Rethinking Energy Policies in Europe Following the War in Ukraine: How to Support the Vulnerable and Speed up the Green Transition

Tuesday, November 29, 2022, 14:00-15:15 Vienna Time (CET) 

Aiko Mineshima, European Department, International Monetary Fund (IMF)
Ian Parry, Fiscal Affairs Department, International Monetary Fund (IMF)
Iulia Teodoru, European Department, International Monetary Fund (IMF)
Karlygash Zhunussova, Fiscal Affairs Department, International Monetary Fund (IMF)

Patrick Imam, Deputy Director, Joint Vienna Institute 

This webinar, organized jointly by the European and Fiscal Affairs Department of the IMF and the JVI, featured two presentations on the impact of the energy shock on advanced and emerging European countries. They focused on the design and effectiveness of policy measures to protect the most vulnerable members of society while continuing the Green Transition.

Aiko Mineshima and Iulia Teodoru made a presentation on the various government measures adopted in Europe since the start of the war in Ukraine in February 2022, which featured both targeted and untargeted ones, at a high fiscal cost. The impact of the energy price shock on households’ budget was not only regressive but expected to rise further in 2023 in most European countries, from an already elevated level. This is despite policymakers’ efforts to respond to the shock with temporary, broad-based price-suppressing measures, including subsidies, tax reductions, and price controls to ease the burden on households. 

Going forward, the need to reduce energy use and limit fiscal costs makes it imperative to shift from broader to more targeted support. The first best measure would be to allow price signals to operate freely while providing targeted income relief to the vulnerable. This approach protects the public purse, while encouraging energy conservation and investments in renewable energy. Given technical challenges in all countries (e.g., lack of data or information on household income and/or consumption, high administrative costs), and given the political economy of it being easier to pass generous and less targeted measures, second best solutions must oftentimes be implemented. These should nonetheless allow to pass price increases to end users, such as rebates or bonuses on energy bills, while clawing back the support from high income groups. Other financing options include a temporary increase in profit taxes and income taxes on the rich. This has the advantage that they do not distort marginal prices. The exact coverage and magnitude of the support depends on a country’s conditions (e.g., fiscal space, social preferences). In addition, governments must be mindful to keep the support broadly fiscally neutral to avoid working against monetary policy. Given that ultimately supply-side measures will make a difference, authorities should also encourage the expansion of investment in renewables and improved energy efficiency (e.g., retrofitting). 

The second presentation, by Ian Parry and Karlygash Zhunussova, focused on options to speed up the Green Transition. The presenters introduced the IMF’s Climate Policy Assessment Tool (CPAT), developed jointly with the World Bank, to help policymakers design, compare, and implement policies to achieve climate change targets. 

While the recent price surges in Europe underscore the urgency of the transition to cleaner and more secure energy sources, how to speed up the Green Transition remains a challenge. The rationale for, and design of, carbon taxation and emissions trading and the impact of mitigation policies were provided in this context, and the case was made to complement pricing policies with sectoral instruments to strengthen incentives (e.g., for renewables and electric vehicles). Feebates—a system of charges and rebates whereby energy-efficient or environmentally friendly practices are rewarded while failure to adhere to such practices is penalized—are a promising option in this regard as they can cost-effectively promote all responses to reduce the emissions intensity of different sectors. International coordination mechanisms focused on a small group of large emitting countries and minimum carbon pricing was also suggested as an important avenue to try to meet the Paris Agreement to limit global warming to below 2 degrees Celsius. The arrangement needs to be equitable however with prices differentiated by development level and accommodate other policies if they achieve equivalent emissions outcomes.  


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