Carrots and Sticks: Taxing and Subsidising Energy

There is enormous confusion about what is meant by an energy subsidy and limited information about the size of such subsidies. The narrowest and perhaps most commonly used definition is a direct cash payment by a government to an energy producer or consumer. But this is just one way in which governments can stimulate the production or use of a particular fuel or form of energy, including oil. Broader definitions attempt to capture other types of government interventions that affect prices or costs, either directly or indirectly. The IEA has defined energy subsidies as any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers – a definition that has been widely adopted.