Valuing "subsidies"
Dec 4, 2014
Bishop Hill in Economics, Energy: gas, Energy: oil

A couple of weeks ago, I mentioned the report by the Overseas Development Institute and Oil Change International, which claimed implausibly that the UK was delivering considerable subsidies to the oil industry.

Since then, I have been having a useful exchange of emails with Sam Pickard, one of the report's authors in which I attempted to understand how these figures had been arrived at. Sam pointed me to the section in the report on definitions of subsidies (p.23-27), which turns out to be four pages of masterly obsfuscation in which they never really quite get round to explaining how they define a subsidy.

Interestingly, the authors do note that the OECD definition:

Estimates. In a number of cases, a national subsidy can be identified but the specific subsidy value has not been published by the national government or independent research institutions. In this case, the total national subsidy values for exploration are likely to be underestimates as the values for these subsidies are not included.

Comparing countries. Caution is required in direct comparison of national subsidy values between countries. As the OECD emphasises in its Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels, a significant number of subsidies take the form of tax expenditures that are calculated using a country’s benchmark tax regime, which can vary widely by country (OECD, 2013).

The wording doesn't quite make sense, but I think what this is trying to say is that estimates of the value of subsidies are based on the country's benchmark tax regime. If so then it makes it quite clear that the ODI/OCI report authors knew exactly what they were doing when they decided that they were going to assess the value of the alleged subsidy relative to the double taxation rate that has been applied to the oil industry in recent years. Not good.

I had also seen it suggested that the report also counted as a subsidy tax deductions that would be seen as normal business expenditure and I came across some support for this idea on p.29:

...many subsidies that benefit fossil fuel extraction more broadly, like tax deductions for drilling and investment costs, also promote exploration activities...

I queried this with Sam, whose answer left me none the wiser:

[our definition] focuses on ‘foregone revenues that are otherwise due’

But by way of an example he referred me to a US Treasury analysis that spoke of allowing oil companies to write off intangible costs relating to drilling, something that it saids 'provides a tax preference to the oil and natural gas industry…[and]…distorts markets by encouraging more investment in the oil and natural gas industry than would occur under a neutral tax system'.

However, if you refer to the Treasury analysis, it says this:

The expensing, rather than capitalization, of [intangible drilling costs] provides a tax preference to the oil and natural gas industry.

Which then led me to a thought. How does the ODI/OCI report value the expensing rather than capitalisation of these intangibles? The benefit to the company of a million pounds expensed immediately rather than capitalised and written off over several years is the interest earned on an amount equal to the the tax rate applied to a million pounds.

They surely wouldn't have valued the benefit at a million pounds would they?

I asked the question of Sam.

And didn't get a reply. I chased him a few days later.

And still didn't get a reply.

Oh dear.


Article originally appeared on (
See website for complete article licensing information.