INF/TE/FFSR/W/2  
 
7 July 2023  
(23-4634) Page: 1/19 
    
 
 
FOSSIL FUEL SUBSIDY REFORM  (FFSR ) 
CLASSIFICATION OF FOSSIL FUEL SUBSIDY MEASURES  
Note by the Secretariat1 
 
 
_______________  
 
 
 
Contents  
1   INTRODUCTION  ................................ ................................ ................................ ..........  2 
2   DEFINITIONS  ................................ ................................ ................................ ..............  2 
2.1   Fossil fuel types  ................................ ................................ ................................ ........  2 
2.2   Subsidy definition  ................................ ................................ ................................ ...... 3 
3   SUPPORT MECHANISM  ................................ ................................ ................................  4 
4   STAGE OF PROVISION  ................................ ................................ ................................ . 7 
5   BENEFICIARY  ................................ ................................ ................................ ..............  9 
6   SECTOR  ................................ ................................ ................................ .....................  10 
7   PATHWAY OF BENEFIT  ................................ ................................ ..............................  11 
8   IMPACT  ................................ ................................ ................................ .....................  14 
8.1   Fiscal impacts  ................................ ................................ ................................ ..........  14 
8.2   Environmental impacts  ................................ ................................ ..............................  16 
8.3   Trade impacts  ................................ ................................ ................................ ..........  17 
 
 
  
 
1 This factual note  has been prepared by the Secretariat at the request of the  FFSR initiative.  It does not 
represent the official position of the WTO  or of the WTO Secretariat . INF/TE/FFSR/W/2  
 
- 2 - 
 
  1  INTRODUCTION  
1.1.  The purpose of the present background paper is to outline different ways in which fossil fuel 
subsidies (FFS) have been classified based on various criteria, including the nature of the support 
mechanism, incidence, beneficiary, sector,  and pathway of bene fit as well as fiscal, environmental , 
and trade impacts.  In this way, the paper aims to facilitate  a deeper understanding of the current 
landscape of existing subsidie s, thus  inform ing discussions  under the FFSR initiative  and identify ing 
knowledge gaps.  
1.2.  In its sequential approach for the assessment of government support measures and their 
reform, the Organization for Economic Cooperation and Development (OECD) considers that the first 
two steps in the reform process are to: (i) identify support measures, d ocument their objectives, 
and estimate their budgetary cost; and (ii) m easure the  distortiveness of  support measures,  
including their  economic, social , and environmental  effects.2 In this regard, mapping out  the 
landscape of fossil fuel support measures i s an important initial consideration that could help to 
better understand the objectives and intended beneficiaries of such measures, as well as to take 
into account their level of distortive effect.  
1.3.  Energy subsidies can be classified along different dimen sions, including the beneficiary,  the 
nature of the instrument (i.e. how the transfer is provided) , and its incidence (i.e. to which aspect 
of production or consumption it is targeted), as well as by type of fuel or energy carrier.3 
2  DEFINITIONS  
2.1.  A first st ep in the classification is to understand what we are talking about when we refer to 
"fossil fuel subsidies".  
2.1  Fossil fuel types  
2.2.  There is general agreement in the literature as to what constitutes a fossil fuel  either through 
reference to the properties of fossil fuels (e.g. their origin from organic material in the geological 
past) or through listings of specific fuel types that constitute fossil fuels . Nuclear fuel, renewable 
energy , and biofuels are not cover ed by the term.4 
2.3.  Fossil fuels include both primary fossil fuel commodities (e.g. crude oil, natural gas, bituminous 
and sub -bituminous coal, and peat) and secondary refined or processed products (e.g. diesel fuel, 
gasoline, kerosene, liquefied petroleum g as (LPG), liquefied natural gas, compressed natural gas, 
and coal and peat briquettes). Primary fuels are those extracted from both conventional and 
unconventional sources. The latter include, for example, oil extracted from bituminous sands, 
shale-based n atural gas, and coal -bed methane.  
2.4.  Electricity and heat are not technically fossil fuels but, in many countries, a proportion of 
generation is fuelled with the fossil feedstock. Therefore, subsidies to electricity and heat generation 
may be a natural fit f or FFS reviews in such economies. The International Energy Agency (IEA) 
includes subsidies to fossil -fuel-fired electricity into its price -gap estimates of FFS. Meanwhile, there 
are non -energy uses of fossil fuels, for instance in chemistry or metallurgy, that are much more 
rarely subject to FFS reviews.5  
 
2 OECD 2021, Companion to the Inventory of Support Measures for Fossil Fuels . 
3 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
4 UNEP 2019, Measuring Fossil Fuel Subsidies in  the Context of the Sustainable Development Goals . 
5 IISD 2017, A guidebook to reviews of FFS . INF/TE/FFSR/W/2  
 
- 3 - 
 
  Figure  1: Global estimates by fuel type  
 
Source:  Fossil Fuel Subsidy Tracker  2021. 
2.2  Subsidy definition  
2.5.  Different definitions are used by organi zations that assess fossil fuel or wider energy subsidies, 
notably the World Trade Organization (WTO), the OECD , and the IEA. These definitions are based 
either on the form of policy intervention by governments (WTO, OECD), or the effect of some of 
these measur es on cost and prices (IEA).6  
2.6.  WTO subsidy definition : In the WTO SCM Agreement, t he definition of a "subsidy" contains 
three basic elements: (i) a financial contribution ; (ii) by a government or any public body within the 
territory of a Member ; (iii) which confers a benefit. All three of these elements must be satisfied for 
a subsidy to exist.  The WTO subsidy definition is widely used by organizations that work on FFS, 
including for G20 peer reviews. The Global Subsidies Initiative (GSI) and several other 
intergovernmental organizations also adhere to it.7 
2.7.  OECD support measures definition : The OECD definition of "government support" also 
builds on the WTO subsidy definitio n.8 The OECD uses a bottom -up method of estimating 
government support to fossil fuels by identifying and quantifying individual policy measures. This 
approach measures fossil fuel support as all direct budgetary transfers and tax expenditures that 
provide  a benefit or preference for fossil -fuel production or consumption. The definition of support, 
as opposed to subsidy, is a deliberately broader one, which encompasses policies that can induce 
changes in the relative prices of fossil fuels. The definition w as adopted in 2019 to track and measure 
the Sustainable Development Goal (SDG) Indicator 12.c.1 on FFS.9 
2.8.  IEA subsidy definition : The IEA establish es a market reference price and then compare s it 
with the price paid by consumers. When the end -user price is  lower than the reference price, it is 
counted as a subsidy.  The approach however does not include subsidies that do not have an impact 
on energy prices in short and medium terms, including, for example, certain tax breaks and cross -
subsidies.10 The IEA ha s also recently considered an  approach  that goes further and  explores 
whether, and how, it might be possible to incorporate environmental aspects into the calculation of 
FFS.11 
 
6 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
7 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
8 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
9 OECD, Inventory of  Support for Fossil Fuels - methodology . 
10 IISD 2017, A guidebook to reviews of FFS . 
11 IEA 2023, Fossil Fuel Subsidies in Clean Energy Transitions: Time for a New Approach?  
INF/TE/FFSR/W/2  
 
- 4 - 
 
  2.9.  IMF subsidy definition : The International Monetary Fund (IMF) argues that failu re of 
governments to internalize externalities confers a subsidy.12 The IMF therefore uses the price paid 
by consumers for energy derived from fossil fuels as the criterion for the existence of FFS. If the 
price is lower than the cost of supply, then subsi dies are deemed to exist. The IMF also widens the 
scope by including "post-tax" consumer subsidies  considering that corrective taxes should be applied 
to fossil fuel prices for environmental damages caused, as well as additional consumption taxes. The 
exem ption of these taxes is then regarded as a subsidy. Further, the IMF includes production 
subsidies drawn from the OECD Inventory.13 
2.10.  These and other definitions (e.g. those of the World Bank's Energy Sector Management 
Programme (ESMAP)  and the System of National Accounts ) can be used as a basis to identify and 
measure FFS and produce harmonized data. Nevertheless, the WTO definition is accepted as very 
comprehensive and allowing the capture of these subsidies, both to producers and consumers. It is 
signed  by 164 members.14 
Table 1:  Typology of energy subsidies based on the SCM Agreement  
Type of subsidies  Examples  
Direct transfer of  
government funds  • Direct spending, budget and off -budget transfers  
• Government ownership of energy -related enterprises if on terms and conditions 
more favourable for business than in case of private ownership  
Induced transfers  
(Price support)  • Price support, including through market regulation  
Tax expenditure, other 
revenue foregone,  
and under pricing  of 
goods and services  • Tax breaks and other government revenue foregone  
• Under pricing  of government -owned energy resources  
• Under pricing  of non -energy, government -owned natural resources or land  
• Under pricing  of government -owned infrastructure  
• Under pricing  of other government -provided goods or services  
• Below -market lending to energy -related enterprises, including loans to energy 
exporters, and debt restructuring and cancellations  
Transfer of risk to  
government  • Credit support through risk transfer mechanisms like loan guarantees  
• Debt restructuring and cancellations  
• Insurance and indemnification  
• Assumption of risks related to occupational health and accidents  
• Assumption of responsibility for remediating environmental damage  
Source:  UNEP 2019 .  
3  SUPPORT MECHANISM  
3.1.  Some  classifications build off the type of the support  mechanism  or instrument used to provide 
them. Under the SCM Agreement, subsidies can be broadly grouped into four categories:  
(i) government measures involving  the direct transfer of funds; (ii)  government revenue that is 
otherwise foregone (not collected); (iii)  governm ents providing goods and services or purchasing 
goods;  and (iv) income  or price  supports.15 The OECD and GSI typologies of FFS further break down 
the high -level categories into more specific groups of FFS. Such fine-grained distinction s would also 
take into account the incidence of the subsidy, i.e. to which aspect of production or consumption it  
is targeted  which is essential to understanding the economic and environmental effects of a 
subsidy.16 
3.2.  The OECD and the GSI classifications distinguish between direct transfers of funds, price 
support, tax expenditures, and transfers of risk to government . 
3.3.  Direct transfer s of government fund s are payments made by governments, or bodies 
acting on behalf of governments, to individual recipients.  This includes direct spending, e.g. for 
specific support programmes, and government ownership (fully or through eq uity shares) of energy -
related enterprises.17 
 
12 IISD 2017, A guidebook to reviews of FFS . 
13 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
14 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
15 See Article 1.1(a)(1) and (2) of the SCM Agreement.  
16 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
17 OECD, Inventory of  Support for Fossil Fuels - methodology . INF/TE/FFSR/W/2  
 
- 5 - 
 
  3.4.  Capital transfers are one common form of direct payments. Direct transfers normally are 
reported by governments in their budgets and generally do not need to be estimated by analyst s. A 
challenge might be data collection by the statistical agencies from the sectoral ministries and state -
owned enterprises, including at the sub -national level, which depends on their capacity.  In cases 
where direct transfers are made to a range of industries, additional analysis ma y be required to 
allocate the amount of payments that are particular  to fossil fuel -related industries.18 
3.5.  Induced transfers (or  price support  or price -gap) are estimated subsidies due to market 
regulation and price support for lower end -user price relative  to the full cost of supply. It refers to a 
change in prices received by producers and paid by domestic consumers as a consequence of 
government interventions, such as through direct price regulation, pricing formulas, border controls 
or taxes, and domesti c purchase or supply mandates. The difference between the end -use price and 
a reference price (reflecting the full cost of the supply, which would prevail in a competitive market) 
amounts to the price gap or induced transfer.19 
3.6.  The most prevalent induced t ransfers are regulations that oblige producers to sell their fuel at 
lower than the opportunity -cost price of that fuel (consumer price support). Among the most 
common mechanisms are direct price controls, automatic pricing formulas and supply mandates, 
sometimes used in combination.  Governments may also support domestic energy industries, or 
certain segments of those industries, such as refining. Import duties increase the price of products 
imported, which allows domestic producers to raise their prices by  up to the amount of the tariff.  In 
cases where fuel prices are regulated, governments generally have very good documentation of the 
regulated fuel prices and domestic price build -up as monitored by regulatory agencies. Furthermore, 
data on the prices of f uels and electricity sold domestically are generally available for most countries, 
even if only for certain regions.20 
3.7.  Tax expenditures  are tax concessions that are typically provided through lower rates, 
exemptions, or rebates of consumption taxes on fossil fuels (mainly value -added taxes and excise 
taxes) or measures to reduce the cost of the extraction of fossil fuels (including accelerated -
depreciation allowances for capital expenditure, investment tax credits, deductions for exploration 
and develop ment expenses, and preferential capital -gains treatment). Tax expenditures can also 
take less visible forms such as the special treatment of income from state -owned enterprises, tax 
relief for income earned on industry sinking funds (e.g. for site remediat ion), tax exempt bonds, the 
use of foreign tax credits for what may be considered royalty payments, or preferential tax rates on 
fuels used as inputs in fossil -fuel production. Tax expenditures are often premised on providing 
government support to activiti es or entities deemed to be socially beneficial; or on concerns relating 
to risk and uncertainty, energy security, capital intensity, high upfront costs, and long project 
timelines.21 
3.8.  Unlike direct spending, tax expenditures are almost always deliberated o utside of the 
budgetary framework. Once in place, tax expenditures do not typically require approval by the 
legislature and might therefore be less subject to oversight. The lack of established accounting and 
reporting practices of tax expenditures, or lac k of transparency can limit assessments and 
international comparability of tax expenditures for FFS. In addition, information on tax expenditures 
at the sub -national  level is often hard to come by.22 
3.9.  Transfer of risk to government . Private enterprise in th e fossil -fuel industry involves 
managing various risks – technological, financial, price -related and policy -related, and geological. 
Reports show that "[m] any governments of fossil -fuel producing countries have developed ways to 
 
18 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
19 OECD, Inventory of  Support for Fossil Fuels - methodology . For countries that import a given product, 
consumer subsidy estimates derived through the measurement  of price -gaps are explicit. That is, they 
represent net expenditures resulting from the domestic sale of imported energy at lower, regulated prices. In 
contrast, for countries that export a given product – and therefore do not pay world prices – subsidy e stimates 
are implicit and have no direct budgetary impact. Rather, they represent the opportunity cost of pricing 
domestic energy below market levels. For countries that produce a portion of their fossil -fuel consumption 
themselves and import the remainder , the estimates represent a combination of opportunity costs and direct 
government expenditures.  
20 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
21 OECD, Inventory of  Support for Fossil Fuels - methodology . 
22 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . INF/TE/FFSR/W/2  
 
- 6 - 
 
  shift a portion of those ri sks to the government, and ultimately taxpayers. "23 This is usually through 
direct involvement in industry, for example through a state -owned enterprise, or by offering credit, 
loan guarantees or other risk -sharing mechanisms to independent companies on te rms that are 
more favourable than could be obtained from private lenders.  
Table  2: Typology of energy subsidies  
Category  Sub-category  Examples  
Direct transfers of 
government funds  Direct spending, budget  
and off -budget transfers.  • Agency appropriations: Targeted spending on the 
sector through government budgets of different 
levels and budgets of individual government 
agencies.  
• Equity infusions.  
• Government  procurement of energy at above -
market rates.  
Government ownership  
of energy -related enterprises  
if on terms and conditions  
more favourable for business  
than in case of private ownership.  • Government ownership of strategic and other 
energy assets  that provides returns on investment 
at rates below -market.  
Induced transfers  
(Price support)  Price support, including through 
market regulation . • Consumption mandates and mandated feed -in 
tariffs: fixed consumption shares for use of a 
specific energy type.  
• Border protection or restrictions: controls (tariff 
and non -tariff measures) on imports or exports 
leading to unfair advantages.  
• Regulated prices set at below -market rates: for 
consumers (including where there is no financial 
contribution by government).  
• Regulated prices set at above -market rates: for 
producers .  
• Cross -subsidies  in the electricity sector . 
Tax expenditures, 
other  
revenue foregone, 
and under pricing  
of other goods 
and services, 
including risk  Tax breaks and other  
government revenue foregone . • Income -tax expenditures: Tax expenditures are 
foregone tax revenues, due to special exemptions, 
deductions, rate reductions, rebates, credits or 
deferrals that reduce the amount of tax that would 
otherwise be payable.  
• Exemptions  from excise taxes and othe r special 
taxes, or other duties: Exemption of excise taxes 
on fuels; special targeted taxes on energy industry 
(e.g. based on environmental concerns or 
"windfall " profits); exemption of import duties on 
equipment for a specific industry.  
Under pricing  of government - 
owned energy resources.  • Benefits related to differences in procedures for 
energy resource leasing: For example, some 
countries auction access to larger sites, but 
designate a sole source for smaller sites.  
• Royalty relief or reductions in other taxes due on 
extrac tion: reduced, delayed or eliminated 
royalties.  
Under pricing  of non -energy,  
government -owned natural  
resources or land.  • Access to government -owned natural resources 
such as water or land at no charge or for below -
market rate.  
Under pricing  of government - 
owned infrastructure  • Use of government -provided infrastructure at no 
charge or below -market rate.  
Under pricing  of other  
government -provided goods or 
services . • Government -provided goods or services at below -
market rates.  
 
23 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . INF/TE/FFSR/W/2  
 
- 7 - 
 
  Category  Sub-category  Examples  
Transfer of risk to 
government  Credit support . • Loan guarantees: at below -market rates.  
Debt restructuring and  
cancellations  • Debt restructuring: the government -orders the 
easing of the debt burden on one or more firms.  
• Debt cancellation: the government forgives the 
outstanding balance of a loan it has made, with no 
compensation from the beneficiary.  
Insurance and indemnification . • Government insurance and indemnification: market 
or below - market risk-management or risk -shifting 
services  
• Statutory caps on commercial liability: can confer 
substantial subsidies if set well below plausible 
damage scenarios.  
Assumption of risks related to 
occupational health and accidents . • Assumption of occupational health and accident 
liabilities.  
Assumption of responsibility for 
remediating environmental 
damage . • Responsibility for closure and post -closure risks: 
facility decommissioning and clean -up; long -term 
monitoring; remediation of contaminated s ites; 
litigation  
• Waste management and environmental damages: 
avoidance of fees payable to deal with waste, 
avoidance of liability and remediation to make the 
environment whole.  
Source:  UNEP 2019 .  
3.10.  The level of difficulty in measuring government support varies across these different transfer 
mechanisms, starting with the ease of  quantifying the cost of direct spending programmes, to the 
estimation of induced transfers due to government regulation and the revenue forgone from 
providing tax benefits, to quantifying the support element of transferring risk to the government 
through concessional finance. With the exception of direct spending programmes, the estimation for 
the other support measures hinges on measuring the difference between either applied tax rates, 
regulated price, interest rate and realised equity return, and their reference counterparts.24 
3.11.  The most straightforward government programmes to identify and measure are direct 
spending programmes. These are well documented, revised on a budget cycle, and subject to 
legislative and executive branch scrutiny. Tax expenditure s, on the other hand, are often under 
reported by many jurisdictions.  It remains that direct spending programmes and tax expenditures 
are the more easily measurable forms government support for fossil fuels . Government support 
through the financial system remains underreported despite its scale and potential for affecting the 
allocation of capital across sectors.25 
4  STAGE OF PROVISION  
4.1.  A common broad distinction based on the stage at which subsidies are provided is between FFS 
to consumers and to producers.  
4.2.  Consumption subsidies  cover government support to further the consumption of fossil fuels, 
lowering their costs for private households or industrial consumers . These subsidies are, therefore, 
provided to the consumers of fossil fuels in activities that could include the use of fossil fuels in 
power and heat generation, as well as in industrial processes and activities outside of the energy 
sector, including all  other final uses of fossil fuels, be it in the sectors of transport, agriculture, 
forestry, fisheries, or the residential sector. This is a very broad category ranging from government 
support for household cooking gas to economy -wide gasoline or diesel su bsidies to support the price 
of energy inputs for domestic energy -intensive goods -manufacturing industries.26 
4.3.  Consumption subsidies  predominantly cover  petroleum products for private customers for 
transport, lighting, cooking , or heating, or for fuels used  by electricity generators and strategically 
important domestic industries , with the IEA recording these are often found in developing countries . 
 
24 OECD 2020, Designing fossil fuel subsidy reforms in OECD and G20 countries: A robust sequential 
approach methodology . 
25 OECD 2020, Designing fossil fuel subsidy reforms in OECD and G20 countries: A robust sequential 
approach methodology . 
26 IISD 2022, Background Note of Fossil Fuel Subsidy Reform . INF/TE/FFSR/W/2  
 
- 8 - 
 
  According to IEA's latest available estimations, i n 2022, subsidies worldwide for fossil fuel 
consumption nearly doubled  to more than USD  1 trillion, up from 528 billion in 2021 and by far the 
largest annual value ever seen.27 
4.4.  Under pricing  fossil fuel products relative to the market prices or cost recovery, through 
regulating domestic price or reducing tax rates, and hence the end -user price, results in increased 
consumption of fuels relative to a fully priced pricing counterpart.28 There i s also a large number of 
sector -specific fossil fuel consumption subsidies — for the fishing sector, for road freight, for farming, 
etc. For example, fuel subsidies reduce the costs of fishing, leading to an increase of fishing capacity, 
and contributing t o continued overfishing in the ocean.29 
4.5.  Production subsidies  are provided to the producers of fossil fuels  and can occur along all 
stages of fossil fuel production. Such subsidies include transfers to producers of fossil fuels and can 
include such activiti es as gaining access to reserves, exploration and field development, extraction, 
transportation and storage, refining and processing, as well as decommissioning of installations.30 
4.6.  They are concentrated in the major producers of oil, gas, and coal. Produce r subsidies are 
generally identified by an inventory approach . The OECD compiles estimates of producer support in 
its inventory, which currently covers 43 countries. Non -governmental organi zations (NGOs) have 
published reports identifying individual polici es and programmes supporting fossil -fuel production in 
individual countries. However, there  are currently no global estimates of producer subsidies.31  
4.7.  Countries use tax incentives and other forms of government support, such as concessional 
finance or dire ct budgetary transfers, to attract domestic and foreign investment. Investments in 
the fossil fuel extractive sector have the potential to be important drivers for economic growth, but 
they can also  cause economic, social and environmental harm. Government  support to the sector 
can be designed to effectively and efficiently deliver benefits to its economy, but it can erode a 
government 's ability to generate the requisite revenue to fund other public services and investments. 
Government support can also be d istortive as it may tilt the playing field towards fossil -fuel energy 
sources locking in carbon -intensive assets, slowing down the uptake of less carbon -intensive 
technologies and crowding out investments in other industries.32 
4.8.  There may sometimes be a fin e line between production and consumption subsidies in terms 
of their trade effects. The IISD gives the example of producer subsidies in domestic transformation 
which could be corporate income -tax subsidies to new refineries. Such measures are not directly  
linked to the consumption of fossil fuels, but rather support the production of refined petroleum 
products. Consumer subsidies in domestic transformation, on the other hand, can take the form of 
price controls or tax subsidies that directly lower the pric e of fossil fuel inputs. Furthermore, 
downstream sectors and enterprises using subsidized fuels as inputs would benefit from relatively 
lower production costs. Thus, the effects of consumption subsidies can vary widely depending on 
how targeted they are an d on the intended beneficiary (e.g.  downstream producer or a household).33  
4.9.  A third category of FFS that is sometimes used is that of "general services " subsidies that 
benefit neither individual producers nor consumers of FFS but, rather, are applied to a broader sector 
or economy, for example, some research and development activities or the construction of 
infrastructure.34 
 
27 IEA 2023, Fossil fuel consumption subsidies 2022 . 
28 OECD 2020, Designing fossil fuel subsidy reforms in OECD and G20 countries: A robust sequential 
approach methodology . 
29 Climate Action Network 2023, Fossil Fuel Subsidies in the EU . 
30 IISD 2022, Background Note of Fossil Fuel Subsidy Reform . 
31 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
32 OECD 2 020, Designing fossil fuel subsidy reforms in OECD and G20 countries: A robust sequential 
approach  methodology . 
33 IISD 2020, Exploring the Trade Impacts of Fossil Fuel Subsidies . 
34 IISD 2022, Background Note of Fossil Fuel Subsidy Reform . INF/TE/FFSR/W/2  
 
- 9 - 
 
  Figure  2: Fossil fuel subsidies  by category (2019)  
 
Source: IISD 2022 . 
4.10.  The OECD Inventory similarly classifies subsidies by their beneficiaries as follows:  
• Producer Support  Estimate : transfers or expenditures from consumers and taxpayers to 
producers of fossil fuels. Fossil -fuel production encompasses the following activities along 
the supply chain: exploration and extraction; bulk transportation and storage; and refining 
and process ing. 
• Consumer Support  Estimate : transfers or expenditures in favour of consumers of fossil 
fuels. Consumption of fossil fuels refers to the stage at which fuels are combusted or used 
as raw materials by various end -use sectors, whether it occurs in motor vehicles, stationary 
engines, heating equipment or power plants. Consumption encompasses the following 
activities: the use of fossil fuels in power and heat generation; their use in industrial 
processes and activities outside of the energy sector; an d all other final uses of fossil fuels, 
whether in the transport sector, the residential sector, or primary industries outside of the 
energy sector (e.g. agriculture and forestry).  
• General Services Support  Estimate : transfers or expenditures arising from p olicy 
measures that create enabling conditions for the fossil -fuel sector through the development 
of private or public services, institutions and infrastructure (regardless of their objectives 
and impact on fossil -fuel production and or consumption). It in cludes policies where fossil 
fuels are the main beneficiaries but does not include any payments to individual producers. 
GSSE transfers do not directly alter producer receipts or costs, or consumption expenditures, 
although they may affect production or co nsumption of fossil fuels in the long term.35 
 
5  BENEFICIARY  
5.1.  The classification of subsidies by transfer mechanisms is helpful because it allows researchers 
to identify the sources of data and the relevant method of estimation for a particular mechanism. 
However, for understanding the economic or environmental effects of a subsidy, it may be  more 
helpful to know the stage of production or consumption at which the support is targeted  (i.e., as the 
OECD calls it, the subsidy's "incidence") since the same type o f subsidy can have varying effects on 
production, and the environment.36 Classifying subsidies by their incidence gives information about  
 
35 OECD, Inventory of  Support for Fossil Fuels - methodology . 
36 For example, a direct budgetary transfer tied to output returns will not have the same effects on 
production as one tied to intermediate inputs such as energy used in processing. The former effectively raises 
the price of the output for the producer, creating a higher optimal p roduction amount, whereas the latter 
reduces the cost of specific inputs, and thus in addition to encouraging more production it will also skew the 
input mix towards the use of the supported inputs. A subsidy to energy inputs, for example, would encourage 
INF/TE/FFSR/W/2  
 
- 10 - 
 
  the recipient of a subsidy . Initial incidence is focused on the aspect of production or consumption 
that is officially targeted by the measure, or on which the measure is based. The ultimate incidence 
of a subsidy may differ from its formal incidence  – for example, a subsidy to a st ate-owned oil 
company might result in lower oil prices, making domestic consumers the ultimate beneficiaries.37 
5.2.  The OECD identifies nine types of formal incidence  of which  seven relate to production : 
• Output returns : Increase s the price received by producer s for the sales of a specific good, 
or make up for losses incurred at selling that good at an administered price , e.g. direct 
subsidization by governments of unit costs of coal production.  
• Enterprise income : Enable s a firm to earn more income over the cour se of a year than it 
would otherwise, e.g. an annual cash infusion to make up for overall losses, or a concessional 
rate of income tax not specifically tied to the production of a particular commodity.  
• Cost of intermediate inputs : Reduces the unit cost of a particular input, typically through 
an input -price subsidy, or a reduction or exemption in a tax on the input. It can also include 
the provision of goods and services by the government at below -market prices.  
• Labour : Reduce s the cost of labour to compani es by subsidi zing wages or reducing the 
social charges normally paid by firms. It can also increase the wages and benefits of 
labourers, e.g. through an income -tax exemption or the government provision of a benefit.  
• Land and natural resources : Allows firms  to acquire land at a reduced cost when used for 
a productive activity, such as coal mining, through tax reductions or under -priced access to 
government -owned land ; or reduced resource royalties or taxes for the exploitation of 
natural resources, e.g. oil and gas wells.  
• Capital : Include s both grants to help a firm purchase capital equipment or invest in 
construction works, and assistance that reduces the financing cost of the firm or a project. 
Tax benefits may also be tied to capital investments or financi ng costs.  
• Knowledge : Government -funded R&D, other than primary research, or the transfer of 
government -owned intellectual property rights to producers ; indirect forms include targeted 
tax credits for investments in fossil fuel -related R&D.  
 
5.3.  There are also two types of incidences that relate to the direct consumption  of fossil fuels:  
• Unit cost of consumption : Reduce s the price received by final consumers in the purchase 
of a fossil fuel, where consumers comprise both households and enterprises , e.g. price 
discounts and VAT or excise -tax exemptions.  
• Household or enterprise income : Reduce s the cost of energy purchases for households 
or enterprises at a rate that varies with income, e.g. lifeline electricity rates that reduce the 
price of electric ity for households at a rate dependent on total electricity consumption.  
 
5.4.  This classification of subsidies facilitates an analysis of their effects on fossil fuel production 
and consumption, and consequently on the environment. The OECD considers that it c reates greater 
value in terms of illustrating the impacts of subsidies to policymakers. 38 
6  SECTOR  
6.1.  The OECD Inventory – which follows the  IEA's World Energy Balances – groups  fossil-fuel 
production and consumption subsidies under the following categories:  
• Production sector:  includes measures that support the production, exploration, trade, 
storage and transportation of fossil fuels.  
• Transportation sector:  includes measures that support the final uses of fossil fuels in the 
transport sector, incl uding domestic aviation, domestic navigation, road, and rail.  
• Residential sector:  includes measures that support the final uses of fossil fuels in the 
residential sector, including consumption by households.  
• Electricity generation sector:  includes measures  that support the use of fossil fuels in 
electricity and heat generation. This includes fossil -fuel inputs to electricity and heat plants, 
both main and auto producers.  
 
the increased use of fossil -fuels, and depending on their importance in the input mix, could lead to more 
production than would be the case in the absence of the subsidy.  
37 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . 
38 UNEP 2019, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals . INF/TE/FFSR/W/2  
 
- 11 - 
 
  • Other sectors:  includes measures that support the use of fossil fuels in the energy 
transformation sector other than electricity and heat generation; industrial and 
manufacturing sector; commercial and public services; agriculture, forestry and fisheries 
sector; non -energy use.39 
 
6.2.  The effects of FFS differ depending on the sector. IISD resea rch suggests that the  most direct 
trade impacts of fossil fuel production subsidies are in upstream markets for crude products .40 
They consider that, based on empirical  results , the scale of  these impacts is likely very significant. 
The most important direct trade impact is the effect that oil, gas and coal subsidies have on  
displacing or impeding competitors ' exports of crude fossil fuel products to the market of  the 
subsidizing economy or third -country markets. This impact can materialize in  three ways:  (1) 
increasing the market share of subsidized products ; (2) reducing the decline of subsidized  products ' 
market share ; and (3) protecting the existing market share of subsidized products,  compared with 
a scenario without subsidies.  
6.3.  Energy tran sformation and industrial activities  can benefit from FFS in three  main ways. 
First, upstream production subsidies can lower the production costs of crude  products and therefore 
the input costs of businesses that transform those products into  refined energ y carriers or other 
products. Second, consumption subsidies also decrease the costs of these inputs, but more directly. 
Third, producers of refined energy carriers can also directly  benefit from subsidies to their 
production.  When FFS lower the production costs for producers of value -added energy  products or 
non-energy products, then these sectors gain a competitive advantage both  within the home market 
vis-à-vis imports and in international markets. This is particularly the  case for energy -intensive 
produc ts or services  but could also apply to other sectors with stiff  competition in which small 
changes in production costs can alter the competitive position of  various producers. FFS can also 
affect trade in competing products. If oil, gas and coal subsidies  benefit certain products that have 
available foreign and unsubsidized substitutes, then the  producers of those substitutes lose out on 
potential market uptake in the subsidizing economy  and even in other markets.41 
6.4.  Final  consumption subsidies  can also have  global economy -wide effects. If many countries 
have economy -wide fossil fuel consumption subsidies, then their combined effect leads to excess 
demand for  and consumption of energy products and energy -intensive products on a global scale. 
This can create a dverse trade impacts for countries with liberalized energy pricing mechanisms.  
Another trade  effect can occur because FFS result in air pollution and global climate change,  which 
negatively affect the productivity of workers and firms. This can occur through a decline  in the 
productivity of human capital as a result of air pollution or a decline in general productivity as a 
result of temporary and  partial shutdowns of (parts of) production processes.42 
7  PATHWAY OF BENEFIT  
7.1.  Depending on the way the benefi t is received, subsidies, including FFS, may be grouped into 
direct and indirect ones. Direct subsidies  are generally provided through targeted (cash -based) 
payments, such as loans or tax  preferences. These subsidies may be implemented per unit of output 
or per unit of input used into  the activity, or per unit of output or input value. The OECD labels a 
fixed subsidy per unit a "specific subsidy ", and a  fixed subsidy per value "ad valorem ".43 
7.2.  The effects of direct FFS  are more straightforward . A financial c ontribution or price/market 
controls directed toward a specific product can create a benefit in the form of a competitive 
advantage that the producer of such a product would enjoy against un - or less -subsidized 
competitors producing like products. FFS enhance the competitiveness of subsidized products both 
in the subsidizing jurisdiction and in other markets. They also enhance its competitiveness against 
alternative or like products, especially when such subsidies are used to start or maintain production 
in circumstances that would make fossil fuel extraction less profitable.44 
 
39 OEDC, Inventory of  Support for Fossil Fuels - methodology . 
40 IISD 2020, Exploring the Trade Impacts of Fossil Fuel Subsidies . 
41 IISD 2020, Exploring the Trade  Impacts of Fossil Fuel Subsidies . 
42 IISD 2020, Exploring the Trade Impacts of Fossil Fuel Subsidies . 
43 OECD 2013, Analysing energy subsidies in the countries of Eastern Europe, Caucasus and Central 
Asia. 
44 IISD 2022, Background Note of Fossil Fuel Subsidy Reform . INF/TE/FFSR/W/2  
 
- 12 - 
 
  7.3.  Indirect subsidies  are received indirectly by the recipient as a higher market price for output 
and/or a  lower market price for input goods and services, purchased from an upstream in dustry that 
is able to  discount its prices thanks to the subsidies it also receives.45 
7.4.  Indirect subsidies are explained by the fact that adverse effects on trade can accumulate 
downstream in the value chain of fossil fuel products. Producers that are not directly subsidized may 
enjoy cheaper inputs into their production process as a result of subsidies provided upstream to 
fossil fuel producers, thus conferring on them a comparative advantage against competitors . Having 
access to below -cost energy inputs, preferential transport costs, or subsidized electricity could be 
converted to increased market share, displacing a competitor 's imports in their own or a third -
country market, as well as in the reduced attractiveness of alternative products. Midstream and 
downstream markets in which such "pass-through " effects of FFS may occur include those of 
transport fuels (gasoline, diesel, and jet kerosene), grid -scale electricity generation, energy -
intensive industries (iron and steel, cement, fertilizer, petrochemica ls, paper), and electricity -
intensive industries (alumin ium, steel, and other non -ferrous metals).46 
7.5.  Another distinction  used by the IMF  categorizes FFS into explicit and implicit subsidies. Explicit 
subsidies  occur when the retail price is below a fuel's supply cost. For a non -tradable product, the 
supply cost is the domestic production cost, inclusive of any costs to deliver the energy to the 
consumer, such as distribution costs and margins. In contrast, for an internationally tradable 
product, the  supply cost is the opportunity cost of consuming the product domestically rather than 
selling it abroad plus any costs to deliver the energy to the consumer. Explicit subsidies also include 
direct support to producers, such as accelerated depreciation.  
7.6.  Implicit subsidies  occur when the retail price fails to include external costs and/or there are 
preferential consumption tax rates on energy. External costs include contributions to climate change 
through greenhouse gas emissions, local health damages (prima rily pre mature  deaths) through the 
release of harmful local pollutants like particulates, and traffic congestion and accident externalities 
associated with the use of road fuels. According to the IMF, to get  energy prices right these adverse 
effects on soc iety must be reflected in prices and general consumption taxes to household fuels  must 
be applied .47 
7.7.  Using this categorization, the IMF estimates that, globally, FFS were USD 5.9 trillion or 6.8% 
of GDP in 2020 and are expected to increase to 7.4% of GDP i n 2025 as the share of fuel consumption 
in emerging markets continues to climb. 8% of this IMF calculation of 2020 subsidies reflects 
undercharging for supply costs (explicit subsidies) and 92% for undercharging for environmental 
costs and foregone consump tion taxes (implicit subsidies).48 
 
45 OECD 2013, Analysing energy subsidies in the countries of Eastern Europe, Caucasus and Central 
Asia. 
46 IISD 2022, Background Note of Fossil Fuel Subsidy Reform . 
47 IMF, Fossil Fuel Subsidie s. 
48 IMF, Fossil Fuel Subsidies . INF/TE/FFSR/W/2  
 
- 13 - 
 
  Figure s 3 and 4 : Subsidies by Year (% of GDP  and US$ at constant 2021 prices ) 
 
 
 
Source:  IMF. 
7.8.  According to IMF estimations, petroleum, natural gas, and electricity accounted for 28, 27 and 
42% of the explicit global subsidy in 2020 (Figure 5 below), while coal accounted for just 3% (as 
coal prices generally cover supply costs). Globally, 8% of the explicit IMF's calculations of explicit 
subsidies in 2020 reflects support for fossil fuel producers (92% is consumer -side subsidies). The 
breakdown by fuel product looks very different for total (explicit plus implicit) subsidies in 2020: 
coal accounts for 41% of the global total in 2020, reflecting underpricing  for carbon and air pollution 
damage. Petroleum accounts for 46% of the global subsidy, largely reflecting the failure of excises 
on petroleum products to fully reflect environmental costs and broader externalities. Natural gas 
(where environmental costs a re more moderate) and electricity (where environmental costs are 
attributed to fuel inputs) account for  9 and 4% of the IMF's global subsidy calculations, 
respectively.49 
 
49 IMF 2021, Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies . 
INF/TE/FFSR/W/2  
 
- 14 - 
 
  Figure 5: Global Fossil Fuel Subsidies by Fue l 
 
Source:  IMF 2021 . 
8  IMPACT  
8.1  Fiscal impacts  
8.1.  The latest available  OECD and IEA data show that overall government support for f ossil fuels 
in 51 countries worldwide almost doubled to USD 697.2 billion in 2021, from USD 362.4 billion in 
2020, as energy prices rose with the rebound of the global economy. In addition, consumption 
subsidies are anticipated to rise even further in 2022  due to higher fuel prices and energy use.50 
Figure  6: Fossil fuel support by energy product : OECD -IEA combined estimates 
(82 economies)  
 
Source:  OECD  2022. 
8.2.  The IEA 's first estimates for 2022 consumer subsidies show that subsidies for natural gas and 
electricity consumption more than doubled compared with 2021, while oil subsidies rose by around 
85%.51 
 
50 OECD 2021, Support for fossil fuels in 2021 . 
51 IEA 2023, Fossil fuel consumption subsidies 2022 . 
INF/TE/FFSR/W/2  
 
- 15 - 
 
  Figure 7: Fossil fuel consumption subsidies by fuel, 2010 -2022  
 
Source:  IEA 2023 . 
8.3.  The IMF underscores that u nderpricing fossil fuels not only undermines domestic and global 
environmental objectives but is a highly inefficient policy for helping low -income households and has 
a sizable fiscal cost  – too little revenue is ra ised from fuel taxes, implying other taxes or government 
deficits must be higher or public spending lower.  According to IMF estimations, f ull price reform  
(addressing both explicit and implicit subsidies)  would raise  revenues of USD 4.2 trillion, 3.8 % of 
global GDP, in 2025 (relative to business -as-usual  levels and accounting for revenue losses due to 
erosion of pre -existing fuel tax bases). Revenue gains vary substantially across regions, largely 
mirroring the distribution of (explicit and implicit) s ubsidies. The IMF estimates that  revenues 
generated by full price reform in 121 emerging market economies  and developing countries in 2025 
would amount to USD 3 trillion, which is broadly in line with their additional spending needs for 
Sustainable Develop ment Goals.52 
Figure 8: Revenue Gain from Reform, 2025  
 
Source:  IMF 2021 . 
 
52 IMF 2021, Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies . 
INF/TE/FFSR/W/2  
 
- 16 - 
 
  8.2  Environmen tal impacts  
8.4.  Increased  fossil fuel  use contributes not only to climate change but also exacerbates air, water, 
and plastic pollution, worsens land degradation, and locks economies into high -carbon production 
cycles.  
8.5.  Greenhouse gas  emissions : Burning fossil  fuels is an important source of greenhouse gas 
emissions that cause climate change. The latest modelling exercise by IISD estimates that  FFSR by 
2025 by a set of 32 economies, including major developed, emerging, and developing countries, 
would reduce CO 2 emissions by an average of 6% in 2030, and in the case of some countries, the 
emissions can be reduced by up to 35%. The reinvestment of just a third of the savings from such 
reform into energy efficiency and renewable energy (a "subsidy swap ") would add an additional 3% 
reduction in CO 2 emissions by 2030.53 
8.6.  Client Earth estimates that, in terms of carbon emissions, coal contributes the most, 
responsible for over 0.3 degrees C of the 1 degree C increase in global average temperatures. This 
would make it th e single largest source of global temperature rise. Oil also releases a huge amount 
of carbon when burned – approximately a third of the world's total carbon emissions. While natural 
gas is often seen as a cleaner energy source than coal and oil, it still accounts for a fifth of the 
world's total carbon emissions.54 
8.7.  Air pollution : The economic impact of fossil fuel combustion's  health effects has been 
estimated to have cost the world approximately USD 2.9 trillion or 3.3% of global GDP in 2018, as 
well as contributing to  the death of 4.5 million people.55 Air pollution from burning fossil fuels can 
cause multiple health issues, including asthma, cancer, heart disease, and premature death. 
Combusting the additives found in gasoline  – benzene, toluene, ethylbe nzene, xylene  – produces 
cancer -causing ultra -fine particles and aromatic hydrocarbons.56 
8.8.  Sulphur dioxide ( SO2), nitrogen oxide ( NOx) and fine particulate matter  (PM2.5) are some of the 
main pollutants  resulting from the combustion of fossil fuels . These p ollutants can cause adverse 
human health effects, but they can also cause reduced agricultural yields, damage to forests and 
fisheries (acid rain), and damage to buildings and infrastructure.57  
8.9.  Land degradation : The Natural Resources Defense Council  highlights that u nearthing, 
processing, and moving underground oil, gas, and coal deposits take an enormous toll on landscapes 
and ecosystems. The fossil fuel industry leases vast stretches of land for infrastructure, such as 
wells, pipelines, and access roads, as well as facilities for processing, waste storage, and waste 
disposal.  As a result, critical wildlife habitat  – land that is crucial for breeding and migration  – ends 
up fragmented and destroyed.58 
8.10.  Water pollution : Coal, oil, and gas develo pment also pose threats to waterways and 
groundwater. The Natural Resources Defense Council  highlights that c oal mining operations wash 
toxic runoff into streams, rivers, and lakes and dump vast quantities of unwanted rock and soil into 
streams. Oil spills  and leaks during extraction or transport can pollute drinking water sources and 
jeopardize freshwater or ocean ecosystems.  Meanwhile, drilling, fracking, and mining operations 
generate enormous volumes of wastewater, which can be laden with heavy metals, radioactive 
materials, and other pollutants.59 
8.11.  Plastic pollution : Over  99% of plastics are made from fossil fuels , according to the 
Environmental and Energy Study Institute . Globally, 300 million tons of plastic waste are produced 
 
53 IISD 2022, Background N ote of Fossil Fuel Subsidy Reform . 
54 ClientEarth 2022, Fossil fuels and climate change: the facts . 
55 IISD 2022, Background Note of Fossil Fuel Subsidy Reform . 
56 Environmental and Energy Study Institute 2021, Fact Sheet | Climate, Environmental, and Health 
Impacts of Fossil Fuels . 
57 IRENA 2016, The True Cost of Fossil Fuels: Saving on the Externalities of Air Pollution and Climate 
Change (REmap brief) . 
58 Natural Resources Defense  Council  2022, Fossil Fuels: The Dirty Facts . 
59 Natural Resources Defense Council  2022, Fossil Fuels: The Dirty Facts . INF/TE/FFSR/W/2  
 
- 17 - 
 
  each year, 14 million ton s of which end up in the ocean, endangering  wildlife and polluting the food 
chain.60 
8.12.  High-carbon economy lock-in: Support for renewable  energy development remains 
approximately three times lower than that for fossil fuels. Prioriti sing subsidies for fossil fuels thus 
slows down not only the innovation and investment needed for transition into renewable energy 
grids, but also reaping the benefits that the deployment of renewable energy technologies could 
have for energy intensity. FFS also tend to contribute to poorly  targeted social welfare policy with 
its fiscal costs and tendency  to benefit higher -income groups. An IMF study reviewing  the estimates 
of welfare impacts in 32 developing countries shows that 80% of gasoline subsidies go to  the top 
40% of the households and that the top 20% of households benefit six times more from the subsidies 
than the poorest 20%.61  
8.13.  According to IMF estimates, b roken down by component (Figur e 9 below ), undercharging for 
air pollution, global warming, bro ader externalities from road use, supply costs, and general 
consumption taxes account for 42, 29, 15, 8, and 6 % respectively of total (explicit and implicit) 
subsidies in 2020. For coal, local air pollution and global warming account for 58 and 40 % of tota l 
subsidies respectively, while for petroleum underpricing for local air pollution and broader 
externalities account for 39 and 33 % of the total subsidy respectively, and global warming a smaller 
16%. In contrast, for natural gas global warming is 59 % of the total subsidy.62 
Figure 9: Global Fossil Fuel Subsidies by Component  
 
Source:  IMF 2021. 
8.3  Trade impacts  
8.14.  Trade impacts of FFS have not been thoroughly explored.63 IISD research highlights that FFS 
trade impacts are closely connected to the product markets that benefit directly and indirectly from 
those subsidies. One fossil fuel subsidy may have trade impacts on several markets and one single 
market can be affected  by several FFS.64 
8.15.  Markets that are affected by FFS can be found across the entire value chain. There are markets 
upstream in fossil fuel production, downstream in end uses of energy and energy -intensive products, 
and midstream in refining, transmission an d distribution support ( e.g. transport and storage). 
Upstream markets for primary fossil fuel commodities include those for crude oil, natural gas and 
coal. Midstream and downstream markets include those for transport fuels (gasoline, diesel , and jet 
 
60 Environmental and Energy Study Institute 2021, Fact Sheet | Climate, Environmental, and Health 
Impacts of Fossil Fuels . 
61 IISD 2022, Background Note of Fossil Fuel Subsidy Reform . 
62 IMF 2021, Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies . 
63 The WTO Secretariat will release a working paper on the topic in the latter part of 2023.  
64 IISD 2020, Exploring the Trade Impacts of Fossil Fuel Subsid ies. 
INF/TE/FFSR/W/2  
 
- 18 - 
 
  keros ene), grid -scale electricity generation, energy -intensive industries (petrochemicals, fertilizer, 
iron and steel, cement, pulp and paper, food),  and electricity -intensive industries (aluminium, steel 
and other non -ferrous metals such as copper, zinc, and t in).65 
Figure  10: Direct and pass -through effects of fossil fuel subsidies  
 
Source:  IISD 2020. 
8.16.  Direct trade effects  occur when subsidies provided to fos sil fuel producers affect the 
markets  for energy commodities such as crude oil, natural gas or coal, as well as transformed energy  
products, through reducing producers ' costs of extraction or transformation, respectively. They  also 
manifest when fossil fue l consumption subsidies directly decrease the costs of fossil fuel  inputs used 
by various industries, whether they process feedstocks into value -added energy  types ( e.g. gasoline, 
diesel, electricity) or they use energy products as inputs to produce  non-energy products ( e.g. iron 
& steel, plastics).  
8.17.  Pass -through trade effects  occur when FFS provided to upstream fossil fuel producers lead 
to lower -cost energy products  that can then be used as input in other production processes 
downstream. Part of the  subsidy  benefit is "passed through " to downstream producers. For example, 
a steel producer may not  enjoy a direct subsidy, but it can still benefit from upstream coal subsidies 
that lower the price  of coal, which is a key input into steel production.   
8.18.  There are also impacts across different markets  when a country that subsidizes a certain  
product uses less of a non -like substitute product. For example, a country subsidizing coal  that 
benefits coal -fired power plants will very likely use less renewable ener gy technologies  than in a 
scenario in which there were no coal subsidies. Not only do FFS thus affect trade in fossil fuels and 
energy -intensive products, but they also affect the relative costs  of cleaner alternative 
technologies.66  
 
65 IISD 2020, Exploring the Trade Impacts of Fossil Fuel Subsidies . 
66 IISD 2020, Exploring the Trade Impacts of Fossil Fuel Subsidies . 
INF/TE/FFSR/W/2  
 
- 19 - 
 
  Figure  11: Trade impa cts of fossil fuel subsidies at various stages of fossil fuel product 
value chains  
 
Source:  IISD 2020. 
8.19.  In terms of sectors, f ossil fuel subsidies can directly or indirectly reduce the marginal cost of 
the production of crude energy products, transformed energy carriers or energy -intensive products. 
As a result, industries within the subsidizing jurisdiction can see their competitive advant age vis -à-
vis non -subsidized foreign products increased . This can provide  them with an  opportunity to capture 
more market share in domestic or international markets compared to a no -subsidy baseline. IISD 
analysis suggests that the trade impacts of FFS are likely the largest when those subsidies affect 
upstream markets, as well as markets for petroleum and energy -intensive products and energy -
intensive products. While the size of the effect would depend on the form of the subsidy and the 
prevailing market p rice in each case, trade openness in these sectors is generally very high, with 
large volumes traded for large sums of money. If FFS affect the marginal cost of production of these 
products, then it is very likely that subsidies will allow their producers to gain a competitive edge in 
these highly competitive and valuable markets. Many producer subsidies reduce the cost of 
investment but can also lower the marginal cost of production and thus affect international trade 
significantly.67 
__________  
 
67 IISD 2020, Exploring the Trade Impacts of Fossil Fuel Subsidie s.