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Measuring Price Subsidies Using the Price-Gap Approach: What does it leave out? (498KB)
The price-gap approach is one of the most commonly employed methodologies for estimating fossil-fuel subsidies: an examination of differences between the observed price for a good or service in the economy against what that price would be without government intervention. This report explains how the price-gap method works, reviews its benefits and limitations, and explores potential systematic bias in estimates, drawing conclusions and implications for their interpretation.
Among its key findings are:
- Price-gap data are basic information needed to estimate support to producers and 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 GDP from extractive industries.
The report was completed under IISD's From Bali to Copenhagen project, about which more information is available at: http://www.iisd.org/trade/crosscutting/bali_copenhagen/
Last updated: 17 August, 2010
