Mapping the Characteristics of Producer Subsidies: A review of pilot country studies

The ability to undertake any meaningful subsidy reforms, either nationally or multilaterally, is hampered by a basic lack of knowledge about the extent of support to the sector and where information on this support might be held. This multi-country research effort identifying and classifying different sources of data on fossil-fuel subsidies has begun to characterize the extent and nature of subsidy programs, identifying the analytical challenges that need to be overcome in order to de-subsidize. China, Germany, Indonesia, Nigeria and the United States were selected as pilot studies, given their position in global and regional fossil-fuel markets, their mix of governance structures and differing degrees of transparency. Data and research challenges unfortunately resulted in the Nigerian case study being dropped from this publication. For the remaining four case study countries the project team focused not only on identifying data coverage within these countries, but on looking for patterns across them as well.

This research project found that the fossil-fuel sector is supported by a multitude of policies, ranging from direct payments to preferential access to government-owned lands. While direct payments were relatively easy to identify in government budget reporting, data were not always provided at a sufficient level of disaggregation to allow proper attribution to beneficiaries. In addition, a range of other subsidy mechanisms were far more difficult to gauge. Mechanisms such as preferential access rights to energy deposits, or caps on liabilities related to fossil fuel enterprises, for example, were not clearly identified in standard government budget documents in any of the four countries examined. Adopting a checklist approach for the policy review was important in ensuring that key potential areas of fossil-fuel subsidy were systematically reviewed by the project team.

The data review also suggests that support for producers is likely to be grossly underestimated by current studies—often focusing only on disparities between domestic energy prices and world reference prices. There are two main sources of this underestimation. First, many subsidies to producers do not affect market-clearing prices in the short term—especially in global commodities such as oil. These subsidies will affect the structure of energy supply within a country, but are generally missed entirely.

Second, even when producer subsidies are captured to some degree, they tend to focus on established programs where financial flows are visible. In contrast, researchers found many emerging subsidy  programs that at present are not properly evaluated because they are not yet widely used and thus are not drawing funding from the treasury. Despite a lack of large financial flows at present, subsidies to new facilities or energy infrastructure can greatly influence today’s investment decisions and need to be properly assessed. Investments in fossil-fuel infrastructure could potentially lock economies into reliance on fossil-based energy for many additional decades. Similarly, programs supporting carbon capture and storage (CCS) and emission allocations to existing industries may amount to tens or hundreds of billions of dollars per year, also preventing the negative climate impacts of high-carbon fuels from showing up in market prices. Changes to these emerging policies need to be followed, as they will affect financial flows within a country and competitiveness between fossil fuels and emerging competitors.