G20 Fossil fuel subsidy reform: Early numbers from IEA seem low

Ben Sills of BusinessWeek reports today that the International Energy Agency (IEA) estimates global fossil fuel subsidies in 2008 at $557 billion.  The figure is based on an interview the magazine did with Fatih Birol, Chief Economist of the International Energy Agency. 

More than half a trillion dollars per year in subsidies to fossil fuels is, indeed, a large number.  However, based on other sources and other work I am doing, I believe it is too low.  This conclusion is not based on any detailed information I've seen from IEA.  While I attended an expert meeting in February on G20 fossil fuel subsidy reform and provided detailed comments on their draft joint report and estimation methodology, I have not been involved with the G20 subsidy reform process since that time.  My rationale for concluding the numbers are too low include:  

• IMF numbers for oil alone were nearly as high.  In February, the International Monetary Fund released its own analysis (blog post on report; link to report) of global subsidies to petroleum.  They pegged oil subsidies for 2008 at  at least $519 billion, much higher than the $312 billion IEA says went to oil during that same year. 
• IEA value is similar to past "price gap" estimates that form lower-bound for subsidy value.  The figures for both IMF and IEA appear to be primarily "price gap" calculations that examine the difference between world prices and domestic prices for fuels.  Price gap values tend to set the floor for subsidy levels, but miss many other policies that generate subsidies to various energy sources. 
• Earth Track case studies have found substantial data gaps in fossil fuel subsidy information.  For the past year or so, I've been working with the Global Subsidies Initiative on a series of case studies that examine data availability on fossil fuel subsidies in four countries: the US, Germany, China, and Indonesia.  Our review has turned up systematic weaknesses in data reporting and transparency in a number of key subsidy areas.  These include tax subsidies; credit support especially for state-owned energy infrastructure and power plants; and insurance and indemnification subsidies.  It is unlikely that IEA, even with its strong global relationships, was able to solve these substantial data gaps in the few months it has had to prepare its data set.  As a result, it is likely that they have systematically undercounted certain types of subsidies in most of the countries evaluated.  (If you would like to be notified when our case studies are publicly available, you can add your e-mail to our distribution list here). 

Even ignoring the political challenges of reaching consensus, it would be unrealistic to think that IEA or any of the other parties involved with obtaining data for the G20 fossil fuel subsidy reform process (World Bank, OECD, and OPEC; along with many member countries and other organizations such as the IMF that also have input) could assemble a comprehensive data set on global subsidies in such a short time frame. 

What will be important, however, is that IEA be clear about where it has not been able to measure subsidies; and that the Agency state how filling in those gaps would have influenced its reported numbers.   If values from multiple sources exist but conflict, IEA should provide a range if the estimates are plausible.

Finally, where IEA's review on fossil fuel subsidies found that survey countries are simply not collecting needed data at all, the Agency needs to flag the areas for future attention and improvement.  G20 subsidy reform needs to be viewed as a process, not as an event.  However, it will not be a successful process unless rules for full disclosure are put in place and properly enforced.

UPDATE:

Some additional information on the IEA figures can be found in the Financial Times; and on the subsidy reform work program at the OECD web site.  The FT notes that the current numbers are higher than IEA's prior estimates.  (This would be consistent with the sharp increases in energy prices between 2007 and 2008; whether portions are also due to broader coverage of producer subsidies can't be discerned without more detailed information). 

A reader also points out that part of the reason IEA's values are lower than IMF is that IEA's pick up a full year average for 2008, so include the subsequent declines later in the year.  IMF's are based on subsidy rates at mid-year before the sharp price declines.  Price gap subsidies tend to rise when energy prices rise quickly, as policy adjustments to raise prices in countries with consumer subsidies tend to lag.

Two final points.  First, while IEA is the cited party on these estimates in both the FT and BusinessWeek articles, the work is being conducted by four international agencies (IEA, OECD, World Bank, and OPEC), not just one.  And second, while it is not possible to tell at this stage for sure whether any types of subsidies have been systematically excluded, the current plan is to make the detailed basis for the estimates available in the fall.  This would be quite helpful in building more systematic data coverage over time.