IISD & G SI paper on subsidy estimation: Measuring price subsidies using the price-gap approach: What does it leave out?

kristy Resource Efficiency

In the wake of India ’s move in June to reduce its fuel subsidies, and the IEA’s announcement that US$ 557 billion was spent on fossil-fuel subsidies by 37 of the world’s economies in 2008, the measurement of subsidies is a pressing and sensitive issue – what does it include and what does it omit?

In Measuring Price Subsidies Using the Price- G ap Approach: What does it leave out?, prepared under the International Institute for Sustainable Development’s (IISD) From Bali to Copenhagen project, Earth Track founder Doug Koplow looks at one of the most commonly employed methodologies for estimating fossil-fuel subsidies: the examination of differences between the observed price for a good or service in the economy against what that price ‘should’ be without the government programs, the price-gap method.

The report explains how the price-gap method works, reviews its benefits and limitations, and explores potential systematic bias in estimates, drawing conclusions for their interpretation. Among its key findings are:

· Price-gap data are basic information needed to estimate market price support (to producers) and market transfers (to consumers), and should be collected annually for all major fossil-fuel energy producing and consuming nations.

· Measuring the price-gap does not capture everything. Reliance on only price-gap data will dramatically understate the magnitude of fossil-fuel subsidies globally, as it fails to capture subsidy flows that do not change fuel prices.

· The ‘transfer method’, which quantifies all subsidy flows conferred by a country’s fossil-fuel policy interventions, is more difficult to complete but can help fill in some of these gaps. Transfer studies should be conducted every five years in the top ten fossil-energy producing and consuming nations, as well as countries which derive large portions of their G DP from extractive industries.

The report can be downloaded at: http://www.globalsubsidies.org/en/research/measuring-subsidies-using-price-gap-approach

The G SI is now one and a half years into a three-year program of work on fossil-fuel subsidies. The conclusions drawn in its first series of reports can be found in Untold Billions: Fossil-fuel Subsidies, Their Impacts and the Path to Reform. A Summary of Key Findings. In the coming months, it will release reports on subsidies to the producers of fossil-fuels, including case studies in Canada and Indonesia .

Christopher Beaton
Research Analyst and Communications Officer
The International Institute for Sustainable Development