Measuring Energy Subsidies Using the Price-Gap Approach

The document examines the 'price-gap' method of measuring energy subsidies, which calculates the difference between domestic and world reference prices. While the author acknowledges its simplicity and utility for international benchmarking, the paper argues that the method creates 'blind spots' by ignoring subsidies that do not alter market prices, such as credit subsidies, R&D funding, and risk transfers. This leads to a significant understatement of the total fiscal and environmental costs of fossil fuel supports. The author recommends a hybrid approach, combining annual price-gap tracking with comprehensive 'transfer-based' evaluations every five years for major energy nations.

• The price-gap approach provides a lower bound for government support because it only captures subsidies that change the final price for consumers, missing programs that support industries without affecting market prices.
• Price-gap calculations are highly sensitive to fluctuations in world reference prices; for example, IEA data showed total price-gap subsidies for a sample of countries rose from 225.5 billion USD in 2005 to 312.8 billion USD in 2007, a 39% increase.
• The method fails to capture critical financial transfers such as loan guarantees, R&D funding, and risk subsidies, which often influence marginal investment decisions for new capacity rather than current market prices.
• There is a systematic bias in the price-gap approach that understates subsidies for specific fuels, particularly nuclear power and advanced coal with carbon capture and storage (CCS), because their supports are often targeted at future capacity.
• The price-gap approach is particularly prone to understating subsidies in countries with poor governance or high corruption, as resources may be sold at world prices while domestic value is diverted away from the government.
• Comparing different measurement methods reveals that price-gap values are significantly lower than total transfers; for instance, while IEA noted consumer subsidies were negligible in OECD countries, other estimates pegged U.S. energy subsidies at roughly 75 billion USD per year.
• The use of average national prices in the price-gap approach masks local price variations and cross-subsidies, which can hide the competitive viability of new technologies like distributed generation.

APA

Koplow, D. (2009). Measuring Energy Subsidies Using the Price-Gap Approach. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/bali_2_copenhagen_ff_subsidies_pricegap.pdf

Chicago

Koplow, Doug. Measuring Energy Subsidies Using the Price-Gap Approach. International Institute for Sustainable Development, 2009. https://www.iisd.org/system/files/publications/bali_2_copenhagen_ff_subsidies_pricegap.pdf.

Wikipedia

{{cite report |last1=Koplow |first1=Doug |title=Measuring Energy Subsidies Using the Price-Gap Approach |publisher=International Institute for Sustainable Development |date=August 2009 |url=https://www.iisd.org/system/files/publications/bali_2_copenhagen_ff_subsidies_pricegap.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{koplow2009measuring, author = {Koplow, Doug}, title = {{Measuring Energy Subsidies Using the Price-Gap Approach}}, institution = {International Institute for Sustainable Development}, year = {2009}, month = aug, url = {https://www.iisd.org/system/files/publications/bali_2_copenhagen_ff_subsidies_pricegap.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }