World Energy Outlook 2006

the country is an exporter or importer) plus internal distribution. For
non-traded energy, such as electricity, the reference price is the estimated
long-run marginal cost of supply. VAT is added to the reference price
where the tax is levied on final energy sales, as a proxy for the normal rate
of taxation to cover the cost of governing a country. Other taxes,
including excise duties, are not included in the reference price. So, even
if the pre-tax pump price of gasoline in a given country is set by the
government below the reference level, there would be no net subsidy if an
excise duty large enough to make up the difference is levied.
The aggregated results are based on net subsidies only for each country,
fuel and sector. Any negative subsidies, i.e. where the final price exceeds
the reference price, were not taken into account. In practice, part of the
subsidy in one sector or for one fuel might be offset by net taxes in
another. Subsidies were calculated only for final consumption, to avoid
the risk of double counting: any subsidies on fuels used in power
generation would normally be reflected at least partly in the final price of
electricity. All the calculations for each country were carried out using
local prices, and the results were converted to US dollars at market
exchange rates.
Russia has the largest subsidies in dollar terms, amounting to about
$40 billion per year (Figure 11.7). Most of these subsidies go to natural gas
and the rest to electricity (which includes the underpricing of gas delivered
to power stations). Subsidies of $25 billion per year to final consumption of
gas are alone more than twice the annual investment projected for the entire
Russian gas industry. Iranian energy subsidies are almost as large, at
an estimated $37 billion per year. Six other countries – China, Saudi Arabia,
India, Indonesia, Ukraine and Egypt – have subsidies in excess of
$10 billion per year each.
In terms of fuels, the biggest subsidies overall go to oil products. Most of the
countries included in this analysis were found to subsidise at least one oil
product. Industrial and residential fuels other than gasoline and automotive
diesel 5 – notably kerosene and liquefied petroleum gas – and other forms of
5. Other products make up about two-thirds of total oil consumption in non-OECD countries as a
whole.
Chapter 11 - The Impact of Higher Energy Prices 279
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© OECD/IEA, 2007