Publication:
Fossil Fuel Subsidies: Approaches and Valuation

Loading...
Thumbnail Image
Files in English
English PDF (1.61 MB)
1,982 downloads
Date
2015-03
ISSN
Published
2015-03
Editor(s)
Abstract
Numbers ranging from half a trillion to two trillion dollars have been cited in recent years for global subsidies for fossil fuels. How are these figures calculated and why are they so different? The most commonly used methods for measuring subsidies are the price-gap approach -- quantifying the gap between free-market reference prices and the prices charged to consumers -- the inventory approach, which constructs an inventory of government actions benefiting production and consumption of fossil fuels. Practitioners are not faced with two choices. The two methods are complementary and should be used together -- price gaps cause distortions throughout the economy and quantification is needed for improving pricing policies; an inventory is useful for examining budgetary allocation. An inventory based on a full accounting framework for producer and consumer support estimates in fact captures price gaps as market transfers to producers or consumers. Differences in subsidy valuation arise from assumptions made to compensate for missing data and the scope of subsidy measurement. Having a common understanding of terms and standardizing calculation methods would go a long way in enabling comparison of subsidies across countries and sectors, benchmarking pricing, and assessing subsidy policies. Subsidy measurement should not be viewed as a one-off exercise to inform subsidy reform strategies. Just as subsidy reform in many countries does not have a clear end but is a continuous process of adjustment, so too is subsidy tracking. Devoting resources to data collection and analysis to track subsidies on a continuous basis can bring rich dividends by increasing transparency and enabling informed decisions.
Link to Data Set
Citation
Kojima, Masami; Koplow, Doug. 2015. Fossil Fuel Subsidies: Approaches and Valuation. Policy Research Working Paper;No. 7220. © World Bank. http://hdl.handle.net/10986/21659 License: CC BY 3.0 IGO.
Associated URLs
Associated content
Report Series
Report Series
Other publications in this report series
  • Publication
    The Future of Poverty
    (Washington, DC: World Bank, 2025-07-15) Fajardo-Gonzalez, Johanna; Nguyen, Minh C.; Corral, Paul
    Climate change is increasingly acknowledged as a critical issue with far-reaching socioeconomic implications that extend well beyond environmental concerns. Among the most pressing challenges is its impact on global poverty. This paper projects the potential impacts of unmitigated climate change on global poverty rates between 2023 and 2050. Building on a study that provided a detailed analysis of how temperature changes affect economic productivity, this paper integrates those findings with binned data from 217 countries, sourced from the World Bank’s Poverty and Inequality Platform. By simulating poverty rates and the number of poor under two climate change scenarios, the paper uncovers some alarming trends. One of the primary findings is that the number of people living in extreme poverty worldwide could be nearly doubled due to climate change. In all scenarios, Sub-Saharan Africa is projected to bear the brunt, contributing the largest number of poor people, with estimates ranging between 40.5 million and 73.5 million by 2050. Another significant finding is the disproportionate impact of inequality on poverty. Even small increases in inequality can lead to substantial rises in poverty levels. For instance, if every country’s Gini coefficient increases by just 1 percent between 2022 and 2050, an additional 8.8 million people could be pushed below the international poverty line by 2050. In a more extreme scenario, where every country’s Gini coefficient increases by 10 percent between 2022 and 2050, the number of people falling into poverty could rise by an additional 148.8 million relative to the baseline scenario. These findings underscore the urgent need for comprehensive climate policies that not only mitigate environmental impacts but also address socioeconomic vulnerabilities.
  • Publication
    Exports, Labor Markets, and the Environment
    (Washington, DC: World Bank, 2025-07-14) Góes, Carlos; Conceição, Otavio; Lara Ibarra, Gabriel; Lopez-Acevedo, Gladys
    What is the environmental impact of exports? Focusing on 2000–20, this paper combines customs, administrative, and census microdata to estimate employment elasticities with respect to exports. The findings show that municipalities that faced increased exports experienced faster growth in formal employment. The elasticities were 0.25 on impact, peaked at 0.4, and remained positive and significant even 10 years after the shock, pointing to a long and protracted labor market adjustment. In the long run, informal employment responds negatively to export shocks. Using a granular taxonomy for economic activities based on their environmental impact, the paper documents that environmentally risky activities have a larger share of employment than environmentally sustainable ones, and that the relationship between these activities and exports is nuanced. Over the short run, environmentally risky employment responds more strongly to exports relative to environmentally sustainable employment. However, over the long run, this pattern reverses, as the impact of exports on environmentally sustainable employment is more persistent.
  • Publication
    The Macroeconomic Implications of Climate Change Impacts and Adaptation Options
    (Washington, DC: World Bank, 2025-05-29) Abalo, Kodzovi; Boehlert, Brent; Bui, Thanh; Burns, Andrew; Castillo, Diego; Chewpreecha, Unnada; Haider, Alexander; Hallegatte, Stephane; Jooste, Charl; McIsaac, Florent; Ruberl, Heather; Smet, Kim; Strzepek, Ken
    Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.
  • Publication
    The Asymmetric Bank Distress Amplifier of Recessions
    (Washington, DC: World Bank, 2025-07-11) Kim, Dohan
    One defining feature of financial crises, evident in U.S. and international data, is asymmetric bank distress—concentrated losses on a subset of banks. This paper proposes a model in which shocks to borrowers’ productivity dispersion lead to asymmetric bank losses. The framework exhibits a “bank distress amplifier,” exacerbating economic downturns by causing costly bank failures and raising uncertainty about the solvency of banks, thereby pushing banks to deleverage. Quantitative analysis shows that the bank distress amplifier doubles investment decline and increases the spread by 2.5 times during the Great Recession compared to a standard financial accelerator model. The mechanism helps explain how a seemingly small shock can sometimes trigger a large crisis.
  • Publication
    Impact of Heat Waves on Learning Outcomes and the Role of Conditional Cash Transfers
    (Washington, DC: World Bank, 2025-07-14) Miranda, Juan José; Contreras, Cesar
    This paper evaluates the impact of higher temperatures on learning outcomes in Peru. The results suggest that 1 degree above 20°C is equivalent to 7 and 6 percent of a standard deviation of what a student learns in a year for math and reading tests, respectively. These results hold true when the main specification is changed, splitting the sample, collapsing the data at school level, and using other climate specifications. The paper aims to improve understanding of how to deal with the impacts of climate change on learning outcomes in developing countries. The evidence suggests that conditional cash transfer programs can mitigate the negative effects of higher temperatures on students’ learning outcomes in math and reading.
Journal
Journal Volume
Journal Issue

Related items

Showing items related by metadata.

  • Publication
    Fossil Fuel Subsidy and Pricing Policies
    (World Bank, Washington, DC, 2016-01) Kojima, Masami
    The steep decline in the world oil price in the last quarter of 2014 slashed fuel price subsidies. Several governments responded by announcing that they would remove subsidies for one or more fuels and move to market-based pricing with full cost recovery. Other governments took advantage of low world prices to increase taxes and other charges on fuels. However, the decision to move to cost recovery and market prices, ending budgetary support, has not been implemented consistently across countries. Policy announcements have varied in the way they were communicated and the level of detail provided. When petroleum product prices bounced back during the first half of 2015, some reforming governments failed to raise prices correspondingly. Recent experience suggests that regular and frequent price adjustments, however small—as in Jordan and Morocco—help the government and consumers to get accustomed to fluctuations in world fuel prices and exchange rates. By contrast, freezing prices, even for a few months—for socioeconomic considerations or because the needed adjustments are small enough to be absorbed—increases the risk of reversion to ad hoc pricing and price subsidies. The more formally the decision to move to market-based pricing is communicated, the more public new price announcements, and the higher the frequency of price changes, the more likely the implementation of the announced pricing policy reform will be sustained.
  • Publication
    Reforming Fuel Pricing in an Age of $100 Oil
    (World Bank, Washington, DC, 2013-01) Kojima, Masami
    Increases in world oil prices since 2004 have challenged consumers and oil-importing countries across the world. Oil prices temporarily fell sharply in 2009, only to triple three years later. The oil import share of gross domestic product rose by nearly half among net oil importers in just two years between 2009 and 2011. Governments that control oil product prices have come under pressure to intervene by keeping domestic prices low and effectively subsidizing consumers. This study focuses on the evolving role of oil in national economies, particularly those of developing countries, and proposes a menu of options for drawing a roadmap for pricing policy reform for oil products. In light of events since 2009, it examines how recent price movements have affected countries' vulnerability to world oil price increases, how governments have adjusted domestic fuel prices in response, the consequences of the policy responses, other coping mechanisms to deal with high oil prices and price volatility, the roadblocks to reforming pricing policy, and how to deal with them. This report suggests a menu of options for moving away from sectoral subsidies to market-based pricing, accompanied by an integrated social protection program and complementary policies to reduce consumption through efficiency improvement and fuel diversification. Sending the right price signals and reducing consumption can bring many benefits, ranging from greater supply security to less congestion and pollution from road transport. This report can help policy makers conduct more informed national dialogues on managing fuel pricing and the political economy around it.
  • Publication
    Political Economy of Power Sector Subsidies : A Review with Reference to Sub-Saharan Africa
    (World Bank Group, Washington, DC, 2014-07) Kojima, Masami; Bacon, Robert; Trimble, Chris
    Power sector subsidies in Sub-Saharan Africa are substantial and highly regressive. While subsidies can be quick, easy, and politically expedient to implement, they are equally quick to take root and challenging to remove. Optimal policies that are technically sound and welfare-enhancing over the long run have nevertheless been found difficult to launch and even more challenging to sustain. Of the barriers to reform, those associated with political economy are among the most powerful, yet their analysis is often lacking due consideration in the reform design process. This paper reviews the literature on power subsidies and their reform with emphasis on the political economy of such reform. It examines pricing principles in the power sector and different types of subsides; drivers for subsidies, benefits and costs of subsidy reform, and their distribution; and approaches to political economy analysis, tools available, and methodological issues. The paper draws examples from Sub-Saharan Africa and elsewhere, and presents case studies from the literature.
  • Publication
    Key Drivers of PPPs in Electricity Generation in Developing Countries : Cross-Country Evidence of Switching between PPP Investment in Fossil Fuel and Renewable-Based Generation
    (World Bank, Washington, DC, 2012-07) Vagliasindi, Maria
    This paper presents new global evidence on the key determinants of public-private partnership investment in electricity generated by fossil fuels and renewable energy based on a panel data analysis for 105 developing countries over a period of 16 years from 1993 to 2008. It aims to identify the key factors affecting private investors' decision to enter electricity generation, through probit analysis, and the amount of investment sunk in this market segment, based on Heckman's sample selection analysis. The paper shows some evidence of switching from investment in fossil fuels to investment in hydro and renewables and within fossil fuels from oil to natural gas. An interesting result of the econometric analysis is that the likelihood of switching toward renewable investment is driven by long-run environmental factors, such as the increases in the price of oil and the introduction of the Kyoto protocol. Another interesting result is that sector governance support schemes, provided by feed-in tariffs, affect only the entry in renewable based electricity generation and have no impact in reducing the amount of investment in fossil fuel based generation. Economy-wide governance factors, including control for corruption and degree of political competition, are factored in by private investors only in the initial stage of the game when the decision to enter into the generation market is taken and not the amount of investment. This confirms that the first generations of independent power producers have been developed on the basis of long-term power purchase agreements guaranteeing a fixed rate of return, through take-or-pay clauses and/or government guarantees.
  • Publication
    United Mexican States Reducing Fuel Subsidies
    (Washington, DC, 2013-05) World Bank
    This paper analyzes the economic, distributional, and environmental impact that energy subsidy reductions and alternative compensating mechanisms might have in Mexico. To achieve that goal, author use a computable general equilibrium model of the Mexican economy. They make several important changes to the original model to build the energy subsidies (to gasoline, diesel, electricity and liquefied petroleum gas) into the benchmark and then do an array of simulations to see the effects of removing such subsidies. The report results for 2012, which is the initial year; 2018, which will be the end of the next administration; and 2024 and 2030, which represent the medium and long term, respectively. When doing the simulations, author look at possible compensation mechanisms and analyze the impact on the income groups that may be affected by the reduction of energy subsidies.

Users also downloaded

Showing related downloaded files

  • Publication
    Design Thinking for Social Innovation
    (2010-07) Brown, Tim; Wyatt, Jocelyn
    Designers have traditionally focused on enchancing the look and functionality of products.
  • Publication
    Governance Matters IV : Governance Indicators for 1996-2004
    (World Bank, Washington, DC, 2005-06) Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
    The authors present the latest update of their aggregate governance indicators, together with new analysis of several issues related to the use of these measures. The governance indicators measure the following six dimensions of governance: (1) voice and accountability; (2) political instability and violence; (3) government effectiveness; (4) regulatory quality; (5) rule of law, and (6) control of corruption. They cover 209 countries and territories for 1996, 1998, 2000, 2002, and 2004. They are based on several hundred individual variables measuring perceptions of governance, drawn from 37 separate data sources constructed by 31 organizations. The authors present estimates of the six dimensions of governance for each period, as well as margins of error capturing the range of likely values for each country. These margins of error are not unique to perceptions-based measures of governance, but are an important feature of all efforts to measure governance, including objective indicators. In fact, the authors give examples of how individual objective measures provide an incomplete picture of even the quite particular dimensions of governance that they are intended to measure. The authors also analyze in detail changes over time in their estimates of governance; provide a framework for assessing the statistical significance of changes in governance; and suggest a simple rule of thumb for identifying statistically significant changes in country governance over time. The ability to identify significant changes in governance over time is much higher for aggregate indicators than for any individual indicator. While the authors find that the quality of governance in a number of countries has changed significantly (in both directions), they also provide evidence suggesting that there are no trends, for better or worse, in global averages of governance. Finally, they interpret the strong observed correlation between income and governance, and argue against recent efforts to apply a discount to governance performance in low-income countries.
  • Publication
    Governance Matters VIII : Aggregate and Individual Governance Indicators 1996–2008
    (2009-06-01) Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
    This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. The authors also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. They find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time. The aggregate indicators, together with the disaggregated underlying indicators, are available at www.govindicators.org.
  • Publication
    Breaking the Conflict Trap : Civil War and Development Policy
    (Washington, DC: World Bank and Oxford University Press, 2003) Collier, Paul; Elliott, V. L.; Hegre, Håvard; Hoeffler, Anke; Reynal-Querol, Marta; Sambanis, Nicholas
    Most wars are now civil wars. Even though international wars attract enormous global attention, they have become infrequent and brief. Civil wars usually attract less attention, but they have become increasingly common and typically go on for years. This report argues that civil war is now an important issue for development. War retards development, but conversely, development retards war. This double causation gives rise to virtuous and vicious circles. Where development succeeds, countries become progressively safer from violent conflict, making subsequent development easier. Where development fails, countries are at high risk of becoming caught in a conflict trap in which war wrecks the economy and increases the risk of further war. The global incidence of civil war is high because the international community has done little to avert it. Inertia is rooted in two beliefs: that we can safely 'let them fight it out among themselves' and that 'nothing can be done' because civil war is driven by ancestral ethnic and religious hatreds. The purpose of this report is to challenge these beliefs.
  • Publication
    Government Matters III : Governance Indicators for 1996-2002
    (World Bank, Washington, DC, 2003-08) Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
    The authors present estimates of six dimensions of governance covering 199 countries and territories for four time periods: 1996, 1998, 2000, and 2002. These indicators are based on several hundred individual variables measuring perceptions of governance, drawn from 25 separate data sources constructed by 18 different organizations. The authors assign these individual measures of governance to categories capturing key dimensions of governance and use an unobserved components model to construct six aggregate governance indicators in each of the four periods. They present the point estimates of the dimensions of governance as well as the margins of errors for each country for the four periods. The governance indicators reported here are an update and expansion of previous research work on indicators initiated in 1998 (Kaufmann, Kraay, and Zoido-Lobat 1999a,b and 2002). The authors also address various methodological issues, including the interpretation and use of the data given the estimated margins of errors.