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© 2022 International Monetary Fund WP/22/152
IMF Working Paper
European and Fiscal Affairs Departments
Surging Energy Prices in Europe in the Aftermath of the War: How to Support the Vulnerable and Speed up the Transition Away from Fossil Fuels
Prepared by Anil Ari, Nicolas Arregui, Simon Black, Oya Celasun, Dora Iakova, Aiko Mineshima, Victor Mylonas, Ian Parry, Iulia Teodoru, and Karlygash Zhunussova
Authorized for distribution by Oya Celasun and Dora Iakova
July 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent the views of the IMF, The World Bank, their Executive Boards, their management, or any other entity mentioned herein.
ABSTRACT: We estimate that the recent surge in international fossil fuel prices will raise European households’ cost of living in 2022 by close to 7 percent of consumption on average. Household burdens vary significantly across and within countries, but in most cases they are regressive. Policymakers have mostly responded to the shock with broad-based price-suppressing measures, including subsidies, tax reductions, and price controls. Going forward, the policy emphasis should shift rapidly towards allowing price signals to operate more freely and providing income relief to the vulnerable. The surge in energy prices will encourage energy conservation and investments in renewable energy, but the manyfold rise in natural gas prices could lead to a persistent switch towards coal. To ensure steady progress towards carbon emissions reduction goals, authorities could use the opportunity to strengthen carbon pricing when global fossil fuel prices decline in the future. Non-price incentives for investments in energy efficiency and renewable energy should also be enhanced, as envisaged in the RePowerEU plan.
RECOMMENDED CITATION: Ari, A., Arregui, N., Black, S., Celasun, O., Iakova, D., Mineshima, A., Mylonas, V., Parry, I., Teodoru, I., & Zhunussova, K. (2022). Surging Energy Prices in Europe in the Aftermath of the War: How to Support the Vulnerable and Speed up the Transition Away from Fossil Fuels. IMF Working Papers, 2022/152
| JEL Classification Numbers: | H22, H23, N50, O13, Q41, Q48, Q51, Q54, Q56, Q58 |
| Keywords: | energy prices, price pass-through, household incidence, distributional analysis, social programs, carbon pricing, climate mitigation |
| Author’s E-Mail Address: | AAri@imf.org; NArregui@imf.org; SBlack@imf.org; OCelasun@imf.org; DIakova@imf.org; AMineshima@imf.org; VMylonas@worldbank.org; IParry@imf.org; ITeoduru@imf.org; KZhunussova@imf.org |
| JEL Classification Numbers: | H22, H23, N50, O13, Q41, Q48, Q51, Q54, Q56, Q58 |
| Keywords: | energy prices, price pass-through, household incidence, distributional analysis, social programs, carbon pricing, climate mitigation |
| Author’s E-Mail Address: | AAri@imf.org; NArregui@imf.org; SBlack@imf.org; OCelasun@imf.org; DIakova@imf.org; AMineshima@imf.org; VMylonas@worldbank.org; IParry@imf.org; ITeoduru@imf.org; KZhunussova@imf.org |
Title page
WORKING PAPERS
Surging Energy Prices in Europe in the Aftermath of the War: How to Support the Vulnerable and Speed up the Transition Away from Fossil Fuels1
Prepared by Anil Ari, Nicolas Arregui, Simon Black, Oya Celasun, Dora Iakova, Aiko Mineshima, Victor Mylonas, Ian Parry, Iulia Teodoru, and Karlygash Zhunussova
Table of Contents
I. Introduction
II. Recent Energy Price Developments in Europe
III. Distributional Implications of High Energy Prices
IV. Policies to Cushion the Impact of Higher Energy Prices
V. Implications of the Energy Price Surge for Climate Policy in Europe
VI. Conclusions
FIGURES
1. International Fossil Fuel Prices
2. Contribution of Energy Prices to Consumer Price Inflation, May 2022
3. European Wholesale Natural Gas and Electricity Prices
4. Wholesale Electricity Price Decomposition
5. Observed Pass-through, 2022
6. Correlation in Wholesale and Retail Energy Prices
7. Stoxx Europe 600 Equity Valuation
8. Higher Energy Prices—Direct and Indirect Burdens on Households
9. Distributional Impact Across Countries
10. Burden of Increase in Retail Natural Gas Prices—Hypothetical High Versus Observed Pass-through
11. Income Support Measures for Households
12. Cumulative Revenues to Fully Compensate Lower-Income Households, 2022
13. Impact of Rising Retail Energy and Carbon Prices on EITE Sector Costs, 2022
14. Policy Measures
15. Change in Energy Generation Mix
16. EU Emissions and Targets for ETS and ESR Sectors by 2030
17. Explicit and Implicit Carbon Prices for Selected Fuels, 2022
18. CO2-Based Components of Vehicle Taxes, Selected Countries
TABLE
1. Measures to Reduce Dependence on Russian Gas
BOX
1. Measures to Reduce Dependence on Russian Gas
ANNEXES
1. Methodology – The Climate Policy Assessment Tool
2. Distributional Impact Analysis – Supplementary Tables
3. Fuel Products: Pass-through from Wholesale Inflation to Retail Inflation
4: New Measures Implemented to Cushion the Impact of High Energy
REFERENCES
Wei Zhao provided excellent research assistance and Marizielle Evio provided expert editorial assistance. The authors thank Laura Papi, Romain Duval, and James Roaf for helpful suggestions.