Indicator 12.c.1 Amount of fossil-fuel subsidies per unit of GDP (production and consumption)

Indicator 12.c.1: Amount of fossil-fuel subsidies (production and consumption) per unit of GDP

Target 12.c: Rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking fully into account the specific needs and conditions of developing countries and minimizing the possible adverse impacts on their development in a manner that protects the poor and the affected communities

United Nations Environment Programme (UNEP)

Definitions:

In order to measure fossil fuel subsidies at the national, regional and global level, three sub-indicators are recommended for reporting on this indicator: 1) direct transfer of government funds; 2) induced transfers (price support); and as an optional sub-indicator 3) tax expenditure, other revenue foregone, and under-pricing of goods and services. The definitions of the International Energy Agency (IEA) Statistical Manual (IEA, 2005) and the Agreement on Subsidies and Countervailing Measures (ASCM) under the World Trade Organization (WTO) (WTO, 1994) are used to define fossil fuel subsidies. Standardised descriptions from the United Nations Statistical Office’s Central Product Classification should be used to classify individual energy products. It is proposed to drop the wording “as a proportion of total national expenditure on fossil fuels” and thus this indicator is effectively "Amount of fossil fuel subsidies per unit of GDP (production and consumption)".

Concepts:

The concepts and definitions used in the methodology have been based on existing international frameworks and glossaries.

• Use definition of fossil fuels from the International Energy Agency (IEA) Statistics Manual, “Fossil fuels are taken from natural resources which were formed from biomass in the geological past. By extension, the term fossil is also applied to any secondary fuel manufactured from a fossil fuel.”
• Use the terms set out in the Central Product Classification (CPC), Rev. 2.1 for the statistical classification of the individual products. No other commonly accepted definition identified.
• Include electricity and heat generated from fossil fuels in the scope of fossil fuels.
• Include non-energy uses with monitoring optional for the measuring of this indicator.
• Additional details are provided in the methodological document entitled, Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals.

Percent (%) - for Fossil-fuel subsidies (consumption and production) as a proportion of total GDP;

Billions of nominal United States dollars - for Fossil-fuel subsidies (consumption and production);

Nominal United States dollars - for Fossil-fuel subsidies (consumption and production) per capita.

Direct transfers are generally reported in government budgets, and well documented in sectoral and Finance Ministries, broken down by programme if not by fuel. Those that meet the SNA definition of “subsidies” – i.e., subsidies on products, and other subsidies on production – can also be found in a country’s System of National Accounts. Budget documents are publicly available for most countries. The degree to which information on individual programmes is itemized in those reports is highly variable, however. Support to corporations involved in energy production or transformation may sometimes be found in their annual reports, for example. In some cases, researchers may be able to obtain unpublished data from state-owned energy enterprises directly.

Induced transfers are measured by calculating the price-gap between the producer or consumer price and a reference price and multiplying that differential by the affected volume produced or consumed.

Measuring the value of special features introduced into the tax code to favour certain industries or activities of those industries (such as investment in productive capital) can be a complex endeavour. Some countries do this exercise already, and report the annual value of those tax features in their periodic tax-expenditure reports. Where that is not the case, the analysist must construct a model and estimate the difference in the revenues that would be owed to the government under the baseline conditions and with the special tax feature.

Fossil fuel subsidies should be monitored on an annual basis.

1. National Focal Points from National Statistical Systems.
2. International Estimate Providers – the Organisation for Economic Co-operation and Development (OECD), the International Energy Agency (IEA) and the International Monetary Fund (IMF)

The monitoring and reporting of SDG Indicator 12.c.1 requires capacity within national statistical systems to evaluate direct and indirect transfers of government funds. 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. There is a need for additional training materials and sharing of experiences on the indicator.

The indicator methodology utilizes a phased monitoring to allow for countries with different capacities to engage in monitoring 12.c.1. The two phases include global monitoring based on price gap estimates plus national monitoring of direct and indirect transfers with optional monitoring of tax expenditure foregone.

It is proposed that countries report on the subsidy categories listed below as sub-indicators:

- Direct transfers;

- Induced transfers (reporting on regulated prices and calculation of the total amount);

- Tax expenditure, other government revenue foregone and under-pricing of goods and services, including risk (optional).

The last category should be included as an optional sub-indicator. Each sub-indicator should be expressed in national currency or United States dollars in current prices. The United Nations Environment Programme (UNEP) uses market exchange rates to calculate between national currency and United States dollar.

Care should be given if a country chooses to aggregate across the three sub-indicators in order to avoid double counting and all three sub-indicators should be publicly available to ensure transparency. Care needs to be taken when aggregating estimates of induced transfers with data on direct transfers and some measures in under-pricing of goods and services.

Estimates of subsidies to consumers observable through price-gaps (i.e., consumer price support) have been calculated by several international organizations (the Inter-American Development Bank (IADB), the International Energy Agency (IEA), and the International Monetary Fund (IMF)), covering different geographic regions and time-periods. The three organisations that produce these estimates use roughly the same approach, which can be summed up by the following equation:

$Consumer\mathrm{\ }price\mathrm{\ }support\mathrm{\ }=\mathrm{\ }(adjusted\mathrm{\ }netoftax\mathrm{\ }reference\mathrm{\ }unit\mathrm{\ }price\mathrm{\ }–\mathrm{\ }local\mathrm{\ }netoftax\mathrm{\ }unit\mathrm{\ }price)\mathrm{\ }x\mathrm{\ }units\mathrm{\ }subsidized$

Estimates are based on reference prices on import (or export) parity prices using the price of a product at the nearest international hub, adjusted for quality differences if necessary, plus (or minus) the cost of freight and insurance to the net importer (or back to the net exporter), plus the cost of internal distribution and marketing and any value-added tax (VAT). For tradable commodities (mainly coal, crude oil, and petroleum products), the reference prices are based on the spot price at the nearest international hub – e.g., the United States, Northwest Europe, or Singapore.

2024-01-31

United Nations Environment Programme (UNEP)

12.1.1, 8.4.1/12.2.1, 8.4.2/12.2.2

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