Energy prices in the EU
Energy prices have been increasing since 2021 in the EU. Assuming inelastic energy demand, it is estimated that in 2022 median households will spend 3% of their income for residential energy, while households in the lowest income quintile will spend around 6% of their income.
In this commentary, Bethuyne et al. review the measures taken by EU member states in order to mitigate the impact of high energy prices on consumers and shield firms in energy intensive industries from the sudden price volatility. These policies can be divided into three categories:
- Price policies, which directly target the final energy price paid by households and firms. They include lowering indirect taxation (including excise duties on energy) or levies, subsidies, direct interventions in price setting, and social tariffs.
- Income policies entail some form of monetary compensation paid to energy consumers, i.e. transfers in cash or in kind (e.g. through ‘energy vouchers’).
- Other measures include support to firms, in particular to energy intensive industries and revenue raising measures (including in particular taxes on windfall profits).
While all three policies can lessen the economic costs of higher fuel prices, income policy measures – not proportional to current energy consumption – are preferred for their significantly lower impact on greenhouse gas emissions compared to fuel tax cuts. Tax reductions on fossil energy induce higher emissions from burning fossil fuels. With the fuel tax subsidy, greenhouse gas emissions increase by 0.8% in the short-run and by up to 1.5% in the long-run relative to the baseline, while they stay relatively stable in the other two scenarios. The tax reductions also increase the reliance on imported fossil fuels and encourage the consumption of fossil fuel-intensive durable goods. Consequently, they would make the required switch from dirty to clean technologies even costlier in the long run. In short, energy tax subsidies not only enforce the EU’s reliance on fossil fuel imports but also work against achieving the ambitious climate targets of the European Green Deal.
Targeted income support is the most social and climate-friendly measure for mitigating the impact of high energy prices
By: Gerrit Bethuyne, Arianna Cima, Björn Döhring, Åsa Johannesson Lindén, Ruben Kasdorp, Janos Varga – European Commission
What economists think
The Initiative on Global Markets ran a survey on June 23rd on how Europe should deal with high energy prices. The economists surveyed were from both European and American universities.
Energy Costs
By: IGM-University of Chicago
