## 1. Tourism Sector

## Source details

**Canonical URL:** [1. Tourism Sector](https://www.imf.org/-/media/files/publications/cr/2023/english/1hrvea2023003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2023/english/1hrvea2023003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2023/english/1hrvea2023003.pdf.json)

---

### Introduction and context
- Tourism remains an important sector for Croatia, but merchandise exports have outpaced services exports since the Global Financial Crisis (GFC), driven by machinery and vehicles, chemicals, and material manufactures.
- Merchandise goods exports accounted for 51 percent of total exports in 2022, compared to 41 percent two decades ago.
- Exports of merchandise featured less volatility compared to exports of services.
- The structure of goods exports has been broadly stable over time across SITC 1-digit sectors.

### Tourism sector characteristics and challenges (Box 1)
- Key indicators (2019):
  - Direct tourism GDP as a share of total: 11.8 percent (Croatia ranks second among available OECD and selected non-OECD countries in the key tourism indicators dashboard).
  - Direct tourism employment as a share of total employment: 6.8 percent.
- Croatia’s (direct) tourism GDP per (direct) tourism employment is higher than that of many peers.
- Sectoral concentration:
  - Geographic: concentrated in coastal areas.
  - Seasonal: concentrated in summer months.
- Identified challenges:
  - Lack of workers.
  - Seasonality.
  - Unbalanced spatial distribution.
  - Insufficient innovative and high-quality products despite abundant natural and cultural resources.
- Note: About 40 percent of accommodation in Croatia consists of private accommodations (tourism employment statistic could be underestimated because of accommodation composition).

### Goods export structure (Box 2)
- 2020 merchandise export composition:
  - Manufacture goods classified chiefly by material: 26.9 percent of exports.
  - Foods and live animals: 16.6 percent.
  - Machinery and transport equipment: 15.7 percent.
- Services (SITC 2-digit) travel and tourism:
  - 2019: accounted for 35 percent of total exports.
  - 2020: accounted for 20 percent of total exports (pandemic impact).
- Other large merchandise sectors in 2020 (combined): machinery and vehicles, material manufactures, chemicals, miscellaneous manufactured articles = 39.7 percent of total exports.

### Methodology overview
- Comparative advantage measurement:
  - Revealed Comparative Advantage (RCA) at the country-product level; high-RCA products defined as RCA > 1.
  - Number of high-RCA products denoted NRCA.
  - Sector-level: SITC (Rev. 2) 1-digit; product-level: SITC 4-digit.
- Machine-learning method:
  - A product-based K-nearest neighbor (KNN) collaborative-filtering algorithm applied to worldwide product-level data to predict Croatia’s potential export products and provide “recommendations” (algorithm-based predictions, not direct industrial policy prescriptions).

### Goods export competitiveness findings (RCA and NRCA)
- NRCA and comparative position:
  - Croatia has a relatively broad range of products exhibiting comparative advantages; NRCA is relatively high globally and approximately the median among euro area (EA) peers.
  - Tourism-dependent economies tend to have lower NRCA, but Croatia stands out among tourism-intensive countries with the highest number of high-RCA products in its goods exports (per the sample analyzed).
- Correlations and dynamics:
  - Number of high-RCA products displayed a positive correlation with real GDP per capita since the mid-1990s.
  - Number of high-RCA products displayed a negative correlation with income volatility (5-year moving window standard deviation of real GDP per capita).
  - Croatia’s NRCA increased significantly since the early 2010s post-GFC, coinciding with a sharp decline in growth volatility until the pandemic onset.
- World average:
  - World average NRCA reported as 94.4 in 2020 (European countries have high NRCA in general).

### Technology intensity of exports
- Shares and trends:
  - Croatia’s share of medium-and-high-technology exports in all manufactured exports: 47.5 percent (relatively low compared to EA countries; EA average is GDP-weighted).
  - Share of medium- and high-technology products in total exports increased by around 10 percentage points over the past 25 years but remains below the EA average and did not recover to pre-GFC levels after the decline following the GFC.
- Sectoral restructuring:
  - Post-GFC decline in medium-tech partly reflected domestic industrial restructuring during EU accession, including a significant drop in ship exports and offsetting increases in chemical products and industrial machinery.
- Composition within high-RCA set:
  - Low-technology products dominate.
  - Medium-technology products’ share has been increasing over the past two decades.
  - High-technology products’ share has been stagnant at low levels.
  - Growing share of medical and pharmaceutical products has contributed to medium-technology increases.

### Export products potential (machine-learning predictions)
- Algorithm inputs and logic:
  - Collaborative-filtering leverages (i) a country’s existing goods export structure and (ii) export portfolios of similar countries to predict product-level export potential.
- Cross-country association:
  - Economies with export portfolios better aligned with algorithm recommendations have experienced higher and more resilient growth (per cross-country estimation).
- Croatia-specific algorithmic findings:
  - Main conclusion: Croatia may have latent comparative advantages in manufactured goods—material-related manufactured goods, machinery, and transport equipment sub-sectors.
  - Machinery and transport equipment exports: 15.7 percent of Croatia’s total export basket in 2020.
  - Predicted share of machinery and transport equipment sector: 30.8 percent (Prediction 2020 vs. Export 2020 as shown in Figure 10).
  - Among top 20 predicted products, 15 products have high actual RCAs.
  - Among the 5 products with actual RCA less than 1, four are medium- or high-technology products (two in the chemical sector and two in machinery and transport equipment).
  - Decomposition: machinery and transport equipment sector accounts for more than half of the medium- and high-technology products across all sectors.

### Implications for policy and reform (as cited and implied)
- Overarching priority:
  - Raising productivity to unlock capacity for higher and more resilient growth.
- Diversification and upgrading:
  - Product-level and sectoral diversification toward more technology-intensive manufacturing could strengthen competitiveness and reduce volatility.
- Use of algorithm recommendations:
  - Algorithm-based export recommendations can inform a broader and deeper reform agenda to address bottlenecks and guide export diversification strategies.
- Specific reform areas recommended (Box 3 policy conclusions):
  - Strengthen institutional efficiency.
  - Enhance labor productivity.
  - Promote labor market matching and on-the-job training.
  - Improve the business environment to attract investments and talents.
- Structural bottlenecks and indicators highlighted:
  - R&D personnel as a percentage of the population: below 1 percent in 2021.
  - Patent applications to the European Patent Office per million inhabitants:
    - Applicants: 7.2 per million inhabitants.
    - Inventors: 6.7 per million inhabitants.
    - EU averages: 151.9 for inventors and 151.4 for applicants.
    - Croatia’s values are significantly lower than EU averages and are the lowest among the EA countries.
  - Croatia exhibits the second lowest gross value added per unit of fixed assets among the EA, suggesting low investment efficiency.
  - Real productivity growth in manufacturing is relatively low among the EA countries.

*Prepared by Xuege Zhang; chapter excerpt from "GOODS EXPORT DIVERSIFICATION AND COMPETITIVENESS IN CROATIA."*

### Methodology details (Box 3 excerpt)
- Recommender design:
  - Product-based K-nearest neighbor (KNN) algorithm.
  - Similarity measure: cosine similarity score (ranges from -1 to 1).
  - Key input: actual RCA matrix R = [p1, p2, ..., pn] where pj is a vector of length m representing RCA scores of product j for all m countries.
- Implementation steps for country i in year t:
  - 1. Represent each product as a vector of RCA scores, pj.
  - 2. Select set of products where r_ij > 1 (country i high-RCA set).
  - 3. For each product j calculate predicted r_ij as weighted average RCA of high-RCA set weighted by cosine similarity between product j and products in the country's high-RCA set.
  - 4. Recommended products are the K_RCR,i,t products with highest predicted r_ij values.
- Growth associations (system GMM estimation):
  - A 0.1 increase in similarity between actual and predicted goods export portfolios is associated with a 0.22 percentage point increase in the annual growth rate of GDP per capita.
  - A 0.0015 decrease in growth volatility (standard deviation of growth rate in a 5-year window) is associated with a 0.1 increase in similarity.
  - Results robust to varying forward-looking horizons and standard winsorization.

---

### Energy, Climate, and Carbon Pricing (selected excerpts)

### Energy prices and household affordability
- Electricity and natural gas prices for households are significantly lower than the EU average.
  - Prior to energy support packages (2021H1): electricity and natural gas prices paid by households were 41 percent below the EU average.
  - After the 2022 energy support packages (2022H1): electricity prices are 46 percent below EU average, and natural gas prices are 52 percent below EU average.

### Energy security, decarbonization strategy, and NRRP
- NRRP and climate finance:
  - Nearly 40 percent of the EUR 5.5 billion grants contribute to climate targets.
  - NRRP reforms and investments include:
    - (i) remove barriers and administrative procedures restraining the RES uptake;
    - (ii) finalize the certification of the gas transmission system operator;
    - (iii) promote the use of alternative fuels in transport.
  - Measures to improve energy efficiency: prominent in NRRP-funded green transition (¼ of green investments), mainly related to building stock renovation and energy efficiency obligation schemes for energy suppliers.
- Investment needs:
  - Under the baseline scenario and current legislation, additional investment needs across all sectors to achieve greater reductions in GHG emissions by 2030 and climate neutrality in 2050 are estimated at €20.5 bn (Croatia NECP).
- Other notes:
  - New national hydrogen strategy important for low-carbon transition.
  - Effective absorption of RRF grants and other EU funds emphasized given remaining investment costs.

### Renewable Energy Sources (RES) and energy mix
- RES share:
  - RES accounts for about 1/3 of total energy supply in Croatia, mainly hydropower, biomass, and wind power.
  - RES share is above the EU and EA average, with potential for diversification.
  - RES use in transport: low; average share of RES energy in transport fuel consumption among the lowest in the EU.
- Gas and LNG:
  - During 2022 the underground gas storage facilities had among the highest fullness rates in the EU.
  - Since 2021, LNG imports (mainly from the US) are used to meet growing domestic and regional gas demand.

### Climate change exposure, impacts, and projections
- Historical impacts and exposure:
  - Between 1980 and 2021, weather and climate-related extreme events incurred damages of USD 2.9 billion (EEA).
  - On average, a natural disaster estimated to have caused damages of about 0.7 percent of GDP and affected 382 per 100,000 inhabitants every year.
  - Urban coastal areas most exposed to extreme weather events.
- Projections:
  - Mean annual temperature increase: between 1.3°C and 1.5°C by 2040 and by up to 2.2°C and 2.5°C by 2070, along with more frequent extremely high temperatures.
  - Projected global mean sea level increase: 19-38 cm by mid-21st century (2046-65) and 32-82 cm by end-21st century.
- Vulnerability:
  - About a quarter of the Croatian economy is based on sectors potentially vulnerable to climate change and extreme weather, including tourism and agriculture.
  - Croatia has a large probability of being hit by a severe natural disaster in the region (backward-looking probabilities based on EM-DAT).

### Adaptation strategies, gaps, and recommended institutional changes
- Strategy and planning:
  - National Adaptation Strategy (2020) implemented via National Adaptation Plans updated every five years; priorities include water availability, coast and coastal zones, forestry and land use change, agriculture, biodiversity, and human health.
  - Important to implement the 2020 National Adaptation Strategy and finalize incomplete legislative framework to enable faster deployment of renewables.
- Key gaps in public investment integration:
  - No ex-ante technical guidance from center on incorporating climate risks/opportunities into domestically financed public investments.
  - No framework to ensure climate change is integral to capital spending decision-making or that climate impact is an explicit criterion in selection of budget-funded projects.
  - Climate-related public investment expenditures are not identified in the budget.
  - No explicit requirement for ex-post audits or review of climate impacts of all public investments (ex-post monitoring of GHG emissions conducted for some public assets only).
  - Missing methodology for estimating maintenance needs from climate damages to public infrastructure; asset registers lack information on climate risks.
  - Financial strategy for natural disasters primarily focuses on absorbing costs once they occur.
  - Ministry of Finance (MOF) does not publish a fiscal risk statement that includes climate-related fiscal risks; climate risks not included in fiscal sustainability analysis.
  - Budget and fiscal strategy documents and guidance do not refer to climate change policy and risks.
- Recommended strengthening of climate-relevant public investment management along four priorities:
  - (i) project appraisal and selection;
  - (ii) identifying climate-relevant public capital spending projects by ministries, subnational governments, and public corporations (PCs);
  - (iii) maintenance needs for climate damages to public assets;
  - (iv) climate change fiscal risk analyses.
- Additional recommendations:
  - Include climate considerations in central government budget guidelines for project development and appraisal prepared by the MOF and line ministries.
  - Integrate climate-related performance targets into PCs management agreements and strategic/financial plans.
  - Develop strategy to identify and estimate climate change-related damage to public assets and include information in asset registers.
  - Analyse aggregate sensitivity of the budget to climate change risks facing public assets so fiscal risks can inform fiscal strategy.

### GHG emissions, sectoral composition, and EU policy context
- Aggregate and trends:
  - Croatia's total emissions accounted for 0.7 percent of the EU total in 2019 and fell by 17 percent between 2005 and 2019 (EU-wide reduction was 19 percent in same period).
  - In 2021, Croatia had the sixth highest GHG emissions per unit of GDP in the EU.
  - Emission intensity (tCO2e per unit of consumed energy) is significantly higher than the EU average.
- Sectoral shares:
  - Transport: 29 percent of Croatia's total emissions (higher than EU average).
  - Industry: 25 percent.
  - Building stock: 13 percent.
- LULUCF:
  - Carbon sink capacity declined by 35 percent between 2005 and 2019.
- NECP targets:
  - NECP (2021-2030) sets overall emission reduction targets in the range of [34,37] for 2030 and [57,73] for 2050 relative to 2005 depending on green transition scenario ambition.
  - Croatia’s 2030 target for non-ETS sectors is a 7 percent reduction relative to 2005 as set by ESD; Croatia projects to overachieve it with continuation of current policies.
- Policy gaps:
  - Croatia has lowered fossil fuel phase-out ambitions; a fossil fuel phase-out plan for coal or for oil and gas is missing.
  - Croatia’s long-term climate strategy does not include a net-zero target for 2050.

### EU Emissions Trading System (ETS), Fit-for-55, and carbon pricing
- ETS coverage and parameters:
  - The EU ETS covers about 41 percent of EU total emissions; Croatia joined the ETS in 2013; the ETS currently covers about 40 percent of Croatia’s total GHGs.
  - Emissions price is currently about €90/mtCO2.
  - The cap declines every year (currently by 2.2 percent).
- Fit-for-55 implications:
  - Faster cap decline (4.4 percent during 2028-30).
  - Target of 61 percent in 2030 compared to 2005 (instead of currently 43 percent).
  - Introduction of Carbon Border Adjustment Mechanism (CBAM) and phase-out of free allowances as CBAM is phased in.
  - Extension of ETS to maritime transport (gradually 2024-26) and a separate new ETS for buildings, road transport, and fuels.
  - Fit-for-55 raises expected non-ETS reduction target for Croatia from 7 percent to 16.7 percent, implying additional efforts needed in non-ETS sectors (transport and buildings).

### Fiscal, taxation, and energy subsidy context
- Environmental taxation:
  - Environmental taxes: 3.1 percent of GDP in 2021 or 8.7 percent of total tax and social contributions revenue (EU average 2.2 percent of GDP).
  - Excise taxes on energy (including fuel for transport) account for 80 percent of environmental taxes.
- Energy support measures and fiscal impact:
  - Since Russia’s war in Ukraine and the sharp increase in oil prices, the government provided extensive support to fossil fuels roughly until end-March 2024.
  - Measures included reduced VAT rates on natural gas and thermal energy, and on pellets, briquettes, and firewood.
  - Prices of unleaded gasoline and diesel for motor vehicles and heating oil price have been capped mainly via reductions in excise taxes.
  - Green levy paid by petrol and diesel fuel distributors/suppliers for the minimum share of biofuels was reduced to almost zero.
  - Revenue loss from cuts in energy-related taxes is estimated at about 0.8 percent of GDP, with subsidies to offset the rise in energy prices at about 3 percent of GDP during 2022-24 (see 2023 Croatia Article IV Staff Report).
  - Current excise system not aligned with GHGs intensity of the tax base; system heavily reliant on transport as the biggest emitter.

---

### Excise Taxes, Carbon Pricing, and CPAT Simulations

### Excise structure and effective carbon prices (selected verbatim rates)
- Excises on oil derivatives when used for transportation:
  - €597.25 per 1,000 l leaded petrol → €258.5/tCO2e; CO2 intensity 2.3/ l
  - €406 per 1,000 l unleaded petrol → €175.8/tCO2e; CO2 intensity 2.3/ l
  - €597.25 per 1,000 l aviation spirit → €186.6/tCO2e; CO2 intensity 3.2 / l
  - €353 per 1,000 l Diesel -motor fuel → €130.7/tCO2e; CO2 intensity 2.7 /l
- Excises on oil derivatives when used as heating fuels for businesses and households:
  - €21 per 1,000 l Diesel -heating fuel → €7.8/tCO2e; CO2 intensity 2.7 /l
  - €56.14 per 1,000 l heating fuel for business/households → €24.4/tCO2e; CO2 intensity 2.3/ l
  - €232.53 per 1,000 l heating fuel (kerosene) → €93/tCO2e; CO2 intensity 2.5 /l
  - €21.24 per 1,000 kg heating fuel for business/households (heavy fuel oil) → €6.7/tCO2e; CO2 intensity 3.15 /kg
- Other notable rates:
  - Blue diesel (agricultural vehicles, ships): €0.0 per 1,000 l → €0/tCO2e; CO2 intensity 2.7 /l
  - LPG: €13.27 per 1,000 l motor fuel or heating fuel → €8.8/tCO2e; CO2 intensity 1.51 /l
  - Coal and coke: €0.31 per GJ heating fuel business/non-business use → €3.0/tCO2e; CO2 intensity 104 /GJ
  - Electricity: reduced VAT to 13 percent for electricity (April 2022); standard VAT is 25 percent
  - Natural gas and district heating: VAT reduced to 5 percent (April 2022)

### Fossil fuel subsidies, price caps, and fiscal implications
- Fossil fuel subsidy intensity increased in Croatia by about 0.9 percent of GDP from 2015 to 2020 (relative to 0.35 percent of GDP for the EU average).
- Energy subsidies projected to increase further, especially implicit subsidies (consumer prices below efficient levels).
- Untargeted support measures (reduced excise rates and price caps) create large fiscal costs and run counter to decarbonization goals.
- Recommendation: if further support needed, measures should be directly targeted to vulnerable households and firms.

### CPAT analysis, baseline projections, and emissions trends
- CPAT (IMF/World Bank Carbon Price Assessment Tool) findings under business-as-usual (BAU) policies:
  - By 2030, total emissions estimated to decline by less than one percent below 2019 levels.
  - Sectoral BAU changes:
    - Waste: −7 percent
    - Energy-related and agriculture: less than −2 percent
    - Industrial emissions: increase by almost 8 percent
  - Energy-intensity of GDP expected to fall due to increased energy efficiency and newer technology.
  - CPAT finds higher growth in transportation and waste emissions than EEA and NECP.

### Carbon pricing rationale and policy design
- Carbon tax in non-ETS sectors (primarily buildings and transportation) recommended as the most cost-effective instrument.
- Advantages:
  - Promotes savings and shifts to clean energy based on carbon content.
  - Equalizes marginal abatement costs across fuels/sectors.
  - Mobilizes fiscal revenue to finance greening and compensation.
  - Generates domestic environmental benefits and is administratively straightforward using existing excise infrastructure.
- Design considerations:
  - Coordinate tax approach for heavy-duty vehicles with neighboring countries to avoid freight shifting due to differential diesel taxes.
  - Accompany non-ETS carbon price with an ETS price floor to equalize abatement costs.
  - Progressively increase carbon tax along a pre-announced path.

### Simulation results: carbon tax scenarios and impacts (verbatim scenario example)
- Example policy: carbon tax progressively reaching €75/tCO2e by 2030 (introduced progressively from €30 in 2023), applied economy-wide to sectors not covered by EU ETS.
- CPAT simulation outcomes (2030, relative to BAU or 2005 as noted):
  - Economy-wide: reduces overall emissions to 30 percent below 2005 levels in 2030 or 11 percent below BAU.
  - Emissions declines compared to BAU:
    - Buildings: −12 percent
    - Power: −9 percent
    - Transportation: −8 percent
    - Agriculture, waste: −10 percent
    - Industry: −15 percent
  - Revenue raised: 5 percent of GDP (for the €75/tCO2e scenario).
  - Efficiency costs: reported in scenarios (table shows 0% to −1% of GDP across scenarios).
  - Deaths averted (cumulative under scenarios): figures shown (e.g., 0, 218, 312, 416, 655, 1 — as presented in source table for different scenarios).
- Note: higher carbon prices (above €100/tCO2) are required to fully achieve mitigation targets; complementary sectoral policies can deliver targeted impacts at manageable costs.
- Alternative path:
  - Initial carbon tax of €30/tCO2e for non-ETS sectors, progressively rising each year before Fit-for-55 rules take effect in 2027-28.

### Distributional considerations and revenue recycling
- Recommended revenue recycling:
  - Recycle a portion of revenue to support poorest households via lump-sum transfers (generally about 20 percent of revenue to compensate the bottom 40 percent of households).
  - Use remaining revenues to reduce direct taxes (corporate or personal income tax) to positively affect productivity.
- CPAT distributional findings:
  - Before transfers, poorest households experience a smaller relative decline in gasoline and natural gas consumption.
  - Revenue recycling/transfer schemes more than offset direct and indirect impacts on households.
  - Household-level variation within income groups can be large; authorities should be mindful of intra-group effects.

---

### Feebates and Sectoral Policies

### Role and rationale
- Sectoral policies, including feebates, are important to reduce emissions in power, buildings, and transportation while keeping carbon prices politically manageable.
- Feebates: revenue-neutral sliding scale of fees on activities/products based on emission rates (above-average pay, below-average receive net revenues).
- Feebates affect technology choice (stock) via shadow prices; average prices not affected but stock shifts toward more efficient technologies.

### Electrification and decarbonization
- Electrification of transport and buildings plus decarbonization of electricity generation are essential complements.
- Feebates at sectoral levels and non-ETS carbon pricing can together promote necessary shifts.

### Feebate examples and impacts (verbatim figures)
- Power feebate example:
  - A feebate with price €100/tCO2e would have applied a fee equivalent to 8.4 cents/kWh for coal, 2.1 cents/kWh for natural gas, and a subsidy of 1.4 cents/kWh for renewables in 2022.
  - Coal and oil power generation account for about 28 percent of gross production of electricity and heat from combustible fuels in Croatia.
- Transport feebate illustration:
  - A feebate with price of €400/tCO2e would provide a subsidy for electric or smaller gasoline vehicles, and apply an equivalent tax of €3,400 to a vehicle with 200 g CO2/km, which is €130 above the current tax for diesel-powered vehicles but considerably higher than the tax applied to gasoline-powered vehicles.

### Policy recommendations by sector
- Buildings and public sector:
  - Intensify programs for energy renovation of multi-apartment buildings, family houses, public sector buildings, and buildings of cultural importance to promote RES deployment.
  - Systematic energy management in the public sector (e.g., remote metering).
  - Public lighting energy renovation programs.
- Road transport:
  - Intensify introduction of electric cars and use of biofuels.
  - Reverse decision to cancel penalties for fuel suppliers not meeting RES mandates.
  - Replace lower price measure for "blue diesel" in agriculture and fisheries with a subsidy for biodiesel use and production.
  - Promote energy-efficient rail, maritime, and inland navigation traffic and low-emission urban zones; optimize freight logistics and smart parking/traffic management.
- Non-ETS sectors (waste and agriculture):
  - Prevent creation and reduce disposed biodegradable waste.
  - Use biogas to produce biomethane, electricity and heat or flare methane in landfills.
  - Changes in livestock nutrition and fodder quality; introduce biogas plants; improve livestock facilities and manure management systems.
- Industry:
  - Industry significant source of emissions; further work recommended to analyze industry in sectoral detail.

### Sectoral outcomes under feebates (verbatim table excerpt)
- Feebates (€ per tonne of CO2e) — sectors’ percent relative to 2005 levels (verbatim layout preserved as supplied):
  - Feebates (€ per tonne of CO2e)
  - 100200400
  - Non-ETS-7%-2%2%-3%-6%-9%
  - Transport21%36%31%27%23%
  - Buildings-29%-33%-37%-40%-42%
  - Agriculture-18%-19%-23%-25%-27%
  - Waste-43%31%22%17%13%10%
  - ETS-38%-43%-46%-47%-49%
  - Power-56%-67%-67%-67%-68%
  - Industry-20%-17%-23%-25%-28%
  - Economy-wide[-34%,37%]-20%-21%-25%-27%-29%
- Source note: IMF staff estimates using CPAT.

*Source: Republic of Croatia — International Monetary Fund (excerpts from provided content).*

### 1. Tourism Sector _______________________________________________________________________ 4

### 1. Tourism Sector

### Introduction and context
- Tourism remains an important sector for Croatia, but merchandise exports have outpaced services exports since the Global Financial Crisis (GFC), driven by machinery and vehicles, chemicals, and material manufactures.
- Merchandise goods exports accounted for 51 percent of total exports in 2022, compared to 41 percent two decades ago.
- Exports of merchandise featured less volatility compared to exports of services.
- The structure of goods exports has been broadly stable over time across SITC 1-digit sectors.

### Tourism sector characteristics and challenges (Box 1)
- Direct tourism GDP as a share of total reached 11.8 percent in 2019 (Croatia ranks second among available OECD and selected non-OECD countries in the key tourism indicators dashboard).
- Direct tourism employment as a share of total employment was 6.8 percent in 2019.
- Croatia’s (direct) tourism GDP per (direct) tourism employment is higher than that of many peers.
- Tourism is concentrated in coastal areas and seasonally concentrated in summer months.
- Identified tourism sector challenges: lack of workers, seasonality, unbalanced spatial distribution, insufficient innovative and high-quality products, despite abundant natural and cultural resources.
- About 40 percent of accommodation in Croatia consists of private accommodations (note that tourism employment statistic could be underestimated because of accommodation composition).

### Goods export structure (Box 2)
- In 2020, manufacture goods classified chiefly by material accounted for 26.9 percent of exports, foods and live animals 16.6 percent, and machinery and transport equipment 15.7 percent.
- At the SITC 2-digit level under services, the travel and tourism sector accounted for 35 percent of total exports in 2019 but only 20 percent in 2020 due to the pandemic.
- Other large merchandise sectors in 2020 (machinery and vehicles, material manufactures, chemicals, miscellaneous manufactured articles) combined to 39.7 percent of total exports.

### Methodology overview
- Revealed Comparative Advantage (RCA) is used at the country-product level, with high-RCA products defined as RCA > 1.
- The number of high-RCA products is denoted NRCA.
- Sector-level refers to SITC (Rev. 2) 1-digit; product-level refers to SITC 4-digit.
- A machine-learning collaborative-filtering algorithm is applied to worldwide product-level data to predict Croatia’s potential export products and provide “recommendations” (algorithm-based predictions, not direct industrial policy prescriptions).

### Goods export competitiveness findings (RCA and NRCA)
- Croatia has a relatively broad range of products exhibiting comparative advantages; NRCA is relatively high globally and approximately the median among euro area (EA) peers.
- Tourism-dependent economies tend to have lower NRCA, but Croatia stands out among tourism-intensive countries with the highest number of high-RCA products in its goods exports (per the sample analyzed).
- The number of high-RCA products displayed:
  - A positive correlation with real GDP per capita since the mid-1990s.
  - A negative correlation with income volatility (5-year moving window standard deviation of real GDP per capita).
- Croatia’s NRCA increased significantly since the early 2010s post-GFC, coinciding with a sharp decline in growth volatility until the pandemic onset.
- World average NRCA is reported as 94.4 in 2020 (European countries have high NRCA in general).

### Technology intensity of exports
- Croatia’s share of medium-and-high-technology exports in all manufactured exports is 47.5 percent, which is relatively low compared to EA countries (EA average is GDP-weighted).
- Croatia’s share of medium- and high-technology products in total exports increased by around 10 percentage points over the past 25 years but remains below the EA average and did not recover to pre-GFC levels after the decline following the GFC.
- The decline in medium-tech exports after the GFC partly reflected domestic industrial restructuring during EU accession, including a significant drop in ship exports and offsetting increases in chemical products and industrial machinery.
- Within Croatia’s high-RCA product set:
  - Low-technology products dominate.
  - Medium-technology products’ share has been increasing over the past two decades.
  - High-technology products’ share has been stagnant at low levels.
- The growing share of medical and pharmaceutical products has contributed to medium-technology increases.

### Export products potential (machine-learning predictions)
- The collaborative-filtering algorithm predicts product-level export potential by leveraging (i) a country’s existing goods export structure and (ii) export portfolios of similar countries.
- Improving toward the algorithm’s predicted export structure could potentially boost growth and macroeconomic stability; economies with export portfolios better aligned with such recommendations have experienced higher and more resilient growth (per cross-country estimation).
- The algorithm’s recommendations are intended as inputs to inform broader structural reforms and product-level diversification or specialization strategies, especially for small open economies facing trade-offs when accessing global markets.

### Implications for policy and reform (as cited and implied in the analysis)
- Raising productivity is important for Croatia to unlock capacity for higher and more resilient growth.
- Product-level and sectoral diversification toward more technology-intensive manufacturing could strengthen competitiveness and reduce volatility.
- Algorithm-based export recommendations can inform a broader and deeper reform agenda to address bottlenecks and guide export diversification strategies.

*Prepared by Xuege Zhang; chapter excerpt from "GOODS EXPORT DIVERSIFICATION AND COMPETITIVENESS IN CROATIA."*

### Box 3. Croatia: Methodology Overview

### Box 3. Croatia: Methodology Overview

### Methodology
- Export product recommendation system: product-based K-nearest neighbor (KNN) algorithm.
- Similarity measure: cosine similarity score (ranges from -1 to 1).
- Key input: actual RCA matrix 푹푹 written as 푹푹=[풑풑1,풑풑2, ...,풑풑푛푛] where 풑풑풋풋 is a vector of length 푚푚 representing the RCA scores of product 푗푗 for all the 푚푚 countries:
  - 풑풑풋풋 =
    [푟푟1푖푖
    푟푟1푖푖
    ⋮
    푟푟푚푚푖푖]
- In the implementation, 푚푚 is effectively the cross-sectional country numbers; each product has 푚푚 features.
- Intuition: by comparing the sets of countries that export products and the importance of the products in countries' export baskets, infer how closely related two products are.

### Implementation steps of the product-based KNN recommender for country 풊풊 in year 푡푡
- 1. Represent each product in the SITC 4-digit product space as a vector of RCA scores, 풑풑풋풋.
- 2. Select the set of products that country 푖푖 has a revealed comparative advantage, i.e., 푟푟푖푖푖푖>1 (high-RCA product set of country 푖푖).
- 3. For each 푗푗∈[1,푛푛] calculate the predicted value of 푟푟푖푖푖푖 as a weighted average RCA score of the high-RCA product set, weighted by the cosine similarity between product 푗푗 and the products in the country's high-RCA set.
- 4. The recommended products for country 푖푖 are the 퐾퐾
  �
  푅푅푅푅푅푅,푖푖푖푖 products with the highest predicted 푟푟푖푖푖푖 values (i.e., recommendation scores), where 퐾퐾
  �
  푅푅푅푅푅푅,푖푖푖푖 comes from the estimation in the first stage.

### Similarity between recommended and actual export structures; growth associations
- Definition of export structure (actual): number of high RCA exports (SITC 4-digit) that belong to each SITC 1-digit sector, as a share of total number of high RCA exports.
- Definition of recommended export structure: vector of the number of recommended products that belong to each SITC 1-digit sector as a share of the total number of recommended export products.
- Similarity score: distance between the two vectors of actual and recommended structures.
- System GMM estimation results:
  - A 0.1 increase in the similarity between actual and predicted goods export portfolios is associated with a 0.22 percentage point increase in the annual growth rate of GDP per capita.
  - A 0.0015 decrease in the growth volatility (standard deviation of growth rate in a 5-year window) is associated with a 0.1 increase in similarity.
- Robustness: results are robust by varying forward-looking horizons and standard winsorization.

### Croatia: export potential findings (algorithm results and context)
- Dataset used: large economy-product space covering more than 700 products of over 190 economies during 1980-2020.
- Main algorithmic conclusion: Croatia may have latent comparative advantages in goods exports, particularly in manufactured goods—material-related manufactured goods, machinery, and transport equipment sub-sectors.
- Comparative shares (selected):
  - Croatia’s exports from the machinery and transport equipment sector accounted for 15.7 percent of Croatia’s total export basket in 2020.
  - Predicted share of machinery and transport equipment sector: 30.8 percent (Prediction 2020 vs. Export 2020 as shown in Figure 10).
- Top-product detail:
  - Among the top 20 predicted products, 15 products have high actual RCAs.
  - Among the 5 products with actual RCA less than 1, four are medium- or high-technology products (two in the chemical sector and two in machinery and transport equipment).
- Technology composition:
  - A decomposition into medium- and high-technology products reveals that the machinery and transport equipment sector accounts for more than half of the medium- and high-technology products across all sectors.

### Policy conclusions and recommendations
- Priority: comprehensive structural reforms to enhance productivity and help Croatia ascend the technology ladder.
- Rationale: higher productivity is key to realizing manufacturing export potential and fostering faster income convergence; productivity in Croatia still lags behind EU peers despite progress.
- Specific reform areas recommended:
  - Strengthen institutional efficiency.
  - Enhance labor productivity.
  - Promote labor market matching and on-the-job training.
  - Improve the business environment to attract investments and talents to compete in the global market.
- Structural bottlenecks and indicators highlighted:
  - R&D personnel as a percentage of the population was below 1 percent in 2021.
  - Patent applications to the European Patent Office per million inhabitants:
    - Applicants: 7.2 per million inhabitants.
    - Inventors: 6.7 per million inhabitants.
    - EU averages: 151.9 for inventors and 151.4 for applicants.
    - Croatia’s values are significantly lower than the EU averages and are the lowest among the EA countries.
  - Croatia exhibits the second lowest gross value added per unit of fixed assets among the EA, suggesting low investment efficiency.
  - Real productivity growth in manufacturing is relatively low among the EA countries.

*REPUBLIC OF CROATIA  INTERNATIONAL MONETARY FUND*

### 40. Under the provisions of the Gas Market Act (2018), the energy entity HEP was designated as the

### 1hrvea2023003 - 40. Under the provisions of the Gas Market Act (2018), the energy entity HEP was designated as the

### Energy prices and household affordability
- Electricity and natural gas prices for households are significantly lower than the EU average.
- Prior to energy support packages (2021H1), electricity and natural gas prices paid by households were 41 percent below the EU average.
- After the 2022 energy support packages (2022H1), electricity prices are 46 percent below EU average, and natural gas prices are 52 percent below EU average.

### Energy security, decarbonization strategy, and NRRP
- Croatia aims to decarbonize the energy supply, reduce reliance on fossil fuels, and promote renewable energy to ensure energy security.
- Boosting investment in clean energy is part of the 2021-26 National Resilience and Recovery Plan (NRRP).
- Nearly 40 percent of the EUR 5.5 billion grants contribute to climate targets.
- NRRP reforms and investments include:
  - (i) remove barriers and administrative procedures restraining the RES uptake;
  - (ii) finalize the certification of the gas transmission system operator;
  - (iii) promote the use of alternative fuels in transport.
- Measures to improve energy efficiency are prominent in NRRP-funded green transition (¼ of green investments), mainly related to building stock renovation and energy efficiency obligation schemes for energy suppliers.
- The new national hydrogen strategy plays an important role in the low-carbon transition.
- Importance of effective absorption of RRF grants and other EU funds noted given significant remaining investment cost of reaching medium-to-long term climate goals.
- Under the baseline scenario and current legislation, additional investment needs across all sectors to achieve greater reductions in GHG emissions by 2030 and climate neutrality in 2050 are estimated at €20.5 bn (Croatia NECP).

### Renewable Energy Sources (RES) and energy mix
- RES accounts for about 1/3 of total energy supply in Croatia, mainly hydropower, biomass, and wind power.
- RES share is above the EU and EA average, with potential for diversification.
- RES is mainly used for electricity generation and thermal energy; RES use in transport is low.
- The average share of RES energy in transport fuel consumption is among the lowest in the EU; share of newly registered vehicles using clean energy is also low.
- Power generation uses diverse technologies; hydropower, and in the last decade, bio and wind energy partially replacing fossil fuels.
- During 2022 the underground gas storage facilities had among the highest fullness rates in the EU.
- Since 2021, LNG imports (mainly from the US) are used to meet growing domestic and regional gas demand.

### Climate change exposure, impacts, and projections
- Over the last two decades, frequency of natural disasters increased: droughts, floods, landslides, heat waves, storms, and wildfires.
- Urban coastal areas are the most exposed to extreme weather events.
- Between 1980 and 2021, weather and climate-related extreme events incurred damages of USD 2.9 billion (EEA).
- On average, a natural disaster is estimated to have caused damages of about 0.7 percent of GDP and affected 382 per 100,000 inhabitants every year.
- Projections for mean annual temperature: increase between 1.3°C and 1.5°C by 2040 and by up to 2.2°C and 2.5°C by 2070, along with more frequent extremely high temperatures.
- Projected global mean sea level increase: 19-38 cm by mid-21st century (2046-65) and 32-82 cm by end-21st century.
- About a quarter of the Croatian economy is based on sectors potentially vulnerable to climate change and extreme weather, including tourism and agriculture.
- Croatia has a large probability of being hit by a severe natural disaster in the region (backward-looking probabilities based on EM-DAT).

### Adaptation strategies, gaps, and recommended institutional changes
- National Adaptation Strategy (2020) implemented via National Adaptation Plans updated every five years; priorities include water availability, coast and coastal zones, forestry and land use change, agriculture, biodiversity, and human health.
- Important to implement the 2020 National Adaptation Strategy and finalize incomplete legislative framework to enable faster deployment of renewables.
- Key gaps in integration of climate adaptation into public investment management and budgetary processes:
  - No ex-ante technical guidance from center on incorporating climate risks/opportunities into domestically financed public investments.
  - No framework to ensure climate change is integral to capital spending decision-making or that climate impact is an explicit criterion in selection of budget-funded projects.
  - Climate-related public investment expenditures are not identified in the budget.
  - No explicit requirement for ex-post audits or review of climate impacts of all public investments (ex-post monitoring of GHG emissions conducted for some public assets only).
  - Missing methodology for estimating maintenance needs from climate damages to public infrastructure; asset registers lack information on climate risks.
  - Financial strategy for natural disasters primarily focuses on absorbing costs once they occur.
  - Ministry of Finance (MOF) does not publish a fiscal risk statement that includes climate-related fiscal risks; climate risks not included in fiscal sustainability analysis.
  - Budget and fiscal strategy documents and guidance do not refer to climate change policy and risks.
- Suggested strengthening of climate-relevant public investment management along four priorities:
  - (i) project appraisal and selection;
  - (ii) identifying climate-relevant public capital spending projects by ministries, subnational governments, and public corporations (PCs);
  - (iii) maintenance needs for climate damages to public assets;
  - (iv) climate change fiscal risk analyses.
- Recommendation that climate considerations be included in central government budget guidelines for project development and appraisal prepared by the MOF and line ministries.
- Recommendation that climate-related performance targets be integrated into PCs management agreements and strategic/financial plans.
- Need to develop strategy to identify and estimate climate change-related damage to public assets and include information in asset registers.
- Croatia would benefit from an analysis of aggregate sensitivity of the budget to climate change risks facing public assets so fiscal risks can inform fiscal strategy.

### GHG emissions, sectoral composition, and EU policy context
- Croatia's total emissions accounted for 0.7 percent of the EU total in 2019 and fell by 17 percent between 2005 and 2019 (EU-wide reduction was 19 percent in same period).
- In 2021, Croatia had the sixth highest GHG emissions per unit of GDP in the EU.
- Emission intensity (emitted tCO2e of energy related GHGs per unit of consumed energy) is significantly higher than the EU average.
- Transport sector accounts for 29 percent of Croatia's total emissions (higher than EU average).
- Industry and building stock account for 25 percent and 13 percent of total emissions, respectively.
- LULUCF (land use, land-use change, and forestry) carbon sink capacity declined by 35 percent between 2005 and 2019.
- Croatia’s NECP (2021-2030) sets overall emission reduction targets in the range of [34,37] for 2030 and [57,73] for 2050 relative to 2005 depending on green transition scenario ambition.
- Croatia’s 2030 target for non-ETS sectors is a 7 percent reduction relative to 2005 as set by ESD; Croatia projects to overachieve it with continuation of current policies.
- Croatia has lowered fossil fuel phase-out ambitions; a fossil fuel phase-out plan for coal or for oil and gas is missing.
- Croatia’s long-term climate strategy does not include a net-zero target for 2050.

### EU Emissions Trading System (ETS), Fit-for-55, and carbon pricing
- The EU ETS covers large emissions sources from energy, industry, and within-EU aviation; set up in 2005; covers about 41 percent of EU total emissions.
- Croatia joined the ETS in 2013; the ETS currently covers about 40 percent of Croatia’s total GHGs.
- The ETS operates on “cap and trade”; the emissions price is currently about €90/mtCO2.
- The cap declines every year (currently by 2.2 percent), creating incentives to cut emissions.
- Fit-for-55 package will bring faster reduction of the cap (4.4 percent during 2028-30) and fewer allowances on the market to reach target of 61 percent in 2030 compared to 2005 (instead of currently 43 percent).
- A Carbon Border Adjustment Mechanism (CBAM) will introduce a new carbon pricing system for energy-intensive products imported into the EU; free allowances for the ETS will be phased out as CBAM is phased in.
- Fit-for-55 envisages extension of the EU ETS to maritime transport (gradually 2024-26) and a separate new ETS for buildings, road transport, and fuels for additional sectors.
- Fit-for-55 raises expected non-ETS reduction target for Croatia from 7 percent to 16.7 percent, implying additional efforts needed in non-ETS sectors (transport and buildings).

### Fiscal, taxation, and energy subsidy context
- Croatia’s environmental taxes were 3.1 percent of GDP in 2021 or 8.7 percent of its total tax and social contributions revenue (EU average 2.2 percent of GDP).
- Excise taxes on energy (including fuel for transport) account for 80 percent of environmental taxes.
- Since Russia’s war in Ukraine and the sharp increase in oil prices, the government provided extensive support to fossil fuels roughly until end-March 2024.
- Measures included reduced VAT rates on natural gas and thermal energy, and on pellets, briquettes, and firewood.
- Prices of unleaded gasoline and diesel for motor vehicles and heating oil price have been capped mainly via reductions in excise taxes.
- Green levy paid by petrol and diesel fuel distributors/suppliers for the minimum share of biofuels was reduced to almost zero.
- Revenue loss from cuts in energy-related taxes is estimated at about 0.8 percent of GDP, with subsidies to offset the rise in energy prices at about 3 percent of GDP during 2022-24 (see 2023 Croatia Article IV Staff Report).
- Current excise system is not aligned with the GHGs intensity of the tax base; system heavily reliant on transport as the biggest emitter.

*Source: Republic of Croatia — International Monetary Fund (excerpts from provided content).*

### 21.      Excise taxes on energy are Croatia’s main domestic instruments to put a price on

### Excise taxes on energy are Croatia’s main domestic instruments to put a price on carbon emissions, but current rates result in substantially different carbon prices across fuels and activities

### Current excise structure and effective carbon prices
- Natural gas, coal, and electricity are lightly taxed compared with oil derivatives.
- Excises on oil derivatives when used for transportation:
  - €597.25 per 1,000 l leaded petrol → €258.5/tCO2e; CO2 intensity 2.3/ l
  - €406 per 1,000 l unleaded petrol → €175.8/tCO2e; CO2 intensity 2.3/ l
  - €597.25 per 1,000 l aviation spirit → €186.6/tCO2e; CO2 intensity 3.2 / l
  - €353 per 1,000 l Diesel -motor fuel → €130.7/tCO2e; CO2 intensity 2.7 /l
- Excises on oil derivatives when used as heating fuels for businesses and households are significantly reduced:
  - €21 per 1,000 l Diesel -heating fuel → €7.8/tCO2e; CO2 intensity 2.7 /l
  - €56.14 per 1,000 l heating fuel for business/households → €24.4/tCO2e; CO2 intensity 2.3/ l
  - €232.53 per 1,000 l heating fuel (kerosene) → €93/tCO2e; CO2 intensity 2.5 /l
  - €21.24 per 1,000 kg heating fuel for business/households (heavy fuel oil) → €6.7/tCO2e; CO2 intensity 3.15 /kg
- Other notable rates:
  - Blue diesel (agricultural vehicles, ships): €0.0 per 1,000 l → €0/tCO2e; CO2 intensity 2.7 /l
  - LPG: €13.27 per 1,000 l motor fuel or heating fuel → €8.8/tCO2e; CO2 intensity 1.51 /l
  - Electricity: reduced VAT to 13 percent for electricity (April 2022); standard VAT is 25 percent
  - Natural gas and district heating: VAT reduced to 5 percent (April 2022)
  - Coal and coke: €0.31 per GJ heating fuel business/non-business use → €3.0/tCO2e; CO2 intensity 104 /GJ
  - Electricity excises and reduced rates shown with specific per-MWh or per-kWh figures in source table

### Fossil fuel subsidies, price caps, and fiscal implications
- Fossil fuel subsidy intensity increased in Croatia by about 0.9 percent of GDP from 2015 to 2020, relative to 0.35 percent of GDP for the EU average (EC, 2022).
- Energy subsidies are projected to increase further, especially implicit subsidies (where prices paid by consumers are below efficient levels).
- Untargeted support measures, such as reduced excise rates and energy price caps, create large fiscal costs and run counter to decarbonization goals.
- If further support is needed, measures should be directly targeted to vulnerable households and firms.

### Decarbonization priorities and land/forest management
- Key actions:
  - Accelerate electrifying transportation and building heating while decarbonizing electricity generation.
  - Continue and expand investments in solar for transportation and electricity generation.
  - Accelerate introduction of renewable energy (wind, solar, geothermal) in small systems and development of energy communities by simplifying permit approvals and procedures under the NRRP.
  - Use REPowerEU funds both for expanding LNG terminal and gas network and for accelerating renewables rollout, reducing fossil fuel consumption in industry and transport, and ramping up smart investment, including in gas connectivity.
- Carbon sink and forestry:
  - Croatia aims to maintain carbon sink capacity constant by maintaining the intensity of forest management at current levels.
  - Principles for use of wood mass (e.g., cascading principle) should be incorporated in national development plans.
  - Finalize the land information system to provide accurate data on LULUCF resources.
  - Accelerate NECP objectives for 2030 (e.g., afforestation including urban and peri-urban areas) and assess options to turn abandoned farmland into new forest areas.
  - 36.8 percent of Croatia’s continental territory is covered by Natura 2000.

### CPAT analysis, baseline projections, and emissions trends
- IMF/World Bank Carbon Price Assessment Tool (CPAT) used to analyze energy externalities and emissions under business-as-usual (BAU) and policy scenarios.
- Under business-as-usual policies:
  - By 2030, total emissions are estimated to decline by less than one percent below 2019 levels.
  - Waste: −7 percent
  - Energy-related and agriculture: less than −2 percent
  - Industrial emissions: increase by almost 8 percent
  - Energy-intensity of GDP expected to fall due to increased energy efficiency and newer technology
- CPAT finds higher growth in transportation and waste emissions than EEA and NECP.

### Carbon pricing: rationale and policy design
- A carbon tax in non-ETS sectors (primarily buildings and transportation) is the most cost-effective instrument for emissions reduction.
- Advantages: promotes savings, shifts to clean energy based on carbon content, equalizes marginal abatement costs across fuels/sectors, mobilizes fiscal revenue to finance greening and compensation, generates domestic environmental benefits, and is administratively straightforward using existing excise infrastructure.
- Coordination: consider a coordinating tax approach for heavy-duty vehicles with neighboring countries to avoid freight shifting due to differential diesel taxes.
- Non-ETS carbon price can be accompanied by a price floor for ETS sectors to equalize abatement costs; carbon tax should be progressively increased along a pre-announced path.

### International comparisons and timing
- Explicit carbon tax prices for non-ETS sectors in other European countries vary from €29 to €387/tCO2e.
- Some countries have carbon taxes that increase progressively until 2026 with transitions to ETS systems or have introduced ETS floor prices ahead of Fit-for-55.
- Introducing a carbon tax before Fit-for-55 rollout (expected national incorporation in 2027) would smooth transition and preempt more abrupt, higher-cost decarbonization later.

### Simulation results: carbon tax scenarios and impacts
- Example policy: carbon tax progressively reaching €75/tCO2e by 2030 (introduced progressively from €30 in 2023), applied economy-wide to sectors not covered by EU ETS.
- CPAT simulation outcomes (2030, relative to BAU or 2005 as noted):
  - Economy-wide: reduces overall emissions to 30 percent below 2005 levels in 2030 or 11 percent below BAU
  - Emissions declines compared to BAU:
    - Buildings: −12 percent
    - Power: −9 percent
    - Transportation: −8 percent
    - Agriculture, waste: −10 percent
    - Industry: −15 percent
  - Revenue raised: 5 percent of GDP (for the €75/tCO2e scenario)
  - Efficiency costs: reported in scenarios (table shows 0% to −1% of GDP across scenarios)
  - Deaths averted (cumulative under scenarios): figures shown (e.g., 0, 218, 312, 416, 655, 1 — as presented in source table for different scenarios)
- Alternative starting point: initial carbon tax of €30/tCO2e for non-ETS sectors, progressively rising each year before Fit-for-55 rules take effect in 2027-28.
- Note: higher carbon prices (above €100/tCO2) are required to fully achieve mitigation targets; complementary sectoral policies can deliver targeted impacts at manageable costs.

### Sectoral scenario table highlights (selected figures preserved)
- CPAT sectoral projections and targets (relative to 2005 and 2019 where indicated):
  - ETS sectors: NECP target −43%; EU Ff55 −61%; CPAT: −43% (WEM)
  - Power: CPAT: −67% (WEM)
  - Manufacturing and construction: CPAT: −17% (WEM)
  - Non-ETS sectors: NECP −7%; CPAT: 2% (WEM)
  - Transport: CPAT: 36% (WEM)
  - Buildings: CPAT: −33% (WEM)
  - Agriculture: CPAT: −19% (WEM)
  - Economy-wide: CPAT: −21% (WEM)
- Share of RES in gross final energy consumption:
  - NECP: 36.4% (2030)
  - CPAT: 76% of power generation (WEM)
- Primary energy consumption:
  - NECP: 447.9 PJ (2020), 344.4 PJ (2030), 287.4-251.0 PJ (2050)
  - CPAT: 314.9 PJ (WEM)
- Final energy consumption:
  - NECP: 293.1 PJ (2020), 286.9 PJ (2030), 225.6-189.6 PJ (2050)
  - CPAT: 294.4 PJ (WEM)
- Methane (CH4): NECP −30% (2030 relative to 2020); CPAT: −5% (WEM)

### Distributional considerations and revenue recycling
- Distributional impacts should be carefully considered to reduce energy poverty risks.
- Recommended revenue recycling approach:
  - Recycle a portion of revenue to support poorest households via lump-sum transfers (generally about 20 percent of revenue to compensate the bottom 40 percent of households).
  - Use remaining revenues to reduce direct taxes (corporate or personal income tax) to positively affect productivity.
- CPAT distribution module accounts for direct and indirect effects on consumption and can simulate transfer schemes:
  - (i) new or existing targeted transfers
  - (ii) transfers toward public investment in infrastructure access
  - (iii) scaling up an existing social protection scheme
  - (iv) reforming personal income tax (PIT) schemes
- Distributional simulation notes:
  - Before transfers, poorest households experience a smaller relative decline in gasoline and natural gas consumption.
  - Revenue recycling/transfer schemes more than offset direct and indirect impacts on households.
  - Household-level variation within income groups can be large and difficult to remedy through typical redistribution schemes; authorities should be mindful of these intra-group effects.

*Source: IMF staff analysis and CPAT estimates as presented in the supplied content.*

### 31.      Carbon pricing could be reinforced with feebates and other sectoral policies. In Croatia,

### Carbon pricing could be reinforced with feebates and other sectoral policies. In Croatia

### Role of feebates and sectoral policies
- Sectoral policies are especially important to reduce emissions in power, buildings, and transportation sectors, while keeping carbon prices (i.e., consumer price impacts) at politically manageable levels since quite high carbon prices are needed to achieve deep emissions reduction in buildings and transport.
- Feebates provide a revenue-neutral, sliding scale of fees on activities (e.g., power generation) or products (e.g., vehicles). Activities or products with above average emission rates pay a net tax; activities or products with below average emission rates get net revenues.
- Feebates are modeled through shadow prices, which affect the efficiency channel of the energy use but not the usage channel. While average prices are not affected, the stock shifts toward more energy efficient vehicles, buildings, power generators, etc.

### Electrification and decarbonization (power, transport, buildings)
- The electrification of transport and buildings plus decarbonization of electricity are crucial for achieving deep decarbonization, which the EU has committed to.
- Policies to promote both electrification of transport and buildings and low-carbon electricity generation are complements and need to be pursued in tandem.
- Feebates at the sectoral level and non-ETS sector carbon pricing can promote these complementary policies.

### Energy efficiency priorities and feebate examples
- Energy efficiency improvements need to be prioritized. Carbon pricing alone can achieve gains but needs to be complemented by feebates in transportation and buildings to induce the level of efficiency improvements needed to achieve lowest-cost, deep decarbonization.
- Power generation feebate example:
  - A feebate with price €100/tCO2e would have applied a fee equivalent to 8.4 cents/kWh for coal, 2.1 cents/kWh for natural gas, and a subsidy of 1.4 cents/kWh for renewables in 2022.
  - The feebate would promote more energy efficient technologies and disincentivize coal power generation.
  - Switching from coal and oil to natural gas can significantly lower emissions—in Croatia coal and oil power generation account for about 28 percent of gross production of electricity and heat from combustible fuels.
- Buildings sector feebate design:
  - Feebates could incentivize the shift from fossil fuel-based heating to the use of more energy-efficient appliances and building renovations.
  - The feebate could take the form of a carbon tax on heating fuels, while subsidies can be provided for electric or clean-fuel heating systems and energy-efficiency improving renovation.
  - Domestic appliances (refrigerators, AC) could incur a fee depending on their efficiency level.
- Public programs Croatia could intensify:
  - (i) Programs for energy renovation of multi-apartment buildings, family houses, public sector buildings, and buildings of cultural importance to promote the deployment of RES;
  - (ii) Systematic energy management in the public sector to achieve energy savings (e.g., remote metering);
  - (iii) Public lighting energy renovation programs to reduce electricity consumption and light pollution.

### Road transport sector measures
- Road transportation emissions in Croatia mainly come from passenger vehicles and continue to grow.
- Feebates provide a sliding scale of fees on vehicles with above average emission rates and a sliding scale of rebates for vehicles with below average emission rates.
- Existing taxes and grants:
  - Car acquisitions in Croatia are taxed the standard VAT rate (25 percent) and a special tax on motor vehicles based on the vehicle sale price, its CO2 emissions and the type of fuel used (diesel or gasoline).
  - The Fund for Environmental Protection and Energy Efficiency periodically awards grants for co-financing the purchase of energy-efficient vehicles, for individuals and legal entities, and for the public sector.
- Transport feebate illustration:
  - A feebate with price of €400/tCO2e would provide a subsidy for electric or smaller gasoline vehicles, and apply an equivalent tax of €3,400 to a vehicle with 200 g CO2/km, which is €130 above the current tax for diesel-powered vehicles but considerably higher than the tax applied to gasoline-powered vehicles.
- Policy recommendations for transport:
  - Intensify introduction of electric cars and use of biofuels.
  - Reverse the decision to cancel the penalties for fuels suppliers not meeting the RES mandates.
  - Replace the lower price measure for "blue diesel" in agriculture and fisheries with a subsidy for the use of biodiesel and its production in these sectors.
  - Other measures to accelerate decarbonization: (i) energy-efficient rail, maritime, and inland navigation traffic; (ii) a market for advanced biofuels for direct energy consumption in traffic; (iii) urban transport systems via optimization of freight transport logistics, smart management of public parking areas and traffic management, platforms for integrated passenger transport, and low-emission urban zones.

### Non-ETS sectors: waste and agriculture (methane and other GHGs)
- Measures to reduce GHG emissions, in particular methane (CH4), in other non-ETS sectors could include:
  - Preventing the creation and reducing the amount of disposed biodegradable waste;
  - Using biogas to produce biomethane, electricity and heat when feasible, or flaring methane in a landfill (waste management);
  - Changes in livestock nutrition and quality of fodder;
  - Introducing biogas plants;
  - Improving livestock facilities and manure management systems (agriculture).

### Industry and future work
- Industry is a significant source of emissions and, although not included in the sectoral analysis presented, could be examined in future work.

### Sectoral emissions outcomes, 2030 (Percent relative to 2005 levels)
- The source presents modeled sectoral emissions outcomes for 2030 under feebates at different prices. Verbatim excerpt:
  - Feebates (€ per tonne of CO2e)
  - 100200400
  - Non-ETS-7%-2%2%-3%-6%-9%
  - Transport21%36%31%27%23%
  - Buildings-29%-33%-37%-40%-42%
  - Agriculture-18%-19%-23%-25%-27%
  - Waste-43%31%22%17%13%10%
  - ETS-38%-43%-46%-47%-49%
  - Power-56%-67%-67%-67%-68%
  - Industry-20%-17%-23%-25%-28%
  - Economy-wide[-34%,37%]-20%-21%-25%-27%-29%
- Source note: IMF staff estimates using CPAT.

*Source: IMF staff analysis as presented in the provided content unit.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1hrvea2023003.pdf_