Measuring Energy Subsidies Using the Price-Gap Approach

This research paper evaluates the 'price-gap approach' for measuring fossil fuel subsidies, arguing that while it provides a useful global benchmark, it systematically understates the total magnitude of government support by ignoring transfers that do not affect end-user prices.

• The price-gap approach estimates subsidies by calculating the deviation between domestic energy prices and world reference prices, serving as a proxy for the aggregate impact of policies on market prices.
• A primary advantage of the price-gap method is its relative simplicity, allowing analysts to track subsidies across countries with varying governance structures without requiring detailed government cooperation.
• The price-gap approach establishes only a lower bound of government support because it fails to capture subsidies that do not change the final market price, such as those provided to domestic producers who are small players in a global market.
• Measurement accuracy is hindered by the difficulty of establishing world reference prices for non-uniform commodities like natural gas and coal, and the lack of a global reference price for electricity, where long-run marginal cost (LRMC) is often used as a proxy.
• The price-gap method misses critical fiscal and political data, such as the specific programs and beneficiaries of subsidies, which are necessary for challenging political coalitions and implementing subsidy reform.
• Price-gap metrics fail to capture the impact of subsidies on marginal investment decisions, such as loan guarantees, R&D, and carbon capture and sequestration (CCS) funding, which drive the long-term energy transition.
• Data from the IEA shows that price-gap estimates are highly sensitive to shifts in world reference prices; for example, total price-gap subsidies across a sample of countries rose from 225.5 billion USD in 2005 to 312.8 billion USD in 2007.
• There is a significant discrepancy between price-gap estimates and total transfer measurements; for instance, while IEA noted consumer subsidies in the OECD were negligible, other estimates pegged U.S. energy subsidies at roughly 75 billion USD per year in 2007.
• Certain fuel types are more prone to underestimation via the price-gap approach, particularly emerging resources (like cellulosic ethanol) and nuclear power, where subsidies are targeted at new capacity rather than current market prices.
• Geographic factors can bias results, as price-gap calculations often rely on national averages that mask local price variations, cross-subsidies, and the specific impacts of import/export restrictions at coastal regions.

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} }