## PRODUCTIVITY IN ITALY: SCOPE FOR IMPROVEMENT

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### Two decades of weak productivity: regional and sectoral dimensions
- Real value added per worker declined by nearly 5 percent during 2000–19.
- Total factor productivity fell by 13½ percent during 2000–19.
- Real per capita income in 2019 was about 6 percent below the pre-Global Financial Crisis level.
- Productivity deterioration is broad based across regions and sectors:
  - Central, Southern and Island regions experienced the largest productivity declines of 6 and 10 percent, respectively, over the past two decades.
  - Northern regions remain relatively more productive but also saw weakening in productivity, with gradual improvements in recent years.
  - Sectoral declines: construction and arts-and-entertainment suffered productivity declines of more than 20 percent during 2000–19.
  - Exceptions with notable productivity performance: information and communication technology (ICT), agriculture and, more recently, industry — but these account for about one-fifth of total value added and employment.
- Regional laggards (South and Islands) combine lower productivity within most activities and higher concentration in low-productivity activities (trade and hospitality, construction, agriculture); firm-size differences also matter.

### Productivity determinants and complementarity of reforms
- Prior literature identifies many structural contributors to productivity: public sector efficiency, quality of the judicial system, regulatory complexity, public capital stock, incentives for innovation and digitization, and labor and product market regulation.
- Structural indicators are highly correlated:
  - Dataset: 56 structural indicators across 21 regions (average values during 2015–19) analyzed with Principal Component Analysis (PCA).
  - Nearly 60 percent of the total variance in the 56 series is accounted for by the first principal component (PC1); the first and second components explain about 57 and 11 percent of the variance, respectively.
  - PCA loadings examples: European Quality of Government index 0.15; Regional Competitiveness Index 0.16; Share of students with adequate Italian 0.17; Early exit rate from the education system -0.17; Share of 18-24 year-old not in education, unemployed or inactive -0.17; Bank branches per 100,000 inhabitants 0.16; Population at risk of poverty or social exclusion -0.17.
- Implication: reforms are complementary and reinforcing rather than strictly additive; improving one structural characteristic is more effective when accompanied by improvements in others.

### Empirical relationships and causal evidence
- Cross-region OLS regressions:
  - Strong, statistically significant positive relationship between region-specific PC1 values and regional productivity (log of average regional GVA per employment, 2015–19).
  - Models report R-squared values up to 0.741 in specifications shown.
- Difference-in-differences (DID) framework exploiting sectoral exposure to the public sector provides causal evidence:
  - A unit improvement in the first principal component of structural indicators is associated with nearly two percent increase in regional productivity for a specific sector.
  - Higher exposure to the public sector can boost the impact of better structural indicators on productivity by another 0.1–0.3 percent.
  - Results are robust to various definitions of exposure, controls, and fixed effects.

### Simulated scenarios: effects of structural improvements on productivity
- Two scenarios using estimated DID model impacts (holding regional economic structure fixed):
  - Baseline scenario: each region improves its composite indicator (PC1) by one quintile
    - Raises within-sector productivity by about 20 percent in the South and the Islands and by nearly 10 percent in the Central region.
    - Lifts Italy-wide labor productivity by about 6½ percent.
  - Stretch scenario: each region lifts its composite indicator of structural characteristics to the 80th percentile of the national frontier
    - Raises Italy-wide labor productivity by about 10¾ percent.
- Additional point: expanding the national frontier (i.e., improving top regional practices toward best-performing EU peers) could yield considerably larger productivity gains.

### Conclusion and policy implications (productivity)
- Correlated structural weaknesses across regions and sectors imply the need for a comprehensive, multi-faceted reform push rather than isolated, sequential measures.
- Italy’s National Recovery and Resilience Plan—which combines a comprehensive program of reforms and investment spending—is well designed to raise labor productivity and potential growth.
- Catching up to the national frontier is a crucial interim step, but pushing out the national frontier toward best-performing EU countries is key to lift productivity to peer levels.
- Note on interpretation: the simulations are based on a reduced-form model and do not identify transmission channels; a structural model would be needed to trace mechanisms such as within-firm productivity, resource reallocation, and firm entry and exit.

### Securing a Smooth Green Transition — Progress and Targets
- Italy’s total greenhouse gas (GHG) emissions have fallen since 1990 by a further 27 percent, with most progress achieved during 2009–14.
- Italy’s per capita emissions: in line with the average of the four largest European economies, and below those of most other G-20 countries.
- Sectoral progress:
  - Power and manufacturing sectors (subject to EU ETS) delivered the largest reductions and are closer to meeting existing sectoral targets for 2030.
  - Building (housing) sector represents around 15 percent of emissions and has lagged in absolute and relative terms.
- To meet the “Fit for 55” target (cut carbon emissions by 55 percent by 2030 relative to 1990), Italy would need to triple the annual decline in its emissions intensity of GDP by significantly reducing the carbon content of the energy mix and/or accelerating improvements in energy efficiency.
- Maintaining the same rate of progress as the past decade would result in only half the needed emissions reduction by 2030.
- Climate exposure and recent events:
  - In July 2022, Italy declared a water emergency in five Northern regions following extended drought and high temperature.
  - Sicily recorded 48.8 degrees Celsius (119 degrees Fahrenheit) in August 2021.
  - In October 2021, more than 300 mm (11.8 inches) of rain fell near Catania in a few hours.
  - According to the European Severe Weather Database, Italy experienced 1,499 extreme weather events in 2020, compared to 380 in 2010.

### Model and Macroeconomic Calibration (IMF-ENV)
- Model: IMF-ENV model — a recursive-dynamic computable general equilibrium model with five fossil fuel sectors and eight power sectors; calibrated with GTAP v10, IMF macro trends, and IEA energy trends.
- Assumptions:
  - Vintage capital with new vintages more energy efficient.
  - Flexible labor market.
  - GHG emissions depend on economic activity and past investment decisions.

### Carbon Pricing Scenarios and Key Quantities
- To achieve an emissions reduction of just under 45 percent relative to 2005 by 2030:
  - Required carbon tax by 2030 in the scenario starting with recent ETS price increases: €140 per ton of CO2.
    - This represents an increase of around €60 from the current ETS carbon price (note: ETS covers only a subset of emissions; effective coverage is lower).
  - Required carbon tax by 2030 in a delayed-adjustment scenario (partial reversal of recent ETS price increase): around €200 per ton of CO2.
  - Carbon tax revenues are estimated to triple by 2030: from 0.6 percent of GDP in 2021 to 1.7 percent of GDP in 2030.

### Fiscal Recycling Options and Macroeconomic Effects
- Five revenue recycling strategies analyzed (keeping government revenue to GDP and private sector tax burden unchanged):
  1. Reduction in the tax wedge on labor income.
  2. Lower VAT rate.
  3. Cut in income taxes.
  4. Equal lump sum transfers to households.
  5. 50/50 split between higher public investment and transfers to households.
- Key findings:
  - Recycling carbon tax revenue to lower the tax on wages generates the smallest cumulative negative impact on GDP by 2030.
  - With wage-tax recycling, output surpasses the no-carbon-tax counterfactual beyond 2030 due to reduced distortions raising employment, investment, and consumption.
  - Delayed climate action leads to larger cumulative GDP losses because later, more aggressive policy responses are needed.

### Sectoral Reallocation and Distributional Outcomes
- Aggregate GDP impact of carbon pricing is mild but masks large sectoral heterogeneity and reallocation:
  - Value added in fossil fuel extraction and energy transformation sectors declines by more than 15 percent relative to baseline.
  - Electricity sector expands with added renewables and grid improvements.
  - Some energy-intensive trade-exposed (EITE) industries (chemicals, iron and steel, non-metallic minerals, pulp and paper) may not be most adversely affected and could increase output relative to the baseline owing to relative competitiveness gains versus France, Germany, and the rest of the EU.
  - Publicly provided services (including education and health) expand relative to baseline; transportation services are negatively affected despite electrification.
- Employment effects:
  - Lowering labor income tax financed by carbon tax stimulates labor supply and demand, producing a small net increase in employment and reallocation toward more labor-intensive sectors.

### Marginal abatement costs and timing
- In the model’s optimizing framework, marginal costs of abating carbon (MACs) are equated across all sectors in every time period.
- MAC curves are upward sloping and increasing at an increasing rate.
- Abatement cost curves reflect:
  - the cost of investing in new generation, less emissions-intensive capital;
  - the ease of substitution between factors of production.
- Differences in MAC curves across sectors are large:
  - power sector has a much flatter curve than iron and steel.
  - For any given carbon tax, more emissions reduction can be obtained from the relatively-easy-to-abate power sector than from the harder-to-abate iron and steel sector.
- Longer-run MAC curves are flatter than shorter-term curves because of greater substitutability over time and turnover of older, more-polluting capital to newer-vintage greener capital.
- Policy implication: moving early with raising carbon taxes allows a larger reduction in emissions at a lower economic cost; delaying forces adjustment along a shorter-run, steeper MAC curve and could require large cuts in output of heavily polluting sectors.

### Italy’s competitiveness and cross-country context
- Italy’s competitiveness is expected to be less affected by climate mitigation policies than other large EU countries under a scenario where all EU countries implement their climate targets, because:
  - others may have more stringent targets (e.g., Germany); and/or
  - some economies are already less carbon-intensive than Italy’s (e.g., France), implying higher mitigation costs abroad.
- Model simulations find significant gaps for Italy to meet its climate goals under baseline policies.

### Investment needs and asset stranding
- Italy’s 2019 National Climate Plan estimated that 5 percent of GDP in annual investment would be needed.
  - Estimates of how much of this investment is in addition to regular replacement of capital in a baseline scenario range between 0.8–1.6 percent.
- To achieve the more ambitious EU “Fit for 55” goals, the EU-wide revision of investment needs would suggest that Italy‘s needs would increase to around 6 percent of GDP.
- Asset stranding risk if transition is delayed:
  - assumed share of capital stock at risk of stranding is between 30–60 percent and inversely proportional to a sector’s energy intensity.
  - estimated assets equivalent to 11 percent of GDP in the manufacturing sector and 5 percent in the power sector could be subject to stranding.
  - For the manufacturing sector, this implies the need for some additional 1.5 percent of GDP in annual investment over the decade in addition to the needs identified in the 2019 National Climate Plan.

### Sectoral progress and technology deployment
- Renewable energy deployment:
  - share of renewables in total energy production stands at 20 percent, close to the EU average.
  - significant expansion occurred between 2010–13 (supported by subsidies); deployment of new capacity slowed thereafter.
- Clean transport:
  - in 2021, the share of electric cars sold (including hybrids) reached 40 percent, up from 6 percent in 2019.
  - this reduced the average carbon emissions from new cars by 40 percent since 2020.
  - even with optimistic assumptions (each new car has half the emissions of the old one and car fleet constant at 38 million), emissions objectives for 2030 will not be met.

### Green policy framework — taxation
- Italy’s implicit tax on energy consumed is the highest among all OECD countries.
- Energy tax revenue equals 3 percent of GDP (or 7 percent of fiscal revenue).
- Effective tax on carbon is the second highest for all OECD countries.
- Road transport carbon is taxed the heaviest at an average of €250 per t/CO2 due to high gasoline excise taxes.
- Fuels for other activities were taxed an average of €20 per t/CO2 (data for 2021).
- More than 50 percent of Italy’s emissions were taxed below the threshold of €60 per t/CO2 (though still above the EU average), indicating gaps in coverage of carbon taxation.
- ETS-related points:
  - explicit taxation of emissions covered by the ETS sectors (power and industry) has been especially low; incentives relied almost exclusively on the ETS.
  - most emissions in these sectors were taxed below €60 per t/CO2 due to persistently low carbon prices and free permits.
  - corresponding ETS revenue was less than 0.2 percent of GDP per year.
  - ETS permit prices are vulnerable to price volatility, including sudden price dips.
- Within-sector tax inconsistencies:
  - carbon from gas is generally taxed less than carbon from oil;
  - oil and coal used by businesses are very lightly taxed despite high carbon content;
  - diesel receives more favorable tax treatment than gasoline, despite higher health risks.

### Tax incentives, subsidies, and effectiveness
- Historical and recent subsidies:
  - subsidies for renewable electricity production comprised the vast majority of carbon-reducing subsidies at around €12 billion annually (financed by a general system charge on electricity bills, mostly benefiting photovoltaic energy under “Conto Energia”).
  - a 2019 decree allowed subsidies in new photovoltaic projects at an expected cost of €1 billion a year.
- Recent expansion of green tax incentives and NRRP:
  - for the last two years, total green subsidies—including pre-existing schemes—amounted to 2.2 percent of GDP.
  - NRRP includes a total of more than 2 percent of GDP for green tax incentives in coming years.
  - Transition 4.0 plan: tax credits range between 6 percent and 50 percent according to the type of investment, invested amount, and investment period.
- Major targeted programs and their performance:
  - Superbonus:
    - provides a tax credit equal to 110 percent of costs to increase energy efficiency of existing buildings.
    - spending under Superbonus is estimated at more than €10 billion in 2021, out of a total budget envelope of €33 billion (full envelope now committed).
    - Superbonus covered 57,000 building units (total stock is 12.4 million, of which more than 60 percent is over 45 years old).
  - Car Ecobonus:
    - provides incentives up to €5,000 for purchase of low emission cars.
    - annual cost €650 million.
  - Effectiveness:
    - Superbonus and Ecobonus are estimated to have delivered 2 million and 0.4 million tons of CO2 savings, respectively, at implicit costs of €5,000 and €1,500 per ton of CO2 abated — well short of savings needed to achieve 2030 targets and at high fiscal cost.
- Environmentally damaging subsidies:
  - 40 fossil-fuel subsidies for a total of €13 billion existed in 2020.
  - Examples include diesel favorable treatment, aviation and maritime exemptions, reduced VAT for domestic use of electricity, reductions in excise duty on diesel used in trains, diesel exemptions in agriculture.

### Public investment, pricing certainty, and administrative bottlenecks
- Public investment:
  - NRRP will enable a step-up in public investment but will represent an annual average of 0.3 of GDP.
  - IEA estimates 30 percent of total investment resources should be public investment, which for Italy would amount to 2 percent of GDP.
  - Authorities intend to focus on public transport, high-speed train and public transport lines, vehicle charging stations, and some investments in innovative renewable energy sources, circular economy, and waste and water management.
- Pricing and insurance for green investments:
  - Italy has not implemented measures to reduce price volatility facing green investments comparable to some other EU countries.
  - uncertainty regarding future fossil fuel and carbon permit prices and tax policy deters investment in alternative technologies.
  - earlier costly subsidies provided price certainty until 2013; policy interventions reducing price uncertainty since then have been limited.
  - government introduced a Contract for Difference program to lock in a price for renewable energy; growth in long-term Power Purchase Agreements has fallen behind expectations.
- Energy efficiency obligation:
  - Italy implemented a “white certificates” energy efficiency obligation scheme since 2005.
  - Scheme evaluated as very effective in delivering energy savings, especially in manufacturing.
- Administrative bottlenecks:
  - many private renewable projects (potential capacity of 60 MW, which would double existing renewables capacity) are awaiting approval with delays reaching 6 years on average.
  - most of these new projects require no or minimal fiscal support to be profitable due to declining costs of new capacity.
  - existing renewable installations continue to depend on large fiscal subsidies (which could reach a cumulative 13 percent of GDP over 20 years).
  - government has reduced administrative barriers in designated areas but further streamlining is needed.

### Conclusions and policy issues — key recommendations (green transition)
- Italy has had some ambitious policies and high fuel taxes that helped reduce emissions in some sectors, but progress has stalled in renewables deployment and gaps remain in meeting 2030 targets.
- Near-term coal reliance to mitigate energy security concerns calls for stronger action in coming years.
- Policy actions that could be promptly adopted with limited competitiveness risks include:
  - locking in current carbon prices through a carbon price floor to secure incentives for renewables and provide greater certainty for green investment;
  - further streamlining regulatory procedures to unlock renewable capacity deployment and investment;
  - increasing and revamping effective carbon taxation to reduce asymmetries across sectors and types of primary energy sources (a comprehensive carbon tax may not entail a sizable increase for some products given already high energy taxes on some products);
  - rationalizing environmentally-friendly subsidies to improve cost-effectiveness, using higher effective carbon taxation and more cost-effective subsidies to create fiscal space for boosting green public investment and reducing distortive taxation.
- Timing matters: delaying a comprehensive carbon tax could necessitate more abrupt and larger future increases, raising macroeconomic costs.

### Box 1. Climate Finance by the Private Sector in Italy — Overview
- Financing spending for climate mitigation and adaptation will require mainly private sector capital.
- Banks will likely have a central role in climate finance given their dominant place in the financial system.
- Strengthening banks’ resilience to physical and transition climate risk while providing adequate funding to facilitate the economy’s low-carbon transition will be critical to ensuring macrofinancial stability.
- Italy has seen growth in its green bond issuance in recent years, including its first green sovereign bond in 2021. Sustainability-linked bonds (SLBs) have been issued by some Italian firms, but markets remain mostly limited to large issuers and the scale of issuance is still very small compared to green financing needs.

### Box 1 — Italian Firms’ and Banks’ Exposure to Physical Climate Risk
- Sample and exposure:
  - Sample includes 37,103 European firms/facilities; among them, 970 are Italian firms/facilities.
  - In this sample, nearly all Italian firms have high or very high exposure to heat stress; over 90 percent are highly exposed to water stress.
  - Italian firms are especially exposed to heat stress, water stress, and flood risk.
- Banks’ exposure:
  - According to the ECB/ESRB, the Italian banking system has over €300 billion of exposures to firms in areas with high or increasing climate physical risk, which is one of the highest among EU countries.
  - A Bank of Italy study using publicly available data estimates that Italian banks have about €170 billion of exposure to physical climate risk.

### Box 1 — Financing Climate Mitigation and Managing Transition Risk
- Transition risk and loan exposures:
  - Efficient private-sector capital allocation for the low-carbon transition requires appropriate pricing of the costs and risks associated with carbon emissions.
  - If carbon is priced too low, social benefits of reducing emissions will not be fully reflected in private financial contracts, exposing banks to transition risk as loans to fossil-fuel-dependent borrowers could significantly lose value.
  - Bank of Italy studies show that about 40–50 percent of corporate loans to Italian firms are exposed to climate transition risk, with small and micro firm borrowers particularly vulnerable.
- Market development and obstacles:
  - Italy has made progress (green bonds, first green sovereign bond in 2021, emergence of SLBs) but markets are limited to large issuers and small relative to needs.
  - Several Italian banks are starting to incorporate climate considerations into lending decisions.
  - Major obstacles include misaligned financial incentives and high uncertainties, which in certain cases could give rise to boom-bust cycles in segments of green finance.
  - Further enhancing climate-related data disclosure and standardization is needed to strengthen the foundation for adequate and sound climate finance.

### Annex I — Carbon Taxes and Asset Stranding: Model and Scenario Findings
- Model setup (stylized Solow growth model with carbon pricing):
  - Economy produces a single good Y using two types of capital: dirty capital K and clean capital R with a Cobb-Douglas type production function (both types additively separable).
  - Carbon emissions e are proportional to output produced with dirty capital.
  - Total saving is a fixed share s of GDP, with shares sk,t and sr,t such that sk,t + sr,t = s, sk, sr ≥ 0.
  - Capital accumulation equations incorporate physical depreciation δk and δr and policy-induced depreciation/appreciation via a tax τ on dirty capital and a subsidy μ on clean capital.
- Policy instruments:
  - Tax on dirty capital τ and subsidy on clean capital μ (μ = 2τ in the simulations).
  - Policy-induced depreciation for dirty capital can retire capital before its physical life has expired (asset stranding); policy-induced appreciation can partially or fully offset physical depreciation for clean capital.
- Scenarios compared:
  - Business-as-usual (BaU): no climate policies; economy remains in original steady state.
  - Immediate-and-gradual (IaG): tax and subsidy increased gradually in a linear manner at the outset.
  - Delayed-but-aggressive (DbA): BaU continues for seven more periods, followed by full deployment of taxes and subsidies calibrated to achieve the same cumulative reduction in carbon emissions as IaG.
- Simulation parameter values:
  - α = 0.3, β = 0.4, s = 0.2, δk = 0.1, δr = 0.1, θ = 0.5, μ = 2τ.
- Key comparative findings:
  - IaG scenario:
    - Gradual increase in τ and μ leads to a decline in the share of saving allocated to dirty capital and an increase for clean capital.
    - Dirty capital stock declines gradually; clean capital rises smoothly.
    - Total output along the transition path is on average similar to the BaU steady state but marginally lower.
    - Carbon emissions decline gradually.
    - Medium-term depreciation of dirty capital is lower than in BaU because of the smaller dirty capital stock.
  - DbA scenario:
    - Sharp increase in τ and μ after seven periods causes rapid re-allocation of saving to clean capital.
    - Dirty capital stock declines more sharply; clean capital grows more quickly relative to IaG.
    - Total output is temporarily much lower after policies are introduced because larger upfront policy-induced depreciation of dirty capital reduces production capacity and aggregate saving constrains rapid clean capital accumulation.
    - Rapid accumulation of clean capital eventually lifts output above the IaG path; emissions decline more quickly once policies are in place.
    - More aggressive policies lead to a temporary sharp drop in output and greater stranding of dirty assets before their physical life has expired.
- Policy implication:
  - Delaying action requires adopting a more aggressive policy response to achieve the same cumulative emissions reduction, which entails larger short-term output losses and greater asset stranding compared with a timely, gradual approach.

*Source: IMF staff paper "PRODUCTIVITY IN ITALY: SCOPE FOR IMPROVEMENT" (July 14, 2022).*

### References ____________________________________________________________________________________ 10

### PRODUCTIVITY IN ITALY: SCOPE FOR IMPROVEMENT

### Two decades of weak productivity: regional and sectoral dimensions
- Real value added per worker declined by nearly 5 percent during 2000–19.
- Total factor productivity fell by 13½ percent during 2000–19.
- Real per capita income in 2019 was about 6 percent below the pre-Global Financial Crisis level.
- Productivity deterioration is broad based across regions and sectors:
  - Central, Southern and Island regions experienced the largest productivity declines of 6 and 10 percent, respectively, over the past two decades.
  - Northern regions remain relatively more productive but also saw weakening in productivity, with gradual improvements in recent years.
  - Sectoral declines: construction and arts-and-entertainment suffered productivity declines of more than 20 percent during 2000–19.
  - Exceptions with notable productivity performance: information and communication technology (ICT), agriculture and, more recently, industry — but these account for about one-fifth of total value added and employment.

- Regional laggards (South and Islands) combine lower productivity within most activities and higher concentration in low-productivity activities (trade and hospitality, construction, agriculture); firm-size differences also matter.

### Productivity determinants and complementarity of reforms
- Prior literature identifies many structural contributors to productivity: public sector efficiency, quality of the judicial system, regulatory complexity, public capital stock, incentives for innovation and digitization, and labor and product market regulation.
- Structural indicators are highly correlated:
  - A dataset of 56 structural indicators across 21 regions (average values during 2015–19) was analyzed with Principal Component Analysis (PCA).
  - Nearly 60 percent of the total variance in the 56 series is accounted for by the first principal component (PC1); the first and second components explain about 57 and 11 percent of the variance, respectively.
  - The vast majority of PCA loadings conform with economic intuition (see Table 2 loadings examples: European Quality of Government index 0.15; Regional Competitiveness Index 0.16; Share of students with adequate Italian 0.17; Early exit rate from the education system -0.17; Share of 18-24 year-old not in education, unemployed or inactive -0.17; Bank branches per 100,000 inhabitants 0.16; Population at risk of poverty or social exclusion -0.17).
- Implication: reforms are complementary and reinforcing rather than strictly additive; improving one structural characteristic is more effective when accompanied by improvements in others.

### Empirical relationships and causal evidence
- Cross-region OLS regressions show a strong, statistically significant positive relationship between region-specific PC1 values and regional productivity (log of average regional GVA per employment, 2015–19); models report R-squared values up to 0.741 in specifications shown.
- Difference-in-differences (DID) framework exploiting sectoral exposure to the public sector provides causal evidence:
  - A unit improvement in the first principal component of structural indicators is associated with nearly two percent increase in regional productivity for a specific sector.
  - Higher exposure to the public sector can boost the impact of better structural indicators on productivity by another 0.1–0.3 percent.
  - Results are robust to various definitions of exposure, controls, and fixed effects.

### Simulated scenarios: effects of structural improvements on productivity
- Two scenarios using estimated DID model impacts (holding regional economic structure fixed):
  - Baseline scenario: each region improves its composite indicator (PC1) by one quintile
    - Raises within-sector productivity by about 20 percent in the South and the Islands and by nearly 10 percent in the Central region.
    - Lifts Italy-wide labor productivity by about 6½ percent.
  - Stretch scenario: each region lifts its composite indicator of structural characteristics to the 80th percentile of the national frontier
    - Raises Italy-wide labor productivity by about 10¾ percent.
- Additional point: expanding the national frontier (i.e., improving top regional practices toward best-performing EU peers) could yield considerably larger productivity gains.

### Conclusion and policy implications
- Correlated structural weaknesses across regions and sectors imply the need for a comprehensive, multi-faceted reform push rather than isolated, sequential measures.
- Italy’s National Recovery and Resilience Plan—which combines a comprehensive program of reforms and investment spending—is well designed to raise labor productivity and potential growth.
- Catching up to the national frontier is a crucial interim step, but pushing out the national frontier toward best-performing EU countries is key to lift productivity to peer levels.
- Note on interpretation: the simulations are based on a reduced-form model and do not identify transmission channels; a structural model would be needed to trace mechanisms such as within-firm productivity, resource reallocation, and firm entry and exit.

*Source: IMF staff paper "PRODUCTIVITY IN ITALY: SCOPE FOR IMPROVEMENT" (July 14, 2022).*

### References

### References

### Cited Works
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- Acemoglu, Daron, Simon Johnson, and James Robinson, 2005, "Institutions as a Fundamental Cause of Long-run Growth", Aghion, Philippe and Stephen Durlauf (eds.) Handbook of Economic Growth. North Pole: 2005, Chapter 6.
- Albanese, Giuseppe, Guido de Blasio, and Andrea Locatelli, 2019, "Place-based Policy and Local TFP", Bank of Italy Working Paper No. 1253.
- Andrle, Michal, Alvar Kangur, and Mehdi Raissi, 2018, "Italy: Quantifying the Benefits of a Comprehensive Reform Package", IMF Working Paper 18/60.
- Bank of Italy, 2021, “2020 Annual Report”, Riquadro: gli effetti delle riforme sulla produttivita e sulla crescita evidenze per l'Italia.
- Blanchard, Olivier and Francesco Giavazzi, 2003, "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets", Quarterly Journal of Economics, 118(3), 879–907.
- Bugamelli, Matteo, Francesca Lotti, Monica Amici, Emanuela Ciapanna, Fabrizio Colonna, Francesco D’Amuri, Silvia Giacomelli, Andrea Linarello, Francesco Manaresi, Giuliana Palumbo, Filippo Scoccianti, and Enrico Sette, 2018, "Productivity growth in Italy: a tale of a slow-motion change", Bank of Italy Occasional Paper, No. 422, January 2018.
- Calligaris, Sara, Massimo Del Gatto, Fadi Hassan, Gianmarco I.P. Ottaviano, and Fabiano Schivardi, 2016, "Italy's Productivity Conundrum. A Study on Resource Misallocation in Italy", Economic and Financial Affairs Discussion Paper 30.
- Coe, David, and Dennis J. Snower, 1997, "Policy Complementarities: The Case for Fundamental Labor Market Reform", IMF Staff Paper, 44 (1), 1–35.
- Di Vita, Giuseppe, 2018, "Institutional quality and the growth rates of the Italian regions: the costs of regulatory complexity", Papers in Regional Science, Volume 97 Number 4, November 2018.
- Esposito, Gianluca, Sergi Lanau, and Sebastiaan Pompe, 2014, "Judicial System Reform in Italy", IMF Working Paper 14/32.
- European Central Bank, 2021, "The impact of the COVID-19 pandemic on labour productivity growth", ECB Economic Bulletin, Issue 7/2021.
- European Commission, 2021, "Quarterly Report on the Euro Area, Chapter 1, An overview of the economics of the Recovery and Resilience Facility", Volume 20, No 3.
- Giacomelli, Silvia, and Carlo Menon, 2017, "Does weak contract enforcement affect firm size? Evidence from the neighbour’s court", Journal of Economic Geography, Pages 1251–1282.
- Giordano, Raffaela, Sergi Lanau, Pietro Tommasino, and Petia Topalova, 2020, "Does Public Sector Inefficiency Constrain Firm Productivity? Evidence from Italian Provinces", International Tax and Public Finance 2020 27:1019–1049.
- Guiso, Luigi, Paola Sapienza, and Luigi Zingales, 2015. "Corporate Culture, Societal Culture, and Institutions" American Economic Review, 105 (5): 336–39.
- Marrocu, Emanuela and Raffaele Paci, 2010, "The effects of public capital on the productivity of the Italian regions", Applied Economics, 2010–42, Pages 989–1002.
- OECD, 2021, OECD Economic Surveys: Italy 2021, OECD Publishing.

### Notes on Referenced Figures and Data Sources
- Text Figure sources include: European Environment Agency; IMF staff estimates; ESSD; IEA energy trends; Global Trade Analysis Project version 10 database (Aguiar and others 2019); IMF macro-economic trends.
- Specific data points and indices referenced in the text include: percentage reductions (e.g., Italy decreased 43% from 2005 to 2019 for power sector; Italy decreased 46% from 2005 to 2019 for manufacturing; Italy decreased 18% from 2005 to 2019 for transport), index bases (e.g., 2005=100; 1990=100), and counts (e.g., Italy experienced 1,499 extreme weather events in 2020, compared to 380 in 2010).

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### Securing a Smooth Green Transition (excerpted findings and policy-relevant results)

### Progress and Targets
- Italy’s total greenhouse gas (GHG) emissions have fallen since 1990 by a further 27 percent, with most progress achieved during 2009–14.
- Italy’s per capita emissions: in line with the average of the four largest European economies, and below those of most other G-20 countries.
- Sectoral progress:
  - Power and manufacturing sectors (subject to EU ETS) delivered the largest reductions and are closer to meeting existing sectoral targets for 2030.
  - Building (housing) sector represents around 15 percent of emissions and has lagged in absolute and relative terms.
- To meet the “Fit for 55” target (cut carbon emissions by 55 percent by 2030 relative to 1990), Italy would need to triple the annual decline in its emissions intensity of GDP by significantly reducing the carbon content of the energy mix and/or accelerating improvements in energy efficiency.
- Maintaining the same rate of progress as the past decade would result in only half the needed emissions reduction by 2030.
- Climate exposure and recent events:
  - In July 2022, Italy declared a water emergency in five Northern regions following extended drought and high temperature.
  - Sicily recorded 48.8 degrees Celsius (119 degrees Fahrenheit) in August 2021.
  - In October 2021, more than 300 mm (11.8 inches) of rain fell near Catania in a few hours.
  - According to the European Severe Weather Database, Italy experienced 1,499 extreme weather events in 2020, compared to 380 in 2010.

### Model and Macroeconomic Calibration
- Analysis uses the IMF-ENV model: a recursive-dynamic computable general equilibrium model with five fossil fuel sectors and eight power sectors; calibrated with GTAP v10, IMF macro trends, and IEA energy trends.
- The model assumes:
  - Vintage capital with new vintages more energy efficient.
  - Flexible labor market.
  - GHG emissions depend on economic activity and past investment decisions.

### Carbon Pricing Scenarios and Key Quantities
- To achieve an emissions reduction of just under 45 percent relative to 2005 by 2030:
  - Required carbon tax by 2030 in the scenario starting with recent ETS price increases: €140 per ton of CO2.
    - This represents an increase of around €60 from the current ETS carbon price (note: ETS covers only a subset of emissions; effective coverage is lower).
  - Required carbon tax by 2030 in a delayed-adjustment scenario (partial reversal of recent ETS price increase): around €200 per ton of CO2.
  - Carbon tax revenues are estimated to triple by 2030: from 0.6 percent of GDP in 2021 to 1.7 percent of GDP in 2030.

### Fiscal Recycling Options and Macroeconomic Effects
- Five revenue recycling strategies analyzed (keeping government revenue to GDP and private sector tax burden unchanged):
  1. Reduction in the tax wedge on labor income.
  2. Lower VAT rate.
  3. Cut in income taxes.
  4. Equal lump sum transfers to households.
  5. 50/50 split between higher public investment and transfers to households.
- Key findings:
  - Recycling carbon tax revenue to lower the tax on wages generates the smallest cumulative negative impact on GDP by 2030.
  - With wage-tax recycling, output surpasses the no-carbon-tax counterfactual beyond 2030 due to reduced distortions raising employment, investment, and consumption.
  - Delayed climate action leads to larger cumulative GDP losses because later, more aggressive policy responses are needed.

### Sectoral Reallocation and Distributional Outcomes
- Aggregate GDP impact of carbon pricing is mild but masks large sectoral heterogeneity and reallocation:
  - Value added in fossil fuel extraction and energy transformation sectors declines by more than 15 percent relative to baseline.
  - Electricity sector expands with added renewables and grid improvements.
  - Some energy-intensive trade-exposed (EITE) industries (chemicals, iron and steel, non-metallic minerals, pulp and paper) may not be most adversely affected and could increase output relative to the baseline owing to relative competitiveness gains versus France, Germany, and the rest of the EU.
  - Publicly provided services (including education and health) expand relative to baseline; transportation services are negatively affected despite electrification.
- Employment effects:
  - Lowering labor income tax financed by carbon tax stimulates labor supply and demand, producing a small net increase in employment and reallocation toward more labor-intensive sectors.

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*Italicized: Source — 1itaea2022002 - References (excerpts from the supplied PDF content).*

### 11.      Earlier increases in carbon taxes are associated with lower costs of carbon abatement

### 11.      Earlier increases in carbon taxes are associated with lower costs of carbon abatement

### Marginal abatement costs and timing
- In the model’s optimizing framework, marginal costs of abating carbon (MACs) are equated across all sectors in every time period.
- MAC curves are upward sloping and increasing at an increasing rate.
- Abatement cost curves reflect:
  - the cost of investing in new generation, less emissions-intensive capital;
  - the ease of substitution between factors of production.
- Differences in MAC curves across sectors are large:
  - power sector has a much flatter curve than iron and steel.
  - For any given carbon tax, more emissions reduction can be obtained from the relatively-easy-to-abate power sector (e.g., substituting wind and solar for fossil fuels) than from the harder-to-abate iron and steel sector (since coal is a necessary feedstock input for iron production).
- Longer-run MAC curves are flatter than shorter-term curves because of greater substitutability over time and turnover of older, more-polluting capital to newer-vintage greener capital.
- Policy implication: moving early with raising carbon taxes allows a larger reduction in emissions at a lower economic cost.
- Conversely, postponing the start date and then attempting similar emission cuts forces adjustment along a shorter-run, steeper MAC curve and could require large cuts in output of heavily polluting sectors that had not previously undertaken clean investment.

### Italy’s competitiveness and cross-country context
- Italy’s competitiveness is expected to be less affected by climate mitigation policies than other large EU countries under a scenario where all EU countries implement their climate targets, because:
  - others may have more stringent targets (e.g., Germany); and/or
  - some economies are already less carbon-intensive than Italy’s (e.g., France), implying higher mitigation costs abroad.
- Model simulations find significant gaps for Italy to meet its climate goals under baseline policies.

### Investment needs and asset stranding
- Achieving large-scale replacement of brown capital with green capital is a priority.
- Italy’s 2019 National Climate Plan estimated that 5 percent of GDP in annual investment would be needed.
  - Estimates of how much of this investment is in addition to regular replacement of capital in a baseline scenario range between 0.8–1.6 percent.
- To achieve the more ambitious EU “Fit for 55” goals, the EU-wide revision of investment needs would suggest that Italy‘s needs would increase to around 6 percent of GDP.
- Asset stranding risk if transition is delayed:
  - assumed share of capital stock at risk of stranding is between 30–60 percent and inversely proportional to a sector’s energy intensity.
  - estimated assets equivalent to 11 percent of GDP in the manufacturing sector and 5 percent in the power sector could be subject to stranding.
  - For the manufacturing sector, this implies the need for some additional 1.5 percent of GDP in annual investment over the decade in addition to the needs identified in the 2019 National Climate Plan.

### Sectoral progress and technology deployment
- Renewable energy deployment:
  - share of renewables in total energy production stands at 20 percent, close to the EU average.
  - significant expansion occurred between 2010–13 (supported by subsidies); deployment of new capacity slowed thereafter.
- Clean transport:
  - in 2021, the share of electric cars sold (including hybrids) reached 40 percent, up from 6 percent in 2019.
  - this reduced the average carbon emissions from new cars by 40 percent since 2020.
  - even with optimistic assumptions (each new car has half the emissions of the old one and car fleet constant at 38 million), emissions objectives for 2030 will not be met.

### Green policy framework — taxation
- Italy’s implicit tax on energy consumed is the highest among all OECD countries.
- Energy tax revenue equals 3 percent of GDP (or 7 percent of fiscal revenue).
- Effective tax on carbon is the second highest for all OECD countries.
- Road transport carbon is taxed the heaviest at an average of €250 per t/CO2 due to high gasoline excise taxes.
- Fuels for other activities were taxed an average of €20 per t/CO2 (data for 2021).
- More than 50 percent of Italy’s emissions were taxed below the threshold of €60 per t/CO2 (though still above the EU average), indicating gaps in coverage of carbon taxation.
- ETS-related points:
  - explicit taxation of emissions covered by the ETS sectors (power and industry) has been especially low; incentives relied almost exclusively on the ETS.
  - most emissions in these sectors were taxed below €60 per t/CO2 due to persistently low carbon prices and free permits.
  - corresponding ETS revenue was less than 0.2 percent of GDP per year.
  - ETS permit prices are vulnerable to price volatility, including sudden price dips.
- Within-sector tax inconsistencies:
  - carbon from gas is generally taxed less than carbon from oil;
  - oil and coal used by businesses are very lightly taxed despite high carbon content;
  - diesel receives more favorable tax treatment than gasoline, despite higher health risks.

### Tax incentives, subsidies, and effectiveness
- Historical and recent subsidies:
  - subsidies for renewable electricity production comprised the vast majority of carbon-reducing subsidies at around €12 billion annually (financed by a general system charge on electricity bills, mostly benefiting photovoltaic energy under “Conto Energia”).
  - a 2019 decree allowed subsidies in new photovoltaic projects at an expected cost of €1 billion a year.
- Recent expansion of green tax incentives and NRRP:
  - for the last two years, total green subsidies—including pre-existing schemes—amounted to 2.2 percent of GDP.
  - NRRP includes a total of more than 2 percent of GDP for green tax incentives in coming years.
  - Transition 4.0 plan: tax credits range between 6 percent and 50 percent according to the type of investment, invested amount, and investment period.
- Major targeted programs and their performance:
  - Superbonus:
    - provides a tax credit equal to 110 percent of costs to increase energy efficiency of existing buildings.
    - spending under Superbonus is estimated at more than €10 billion in 2021, out of a total budget envelope of €33 billion (full envelope now committed).
    - Superbonus covered 57,000 building units (total stock is 12.4 million, of which more than 60 percent is over 45 years old).
  - Car Ecobonus:
    - provides incentives up to €5,000 for purchase of low emission cars.
    - annual cost €650 million.
  - Effectiveness:
    - Superbonus and Ecobonus are estimated to have delivered 2 million and 0.4 million tons of CO2 savings, respectively, at implicit costs of €5,000 and €1,500 per ton of CO2 abated — well short of savings needed to achieve 2030 targets and at high fiscal cost.
- Environmentally damaging subsidies:
  - 40 fossil-fuel subsidies for a total of €13 billion existed in 2020.
  - Examples include diesel favorable treatment, aviation and maritime exemptions, reduced VAT for domestic use of electricity, reductions in excise duty on diesel used in trains, diesel exemptions in agriculture.

### Public investment, pricing certainty, and administrative bottlenecks
- Public investment:
  - NRRP will enable a step-up in public investment but will represent an annual average of 0.3 of GDP.
  - IEA estimates 30 percent of total investment resources should be public investment, which for Italy would amount to 2 percent of GDP.
  - Authorities intend to focus on public transport, high-speed train and public transport lines, vehicle charging stations, and some investments in innovative renewable energy sources, circular economy, and waste and water management.
- Pricing and insurance for green investments:
  - Italy has not implemented measures to reduce price volatility facing green investments comparable to some other EU countries.
  - uncertainty regarding future fossil fuel and carbon permit prices and tax policy deters investment in alternative technologies.
  - earlier costly subsidies provided price certainty until 2013; policy interventions reducing price uncertainty since then have been limited.
  - government introduced a Contract for Difference program to lock in a price for renewable energy; growth in long-term Power Purchase Agreements has fallen behind expectations.
- Energy efficiency obligation:
  - Italy implemented a “white certificates” energy efficiency obligation scheme since 2005.
  - Scheme evaluated as very effective in delivering energy savings, especially in manufacturing.
- Administrative bottlenecks:
  - many private renewable projects (potential capacity of 60 MW, which would double existing renewables capacity) are awaiting approval with delays reaching 6 years on average.
  - most of these new projects require no or minimal fiscal support to be profitable due to declining costs of new capacity.
  - existing renewable installations continue to depend on large fiscal subsidies (which could reach a cumulative 13 percent of GDP over 20 years).
  - government has reduced administrative barriers in designated areas but further streamlining is needed.

### Conclusions and policy issues — key recommendations
- Italy has had some ambitious policies and high fuel taxes that helped reduce emissions in some sectors, but progress has stalled in renewables deployment and gaps remain in meeting 2030 targets.
- Near-term coal reliance to mitigate energy security concerns calls for stronger action in coming years.
- Policy actions that could be promptly adopted with limited competitiveness risks include:
  - locking in current carbon prices through a carbon price floor to secure incentives for renewables and provide greater certainty for green investment;
  - further streamlining regulatory procedures to unlock renewable capacity deployment and investment;
  - increasing and revamping effective carbon taxation to reduce asymmetries across sectors and types of primary energy sources (a comprehensive carbon tax may not entail a sizable increase for some products given already high energy taxes on some products);
  - rationalizing environmentally-friendly subsidies to improve cost-effectiveness, using higher effective carbon taxation and more cost-effective subsidies to create fiscal space for boosting green public investment and reducing distortive taxation.
- Timing matters: delaying a comprehensive carbon tax could necessitate more abrupt and larger future increases, raising macroeconomic costs.

*Source: IMF staff chapter on Italy (content unit 1itaea2022002 - 11).*

### Box 1. Climate Finance by the Private Sector in Italy

### Box 1. Climate Finance by the Private Sector in Italy

### Overview
- Financing spending for climate mitigation and adaptation will require mainly private sector capital.  
- Banks will likely have a central role in climate finance given their dominant place in the financial system.  
- Strengthening banks’ resilience to physical and transition climate risk while providing adequate funding to facilitate the economy’s low-carbon transition will be critical to ensuring macrofinancial stability.  
- Italy has seen growth in its green bond issuance in recent years, including its first green sovereign bond in 2021. Sustainability-linked bonds (SLBs) have been issued by some Italian firms, but markets remain mostly limited to large issuers and the scale of issuance is still very small compared to green financing needs.

### Italian Firms’ and Banks’ Exposure to Physical Climate Risk
- Sample and exposure:
  - Sample includes 37,103 European firms/facilities; among them, 970 are Italian firms/facilities.
  - In this sample, nearly all Italian firms have high or very high exposure to heat stress; over 90 percent are highly exposed to water stress.
  - Italian firms are especially exposed to heat stress, water stress, and flood risk.
- Banks’ exposure:
  - According to the ECB/ESRB, the Italian banking system has over €300 billion of exposures to firms in areas with high or increasing climate physical risk, which is one of the highest among EU countries.
  - A Bank of Italy study using publicly available data estimates that Italian banks have about €170 billion of exposure to physical climate risk.

### Financing Climate Mitigation and Managing Transition Risk
- Transition risk and loan exposures:
  - Efficient private-sector capital allocation for the low-carbon transition requires appropriate pricing of the costs and risks associated with carbon emissions.
  - If carbon is priced too low, social benefits of reducing emissions will not be fully reflected in private financial contracts, exposing banks to transition risk as loans to fossil-fuel-dependent borrowers could significantly lose value.
  - Bank of Italy studies show that about 40–50 percent of corporate loans to Italian firms are exposed to climate transition risk, with small and micro firm borrowers particularly vulnerable.
- Market development and obstacles:
  - Italy has made progress (green bonds, first green sovereign bond in 2021, emergence of SLBs) but markets are limited to large issuers and small relative to needs.
  - Several Italian banks are starting to incorporate climate considerations into lending decisions.
  - Major obstacles include misaligned financial incentives and high uncertainties, which in certain cases could give rise to boom-bust cycles in segments of green finance.
  - Further enhancing climate-related data disclosure and standardization is needed to strengthen the foundation for adequate and sound climate finance.

### Annex I — Carbon Taxes and Asset Stranding: Model and Scenario Findings
- Model setup (stylized Solow growth model with carbon pricing):
  - Economy produces a single good Y using two types of capital: dirty capital K and clean capital R with a Cobb-Douglas type production function (both types additively separable).
  - Carbon emissions e are proportional to output produced with dirty capital.
  - Total saving is a fixed share s of GDP, with shares sk,t and sr,t such that sk,t + sr,t = s, sk, sr ≥ 0.
  - Capital accumulation equations incorporate physical depreciation δk and δr and policy-induced depreciation/appreciation via a tax τ on dirty capital and a subsidy μ on clean capital.
- Policy instruments:
  - Tax on dirty capital τ and subsidy on clean capital μ (μ = 2τ in the simulations).
  - Policy-induced depreciation for dirty capital can retire capital before its physical life has expired (asset stranding); policy-induced appreciation can partially or fully offset physical depreciation for clean capital.
- Scenarios compared:
  - Business-as-usual (BaU): no climate policies; economy remains in original steady state.
  - Immediate-and-gradual (IaG): tax and subsidy increased gradually in a linear manner at the outset.
  - Delayed-but-aggressive (DbA): BaU continues for seven more periods, followed by full deployment of taxes and subsidies calibrated to achieve the same cumulative reduction in carbon emissions as IaG.
- Simulation parameter values:
  - α = 0.3, β = 0.4, s = 0.2, δk = 0.1, δr = 0.1, θ = 0.5, μ = 2τ.
- Key comparative findings:
  - IaG scenario:
    - Gradual increase in τ and μ leads to a decline in the share of saving allocated to dirty capital and an increase for clean capital.
    - Dirty capital stock declines gradually; clean capital rises smoothly.
    - Total output along the transition path is on average similar to the BaU steady state but marginally lower.
    - Carbon emissions decline gradually.
    - Medium-term depreciation of dirty capital is lower than in BaU because of the smaller dirty capital stock.
  - DbA scenario:
    - Sharp increase in τ and μ after seven periods causes rapid re-allocation of saving to clean capital.
    - Dirty capital stock declines more sharply; clean capital grows more quickly relative to IaG.
    - Total output is temporarily much lower after policies are introduced because larger upfront policy-induced depreciation of dirty capital reduces production capacity and aggregate saving constrains rapid clean capital accumulation.
    - Rapid accumulation of clean capital eventually lifts output above the IaG path; emissions decline more quickly once policies are in place.
    - More aggressive policies lead to a temporary sharp drop in output and greater stranding of dirty assets before their physical life has expired.
- Policy implication:
  - Delaying action requires adopting a more aggressive policy response to achieve the same cumulative emissions reduction, which entails larger short-term output losses and greater asset stranding compared with a timely, gradual approach.

*Source: Box 1. Climate Finance by the Private Sector in Italy (Concluded) and Annex I from the provided IMF content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1itaea2022002.pdf_