## 1nldea2023002 ## Source details **Canonical URL:** [1nldea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1nldea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1nldea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1nldea2023002.pdf.json) --- ### Dutch Inflation Developments — measures, drivers, and measurement issues - Headline and core inflation dynamics: - HICP headline inflation peaked at 17.1 percent year-on-year in September 2022 and slowed to 11.0 percent year-on-year in December 2022. - As of December 2022, HICP increased by 11.0 percent year-on-year, while CPI grew by 9.6 percent year-on-year. - Core inflation accelerated to historical highs by end-2022 as higher energy prices fed through into core items. - Methodological differences driving HICP vs CPI gaps: - CPI includes imputed rents for owner-occupied housing (regulated rents grew less than other goods/services), contributing to lower CPI inflation relative to HICP. - The energy weight in the HICP is higher than in CPI, making the HICP more sensitive to energy price changes. - Contract structure and measurement implications: - As of end-August 2022, 56 percent of Dutch households had variable rate energy contracts; among the remaining 44 percent: 11 percent fixed for 1 year, 1 percent for 2 years, 25 percent for 3 years, and 8 percent for 5 years. - Official consumer energy price calculation relies on variable-rate contract pricing and excludes many fixed contracts, overestimating energy bills when prices rise sharply and underestimating them when prices fall abruptly. - CBS alternative calculations (preliminary, August 2022 data point): - Electricity price growth range: 24–93 percent year-on-year instead of reported 150 percent. - Gas price growth range: 34–97 percent year-on-year instead of reported 170 percent. - Implied CPI inflation about 2.4 to 4.5 percentage points lower than published (7.5–9.6 percent instead of published 12 percent). - CBS indicated new methodology may take effect in mid-2023; preliminary estimates reflect wide margins due to data imperfections. - Timing of weights and alternative indicators: - As of 2022Q3: HICP inflation 14.1 percent year-on-year, average CPI 12.3 percent, private consumption deflator 8.9 percent. - HICP/CPI use annual household budgetary survey weights; private consumption deflator uses quarterly-updated weights. - Energy consumption in the Netherlands adjusted by more than 20 percent in 2022. - Economic interpretation: - Widening gap between HICP and the private consumption deflator can indicate an economic slowdown; historically similar widening overlapped with slowdowns in early 2000s, the global financial crisis, and the European sovereign debt crisis. ### Empirical assessment — Phillips curve evidence and drivers of inflation - Empirical setup: - Phillips curve estimated for panel of 17 EA economies and country-specific regressions over 2000Q1–2022Q2; rolling-window panels also estimated. - Main empirical findings: - Lagged inflation and 3-year-ahead inflation expectations are statistically significant and show the largest estimated coefficients for both headline and core inflation. - Inflation dynamics in the Netherlands are both backward- and forward-looking, even after accounting for volatile components such as energy prices. - Goodness of fit and coefficient magnitudes (selected reported values): - Explanatory variables account for about 66 (65) percent of variation of headline (core) OLS regressions with country fixed effects. - In median regressions pseudo R-squared declines to 0.38 (0.32) for headline (core). - Estimated coefficients on three-year-ahead inflation expectations range between 0.4 and 0.6 for headline, and 0.2 and 0.4 for core regressions in many specifications. - Lag of inflation (headline constrained regressions with country fixed effects): 0.650*** (standard error 0.0456). - Inflation expectations (headline constrained regressions): 0.350*** (standard error 0.0456). - Unemployment gap (headline OLS with country fixed effects): -0.163** (standard error 0.0738). - Output gap (headline OLS with country fixed effects): 0.111*** (standard error 0.0319). - Food price contemporaneous (headline constrained regressions): 0.0665*** (standard error 0.0223). - Energy price (headline constrained regressions): 0.140*** (standard error 0.0134). - Rolling-window findings: - Coefficient on lagged inflation has significantly increased in recent rolling windows → inflation has become more backward-looking. - Pass-through from energy to core inflation has increased substantially in the EA and for the Netherlands. - The unemployment-gap coefficient suggests the Phillips curve has become steeper over recent years, though few data points warrant caution. ### Domestic cyclical conditions, pass-through, and persistence - Domestic cyclical proxies used: unemployment gap, output gap, and a combined slack measure (first principal component of seven variables). - At EA level: - All three measures are statistically significant and positively correlated with headline and core inflation. - Netherlands-specific results: - Most single-cycle specifications are not statistically significant; unemployment gap is statistically significant for core inflation. - Magnitude: a one percentage point increase in the unemployment gap associated with 0.35 percentage point decline in core inflation in the Netherlands-specific baseline; panel setting association about 0.2. - Commodity prices and external factors: - Energy and food price coefficients are positive and statistically significant for both EA and the Netherlands. - Dynamic simulations confirm global commodity prices, specifically food and energy, have been key drivers of Dutch headline and core inflation since 2021. - Timing and persistence of energy-to-core pass-through: - Empirical evidence indicates about 6–8 months for energy prices to pass through to core items. - Effects of high energy prices could last up to 18 months. - The 2022 carry-over will account for 3.7 percentage points in the average core inflation rate in 2023; on a monthly basis this carry-over will keep year-on-year core inflation above 2 percent until August 2023. ### Household bills, taxes, and distributional impacts - Average household bill components: commodity (including transportation and distribution), VAT, and other taxes (including ODE and energy tax). - Energy tax and tax-credit developments (policy-relevant exact figures): - Energy tax on gas usage in the first half of 2022: 0.26 EUR/m3 (up from 0.16 EUR/m3 in 2018). - Energy tax on electricity reduced to 0.037 EUR/kWh from 0.10 EUR/kWh in 2018. - Energy tax credit per electricity connection: 681.6 EUR in 2022 (from 308 EUR in 2018). - Distributional risks: - Food price acceleration and persistent high energy prices disproportionately impact low-income households (lower substitution capacity, higher marginal propensity to consume, lower liquid assets). ### Wages, profits, and domestic price decomposition - Wages and wage-price dynamics: - Contractual wage growth (newly agreed wages): 5.0 percent in December 2022 (up from 1.0 percent one year earlier). - Average wage growth: 3.7 percent year-on-year. - Minimum wage increase: 10.3 percent in early 2023. - Pass-through of wages to prices is time-varying; higher in high-inflation periods, increasing wage-price spiral risks if wages become entrenched. - Profit measures and interpretation: - Profit share: ratio of gross operating surplus (or gross value added) to GDP. - Profit mark-up proxied by difference between gross value added and remuneration of employees. - Gross value added excludes intermediate consumption (such as energy), making it a key reference when energy cost hikes are central. - GDP deflator drivers: - Purchasing prices accumulated an increase of 6.8 percent until 2022Q3, led by 9 percent increase in final consumer prices from wholesale-to-retail energy pass-through and post-pandemic recovery. - Slowdown of private consumption in 2022 moderated impact on GDP deflator despite high consumer prices. - Investment recovery from 2022Q2 and acceleration in capital investment prices contributed to GDP deflator acceleration. - Income distribution: - Since mid-2021, wage share has maintained a declining path, largely driven by loss of labor income purchasing capacity. - Recent dynamics: increasing weight of wages on labor costs combined with lack of productivity growth amid economic slowdown; higher labor costs have not impeded corporate profits from accelerating. ### Risks for wage-price spiral and sectoral heterogeneity - Aggregate assessment: - Risks for a wage-price spiral appear limited at aggregate level: wage growth remains well below inflation and wage share has been decreasing for five quarters in a row. - Dutch regulatory setting (no inflation-linked clauses) and flexible social partner negotiations reduce systemic spiral risks. - Micro-level and sectoral vulnerabilities: - Sectoral heterogeneity matters: sectors with limited ability to adapt or raise productivity face viability risks. - Preservation of employment depends on capacity to adapt to new energy environment and improve productivity. - Policy focus: - Analyze distribution between labor (wages) and capital (profits) to assess firms’ capacity to absorb or pass through higher input costs. ### Conclusions on inflation drivers and policy-relevant observations - Drivers: - Combination of domestic and external factors produced high and broad-based price pressures; 2022 Dutch headline inflation reached unprecedented levels largely driven by energy price growth. - Structural contributors: greater share of gas in Dutch energy mix, liberalized energy markets, and current energy inflation calculation. - Phillips-curve evidence: - Past and future inflation expectations are main determinants of consumer prices; domestic and external factors significant but less dominant. - Policy implications: - Lagged pass-through from energy to core inflation (about 6–8 months) implies persistence risks and downside risks for domestic demand. - Despite accelerating contractual wages in 2022, pass-through into wages remained moderate and real wage growth continued falling, lowering aggregate wage-price spiral risks. - Sectoral and household heterogeneity requires attention; capacity to adapt and improve productivity is key to preserving employment, growth, and profits. ### Phillips curve contribution method (formula preserved) - Contribution formula used in dynamic simulations: - CCPx,Dx = βx,Dx,t * ex,Px,Dx + β1,Dx * CCPx,Dx−1 - Where βx,Dx,t is coefficient on variable e from country-specific regressions and β1 is coefficient on lagged inflation. --- ### Energy markets, policy responses, and mitigation priorities - Dutch energy market features: - Greater share of gas in consumer price basket than other EA countries; most electricity produced by fossil fuel-fired powerplants, mainly natural gas. - Liberalized electricity market with about 53 suppliers increases volatility and transmission of wholesale to retail prices. - Dutch TTF spot gas prices were somewhat higher than some other markets during 2022 turbulence. - Government assistance and tax measures (exact measures preserved): - VAT on natural gas, electricity and heat temporarily lowered to 9 percent (from 21 percent) effective July 1, 2022. - Excise duty rate on gasoline and diesel reduced by 17.3 and 11.1 cents/liter, respectively (bringing rates to 65.1 and 41.8 cents/liter), reductions applicable from April 1, 2022. - Price cap for households starting January 1, 2023: - Gas: maximum rate €1.45 per cubic meter up to consumption of 1,200 m3. - Electricity: maximum rate €0.40 per kWh up to consumption of 2,900 kWh. - One-off measures: lump-sum energy allowance of €1,300 for lower-income households (in 2022 and 2023); €190/month rebate on energy bills for small-scale consumers in November and December 2022. - Energy tax refund per electricity grid connection increased from €560 to €785. - Policy guidance: - Household assistance ideally should be targeted and unrelated to energy consumption to preserve conservation incentives. - Authorities might emphasize temporary nature of price caps. - Surge strengthens case for accelerating transition away from fossil fuels to reduce dependence on insecure energy sources. - Public investment in clean infrastructure: - National climate and transition fund: will mobilize €35 billion over next ten years. - Dutch Recovery and Resilience Plan: allocates €846.9 million across four climate-related programs (Wind at Sea €693.7; Green Hydrogen €68.5; Zero Emission Services €56; Aviation in Transition €28.7). --- ### Climate policy, carbon pricing, and mitigation instruments - EU and national targets: - Fit for 55 Plan: reduce EU GHG emissions 55 percent below 1990 levels by 2030; EU pledge: net zero by 2050. - ETS-aligned target: reduce combined emissions from power generation and industry 61 percent by 2030 below 2005 levels. - Netherlands non-ETS sectors target: reduce emissions 48 percent below 2005 by 2030. - CO2 Industry Levy (design and schedule): - Introduced January 2021: charges difference between escalating target price (levy rate) and prevailing EU ETS price. - Levy applies to excess emissions above “dispensation rights.” - Reduction factor: 1.2 for 2021, declining to 0.69 by 2030. - Initial levy rate schedule: €30 per excess tonne in 2021 rising in a straight line to €125 per excess tonne in 2030. - Target updated: reduction target increased to 18.3 million tonnes; rate schedule to be re-assessed in 2023 and 2025. - Note: Based on recent EU ETS price projections the levy may not be binding under current schedule. - Feebate proposal (modest reform to levy): - Feebate formula: CO2 price × {CO2/production ─ pivot point CO2/production} × production. - Pivot point set equal to average emission rate for domestic industry previous year, updated annually, makes feebate approximately revenue neutral over time. - Firms above pivot pay fees; those below receive subsidies; promotes continuous incentives to cut emissions. - Caveat for concentrated sectors: pivot point could erode incentives if set endogenously; in such sectors pivot could be set exogenously and tightened over time. - CO2 price floor for power generation: - Implemented April 5, 2022; target rate €14.9 per tonne in 2022 rising to €31.9 in 2030 (presently far from binding). - Recommendation: convert scheme into feebate and harmonize with industry levy to increase effectiveness while avoiding large pass-through into electricity prices. - Energy tax reform: - Shift taxation away from electricity to natural gas; termination of ODE and fund SDE++ via general taxation and energy taxes. - Planned increases: tax rate on natural gas increased by 4 cents per m3 in 2020; further planned increases during 2023–2028 (subject to review due to energy shock). - Base-broadening: removal of favorable rates for glasshouse horticulture, removal of energy tax exemption for mineralogical/metallurgical processes, limits to input exemption for combined heat pumps. - Retail natural gas price example: - Netherlands retail natural gas price already among highest in Europe; illustrative €25/tCO2 charge on residential natural gas would increase retail price to approximately €1.27/m3. --- ### Transport taxation, km-based charge, congestion, and air passenger tax - Km-based taxation: - Maintaining current fuel/vehicle tax revenue as percent of GDP requires projected charge of 4.5 cents per vehicle km in 2030. - Km-based tax projected to reduce CO2 emissions by 2.5 million tonnes in 2030. - Congestion externalities: - Marginal external congestion cost (MECC) warranting around 8 cents per km on average; MECC estimates for Netherlands around 8–16 cents per vehicle km. - PAYD insurance: - Pay-as-you-drive (PAYD) insurance would raise marginal cost of driving by about 5 cents per km on average; illustrative annual insurance premium €900 and annual driving 17,000 km used for approximation. - Air Passenger Tax: - Departure tax set to triple on January 1, 2023 from €7.95 per trip to generate projected annual revenues of €600 million from 2023 (up from €200 million). - Increase equivalent to about €90 per tonne of CO2 from air travel out of the Netherlands. - Cited social cost of carbon (SCC): $185 per tonne. --- ### Climate impacts, scenarios, and adaptation priorities - Climate projections and scenarios: - Future additional warming in 2041–2060 relative to 1995–2014: SSP1-2.6 +1.0 °C, SSP2-4.5 +1.2 °C, SSP3-7.0 +1.4 °C. - KNMI’14 SLR estimates (relative to 1986–2005): until 2050 moderate scenarios 15–30 cm; fast-warming 20–40 cm. In 2085: moderate 30–60 cm; fast-warming 45–75 cm. Extreme SLR ≥100 cm cannot be excluded. - Macroeconomic impact estimates (top-down staff calculations based on Kahn et al. (2021)): - The Netherlands: Percent Change in GDP per Capita (staff calculations): - SSP1-2.6: 2030 0.11 / 2050 0.25 / 2100 0.43 - SSP2-4.5: 2030 0.02 / 2050 0.05 / 2100 0.11 - SSP3-7.0: 2030 -0.11 / 2050 -0.31 / 2100 -0.89 - IMF staff estimates from changes in frequency of extreme events: - Annual total losses of GDP (range): €0.5-1.5 billion in 2030; €2.2-6.2 billion in 2050. - National bottom-up estimates (Climate Damage Atlas; Jacobs et al., 2019): - Estimated total damages 2018–2050 under no further adaptation: - Cumulative €54.3 to €122.3 billion; annual average €1.7 to €3.8 billion per year (less than 0.5 percent of GDP). - Updated drought range: €38.5–€124 billion (€1.1–€3.9 billion annual average), increasing total damages to €77.5–€173.6 billion (€2.4–€5.4 billion per year). - CIAM stylized CBA results for SLR protection (median RCP4.5 assumptions): - Full protection scenario: EUR 862 million annually between 2050 and 2079 to eliminate inundation risks, total EUR 25.9 billion. - Optimal protection scenario (mix of protection and retreat): EUR 656 million annually, total EUR 19.7 billion between 2050 and 2079; land and capital losses around EUR 2.31 billion cumulatively during same period. - Fiscal implications: - Under severe scenario (RCP7.0) and absent policy change, illustrative calculations indicate debt-to-GDP could be 10 percentage points higher by 2100 versus baseline; annual buildup can be offset by modest annual budgetary adjustment under given assumptions (GDP deflator 2 percent; interest rate 2.3 percent; revenue constant as percent of nominal GDP). - Adaptation governance and capacity: - National frameworks: NAS (2016), UP NAS (2018), Delta Programme (since 2010); Delta Programme 2023 provides latest assessments. - Delta Programme estimated annual budget average EUR 1.5 billion between 2023 and 2036; water authorities expect to invest on average EUR 2 billion per year, of which EUR 915 million on flood defenses. - For 2021, combined public spending on water/flood defenses and related activities was EUR 1.7 billion. - Policy guidance and priorities: - Integrate adaptation holistically into long-term government planning; prioritize adaptations with large positive externalities, remove barriers to private adaptation, and address equity. - Use cost-benefit analysis consistently; monetize non-market impacts (Value of Statistical Life) where appropriate. - Continue monitoring SLR and upgrade protection plans for second-half-century contingencies. --- ### Market distortions, insurance, and flood financing - Market distortions: - Implicit/explicit subsidies (e.g., water use) can induce inefficient adaptation choices (example: inefficient groundwater use by farmers) and lead to welfare losses. - Future NAPs should highlight costs of distortions and distributional impacts. - Insurance and risk pricing: - Insurance can help manage residual climate risks; promoting competitive insurance markets and complete information is important for efficient risk pricing. - Subsidies for insurance reduce private costs but distort behavior if not paired with countermeasures (building codes, land-use restrictions). - Financing and mutuality: - Current flood protection financing relies on cost-sharing and mutuality principles; without institutional constraints mutuality may lead to inefficient risk taking. - Delta Programme recommendation: grant permits to development in flood-prone areas based on cost-benefit analysis so protection costs fall on beneficiaries. --- ### Housing market — imbalances, policies, and reform priorities - Market outcomes and valuation: - House prices nearly doubled since trough in mid-2013 and exceeded previous peak by more than half. - Model-based overvaluation estimate: 14 percent in 2022:Q2. - Price-to-income ratios rose by more than 50 percent since 2015. - Affordability and distributional facts: - Rental expenditure share of household consumption is elevated (third highest share in EA for actual rentals); owners with mortgage burdens compressed between 12–15 percent by 2020. - Renters in 2020: 17 percent (top quintile) to 36 percent (bottom quintile) of disposable income. - Multi-year waiting periods for social housing: 2.0 to 13.7 years depending on region. - Fiscal and financial vulnerabilities: - Foregone revenues from mortgage interest tax relief: 1.3 percent of GDP in 2019. - Housing allowances spending: 0.5 percent of GDP in 2020. - About two fifths of outstanding mortgage stock is interest-only. - Supply constraints and policy measures: - Real investment in homes as share of real GDP recovered from trough but remains below EA average; residential building permits not back to pre-GFC levels. - Programma Woningbouw aims to build 900,000 homes by 2030 at 100,000 units per year. - Abolishment of landlord levy for rent-controlled properties on January 1, 2023; housing associations to allocate at least 92.5 percent of supply to households with annual income below € 44,035 (single) and € 48,625 (multi-person) in 2023. - For 2023 maximum monthly rent in rent-controlled sector set at €808.06. - Regulated rentals constitute about three quarters of rental properties; non-profit housing associations provide nearly four fifths of rent-controlled dwellings. - Policy recommendations: - Reconsider dominant role and incentives of housing associations; conduct full cost-benefit analysis. - Revisit extensive rent control: consider gradual narrowing of rent-controlled accommodations while cushioning with well-targeted housing allowances. - Review eligibility criteria for social housing; implement regular means-testing and stronger mechanisms to reallocate dwellings to free market when warranted. - Accelerate phase-out of generous tax treatment of owner-occupied housing (e.g., mortgage interest deductibility) or move housing to Box 3 of income tax code. - Tighten macroprudential regulation: reduce loan-to-value ratios from 100 percent; curtail 50 percent interest-only allowance; make debt-service-to-income ratio settings more sensitive to financial stability. - Streamline land use policies and building regulations; exploit potential for residential densification and splitting existing residences into smaller units; strengthen municipal incentives to develop land. - Implementation caveats: - Phasing and calibration are crucial given political economy and supply shortages; reforms should be gradual with clear communication and complementary supply-boosting measures. _Italic: International Monetary Fund — content unit 1nldea2023002 (selected excerpts)._ ### 1. Dutch Inflation Developments ___________________________________________________ 5 ### 1. Dutch Inflation Developments ### A. Different Measures of Inflation: Methodological review and recent patterns - Headline and core developments - HICP headline inflation peaked at 17.1 percent year-on-year in September 2022 and slowed to 11.0 percent year-on-year in December 2022. - As of December 2022, HICP increased by 11.0 percent year-on-year, while CPI grew by 9.6 percent year-on-year. - Core inflation continued to pick up to historical highs by end-2022 as higher energy prices fed through into core items. - Key methodological differences driving HICP vs CPI gaps - CPI includes imputed rents for owner-occupied housing (rents are regulated and grew less than other goods/services), contributing to lower CPI inflation relative to HICP. - The energy weight in the HICP is higher than in CPI, making the HICP more sensitive to energy price changes. - Factors explaining high energy price growth in Dutch statistics - Greater share of gas in the Dutch consumer price basket than in other EA countries; most electricity in the Netherlands is produced by fossil fuel-fired powerplants, mainly natural gas. - Liberalized electricity market increases volatility and transmission of wholesale to retail prices: about 53 suppliers active in the market. - Dutch TTF spot gas prices were somewhat higher than in some other markets during 2022 turbulence. - The current consumer energy price calculation relies on variable-rate contract pricing and excludes many fixed contracts, overestimating energy bills when prices rise sharply. - Contract structure and measurement implications - As of end-August 2022, 56 percent of Dutch households had variable rate energy contracts; among the remaining 44 percent: 11 percent fixed for 1 year, 1 percent for 2 years, 25 percent for 3 years, and 8 percent for 5 years. - Because the official method uses variable-rate prices and excludes fixed contracts, consumer energy prices are overestimated when market prices increase sharply and underestimated when they fall abruptly. - CBS alternative calculation work and preliminary impacts - CBS launched a study in early 2022 using utility-supplied price information covering about 3/4 of households to better reflect fixed- vs variable-rate contract discrepancies. - Preliminary alternative calculations (latest data point August 2022) indicate: - Electricity price growth in the range of 24–93 percent year-on-year instead of the reported 150 percent. - Gas price growth in the range of 34–97 percent year-on-year instead of the published 170 percent. - Implied CPI inflation about 2.4 to 4.5 percentage points lower than published (7.5–9.6 percent instead of the published 12 percent). - The CBS reported the new methodology may take effect in mid-2023 for both CPI and HICP; preliminary estimates reflect wide margins due to data imperfections. - Alternative macro price indicators and timing of weights - The private consumption deflator (National Accounts) increased less robustly than HICP/CPI as CPI/HICP rose in late 2021. - As of 2022Q3: HICP inflation stood at 14.1 percent year-on-year, average CPI at 12.3 percent, and the private consumption deflator at 8.9 percent. - HICP/CPI use annual household budgetary survey weights (do not capture within-year consumption pattern shifts); the private consumption deflator uses quarterly-updated weights. - Energy consumption in the Netherlands adjusted by more than 20 percent in 2022. - Economic interpretation - The widening gap between HICP and the private consumption deflator can indicate an economic slowdown; historically, similar widening overlapped with slowdowns in the early 2000s, the global financial crisis, and the European sovereign debt crisis. ### B. The Role of Domestic and Global Factors: Empirical assessment (Phillips curve approach) - Empirical setup and data - Phillips curve estimated for a panel of 17 EA economies and separately for countries with sufficient data over 2000Q1–2022Q2; rolling-window panels also estimated. - The Netherlands-specific regression estimates are compared with panel estimates and used to calculate implied contributions to inflation dynamics. - Appendix I contains data sources, country coverage, methodology, and main results. - Main empirical findings - Past and future inflation expectations play a key role in determining consumer price growth: - Lagged inflation and the 3-year-ahead inflation expectations are statistically significant and show the largest estimated coefficients. - This result holds in both panel EA results and Netherlands-specific regressions, and for both headline and core inflation. - Conclusion: inflation dynamics in the Netherlands are both backward- and forward-looking, even after accounting for volatile components such as energy prices. *Source: IMF staff — “Dutch Inflation: Developments, Drivers, and the Risk of Wage-Price Spiral” (selected sections).* ### 11. Dutch domestic cyclical conditions, as proxied by the unemployment gap, are ### 11. Dutch domestic cyclical conditions, as proxied by the unemployment gap, are ### Domestic cyclical conditions and Phillips-curve evidence - Three separate proxies for domestic cyclical conditions were used in regressions: unemployment gap, output gap, and a combined measure of slack (first principal component of seven variables: output gap, participation rate, unemployment gap, hours worked gap, self-employment gap, and the deviation of the share of part-time employment and temporary employment from their corresponding long-run averages). - At the euro area (EA) level: - All three measures are statistically significant and positively correlated with both headline and core inflation (Annex 1 Table 1). - Netherlands-specific regressions: - Most specifications with single-cycle measures are not statistically significant, indicating other factors beyond the economic cycle contribute to consumer price growth. - The Dutch unemployment gap is statistically significant in determining core inflation; neither the output gap nor the principal components measure are significant. - Magnitude estimates: - A one percentage point increase in the unemployment gap is associated with 0.35 percentage point decline in core inflation under the Netherlands-specific baseline specification regression. - In the panel data setting the corresponding association is about 0.2. ### External factors, commodity prices, and pass-through to inflation - External price pressure measures are not statistically significant in most specifications (panel or country-specific). - Commodity prices are important determinants: - Energy and food price coefficients are positive and statistically significant for both the EA and the Netherlands. - Rolling-window panel analysis: - Pass-through from energy to core inflation has increased substantially in the EA, with a higher coefficient on lagged inflation—suggesting EA inflation has become more backward-looking and persistent. - Dynamic simulations of the Netherlands-specific Phillips curve confirm: - Global commodity prices, specifically food and energy, have played a key role in Dutch headline and core inflation developments. - Energy prices, and to a lesser extent food prices, have been a major driver of Dutch headline inflation since 2021. - Food and energy price growth have been key to core inflation acceleration since mid-2021. ### Wholesale energy price pass-through and energy mix - Cross-country heterogeneity in the EA arises from differences in wholesale-to-consumer pass-through driven by: - Energy mix in electricity generation. - Price-setting mechanisms. - Price composition and tariff design (variable-price tariffs imply faster consumer-price adjustment; pre-fixed tariffs imply slower adjustment). - Netherlands-specific factors explaining higher inflation relative to EA peers: - Variable-rate contracts on CPI/HICP methodology introduce some bias on inflation estimations. - The share of gas and electricity items in the final consumer basket is among the highest in the EA (only surpassed by Slovakia). - The use of gas in electricity generation in the Netherlands is comparatively high, making electricity prices more sensitive to changes in gas prices. - Marginal pricing in EU wholesale electricity markets implies the most expensive generator setting the marginal price makes electricity prices more sensitive to gas when gas is the marginal source. - The threshold for gas prices to determine electricity prices is lower in the Netherlands than in other EA countries, contributing to larger elasticity of Dutch electricity prices to gas markets. ### Household energy bills, taxes, and policy instruments - Average household bill components: commodity (including transportation and distribution), value added tax (VAT), and other taxes. - In the Netherlands, the “other taxes” component includes the ODE tax (Sustainable Energy Surcharge, Opslag Duurzame Energie) and the energy tax; electricity bills also include an energy tax refund/energy tax credit per electricity connection. - Energy tax and tax-credit developments (policy-relevant exact figures preserved): - Energy tax on gas usage in the first half of 2022: 0.26 EUR/m3 (up from 0.16 EUR/m3 in 2018). - Energy tax on electricity reduced to 0.037 EUR/kWh from 0.10 EUR/kWh in 2018. - Energy tax credit per electricity connection: 681.6 EUR in 2022 (from 308 EUR in 2018). - Policy intent: - Taxes (ODE and energy tax under the Environmental Taxes Act) aim to shift consumption away from gas and promote electricity efficiency as domestic gas production declined. ### Inflation dynamics, persistence, and distributional risks - Dutch core inflation developments: - Core inflation accelerated in 2022 reaching 8.4 percent in December (6.6 percent in EA), up from 2.3 percent in December 2021 (2.7 percent in EA). - Component contributions to core inflation (December 2022 vs December 2021): - Processed food: 14.1 percent in December from 2.4 percent in December 2021. - Non-energy industrial goods (NEIG): 8.8 percent in December from 3.4 percent in December 2021. - Services: 5.8 percent in December from 1.3 percent in December 2021. - Energy-to-core pass-through timing and persistence: - Empirical evidence indicates it takes about 6–8 months for energy prices to pass through to core items. - Effects of high energy prices could last up to 18 months. - Carry-over/base effects from 2022 into 2023: - The 2022 carry-over effect will account for 3.7 percentage points in the average core inflation rate in 2023. - On a monthly basis this carry-over will keep year-on-year core inflation above 2 percent until August 2023. - Distributional impact: - Food price acceleration and persistent high energy prices disproportionately impact low-income households (lower substitution capacity, higher marginal propensity to consume, lower liquid assets). ### Wages, wage-price dynamics, and profit margins - Wage-pass-through and macro risks: - Pass-through of wages into prices is time-varying and lower in low-inflation periods; higher in high-inflation periods—raising risks of wage-price spirals. - Strong wage growth could both protect purchasing power and reinforce demand, with risks to corporate liquidity/profits. - Recent Dutch wage data: - Contractual wage growth (newly agreed wages): 5.0 percent in December 2022 (up from 1.0 percent one year earlier). - Average wage growth: 3.7 percent year-on-year. - Minimum wage increase: 10.3 percent in early 2023 (supporting low-wage employees and benefit claimants). - Whether higher wages translate into higher inflation depends on firms’ ability to absorb costs (profit margins) or pass them through to final prices. ### GDP deflator decomposition and income distribution implications - GDP deflator drivers (demand perspective): - Purchasing prices in the economy accumulated an increase of 6.8 percent until 2022Q3, led by a 9 percent increase in final consumer prices resulting from pass-through from wholesale to retail energy prices and the post-pandemic recovery. - The slowdown of private consumption in 2022 helped moderate the impact of accelerating consumer prices on the GDP deflator despite historically high levels. - Moderated investment growth in H2 2021 contained contributions to the GDP deflator, but investment recovery from 2022Q2 and acceleration in capital investment prices contributed to GDP deflator acceleration. - The net external sector moderated domestic price pressures: strong exports and capacity to re-export imported inflation reduced the impact of imported prices on the domestic economy. - Focus for policy and analysis: - The section highlights the importance of analyzing distribution between labor (wages) and capital (profits) as a determinant of domestic price pressures and firms’ capacity to absorb or pass through higher input costs. *Source: IMF staff estimates and calculations, Netherlands country chapter content.* ### 28. Domestic prices can be also interpreted ### 1nldea2023002 - 28. Domestic prices can be also interpreted ### Profit measures and interpretation - Domestic prices are the combination of the remuneration of capital (profits) and labor (wages). - Two national-accounts measures to quantify profits: - Profit share: ratio of the gross operating surplus (or the gross value added) to GDP. Movements primarily determined by relative dynamics of the gross operating surplus and labor costs. - Profit mark-up: proxied at the macro level by the difference between gross value added and remuneration of employees. - Methodological distinctions and analytical implications: - Gross value added excludes intermediate consumption (such as energy and other input costs); therefore it is a key reference in the current episode driven by the hike in energy costs. - Profit share reflects interaction of corporate income with other sectors, relevant when analyzing profits–labor cost interactions. - The public sector played a key role in the profit share performance since the pandemic (to be shown later). - Outlook risk: as pandemic income support phases out, energy prices remain high, and the economic slowdown materializes, the profit mark-up may deteriorate further driven by both declining value added (with accelerating input costs) and rising wages. ### Wage share, decomposition, and recent dynamics - Wage share is a key reference for household income, measured as the representativeness of wages over total income.10 - Based on National Accounts, the wage share can be decomposed from: - Real consumer wages (nominal wage per employed person divided by the private consumption deflator), - Labor productivity, - Terms of trade performance (proxied by the GDP deflator-to-private consumption deflator ratio).11 - The wage share can decline due to: - Decreasing real wages, - Increasing labor productivity, - A relevant terms of trade shock. - Recent pattern: - Since consumer prices started to accelerate in mid-2021, the Dutch wage share has maintained a declining path, largely driven by the loss of labor income purchasing capacity. - Footnotes: - 10 Calculated as nominal compensation of employees over nominal GDP. - 11 [Decomposition formula provided in source text.] ### GDP income approach and pass-through mechanics - GDP income composition includes gross operating surplus (corporate profits), compensation of employees, and public sector remuneration (indirect taxes net of subsidies). - This approach shows price/cost per unit of output as the result of remuneration to corporates, workers, and the public sector. - With taxes and subsidies set and wage growth largely determined by collective bargaining agreements, profits are the most flexible component when a sudden shock occurs. - The pass-through of increased other costs to domestic prices depends on corporates' willingness or capacity to absorb the shock using their profits. ### Labor productivity, unit labor costs (ULC), and interactions with wages - Labor productivity (units produced per worker) is a key determinant of how wage increases affect labor costs. - Unit labor costs can be decomposed into wages and labor productivity: - Wage increases raise ULC. - Labor productivity growth reduces ULC, offsetting wage-driven cost pressures. - Implication: a pick-up in wages could be offset by a similar increase in productivity, reducing the final ULC impact on prices. ### Historical perspective, country comparisons, and role of public support - Profits stability and price dynamics: - Profits have been more stable in the Netherlands than in the Euro Area (EA), providing some buffer against short-term cyclical ULC fluctuations. - Growth of domestic prices in the Netherlands has been more intense and volatile than in the EA over the last 20 years. - Domestic prices in the Netherlands grow stronger than the EA average during upswings, and moderately faster during downturns. - Historical episodes: - 2008 global financial crisis: impact on demand was absorbed by corporate profits, avoiding pass-through of increasing wages and productivity loss to final prices. - Post-2011–12 sovereign debt crisis: Dutch corporate profits recovered faster and stronger than in the EA without adding inflationary pressures, supported by more moderate wage growth and stronger productivity gains than the EA. - 2017–2020: strong Dutch economic performance translated into more intense recovery of wages and corporate profits, increasing domestic prices in times of strong growth. - Pandemic-era public support: - The unprecedented public sector support during 2020–21 was notably channeled through subsidies to corporates, reflected in the strong negative contribution of public sector income to overall domestic costs.12 - This support allowed corporates to partially pass-through higher ULC to final consumers while preserving profits without increasing final prices. - Effect was more visible in the Netherlands than in the EA due to larger public support and stronger wage growth. - The end of remaining pandemic-income support (lower subsidies) and an increase in indirect taxes played a key role in 2022. - Footnote: - 12 Public sector income is defined as indirect taxes net of subsidies. ### Recent developments (2021–2022) and inflation pass-through - Acceleration of inflation in mid-2021 coincided with the gradual re-opening of European economies and was masked with respect to impacts on economic activity. - Pandemic fiscal support affected income distribution between wages and profits and the final impact of wage performance on labor costs. - Latest information related to 2022Q3: - Increasing weight of wages on labor costs. - Lack of productivity growth in a context of economic slowdown. - Higher labor costs did not impede corporate profits also to accelerate, translating into a new acceleration of GDP deflator growth. - Pass-through timing: - Empirical evidence suggests it takes about 6–8 months for energy prices to pass-through to core items, increasing the likelihood of inflation persistence and adding downside risks for domestic demand. ### Risks for a wage-price spiral and sectoral heterogeneity - Aggregate-level assessment: - Based on historical interaction between profits and wages, risks for a wage-price spiral appear limited at an aggregate level. - Despite a positive output gap and a tight labor market, wage growth remains well below inflation and the wage share has been on a decreasing trend for five-quarter in a row. - The Dutch regulatory setting with no inflation-linked clauses and flexibility in social partner negotiations supports healthy interaction between wages and corporate profits. - Micro-level heterogeneity and sectoral vulnerabilities: - Different sectors are affected differently by high energy prices; ability to adapt and improve productivity is key. - Vulnerable sectors may face compromised viability; their capacity to adapt to the new energy environment and improve productivity is key to preserving employment through competitive wages and corporate profits. - Distributional concerns: - As risks of high inflation persistence increase, the loss of purchasing power for households will be heterogeneous across income quintiles, with unclear effects on demand and economic activity overall. ### Conclusions and policy-relevant implications - Drivers of recent high inflation: - Combination of domestic and external factors led to high inflation, with price pressures becoming broad-based, increasing inflation persistence, and adding risks for domestic demand. - In 2022, Dutch headline inflation reached unprecedented levels since the record began, largely driven by high energy price growth. - Contributing structural factors include: a greater share of gas in the Dutch energy mix, liberalized energy markets, and the current method of energy inflation calculation. - Phillips-curve evidence: - Different specifications suggest past and future inflation expectations are the main determinants of consumer prices, while domestic and external factors are statistically significant but less dominant. - Policy-relevant observations: - The lagged pass-through from energy to core inflation (about 6–8 months) implies inflation persistence risks and downside risks for domestic demand. - Despite accelerating contractual wages in 2022, pass-through from inflation into wages remained moderate and real wage growth continued falling, lowering aggregate wage-price spiral risks. - However, sectoral and household heterogeneity requires attention: the capacity to adapt to the new energy environment and to improve productivity is key to preserving employment, growth, and profits. *International Monetary Fund — Chapter/section content as provided in the source PDF.* ### 4. The baseline specification includes contemporaneous energy prices, and contemporaneous ### 4. The baseline specification includes contemporaneous energy prices, and contemporaneous ### Phillips Curve estimation — key results - Methodology follows Chapter 2 “Inflation in Europe: Assessment, Risks, and Policy Implications” of the IMF’s Regional Economic Outlook (October, 2022). - The first principal component explains about 30 percent of the total variance. - Benchmark specification: constraint on the sum of coefficients on past inflation and inflation expectation set equal to one to introduce forward- and backward-looking components; this assumption is relaxed in alternative specifications (OLS, and median regressions). - Estimation scope: - Panel setting for the 17 euro area economies (results in Annex I Table 1); alternative specification with time fixed effects in Annex I Table 2. - Country-by-country analysis for those with at least 30 quarters of data; results qualitatively comparable to IMF (2022). - Goodness of fit and explained variation: - Explanatory variables account for about 66 (65) percent of the variation of headline (core) OLS regressions with country fixed effects. - In median regressions, the estimated pseudo R-squared declines to 0.38 (0.32) for headline (core) regressions. - R-squared increases marginally upon inclusion of time fixed effects to 0.73 and 0.71 for headline and core OLS regressions, respectively. - Pseudo R-squared increases marginally to 0.45 and 0.38 for headline and core median regressions when time-fixed effects are included. - Inflation dynamics and expectations: - Coefficient on lag of headline/core inflation is statistically significant → inflation rates are backward-looking. - Estimated coefficients on three-year-ahead inflation expectations are statistically significant in most specifications and range between 0.4 and 0.6 for headline, and 0.2 and 0.4 for core inflation regressions. - Inflation persistence is lower and coefficients on inflation expectations are higher when time fixed effects are included. - Domestic cyclical variables (statistical significance and magnitudes): - Output gap: a one percentage point increase in the output gap is associated with an increase in the headline (core) inflation rate by about 1.1 (0.9) percentage points. - Unemployment gap: a one percentage point increase in the unemployment gap is associated with a 0.2 percentage point decline in headline/core inflation. - Measure of economic slack: a one percentage point increase is associated with about a 0.2 percentage point increase in inflation under the baseline specification. - External variables and commodity pass-through: - External price pressure measure is not statistically significant in most specifications (only significant in core regressions with country and time fixed effects). - Commodity prices matter: energy price and food price coefficients are positive and statistically significant. ### Phillips Curve coefficient estimates (selected reported values from panel tables) - Lag of inflation (headline constrained regressions with country fixed effects): 0.650*** (standard error 0.0456) in column (1) and similar magnitudes across columns. - Inflation expectations (headline constrained regressions): 0.350*** (standard error 0.0456) in column (1) and similar across columns. - Unemployment gap (headline OLS with country fixed effects): -0.163** (standard error 0.0738) reported in table. - Output gap (headline OLS with country fixed effects): 0.111*** (standard error 0.0319). - Food price contemporaneous (headline constrained regressions): 0.0665*** (standard error 0.0223) in column (1). - Food price t-4 (headline constrained regressions): 0.124*** (standard error 0.0251) in column (1). - Energy price (headline constrained regressions): 0.140*** (standard error 0.0134) in column (1). - External price pressure t-1 (selected columns): coefficients close to zero and often not significant (e.g., -0.000607 with standard error 0.00314 in column (1)). ### Contribution to inflation dynamics (method) - Country-specific coefficients used to calculate contributions to inflation dynamics for each regression in every quarter using dynamic simulations to account for inflation persistence. - Contribution formula (as reported): - CCPx,Dx = βx,Dx,t * ex,Px,Dx + β1,Dx * CCPx,Dx−1 - Where βx,Dx,t is the coefficient on variable e from country-specific regressions and β1 is coefficient on lagged inflation. ### Stability of estimates and rolling regressions - Rolling panel-data Phillips curve estimated on a rolling basis using 17 economies over 16 quarters; estimated coefficients with 90th percentile confidence intervals reported in Annex Figure 1. - Rolling-regression findings: - Estimated coefficient on the lagged headline (core) inflation has significantly increased in the last 3 rolling window periods → inflation has become more backward-looking. - Pass-through of energy prices has increased substantially to core inflation. - Coefficient on the unemployment gap suggests the Phillips curve has become steeper over the last few years. - Given few data points underlying these changes, it is premature to assert long-lasting structural changes. - Policy implication noted: greater pass-through of commodity prices into core inflation increases susceptibility to negative supply shocks; larger effect of past inflation on current inflation suggests potential difficulties in reducing inflation going forward. ### Assessing recent climate policy initiatives in the Netherlands — introduction and mitigation priorities - Netherlands climate commitments: - EU targets: 55 percent emission reduction in 2030 relative to 1990 levels and climate neutrality in 2050. - Vulnerabilities and impacts: - About one-quarter of the country is below sea level; a large part of the lowlands are in a delta. - Impacts of higher temperature and changes in frequency of extreme events appear modest by mid-century but are highly uncertain depending on warming scenarios and global mitigation actions. - Policy posture: - The Netherlands is pursuing strong mitigation and adaptation policies. - Mitigation actions include comprehensive measures and investments designed with acceptability in mind. - Government introduced measures to assist households for sharply higher energy prices. - Longstanding coastal and flood management leaves the country well-prepared for sea-level rise; adaptation strategy is well-developed with strong institutional capacity, financial resources, and knowledge support. ### Mitigation — recent energy price shocks and policy response - Energy price changes (IEA data cited): - Consumer prices for electricity and natural gas more than tripled between January 2020 and November 2022. - Pump prices for gasoline increased about 5 percent between January 2020 and November 2022. - Household burden: - These price shocks imposed a burden on the average Dutch household of 12 percent of their consumption, higher than in most other countries reflecting relatively high household budget shares for natural gas. - Dutch government measures to assist households (as reported): - Reduced taxes on selected energy products: - VAT rate on natural gas, electricity and heat from district heating temporarily lowered to 9 percent (from 21 percent) effective July 1, 2022. - Excise duty rate on gasoline and diesel reduced by 17.3 and 11.1 cents/liter, respectively, bringing respective rates to 65.1 and 41.8 cents/liter. The reductions in excise duty are applicable from April 1, 2022. - Cap on electricity and natural gas prices for households and other low-volume users at January 2022 levels, starting on January 1, 2023: - Gas: maximum rate €1.45 per cubic meter (m3) up to a consumption of 1,200 m3. - Electricity: maximum rate €0.40 per kilowatt hour (kWh) up to consumption of 2,900 kWh. - For usage exceeding these thresholds, rates for low-volume users remain as stated in their energy contract. - One-off financial support measures: - One-off (lump-sum) energy allowance of €1,300 for lower-income households (in 2022 and 2023). - €190/month rebate on energy (natural gas for heating and electricity) bills for small-scale consumers in November and December 2022. - Energy tax refund (per electricity grid connection) increased from €560 to €785. - Policy guidance from the analysis: - Ideally household assistance should be targeted (to limit fiscal costs) and unrelated to energy consumption (to preserve incentives for energy conservation). - The Dutch government might consider continuing to emphasize the temporary nature of the cap on electricity and natural gas prices. - Energy price surge and mitigation case: - Surge strengthens case for accelerating transition away from fossil fuels to address the climate crisis and reduce dependence on insecure energy sources. - Higher energy prices caused only a modest reduction in global CO2 emissions due to switching from gas to coal in some instances and expectations that much of the surge will be reversed. - Even an additional €75 per tonne increase in carbon prices on top of predicted international energy prices for 2030 would still result in international natural gas prices that are 30 percent lower than recently experienced levels (as noted in the report). *Source: IMF staff estimates and calculations as presented in the supplied chapter content.* ### 7. At the EU level, the key climate goal under the Fit for 55 Plan is to reduce EU ### 1nldea2023002 - 7. At the EU level, the key climate goal under the Fit for 55 Plan is to reduce EU ### EU-level climate goals and Emissions Trading System (ETS) - Key climate goal under the Fit for 55 Plan: reduce EU greenhouse gas (GHG) emissions 55 percent below 1990 levels by 2030. - EU pledge: achieve net zero GHGs by 2050. - Emissions Trading System (ETS) is the centerpiece of EU-level mitigation policy; specifies trajectory of progressively tightening emissions caps for GHG emissions, primarily from power generation and industry. - ETS-aligned target: reduce combined emissions from power generation and industry 61 percent by 2030 below 2005 levels. - Non-ETS sectors (primarily buildings, transport, and agriculture): Netherlands assigned target of reducing emissions 48 percent below 2005 by 2030. ### ETS II (transport and buildings) design features - A separate emissions trading system (ETS II) is being developed at the EU level for specific sectors; expected to start in 2027. - Coverage: distributors that supply fuels to the buildings, road transport, and certain other difficult-to-decarbonize sectors. - Entry-smoothing measures: - Total allowances auctioned in the first year will increase by 30 percent. - A stabilization mechanism would automatically release additional allowances if the price per allowance exceeds €45 per tonne of CO2 over a certain period to avoid excessive price increases. ### Public investments in clean technology infrastructure (Box 1) - Two public investment sources for clean energy infrastructure in the Netherlands: - National climate and transition fund: will mobilize €35 billion over the next ten years for energy infrastructure upgrades, mobility, and built environment sustainability. - Dutch Recovery and Resilience Plan: allocates €846.9 million across four climate-related investment programs. - Dutch Recovery and Resilience Plan investment programs and amounts (€ million): - Wind at Sea: 693.7 - Green Hydrogen: 68.5 - Zero Emission Services: 56 - Aviation in Transition: 28.7 - Total: 846.9 - Program objectives: - Wind at Sea: double wind energy in the North Sea to 21 gigawatts by 2030; financing for integration costs (shipping safety, nature/species protection, sustainable fishing) rather than wind farm construction. - Green Hydrogen (runs to 2028): funding for demonstration projects for large-scale electrolysis, R&D, and training supply. - Zero Emission Services: funds for batteries, 45 fully electric inland vessels, and charging stations (with green electricity) to kick start fully electric inland shipping market and associated infrastructure. - Aviation in Transition: multi-year program promoting decarbonization of aviation by 2050, focusing on breakthrough technologies for ultra-efficient aircraft and long-term research. ### National-level policy package (overview) - Netherlands implemented and recently strengthened a comprehensive set of national policies complementing EU-level policy. - Recent tax initiatives and reforms include: - Revisions to the carbon dioxide (CO2) levy for industry. - An energy tax reform. - A CO2 price floor for power generation. - A car tax reform. - An increase in the air passenger departure tax. - Complementary measures in the Dutch Recovery and Resilience Plan include public investments in clean technology infrastructure and stronger regulatory and reporting requirements. - SDE+ scheme expanded into SDE++ to provide funding for renewable electricity, renewable heat, renewable gas, low-carbon heat and low-CO2 production across power generation, industry, transport and agriculture. ### CO2 Industry Levy (design and targets) - Introduced in January 2021: levy or target price on industrial CO2 emissions. - Mechanism: charge equal to any positive difference between an escalating target price (levy rate) and the prevailing EU ETS price. - Coverage: large industrial companies covered under the EU ETS, waste incineration plants, and companies emitting large quantities of nitrous oxide. - Levy applies only to emissions over and above “dispensation rights,” where dispensation rights = production × CO2 related to this production based on EU ETS benchmarks × reduction factor. - EU ETS benchmark: emission rate from the cleanest ten percent of firms in the industry at the EU-level. - Reduction factor: set at 1.2 for 2021, declining to 0.69 by 2030. - Intended emission reduction target originally aligned with levy schedule: 14.3 million tonnes in 2030 compared with BAU emissions projections for 2030 by PBL. - Initial levy rate schedule: - Started at €30 per excess tonne of CO2 emitted in 2021. - Set to rise in a straight line to €125 per excess tonne in 2030. - Example (illustrative): If EU ETS price were €75 per tonne in 2030, the levy would impose a charge of €50 per excess tonne for ETS installations and €125 per tonne for covered non-ETS installations. - Target updated: reduction target increased to 18.3 million tonnes; rate schedule to be re-assessed in 2023 and 2025. PBL monitors emissions via the Climate and Energy Outlook. - Note: Based on recent EU ETS price projections, the CO2 industry levy may not be binding under the current price schedule. ### Efficiency, competitiveness, and leakage considerations for the levy - Trade-off: the levy compromises between efficiency and competitiveness/leakage concerns. - A pure tax on all industry emissions would be more efficient (induces larger reduction in domestic production) but would increase competitiveness losses and leakage risk. - Quantitative example: a €50 tax (on top of prevailing EU ETS price) in 2030 would increase production costs for selected Dutch industries by 2 percent or less (Figure 3 reference). - Administrative practicality: the levy is more practical administratively than other options. - Alternative: carbon tax combined with output-based subsidies is administratively more complex. ### Feebate proposal (modest reform to levy) - Proposed conversion of levy into a feebate to provide more robust incentives for relatively clean firms. - Current treatment of unused dispensation rights: can be carried back up to five years or sold to other firms subject to the levy—this creates uncertain incentives. - Feebate formula (as proposed): - CO2 price × {CO2/production ─ pivot point CO2/production} × production - Features and implications: - Firms with emission rates above the pivot point pay fees; those below receive subsidies. - CO2 price could be the same as currently envisioned for the levy. - Pivot point set equal to the average emission rate for the domestic industry in the previous year and updated annually would make the feebate approximately revenue neutral over time. - Generalizes SDE++ subsidies by linking directly to observed emission rates. - Slightly more effective and efficient than the levy because all firms face the same ongoing incentive to cut emissions. - Caveat for concentrated sectors: in sectors dominated by one or a few firms (e.g., steel), an above-average polluter reducing emissions could lower the benchmark, eroding incentives; in these cases pivot point could be set exogenously and made more stringent over time. ### Energy tax reform (design, implemented changes, and implications) - Reform includes shift in taxation away from electricity consumption and onto natural gas; termination of the renewable energy tax (Opslag Duurzame Energie, ODE). - Specific planned changes: - Tax rate on natural gas increased by 4 cents per cubic meter (m3) in 2020 and rate in the 1st bracket of gas was supposed to increase by a further 5.23 cents per m3 a year during 2023–2028. - Rate for the 1st bracket for electricity supposed to be reduced by 5.23 cents per kilowatt hour (kWh) during 2023–2028—planned reductions would benefit households, especially low-income households, more than businesses. - Decision to repeal ODE; SDE++ will be funded with revenues raised through general taxation and energy taxes. - Changes implemented in 2022 and 2023 differ from initial plan (see Table 2); further adjustments required to achieve the initially intended shift. - Due to energy price shock, natural gas tax is not increasing as much as planned; a review scheduled for 2023 to reassess the proposed increase in natural gas tax relative to mitigation objectives and market developments. - Base-broadening aspects of reform: removal of favorable rates for glasshouse horticulture, removal of energy tax exemption for mineralogical and metallurgical processes, and limits to input exemption for combined heat pumps. - Emissions intensity context: - Natural gas combustion generates 0.055 tonnes of CO2 per gigajoule (GJ) of energy. - Present power generation in the Netherlands produces 0.09 tonnes of CO2 per GJ; expected to decline progressively with power sector decarbonization and additional generation capacity likely to come from renewable sources. - Policy rationale: raising the relative price of natural gas reinforces behavioral responses (adoption of electric space heating and conservation). ### Retail natural gas price impact example - Retail natural gas price for residential use in the Netherlands is already among the highest in Europe. - Example: introduction of a charge on CO2 emissions on natural gas for residential use (e.g., €25/tCO2) would further increase the retail price, but only moderately (to approximately €1.27/m3). ### Tax rates on natural gas and electricity by consumption bracket (Table 2) - Natural Gas, €/m3 (Consumption Bracket, m3): - Year 2021: 0.349 (0 – 170,000); 0.065 (170,001-1 million); 0.024 (1 – 10 million); 0.013 (> 10 million) - Year 2022: 0.363; 0.066; 0.024; 0.013 - Year 2023: 0.49; 0.096; 0.051; 0.04 - Electricity, €/kWh (Consumption Bracket, kWh): - Year 2021: 0.094 (0-10,000); 0.052 (10,001 – 50,000); 0.014 (50,001 – 10 million); 0.001 (> 10 million household); 0.0006 (> 10 million business) - Year 2022: 0.037; 0.044; 0.012; 0.001; 0.0006 - Year 2023: 0.013; 0.1; 0.039; 0.002; 0.001 - Note: Tax rates exclude VAT. ### CO2 price floor for power generation - Implemented with effect from April 5, 2022 (legislative proposal initially introduced in June 2019). - Mechanism: imposes a charge equal to the difference between a target rate and the price of EU ETS allowances. - Scope differences from industry levy: - No exemption analogous to dispensation rights (levy applies to all emissions). - Present target rates are much lower than those for industry and are not binding. - Target rate levels: - Target rate is €14.9 per tonne in 2022 and set to rise to €31.9 in 2030; these targets are far from binding. - Recommendation: convert the power sector scheme into a feebate and harmonize with the industry levy to increase effectiveness and efficiency while avoiding significant increases in electricity prices. - Rationale: current binding price floor would impose first-order charges on generators equal to the emissions price times remaining emissions, likely passed forward into higher electricity prices, which would counteract the energy tax reform’s objective to induce switching from gas to electricity. - Feebate for power sector would apply fees to electricity producers with above-average emission rates and rebates for generators with below-average emission rates, avoiding pass-through into electricity prices and promoting cost-effective fuel switching. - Harmonizing emissions prices across power and industry sectors would strike a cost-effective balance between emissions reductions across both sectors; both feebates would bind at the same time, and only when the EU ETS price is below the current target level for industry. ### Car tax reform - Plan to transition to a nationwide system of taxing driving in passenger cars and delivery vans in proportion to vehicle kilometers (km) driven to provide a more robust source of revenue. - Objective: replace revenues from vehicle and fuel taxes, which are declining with greater penetration of electric vehicles (EVs) into new and on-road vehicle fleets. - Metering technologies (e.g., global positioning systems) could enable tracking and billing of driving by distance. - Exemptions: - Exemptions from vehicle purchase taxes for internal combustion engine commercial vans will be phased out from 2024-2026. - Exemption for electric delivery vans (environmental justification) will continue. *Source: KINGDOM OF THE NETHERLANDS - THE NETHERLANDS, INTERNATIONAL MONETARY FUND (selected excerpts).* ### 22. Maintaining current fuel/vehicle tax revenue as a percent of GDP requires a projected ### 22. Maintaining current fuel/vehicle tax revenue as a percent of GDP requires a projected ### Km-based taxation and projected revenues - Maintaining current fuel/vehicle tax revenue as a percent of GDP requires a projected charge of 4.5 cents per vehicle km in 2030. - Projected revenues are only slightly sensitive to alternative assumptions about the price responsiveness of vehicle km travelled. - Figure reference: See Figure 5 (km elasticity refers to the fuel price elasticity conditional on a fixed level of fuel economy). ### Emissions and remaining externalities - The km-based tax is projected to reduce CO2 emissions by 2.5 million tonnes in 2030. - As internal combustion engine vehicles are progressively retired, externalities associated with fuel combustion—CO2 emissions and local air pollution—will be reduced and eventually eliminated. - Important externalities that will remain include: - Traffic congestion (severe in many European countries) - Accidents - Road damage (noted especially for trucks) - Current gasoline and diesel prices largely fall short of efficient fuel prices needed to cover supply costs, environmental costs, and (where fuels are consumed at the household level) general consumer taxes (except in countries where traffic congestion externalities are moderate). ### Congestion pricing and marginal external congestion cost (MECC) - A charge averaging upwards of 8 cents per km is warranted by congestion, though it should vary by location and time of day. - The efficient charge on a road class is the marginal external congestion cost (MECC). - Recent estimates: MECC for Netherlands has recently been estimated at around 8–16 cents per vehicle km. - MECCs are highly sensitive to region and time of day; nationwide congestion pricing was decided against for now due to public opposition. ### Accident externalities and PAYD insurance - Accident externalities vary with driver and vehicle characteristics; heavier vehicles pose greater injury risks in multi-vehicle collisions. - A system of per km fees varying with drivers and vehicles would be complex to assess and administer. - Pay-as-you-drive (PAYD) vehicle insurance is presented as a practical alternative: - Under PAYD, a driver’s annual premium would equal km driven times their premium per km. - Existing insurance rating factors could be used to set per km charges for different drivers as a proxy for external accident risk. - On average, PAYD would raise the marginal cost of driving by about 5 cents per km. - Illustrative assumption: annual insurance premium of €900 and annual driving of 17,000 km (source used for approximation). ### Air Passenger Tax: rate change, revenue, and environmental incidence - The departure tax (paid by airline operators) for passenger flights is set to triple on January 1, 2023, from its current rate of €7.95 per trip. - With the increase, the tax will generate projected annual revenues of €600 million from 2023 (up from €200 million). - The increased tax is equivalent to a charge of about €90 per tonne of CO2 from air travel out of the Netherlands. - This €90 per tonne is above the current EU ETS price, though well below recent estimates of the social cost of carbon (SCC). - Cited SCC: $185 per tonne. - The fee is levied per trip rather than by flight distance, imposing disproportionately large price increases on shorter flights (which has some environmental justification given higher per-trip fuel use during takeoffs). - A fee on aviation fuel use would be more effective because it would promote travel in more fuel-efficient planes. - If international agreements preclude fuel taxation, an alternative is to vary the fee with a metric related to CO2 emissions per passenger trip (e.g., aircraft fuel economy and default load factors) though this would be administratively complex. - Airport congestion is more efficiently addressed through peak-period landing fees that vary according to expected congestion. ### Climate trends and scenarios for the Netherlands - Climate context: - Temperate oceanic climate with mild temperatures and evenly spread precipitations. - Winter average temperature (1991–2020): 3.9°C. - Summer average temperature (1991–2020): 17.3°C. - Average precipitations: 67 mm/month. - Observed and projected warming: - Average annual temperature in 1991–2020 was about 1°C higher than in 1901–1990. - Future scenarios indicate additional warming of 1.0 °C, 1.2 °C, and 1.4 °C in 2041–2060 with respect to the period 1995–2014. - Warming will be stronger during summer months in all scenarios. - Scenario definitions referenced: - SSP1-2.6: lowest warming (strong mitigation) - SSP2-4.5: intermediate warming (continuation of present trends) - SSP3-7.0: highest warming (no effort to curb emissions) - Precipitation projections: - Moderate long-term trend in total annual precipitation; small compared to natural variability. - Future scenarios do not indicate discernible changes in total precipitations with respect to historical trends and among different emission scenarios. - Possible seasonal shift: approximate 10 percent decline in summer precipitation and an increase of similar magnitude in winter months; large model spread implies precipitation changes are not robust. ### Extremes, drought, and flood exposure - Extreme events: - Models project increased frequency of extreme heat and heavy precipitation; models tend to underestimate trends in extreme hot days. - KNMI projects with high confidence an increase of heavy precipitation on sub-hourly and daily timescales; significant increase in thunderstorms under highest warming scenarios in summer. - Drought indicators: - SPEI Drought Index shows no significant trends across scenarios at national level. - Models project an increase in the maximum number of consecutive dry days in a year, especially during summer months, but with considerable uncertainty. - KNMI projects an increase of the mean highest precipitation deficit during the growing season in all scenarios. - Flood exposure and river discharge: - Approximately 55 percent of the land is exposed to potential flood risks. - About one-quarter of total area is below sea-level. - The Netherlands has strong coastal and riverine defenses, but risks will increase if planned upgrades to flood protection are not in place. - Projected increase in river discharge, particularly from the Meuse, can add further stress if adequate measures are not implemented. - Summer 2021: peak discharge of the Meuse reached the record high since 1911 and was highly unusual because conditions leading to floods usually occur in winter. - KNMI’14 scenarios: high water discharges in 2050 will increase sharply; uncertainty about the medium-term has declined with new evidence. *Source: IMF staff material from the provided content unit.* ### 39. Climate change has the potential to generate macro-critical impacts, that may vary ### 1nldea2023002 - 39. Climate change has the potential to generate macro-critical impacts, that may vary ### Macroeconomic channels and heterogeneity of impacts - Climate affects the macro-economy through: - Productivity shocks (losses of labor productivity, low crop yields from sub-optimal temperature). - Direct destruction of physical and human capital (extreme events such as floods). - Consequences include lower capital accumulation via damage to capital stock and lower investment due to weaker growth prospects and higher uncertainty. - Households’ welfare effects: higher health risks (increased mortality and hospital admissions), lower income prospects, potential need for relocation. - Positive effects are possible in some contexts (e.g., extended growing season, reduced winter heating costs, reduced cold-related mortality and morbidity). - Net balance of negative and positive effects depends on the initial climate of each country. ### Timing and intensity of impacts - Near-term impacts may be limited and not easily distinguishable from normal variabilities because global temperature rise and changes in extreme weather frequency are gradual. - Average temperature rise and sea-level rise pose a gradual but constant challenge. - Intensification of extreme events may lead to less frequent but potentially more severe losses. ### Estimates and projections for the Netherlands — overview and uncertainty - Estimates are highly uncertain; several studies indicate losses may be relatively small by mid-century. - Contributing factors to relatively low sensitivity through mid-century: - High level of development. - Effective risk-management. - Small share of value added from agriculture, forestry, and fishing (less than 2 percent of GDP). - Relatively mild summer temperatures. ### Top-down econometric estimates (Kahn et al., 2021 based staff calculations) - When extrapolating present warming trends with assumed gradual adaptation (excluding sea-level rise and changes in extreme event frequency/intensity): - GDP per capita in 2050 does not change under a fast warming scenario, and modest gains are possible with a low warming scenario. - Table: The Netherlands: Percent Change in GDP per Capita (Staff calculations based on Kahn et al. (2021)) - 2030 / 2050 / 2100 - SSP1-2.6: 0.11 / 0.25 / 0.43 - SSP2-4.5: 0.02 / 0.05 / 0.11 - SSP3-7.0: -0.11 / -0.31 / -0.89 - Notes: SSP1-2.6 compatible with Paris Agreement goal; SSP2-4.5 continuation of current trends; SSP4-7.0 high emission scenario (no efforts to reduce emissions). Positive numbers indicate a gain. ### Estimates from changes in frequency of extreme events (IMF Staff, machine learning selection of variables) - IMF Staff estimates small reductions in annual real GDP per capita growth rates between 2020 and 2050 from changes in frequency of extreme heat, severe droughts, and moderate temperature. - Annual total losses of GDP (range): - €0.5-1.5 billion in 2030 - €2.2-6.2 billion in 2050 - Methodological notes: - Relies on machine learning to select important climate variables (Berkay, Bellon and Massetti, 2022). - Limited to weather shocks occurring within the country (excludes cross-border river flow impacts). - Comparison: European Environmental Agency estimates total economic damage from weather and climate-related extreme events between 1980-2020: - Cumulative losses: €9.3 billion (1.2 percent of 2020 GDP) - Annual losses: €0.2 billion (0.0 percent of 2020 GDP) - Cumulative losses per capita: 5.1 thousand € (11.1 percent of ??? — value shown in table) - Annual losses per capita: 0.1 € (0.3 percent of ??? — values presented in table format in source) ### National bottom-up estimates (Climate Damage Atlas; Jacobs et al., 2019; IMF Staff calculations) - Estimated total damages for 2018–2050 under assumption of no further adaptation: - Cumulative: €54.3 to €122.3 billion - Annual average: €1.7 to €3.8 billion per year - Annualized total losses: less than 0.5 percent of GDP - Damage component ranges (cumulative and annualized, with percent of 2018 GDP): - Drought: cumulative €15.3 to €72.7 bn; 2.0 to 9.4 percent of 2018 GDP; annual €0.5 to €2.3 bn; 0.1 to 0.3 percent of 2018 GDP - Flooding: cumulative €31.9 to €41.5 bn; 4.1 to 5.4 percent of 2018 GDP; annual €1.0 to €1.3 bn; 0.1 to 0.2 percent of 2018 GDP - Heat: cumulative €7.1 to €8.1 bn; 0.9 to 1.0 percent of 2018 GDP; annual €0.2 to €0.3 bn; 0.0 to 0.0 percent of 2018 GDP - Total: cumulative €54.3 to €122.3 bn; 7.0 to 15.8 percent of 2018 GDP; annual €1.7 to €3.8 bn; 0.2 to 0.5 percent of 2018 GDP - Updated Climate Damage Atlas estimates for droughts: €38.5–€124 billion (€1.1–€3.9 billion annual average), increasing total damage estimates to €77.5–€173.6 billion (€2.4–€5.4 billion per year on average). - Flood risk management and land-use regulations that prohibit building in unprotected areas greatly reduce losses and help mitigate financial stability risks. - Caloia and Jansen (2021): banking sector sufficiently capitalized to withstand floods in unprotected areas with relatively little real estate; capital depletions could increase quickly if severe floods hit densely populated areas. ### Bottom-up Europe-wide study (PESETA IV, 2020) — sectoral welfare changes for Central Europe North region (including Netherlands) and EU+UK - Welfare change as share in GDP (%) for two global warming levels (+1.5ºC and +3.0ºC) relative to current economy: - Inland Floods: Central Europe North -0.03 (1.5ºC), -0.13 (3.0ºC); EU + UK -0.04, -0.16 - Coastal Floods: Central Europe North -0.01, -0.08; EU + UK -0.02, -0.16 - Agriculture: Central Europe North 0.09, 0.05; EU + UK 0.03, -0.03 - Droughts: Central Europe North 0.01, -0.02; EU + UK -0.01, -0.08 - Energy: Central Europe North 0.00, 0.00; EU + UK 0.00, 0.00 - Mortality: Central Europe North -0.17, -0.43; EU + UK -0.29, -0.96 - Sum of the Sectors: Central Europe North -0.11, -0.61; EU + UK -0.33, -1.39 - Interpretation: Netherlands and Central Europe North show smaller estimated impacts from droughts and possible improvements in agricultural productivity compared to EU average; mortality (increase from heat, reduction from cold) dominates overall impacts. ### Public finances and fiscal implications - In RCP2.6 and RCP4.5 scenarios, average temperature increase is not expected to significantly affect productivity growth per capita. - In RCP7.0 scenario (more severe) and absent policy change: - Illustrative calculations indicate debt-to-GDP could be 10 percentage points higher by 2100 compared to baseline. - Annual buildup towards the 10 percentage point difference could be offset by modest annual budgetary adjustment. - Calculation assumptions (illustrative chart): GDP deflator of 2 percent; 2.3 percent interest rate on government debt; nominal GDP growing in line with total population; revenue constant as percent of nominal GDP; high expenditure rigidity. ### Limits of current estimates and additional risks - Uncertainties are large; some impacts may be missed, including: - Cross-border spillovers from neighboring countries. - Global upheaval from extreme weather in vulnerable nations. - Compounded effects of multiple new risks occurring simultaneously or in rapid sequence. - Impact estimates do not account for global climate tipping points: - Quick disintegration of Greenland and West-Antarctica Ice Sheets would pose extreme sea-level rise risk (risks considered low during this century). - Release of methane hydrates could accelerate warming and intensify extreme events. - Abrupt collapse of the Atlantic Meridional Overturning Circulation (AMOC) is not likely before 2100 but would cause abrupt cooling in the Netherlands and water cycle shifts if it occurred. ### Assessment of adaptation policies and governance - Key national frameworks: - National Climate Adaptation Strategy (NAS) published in 2016; implementation program (UP NAS) in 2018; 2020 National Climate Adaptation Perspective report reviews accomplishments and provides guidelines for 2020 and beyond. - Government updating NAS based on 2023 KNMI climate scenarios; developing a climate change adaptation monitoring framework. - Delta Programme (since 2010) focuses on protection from high water and flooding, freshwater availability, and spatial adaptation; 2023 Delta Programme provides latest assessment of risks, adaptation measures, and budget. - Adaptive approach: updating climate strategies as new information arrives; coastal protection and flood defense strategies inherently adaptive; example: National Knowledge Programme on SLR (six-year study of effects of SLR up to 5 meters). - Governance roles: - Optimal governance should match geographic/sectoral scope of risks. - National, regional, and local governments integrate climate adaptation into investment and policy plans via centrally coordinated institutions and knowledge platforms. - Water district boards: responsible for flood risk management in their district. - Municipalities: responsible for local climate adaptation. - Coordination via delta programme, union of the water boards, etc. - Central government role: - Ensure adaptation principles embedded in national legislation, policy, and public finance management. - UP NAS aimed to integrate climate adaptation into government investment programs (medium- and long-term planning, budgets, public investment and asset/liability management). - Authorities are developing a framework for monitoring and evaluating climate adaptation at central government level. - Gaps: ex-post reviews and climate-informed impact assessments at early stage; no legally enshrined accountability mechanism ensuring authorities at all levels are held accountable for implementation of adaptation considerations. ### Policy guidance and priorities - Adaptation plans should be integrated holistically into long-term government planning; efficient allocation across sustainable development goals yields highest net social returns. - Staff encourages explicit weighing of costs and benefits of alternative adaptation strategies; cost-benefit analysis plus distributional impact adjustments can improve resource use. - Government should focus on: - Adaptations with large positive externalities (government-priority actions): research on adaptation technologies; updating building codes; reinforcing infrastructure; developing early warning systems. - Removing barriers to efficient private adaptation (e.g., legislative obstacles, market imperfections) to allow firms and individuals to choose efficient adaptation mixes. - Addressing equity issues, e.g., compensating vulnerable populations negatively affected by adaptation policies. *Source: Excerpt from the provided IMF content unit 1nldea2023002.* ### 55. The UP NAP would benefit from highlighting the cost of distortions and distributional ### 55. The UP NAP would benefit from highlighting the cost of distortions and distributional impacts in markets for inputs and outputs ### Market distortions and distributional impacts - Distorted markets lead to inefficient allocation of resources, including in climate change adaptation. - Future NAPs could assess the impact of market inefficiencies on adaptation costs and benefits and their distributional effects – a principle also stressed by OECD (2014). - Example provided: - Implicit or explicit subsidies to fresh- and groundwater use may lead farmers to use water inefficiently to deal with higher summer temperature. - Investing in efficient irrigation or switching to methods or products that are less water intensive would be discouraged, causing welfare losses. - Efficient allocation of water would have immediate positive welfare impacts and would facilitate dynamic efficient adaptation but may be opposed by the beneficiaries. - Subsidies used for income support could produce undesirable distributional effects. - To facilitate market reforms and alleviate equity concerns, compensations could be paid to individuals adversely affected. ### Insurance and efficient risk pricing - Recognition: - The UP NAP highlights the importance of insurance in dealing with residual climate risks but could more strongly support reforms to ensure efficient risk pricing. - Roles and constraints: - Fully offsetting climate change impacts may be too expensive or impossible; government, individuals, and firms must deal with residual risks. - Insurance can help spread these risks across time and society. - Ensuring competitive market access to insurance providers that satisfy all the financial requirements and efforts to ensure complete information is key to competitive risk pricing. - Subsidy trade-offs: - Some insurance for residual risks may be unaffordable for private individuals and firms. - Subsidies can reduce the cost of insurance, but they distort private behavior by shifting the cost of risk from private to public budgets. - Without appropriate countermeasures —such as upgraded and enforced building codes or land use restrictions— subsidies induce a sub-optimal aggregate risk level. - Although the distributional impact of subsidized insurance may be desirable, the efficiency cost should be carefully assessed. ### Financing and mutuality in flood protection - Current financing: - Present financing of flood protection is based on cost-sharing and mutuality principles. - Risk of inefficient incentives: - Without strong institutional constraints mutuality may lead to inefficient risk taking. - Recommendation referenced: - The report welcomes Recommendation 2 of the Deltacommission 2008 to grant permits to new development in low-lying flood-prone areas based on cost-benefit analysis in a fiscally responsible way, so that protection costs fall on the beneficiaries rather than on other administrative levels (Deltacommissie, 2008, p. 12). ### Exposure to coastal and river flooding; Delta Programme - Exposure statistics (exact figures preserved): - Around 55 percent of the country is susceptible to flooding. - 26 percent is below sea-level and 29 percent is susceptible to river flooding. - More than half of the population and two-thirds of economic activity can be potentially affected by coastal and river floods (OECD, 2014). - Preparedness: - The country is uniquely prepared to deal with these challenges due to long-term flood risk management practices, strong institutions, financial resources, centuries of experience, and cooperation between all levels of government. - Delta Programme (Box 2 highlights): - Continuous monitoring, maintenance, and upgrade of existing protection and management of freshwater supply is managed by the central government, provincial and municipal authorities through the Delta Programme, overseen by the Delta Commissioner. - Total estimated annual budget of the Delta Programme is on average EUR 1.5 billion between 2023 and 2036, 55 percent of which are dedicated to new investment and the rest for maintenance, upkeep, and management, according to The Delta Fund. - The Delta Programme 2023 states that water authorities expect to invest on average EUR 2 billion per year, of which EUR 915 million on flood defenses. - For 2021, the Delta Programme estimated that the national government, water authorities, provincial and municipal authorities and drinking water companies together have spent EUR 1.7 billion on flood defenses, sewage purification, water systems, water quality, and sustainable freshwater supply. - Major building blocks of adaptation: - Flood protection, coastline preservation, river water management, and sustainable freshwater supply. ### Planned protection adequacy and need for upgrades - Near-term adequacy: - The planned level of protection is adequate to deal with expected flood risks at least until 2050. - Need for planning and investment: - Key investments and planning are needed to upgrade the defense system by 2050 to ensure minimal levels of protection are extended to the whole population, to deal with continued soil subsidence, and to face increasing risks from climate change. - Potential damages if upgrades are delayed (exact figures preserved): - If planned upgrades are delayed, flood damages in urban areas until 2050 can increase to between EUR 33 bln and 87 bln with continuation of present climate trends, and to between EUR 55 bln and EUR 124 bln if climate change intensifies (The Delta programme, 2021; p.18). ### Sea-level rise (SLR) monitoring and scenarios - Monitoring necessity: - SLR and intensification of conditions that can lead to pluvial and riverine floods should be closely monitored. - KNMI’14 SLR estimates (exact figures preserved and contexts): - Difference between high and low SLR scenarios is projected to be small until 2050: - KNMI’14 estimates range between 15 and 30 centimeters in a moderate warming scenario and between 20 to 40 centimeters in a fast-warming scenario (with respect to the period 1986–2005). - In the second half of the century KNMI’14 projects: - 30 to 60 cm in the moderate scenario and between 45 and 75 cm in the fast-warming scenario in 2085. - Extreme scenarios with SLR of 100 centimeters or more cannot be excluded if melting of Greenland and Antarctica will be faster than predicted. - Implication: - While the country is well-prepared to address SLR as the current trend continues up till 2050, an acceleration of sea-level rise in the second part of the century requires contingency plans. ### Cost-benefit analysis (CBA) tradition and recommendations - Tradition: - Long-standing tradition of using CBA for flood risk management and water governance should be continued and possibly reinforced (Tinbergen, 1954; CPB, 2017). - Standard good practice in CBA should be applied consistently: - A range of policy/investment alternatives should be assessed against each other, including the no incremental protection case (business-as-usual). - The cost of adapting to rising sea levels under a range of SLR scenarios should be calculated against a counterfactual with no SLR. - Whenever possible, regional interdependencies (positive and negative spillovers) should be considered and different combinations of protection options in different parts of the country should be assessed. - Non-market impacts should be monetized using the best-available evidence while being cognizant of inherent uncertainties. - Loss of life should be monetized using the Value of Statistical Life, consistently with national CBA standards. - Disutility losses in case of relocation should also be monetized. - The flood protection strategy envisioned until 2050 is based on implementing the Local Individual Risk (LIR) (the probability per year to die at a certain location due to flooding, taking into account evacuation possibilities) defined in part by a motion of parliament and in part using CBA (van der Most et al 2014). - CBA can contribute to assess if the application of this standard across the country is efficient and could be used to determine the optimal local safety standard. ### CIAM stylized CBA results and model caveats - Model used: - CIAM (Coastal Impact and Adaptation Model, Diaz, 2016) was utilized for a stylized CBA of alternative protection strategies. - The coastline is divided in 128 segments in the model exercise. - The exercise uses the median increase of local sea-level in the Netherlands for the RCP 4.5 scenario in Kopp et al (2014), and also the 5th and the 95th percentiles to illustrate uncertainty. - Comparative findings (exact figures preserved): - Full protection scenario: - EUR 862 million are needed annually between 2050 and 2079 to eliminate contemporaneous and future inundation risks from SLR, or a total of EUR 25.9 billion. - Optimal protection scenario (mix of protection and retreat): - Investment needs in protection reduced to EUR 656 million annually, or EUR 19.7 billion in total between 2050 and 2079. - Land and capital losses due to inundation are around EUR 2.31 billion cumulatively during the same period. - Interpretation and caveats: - Implementing an efficient protection strategy can significantly reduce overall protection costs while minimizing residual damage. - The “optimal” protection level entails slightly elevated risks of inundation but much lower total costs than full protection. - Numerical findings should be taken with caution: - The CIAM exercise potentially underestimates climate change damages by excluding the risks of riverine flood. - The model potentially overestimates adaptation costs since it assumes no protection against SLR in the baseline scenario (no protection scenario). - Despite caveats, the model is useful to compare trade-offs between costs and benefits of protection under alternative strategies. - More accurate national models should allow similar CBAs to facilitate efficient protection strategies. ### Annex summary: CIAM model description (key points) - CIAM basics: - Global optimization model for CBA of adaptation to SLR (Diaz, 2016). - Starts from coastal characteristics on 12,000 coastal segments from the DIVA tool. - Considers coastal erosion, coastal flooding, wetland change and saltwater intrusion. - For each coastal segment, CIAM develops economic, population, and SLR scenarios (SLR scenarios are from Kopp et al (2014)). - Includes expected value of storm surges. - Adaptation strategy evaluation: - Using costs of alternative coastal protections, CIAM determines costs and benefits of alternative adaptation strategies (including no adaptation) for each coastal segment. - Efficient level of coastal protection selected by maximizing net present value. - Protection can be full or partial (accepting storm costs). - Cost categories used in CIAM (measurement approach preserved): - Protection Cost: constructing and maintaining protection (generalized as sea walls); a function of coastline length, sea wall height, and value of land occupied by the sea walls. - Retreat Cost: relocation of population and assets from affected areas, including forced emigration and planned retreat; cost of relocating population and mobile capital in the incremental area of retreat, and cost of demolishing immobile capital. - Inundation Cost: loss of land and assets due to SLR-caused inundation; based on extent of land endowment lost and associated value of land and capital stock. - Measurement is per period; the model optimizes adaptation strategies over 20 periods. - Usefulness: - CIAM develops insights on costs from SLR and different protection strategies at segment or aggregated levels; the SIP aggregates all coastal segments in the Netherlands for this exercise. ### D. Summary of Policy Recommendations (adaptation highlights preserved) - The Netherlands represents a good practice for climate change adaptation, particularly to sea-level rise. The estimates of climate change impacts on the Dutch economy are likely to be modest by mid-century, although subject to high uncertainty. The country has put in place a comprehensive legislative and policy framework for adaptation, implemented through a coordination mechanism at national and subnational level. - Adaptation recommendations: - Climate adaptation could be further strengthened by holistically integrating it into long-term planning frameworks of the government. - Government action could further focus on adaptation with large positive externalities, removing barriers to private adaptation, and dealing with equity issues. - The National Adaptation Plan could also benefit from highlighting the cost of market distortions for adaptation. *Source: content unit 1nldea2023002 (IMF country report excerpt).* ### Annex I. Table 1. The Netherlands: Cost Specification in the CIAM (Concluded) ### Annex I. Table 1. The Netherlands: Cost Specification in the CIAM (Concluded) ### Coastal Impact and Adaptation Model (CIAM) — Cost Categories and Measurement - Wetland Cost - Explanation: The loss of wetland due to the inability to migrate inland naturally, constrained by the rate of SLR and the lack of space. - Measurement of Cost: The wetland losses take two forms, (1) the total service value of the wetland occupied by the sea walls; (2) the service value of the wetland lost related to the rate of SLR. - Flood Cost - Explanation: The damage to population and asset due to extreme surge. - Measurement of Cost: The expected damage associated with the risk of the extreme surge. The likelihood of the extreme events follows the generalized extreme value distribution by using the local surge frequency data from the DIVA tool, while the total land affected by the extreme surge depends on the elevation exposed to a given flood water height. - Model timing - Measurement of the cost per period. The model optimizes the adaptation strategies over 20 periods. ### Key Housing Market Findings (Introduction and Context) - Price and valuation dynamics - House prices nearly doubled since their trough in mid-2013 and surpassed their previous peak by more than half. - Model-based estimates indicate an overvaluation of 14 percent in 2022:Q2. - Price-to-income ratios have risen by more than 50 percent since 2015. - Demand drivers - Contributing factors: decline of mortgage interest rates towards historic lows; generous loan-to-value limits; existence of interest-only mortgages; a tax system strongly favoring ownership; net migration; and formation of new—and smaller—households. - Supply responsiveness - Supply has lagged demand; the unresponsiveness of supply to price signals is a long-standing characteristic. - The failure of many construction companies during the 2009–2013 downturn further hampered provision of homes. ### Policy Actions and Regulatory Measures (chronology and specifics) - Mortgage market and macroprudential measures - Since January 1, 2013: legally binding rule that only up to half of a property’s market value can be financed with interest-only mortgages. - Progressive tightening of loan-to-value ratios to a 100 percent maximum by 2018. - January 2022: the Dutch central bank introduced minimum risk weights for mortgage loans. - Framework introduced for evaluating the debt-service-to-income burden of households. - Taxation and fiscal measures affecting housing - Mortgage interest tax deductibility reduced from 52 percent in 2018 to 37 percent by 2023. - Imputed rent share declined from 0.70 to 0.35 percent. - The government waives the 2 percent transaction tax for first-time buyers of a home with a value of up to €400,000 who are aged between 18 and 35 years. - Tax exemption for gifts up to €106,671 for recipients aged between 18 and 40 years if the proceeds are used for the purchase or renovation of an owner-occupied home. - Rent control and social housing specifics - Rental dwellings classified via an elaborate points system; homes below a threshold attributed to the rent-controlled (social) sector. - For 2023, the maximum monthly rent in the rent-controlled sector was set at €808.06. - From May 1, 2021 to May 1, 2024: restrictions on permissible rent increases for free market rentals (initially inflation plus 1 percent rule for rent-controlled housing; replaced by a wage increase plus 1 percent approach from 2023 if wage developments remain below inflation). - Regulated rentals constitute about three quarters of all rental properties in the Netherlands. - Non-profit housing associations account for nearly four fifths of the supply of rent-controlled dwellings. - With the recent announcement of plans by the government to broaden the scope of the points system, about 96 percent of rental properties will be subject to rent control. - In 2023, housing associations will have to allocate at least 92.5 percent of their rental property supply to households with an annual income of less than € 44,035 (single-person household) and € 48,625 (multi-person household). The remainder could be allocated to households above these thresholds. - For low-income tenants with limited assets, a monthly allowance to subsidize rental payments is available. ### Socio-economic implications and observations - Affordability and distributional effects - Housing valuations in the Netherlands are among the highest in the euro area. - Owner-occupied housing retains a favorable tax status in Box 1 of the Dutch income tax code, with mortgage interest tax benefits more than compensating for taxes on imputed rent. - Reductions in mortgage interest deductibility have been partially offset by declines in imputed rent as a share of property value. - Market segmentation - The rental sector is large and heavily regulated; a sizeable social housing stock and rent control aim to contain rental expenses for households unable or unwilling to purchase. - Non-profit housing associations operate under a public service mandate and benefit from a state guarantee on their borrowing and preferential municipal access to land at below-market prices. - Policy trade-offs - Measures aimed at mitigating macro-financial risks (e.g., tighter LTV, limits on interest-only mortgages, reduced tax deductibility) may also have dampened price increases by constraining mortgage availability. - Some recent tax changes (e.g., transaction tax differentiation, gift tax exemptions) may have the opposite effect by supporting demand for owner-occupied housing. _Italic: Source: Annex I. Table 1. The Netherlands: Cost Specification in the CIAM (Concluded); Housing Supply in the Netherlands: The Road to More Affordable Living (excerpts)._ ### 6. Housing market polices of the government to make access to rental or owner- ### 6. Housing market polices of the government to make access to rental or owner-occupied properties more equitable and affordable seem to fall short of their desired goals. ### Affordability and distributional findings - The share of disposable income Dutch households need to allocate to housing is comparatively high; renters face much steeper costs than the euro area median while the burden for owners with a mortgage has closely followed the trend decline seen in the median euro area country. - Rental expenditure as a share of total household consumption is elevated in a euro area context, driven by both actual rentals (third highest share) and imputed rentals (seventh highest share). - Owners with a mortgage: housing cost burdens ranged from 15 percent of disposable income for the top quintile to 24 percent for the bottom quintile in 2010; compressed to a 12–15 percent span by 2020. - Renters: spent between 17 percent (top quintile) and 36 percent (bottom quintile) in 2020, against 14–32 percent in 2010 — signaling worsening inequality between owners and renters and among renters over time. - Multi-year waiting periods for admission to rent-controlled social housing aggravate inequality; waiting periods can last from 2.0 to 13.7 years depending on region. - Home ownership rates in the bottom two income quintiles are far below the median country in the euro area and have not improved since 2010, suggesting most tax benefits of owning accrue to better situated households. ### Fiscal costs, financial vulnerabilities, and market distortions - Foregone revenues due to mortgage interest tax relief amounted to 1.3 percent of GDP in 2019 (OECD figures). - Spending on housing allowances required outlays of 0.5 percent of GDP in 2020 (OECD figures). - Tax-advantaged status of owner-occupied housing incentivizes maximum leverage; household debt burden is among the highest in the euro area. - About two fifths of the outstanding mortgage stock is accounted for by interest-only products, raising macro-financial stability risks in a housing downturn. - Subsidization of social and owner-occupied housing has contributed to a long-term crowding out of the private rental market since the end of World War II, limiting private rental availability and burdening tenants ineligible for social housing. ### Supply-side performance and constraints - Real investment in homes as a share of real GDP has recovered from its late 2013/early 2014 trough but remains below the euro area average and noticeably below Belgium, France, or Germany. - Residential building permits have yet to return to pre-global financial crisis levels. - The rise in Dutch housing stock per head has stayed among the lowest in the euro area, falling short of demographic requirements. - The Netherlands is the second most densely populated country in the euro area after Malta, limiting scope for residential development and associated infrastructure. - Building plans, codes and regulations aim to ensure livability, environmental sustainability and cultural heritage preservation but lengthen permit procedures, increase project complexity, raise developer costs, and can undermine incentives to provide housing. - Planning and execution capacity has dwindled in private and public sectors (by mid-2022, around 400,000 people employed in the Dutch construction sector, far below the 520,000 at the end of 2008). - Labor market shortages and other supply bottlenecks have contributed to a steep rise in construction costs. - Environmental requirements and thresholds (including nitrogen emissions constraints tied to the large agricultural sector) have halted some construction projects. - About 30 percent of the building stock is ranked E or below on Energy Performance Certificates (in the Netherlands). ### Government proposals and program features - “Programma Woningbouw” envisages building 900,000 homes by 2030 at a pace of 100,000 units per year. - Housing associations committed to construction targets and ensuring sustainability of existing homes; abolishment of the landlord levy for rent-controlled properties on January 1, 2023 may create space for lowering rents. - Central government to strengthen role by adopting and monitoring enforceable performance agreements with provinces, regions and municipalities setting construction targets aligned with national plans. - Aim to reduce lead times between conception and completion of housing projects (averaging 10 years) by identifying bottlenecks, streamlining building regulations, shortening legal procedures and enhancing expertise across government bodies. - Financial support to induce municipalities to develop land for housing. - “Betaalbaar Wonen” program stresses expanding rental regulation scope, facilitating market access for acquirers of owner-occupied properties and better protection of tenants and buyers. ### Policy recommendations and considerations - Reconsider dominant role of housing associations: - Housing associations play a role in supplying affordable housing but their non-profit status and subsidies tilt the playing field against other providers. - Housing associations and owner-occupation have nearly completely crowded out the private rental sector since World War II; their benefits and costs should be carefully evaluated, especially for households ineligible for their services. - Revisit extensive rent control system: - Current system ties rent control to property value and quality, establishing ceilings that restrict supply as potential private providers may retrench for lack of adequate return. - Consider gradually narrowing number of rent-controlled accommodations to create incentives for private sector supply; cushion drawbacks (like higher rents) with a more generous, yet rigorously means-tested, housing allowance. - Make rules more flexible so dwellings can be re-allocated to the free rental market when interim changes to value or characteristics warrant it to reduce lock-in effects. - Review eligibility criteria for social housing: - Current income thresholds for social housing are notably above median household income, opening the sector to large parts of the population and fueling demand for scarce resources. - Recommendation: limit eligibility to groups with socio-economic need once adequate affordable rental properties outside social housing exist; implement more regular means-testing (income is only assessed at contract signature; wealth is not assessed). - Strengthen mechanisms for housing associations to raise rents faster to entice better situated tenants to transition to the free rental market. - Use pecuniary incentives to align municipal and developer incentives: - Explore complementing performance agreements with financial incentives so municipalities capture a larger share of extra tax revenue or some increase in land value when publicly owned land is authorized for development. - Consider more onerous land value taxes on privately owned designated residential land left idle. - Pair the transaction tax hike for acquirers of existing, not owner-occupied properties from January 1, 2023 with tax incentives for developers of new housing. - Reform owner-occupied housing subsidies and tax treatment: - Continue (preferably accelerate) efforts to phase out subsidization of owner-occupied housing. - Ideally move housing to Box 3 of the Dutch income tax code to tax it in line with other investments while recording an appropriate level of imputed rent as income; the Dutch Supreme Court decision of December 2021 opens a window of opportunity. - If Box 1 treatment remains, phase out mortgage interest deductibility faster and lift imputed rent to a more realistic level. - OECD estimates suggest eliminating mortgage interest rate deductibility could reap considerable rewards in terms of affordability. - Tighten macroprudential regulation of mortgage borrowing: - Reduce loan-to-value ratios of 100 percent to levels more in line with international practice. - Curtail the possibility to allow a 50 percent interest-only component in mortgage lending. - Make debt-service-to-income ratio settings more sensitive to financial stability considerations. *International Monetary Fund — Kingdom of the Netherlands — The Netherlands, chapter section 6.* ### 13. Lastly, possibilities to streamline land use policies and building regulations should be ### 13. Lastly, possibilities to streamline land use policies and building regulations should be examined, jointly with the continued pursuit of innovative ways to create more living space. ### Fragmentation of responsibilities and regulatory complexity - The largely decentralized model followed by The Netherlands places responsibility for the development of housing primarily with municipalities, leading to local considerations taking precedence over national priorities in the provision of dwellings and a fragmentation of building codes. - The performance agreements between different echelons of government foreseen in the “Programma Woningbouw” are a step in the right direction to ensure that long-term housing supply is aligned with demand at the country level. - A stronger focus on the harmonization and simplification of frameworks applying to land use and the construction of residential properties may: - help shorten permitting procedures; - imply economies of scale for developers of housing. ### Untapped potential and spatial options for increasing supply - Untapped potential for residential densification warrants study. - Compared to other euro area countries, the current composition of the Dutch housing stock seems to reveal a preference for living in (semi-)detached houses rather than apartments, despite a very high population density. - Policy steps that may help alleviate availability and affordability constraints include: - strengthening efforts to split existing residences into smaller units; - enticing households to move to properties more appropriate for their size; - advancing construction in areas further away from difficult to develop urban centers, if combined with efficient transport infrastructure to exploit desirable job and leisure opportunities. ### Phasing, calibration, and political economy considerations - The Dutch housing market is characterized by substantial complexity and extensive regulation; modifying policies will create winners as well as losers, requiring: - strategic adjustment of measures; - conscientious timing; and - clear communication. - Example: eliminating rent controls and tightening eligibility criteria for social housing appears inconceivable where an alternative supply of affordable rental accommodation is hardly available. - The government’s overarching focus on measures to boost supply in its agenda for the housing market is welcomed, but policymakers should keep an eye on gradually removing market-distorting policy settings that impose non-negligible welfare costs on Dutch households and the economy. ### Conclusions and recommended policy directions - Persistent imbalances and long-standing supply constraints are key determinants of the Dutch housing market outcomes: despite policies to reduce debt-financed demand over the last decade, housing valuations have risen while affordability and availability have declined as supply has not kept pace. - The government has embarked on an ambitious agenda to provide more affordable living, including: - continued, very gradual phase-out of generous tax treatment of owner-occupied properties begun in 2018; - maintaining substantial parts of the population eligible for rent-controlled social housing; - improving co-ordination of housing development at the national and sub-national level; - facilitating building-related regulations and procedures; - enhancing public sector capacity to plan and execute projects; and - offering financial support to municipalities to foster the supply of dwellings. - The scope for economic incentives and private sector involvement should be evaluated: - the substantial role attributed to housing associations could profit from a full-fledged cost-benefit analysis; - an in-depth assessment of the impact of liberal eligibility criteria for social housing and extensive rent control on economic welfare seems warranted; - relaxing rental regulation and narrowing access to social housing, in conjunction with ascertaining a better supply of properties on the free rental market and setting appropriate incentives for municipalities, landowners and developers, should be contemplated; - the phase-out of generous taxation and borrowing arrangements favoring owner-occupied dwellings should be accelerated for social equity and financial stability considerations; - possibilities to harmonize, streamline and simplify provisions guiding construction as well as the use of land and buildings should be exploited to a maximum extent to facilitate the creation of sufficient and affordable living space for a growing number of households. *Source: Chapter excerpt from the IMF country report.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1nldea2023002.pdf_