IEA analysis of fossil-fuel subsidies for APEC

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Quantifying fossil-fuel consumptionsubsidies using the price-gap approach• A price-gap is the amount that an end-use price is below the full cost ofsupply or reference price• It is applicable where end-use prices are regulated and fall short ofinternational market levels© OECD/IEA 2011‣ Does not capture: production subsidies, rebates to consumers, the effect ofcross-subsidies, cost of investing in new capacity (electricity)• What costs are represented by estimates from the price-gap approach?‣ For net exporters, these are essentially opportunity costs‣ For net importers, these are estimates of direct, budgetary transfers• Relevant calculations‣ Subsidy = (reference price – end-use price) * consumption‣ Reference price (fuels) = int’l price (quality adj) +/- freight & insurance + localdistribution + VAT‣ Reference price for electricity is based on annual average-cost pricing: calculatedfrom a weighted average of the cost of electricity production (according to specificpower mix), plus transmission and distribution
Quantifying fossil-fuel consumptionsubsidies using the price-gap approachLPGDieselInternational priceFreight and insuranceInternal distributionValue-added taxEnd-use pricePrice gap(subsidy)Gasoline0 0.2 0.4 0.6 0.8 1.0Dollars per litreThe price-gap method compares end-use prices paid by consumers with reference prices thatcorrespond to the full cost of supply – a subsidy is present if the end-use price falls short ofthe reference price© OECD/IEA 2011
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IEA analysis of fossil-fuel subsidies for APEC

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