The IEA has long described fossil fuel subsidies as a ‘roadblock’ on the pathway to clean energy systems and provided data and advice to support their removal. The methodology is a “price gap approach” where a market reference price is established and then compare it with the price paid by consumers. When the end-user price is lower than the reference price, it is counted as a subsidy.
But this approach does not reflect the environmental costs of fossil fuels such as carbon prices. To deal with this issue, this report suggests “price gap-plus approach”, which explores whether, and how, it might be possible to incorporate environmental aspects into the calculation of fossil fuel subsidies. IEA conducted analysis for six countries that are the negotiating parties for a new international Agreement on Climate Change, Trade and Sustainability (ACCTS) – Norway, Iceland, New Zealand, Switzerland, Costa Rica and Fiji.
The analysis underscores that adding a carbon price to the reference price is more likely to reveal fossil fuel consumption subsidies, even though are no agreed standards for carbon pricing. This issue becomes more sensitive during periods of high and volatile fuel prices, when governments opt to take actions to protect consumers.
Access IEA’s report “Fossil Fuel Subsidies in Clean Energy Transitions: Time for a New Approach?” here
