The study found that the results were highly sensitive to the assumptions made about such standard parameters as costs, selling price, capacity utilization, the project life, discount rate, and inflation, and different but plausible assumptions had led to the opposite conclusions about the presence of subsidies. Specificity could be particularly problematic. It immediately raises the question of how specific—if a tax policy affects only three sectors, including energy, and fossil fuel prices fall as a result, is that a fossil fuel subsidy? More importantly, a policy may not specifically target fossil fuels on paper but may be designed to benefit the fossil fuel industry disproportionately. If fossil fuel suppliers capture the bulk of the benefits of a tax break, not including that tax break in the subsidy calculations—on the grounds that the tax relief did not “specifically” target fossil fuels—would under-estimate support to producers (effect C above).

A commonly employed method for estimating subsidies falling under effect A (reduced spending by consumers) is the “price-gap” approach. The method calculates the difference between the reference price for energy in an actual or imputed market-based transaction and the price actually paid by, or officially charged to, an end user for that same energy delivered to the same location at the same time. The IEA follows this approach in its estimations of global subsidies for fossil fuels. The use of price gap measurements for fossil fuel subsidies usually focuses on positive gaps on the assumption that if energy is sold at a price below what it would have been in a competitive, deregulated market, the main reason for the lower price is some government intervention—a subsidy, a cross-subsidy, or some form of price regulation (including an export tax or restriction). This is in contrast with agriculture, where the focus has historically been more on domestic prices being higher than reference prices, especially in OECD countries, and which has been the subject of international trade negotiations. Because prices can be high or low for reasons other than subsidies, it remains important to confirm that there is a plausible policy mechanism that would result in lower prices. Price gaps do not capture all energy subsidies. Some policies affect market participants (most often producers, including resource owners) in ways that do not result in lower end-user prices. Also, some consumers are subsidized through vouchers or similar programs that are tied to their purchase of fuels but do not affect the domestic prices of those fuels.

One way of arriving at a more comprehensive understanding of subsidies is to list policies using different subsidy-delivery mechanisms in an inventory. Some of these policies may have no measurable effects on prices and some may increase prices charged to consumers. Many alter the mix of energy resources deployed in an economy and the timing of their availability. An overview of different subsidy delivery mechanisms applicable to a wide range of sectors can be found in a primer by Steenblik (2007). Using the WTO’s definition of a subsidy (WTO undated) as the starting point—summarized as “a financial contribution by a government, or agent of a government, that confers a benefit on its recipients”— the primer describes what kind of benefits may be provided and how. The OECD (2010a) provides a detailed overview of subsidy definitions and approaches to calculating indicators of support to arrive at the total support estimate (TSE).

Much of the methodological development has been led by agriculture, where producer subsidies have historically been high in OECD countries, aided by border restrictions. Over the past several decades, practitioners in agriculture have come to a common understanding of terms and acceptance of standardized approaches, enabling comparison of subsidies across countries (Steenblik 2002). The OECD 6