator 12.c.1
Using external benchmarks rather than domestic tax regime benchmarks is one way to improve interpretation of tax expenditure. Using an internationally agreed reference carbon price is one option to help overcome heterogeneous domestic benchmarks on fuel taxation (i.e. consumption-related tax expenditure data). Adopting a climate cost benchmark is in line with the approach adopted in the OECD work streams Taxing Energy Use (OECD, 2019[57]) and Effective Carbon Rates (OECD, 2018[73]), which compare effective tax and carbon rates against a low-end estimate of the climate costs of CO2 emissions from fuel combustion (EUR 30 per tonne of CO2) (USD 35.7),34 thereby facilitating comparability across countries.
A 2019 OECD study focusing on the use of revenues from carbon taxes looked at how shifting from country benchmark tax rates to an external benchmark can aid international comparability of forgone revenue calculations (or revenue potential from carbon pricing) (Marten and van Dender, 2019[74]). The 2019 study proposes two benchmarks, including the EUR 30/tCO2 low end estimate of the social cost of carbon.35 It sets out actual and potential revenue from carbon pricing instruments as against this benchmark and as a share of GDP for the countries considered (Figure 1.13).
The study estimates carbon pricing revenue forgone from taxes and auction permits based on the gap between current prices and that benchmark to exceed actual revenues by 1.12 % as a share of GDP across OECD and G20 countries. That represents a low-end figure, as based on a conservative estimate of the social cost of emissions. In OECD member countries, the revenue forgone is estimated at 0.72% to 0.88% of revenue, basically equivalent to current revenues. This revenue can be interpreted as a form of revenue use “earmarked to apply a preferential effective carbon rate… to some or all emitters” when compared with the benchmark, with corresponding negative impacts on the effectiveness and cost-effectiveness of pricing measures (i.e. by reducing prices for some emitters and introducing heterogeneity into prices) (Marten and van Dender, 2019[74]).
Note: Actual revenue estimates are based on the sum of energy taxes, carbon taxes and emissions trading system auction proceeds, see Annex A of (Marten and van Dender, 2019[74]) for the taxes included. Potential revenue estimates are based on (OECD, 2016[75]).
Source: (Marten and van Dender, 2019[74])
An important caveat to the use of a reference carbon price is that in economies where the existing effective carbon rate is higher than the benchmark rate, some instruments will go unaccounted for. In addition, when using an external as opposed to a domestic benchmark tax rate, the resulting calculation of revenue loss speaks less to countries’ own contexts. The Swedish government, together with an expert sub-group of the London group on environmental accounts, is looking at how effective carbon price analysis might complement national tax reference rates and facilitate country comparisons in monitoring SDG indicator 12.c.1, including through the use of multiple, broadly defined tax bands (Steinbach, Palm and Byambakhorloo, 2020[76]). This would enable identification of negative effective carbon rates (i.e. due to support for fossil fuels), ranging up to maximum observed rates.36 The Irish Central Statistical Office has set out calculations of fossil-fuel subsidies from 2000 to 2018 using average effective carbon rates for various fuels to facilitate assessment of forgone revenue against “reference” carbon prices (CSO, 2020[77]).
The 2019 OECD analysis on measurement and interpretation of fossil-fuel support through tax expenditures outlines two further options to enhance the interpretation and comparability of estimates of tax expenditures. The first is growth decomposition analysis to help assess different drivers of change in support over time, and specifically whether changes in support arise from explicit reform or simply structural changes to the underlying domestic benchmark tax regime. The second is effective tax rate analysis for production of fossil fuels (i.e. corporate effective rates), to inform on the extent to which tax expenditures provide investment incentives in upstream fossil-fuel industry segments.
Decomposing time trends in tax policies would require separating support estimates into benchmark tax rates and those applied to quantify revenue forgone, to isolate changes to underlying benchmark regimes. The growth rate in overall support estimates could be expressed as the sum total of changes in tax rates, fuel consumption, fuel prices, exchange rates and budgetary transfers, to enable a richer analysis of trends in support. In terms of accounting for the joint impact of the benchmark corporate income tax system and tax expenditures on upstream investment, effective tax rate analysis could help assess how both factors affect the “user cost of capital” for fossil-fuel producers, to infer the impact of fossil-fuel support (see Chapter 2). The OECD is considering further work in these areas to complement Inventory data and future national efforts to report on SDG Indicator 12.c.1.
References
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Notes
← 1. A comprehensive discussion of the Inventory approach to estimating support for fossil fuels, including the database’s structure, coverage, data collection processes and the conceptual framework used to transform and collate primary data, is included in the OECD Companion to the Inventory of Support Measures for Fossil Fuels 2015 (OECD, 2015[3]). Section 1.2.3 provides an overview of how to understand tax expenditures related to fossil fuels as documented in the Inventory, including caveats to bear in mind when interpreting Inventory tax expenditure data.
← 2. Costa Rica was not an OECD member at the time of preparation of this publication and not yet reflected in the Inventory. Accordingly, references to OECD member countries as a zone should be read to exclude Costa Rica.
← 3. GSSE includes measures benefiting producers or consumers collectively, as well as measures that do not increase current production or consumption of fossil fuels but may do so in the future (e.g. support for industry-specific infrastructure development such as coal or natural gas terminals, or fossil fuel-focused R&D). This report uses 2017 as its reference year, to enable assessment of trends since publication of the previous Companion (OECD, 2018[2]).
← 4. The prevalence of consumer support in OECD member countries predominantly reflects the fact that many large OECD economies are resource poor and do not extract fossil fuels at significant scale. For OECD member countries in which fossil fuels are relatively abundant, the share of producer support tends to be higher – 46% in Canada, for example, and 40% in Germany in 2019.
← 5. The Public Service Obligation levy continues to support renewables.
← 6. The OECD’s tracking and estimating of government support for fossil fuel production and consumption have traditionally used “support” rather than subsidy. However, the two terms are used interchangeably in this publication.
← 7. Norway and the United Kingdom are the only Western European countries still mining hard coal (Steenblik and Mateo, 2020[7])
← 8. The predominance of crude oil and petroleum product support, as well as consumer support over producer support, is partly due to the large share of petroleum products in countries’ total primary energy supply and the fact that transport fuels tend to be taxed more on average than other sources of energy (resulting in larger tax expenditures from tax concessions) (OECD, 2015[3]).
← 9. See the OECD Companion to the Inventory of Support Measures for Fossil Fuels 2018 for a full explanation of the IEA approach to estimating fossil fuel consumption subsidies and the methodology used to aggregate OECD and IEA estimates (OECD, 2018[2]). Together, the economies covered represented 91% of world energy supply in 2018.
← 10. China ceased publishing official fuel subsidy data starting in 2011, so it has not been possible to document this shift via official sources, contrary to usual Inventory practice.
← 11. In the long run, however, lower electricity prices may encourage residential users to adopt non-fossil technologies such as electric vehicles, or abandon more CO2-intensive methods of heating or cooling.
← 12. For example, measures giving preferential treatment to natural gas used for electricity production over other types of use (e.g. industrial, commercial or residential use of natural gas subjected to higher, market-level tariffs). Output-based support data have not previously been made available because it is difficult to isolate government support for end users of fossil fuel-based energy from broader electricity consumer support (see Annex Table A.1). In addition, trade in electricity can make it difficult to trace the origin and consequently, the generation type of electricity once it has joined a country’s national grid.
← 13. G20 finance ministers recognised this opportunity in committing to support “an environmentally sustainable and inclusive recovery” in April 2020 (Banque de France, 2020[79]). The OECD has provided analysis of different pathways open to governments to rekindle economic activity specifically in the climate context, prioritising rapid re-establishment of economic growth and macroeconomic stability (“Rebound”), restoration of economic growth and macroeconomic stability along with an absolute decoupling of CO2 emissions (“Decoupling”) and an integrated approach to economic recovery, CO2 emissions reductions and well-being outcomes (“Wider Well-Being”) (Buckle et al., 2020[80]).
← 14. The Energy Policy Tracker includes in the calculation of its estimates payment, fine and interest accrual moratoriums to both private and state-owned enterprises, and support to fossil-fuel consuming capital (e.g., airline bailouts, grants to airport administrators, docking fee exemptions for maritime companies) Both of these categories of support fall outside the OECD’s definition of support for the purposes of the Inventory, so caution should be applied when comparing Inventory figures with Energy Policy Tracker aggregate estimates.
← 15. To note that the Inventory captures such support to the extent that information enabling apportionment of the share of support to fossil fuel industries (i.e., isolating the support amounts received by fossil fuel industries among other industry beneficiaries through calculated shares) is available.
← 16. The Inventory adopts the IEA World Energy Balances categorisation of fossil fuel production and consumption sectors. Annex Table A.2 describes the methodology used to allocate support among sectors and the difficulties of isolating sectoral support.
← 17. In addition, OECD-wide, 23% of total primary energy supply goes to the transport sector – more than any other sector – suggesting that significant levels of support might be anticipated.
← 18. Such forms of support, as well as support provided through the corporate and personal income tax system, are methodologically more difficult to link to domestic energy use.
← 19. It also aligns Inventory coverage with long-standing OECD work to support improvement of environmental policies in Eastern European, Caucasus and Central Asian transition economies (OECD, 2021[82]).
← 20. The OECD previously published a regional study of energy subsidies for EaP countries in 2018 based on 2010-15 data (OECD, 2018[78]).
← 21. For a full discussion of trends and reform priorities in EaP countries, see (Petkova, 2021[81]), on which discussion in this section is based.
← 22. The tagging exercise was completed prior to inclusion of the EaP countries in the Inventory and hence represents a lower-bound of Inventory measures potentially relevant to ocean sustainability, covering 42 of 50 countries only, with a total of 1 170 overall measures as documented in the 2019 edition of the Inventory.
← 23. A detailed discussion of the tagging methodology used to identify ocean-relevant fossil fuel support measures can be found in Annex A.3. This section is based on a broader, internal OECD paper authored by colleague Ivan Haščič “Monitoring progress towards a Sustainable Ocean Economy”, with further information available on the OECD’s Environment at a Glance Indicators Sustainable ocean economy webpage.
← 24. Including Cannes (2011), Los Cabos (2013), Saint Petersburg (2013), Brisbane (2014), Antalya (2015), Hangzhou (2016), Hamburg (2017) and Osaka (2019) summits.
← 25. Australia, Brazil, the European Union, Japan, Republic of Korea, the Russian Federation, Saudi Arabia, South Africa, Turkey and the United Kingdom are yet to undertake a peer review or initiate the process.
← 26. They are Peru (2014), New Zealand (2015), the Philippines (2015) and Chinese Taipei (2017) (OECD and IEA, 2019[63]). APEC activity on reform of inefficient fossil-fuel subsidies has stalled since 2017.
← 27. As the peer reviews are voluntary, G20 countries may of course seek to adjust this process for subsequent reviews.
← 28. The medium time horizon for the commitment similarly remains undefined.
← 29. EU countries are required to report on actions taken to phase out fossil fuel subsidies under the EU Regulation on the Governance of the Energy Union and Climate Action.
← 30. The full target 12.c is to “rationalise inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking fully into account the specific needs and conditions of developing countries and minimising the possible adverse impacts on their development in a manner that protects the poor and the affected communities” (UN, 2021[83]).
← 31. I.e., IMF and IEA data on support for consumption of fossil fuels, and OECD Inventory data on direct transfers of funds and tax expenditures in support of both fossil fuel production and consumption.
← 32. For the 2020 edition of the Inventory, of 1 329 measures identified, 301 had no data available. Of these 301 measures, 256 are tax expenditures. This highlights that the Inventory estimates represent a lower bound figure.
← 33. Because larger tax expenditures will result from tax concessions if high nominal taxes on fossil fuels are in place, and lower tax expenditures if nominal rates are low, rates of tax have a strong bearing on levels of support administered through the tax system. See the discussion of the impact of high OECD country tax rates in the context of the transport sector specifically in Section 1.1.4.
← 34. Effective Carbon Rates uses an additional midpoint estimate of the social cost of carbon of EUR 60 (USD 71) as a second benchmark rate. The forthcoming 2021 edition will additionally include a EUR 120 (USD 142) benchmark.
← 35. The second is the median effective carbon rate among (non-zero) sector-level effective carbon rates across all countries.
← 36. The OECD’s forthcoming Taxing Energy Use for Sustainable Development will model such negative carbon prices.