## 1polea2023002

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---

### Energy strategy: strategic context and priorities
- Ensuring energy security is the top priority of Poland’s energy strategy (PEP2040), approved in February 2021.
- PEP2040 prioritized reducing dependence on a single supplier for natural gas and crude oil; a long-term natural gas contract from Russia expired in end-2022.
- The 2022 energy crisis prompted reassessment of natural gas as a transitional fuel and consideration of accelerated decarbonization balanced with energy security.

### 2022 energy crisis — impacts and resilience
- Natural gas prices increased 15-fold between early 2021 and mid-2022, with spillovers to electricity markets.
- Infrastructure investments (including LNG terminal and storage) and diversification measures avoided immediate shortfalls despite supply disruptions.
- Natural gas consumption dropped by 17 percent in 2022, mostly in power generation and industry (-31 percent).
- Russia’s share in oil supply fell from 60 percent in 2021 to 26 percent in Q4'2022.
- Import ban on Russian coal (April 2022) caused local shortages of higher-grade hard coal for small furnaces; government and SOE actions (imports from Colombia, South Africa, Australia) and a subsidized coal distribution program helped alleviate shortages by early-2023.

### Energy security: definition and measurement
- Polish Energy Law (Art. 3.16) defines energy security as covering current and prospective demand in a technically and economically justified manner while maintaining environmental protection requirements.
- Primary measure used: energy import dependency (percent of domestic consumption) to reflect vulnerability to supply disruptions and international price shocks.
- Trend: growing crude oil imports (driven by road fuel demand) and increased natural gas demand in industry and households have tilted consumption toward imported sources.

### Current energy structure and low-carbon gaps
- Electricity production relies mostly on domestically produced coal: 72 percent (including lignite) of coal-fired power generation.
- Poland has not used nuclear power historically; current project timelines envisage the first reactor connected to the grid in 2033.
- Renewable energy accounted for 12 percent of energy supply in 2021, below the EU average of 18 percent.
  - Biomass represents 74 percent of renewables, mostly for space heating.
  - Renewables in power generation accounted for 4 percent of total energy supply in 2020; wind and solar produced half of that.
- Poland’s carbon intensity of energy is the highest in the EU, despite energy dependency being below the EU average.

### GHG emissions: trends and targets
- From 1989 through 2022, GHG emissions in Poland declined by 31 percent while GDP roughly tripled.
- In electricity and heat production, the carbon footprint was reduced by a third while output increased by 10 percent.
- Transport is the only sector with consistently increasing emissions; imported fossil fuels account for an increasing share of GHG emissions.
- EU frameworks:
  - Poland participates in the EU Emissions Trading System (ETS) covering power sector and industry.
  - Emission reduction target under the Effort Sharing Decision: 7 percent compared to the 2005 level.
  - Fit for 55 (on track to be approved by end-2023) will require:
    - Faster reduction of ETS allowances.
    - Increased targets for renewable energy and energy efficiency.
    - Extension of GHG emission pricing to transport and buildings in 2027.

### PEP2040 appraisal and assumptions
- PEP2040 prioritized energy security and outlined a relatively unambitious GHG reduction path:
  - Projected GHG emission reduction of 30 percent by 2030 compared to 1990 level (below the EU 55 percent target).
  - Planned increase in gas-fired electricity production from 4.2 percent to 9.3 percent by 2030.
- Estimated decarbonization in SOE-dominated power sector: 25 percent reduction (in the high EU ETS prices scenario); other sectors expected to achieve larger cuts though policies were not well specified.
- Assumptions for PEP2040 update (expected in Q2 2023) strengthen energy security via accelerated renewables adoption, reduction in energy demand, and extending coal unit lifespans to limit natural gas consumption increases.

### Policy instruments and fiscal considerations
- Carbon pricing (EU ETS) covers power sector and industry; a domestic carbon tax could:
  - Partially internalize externalities from carbon emissions and air pollution.
  - Create incentives for energy efficiency and electrification of heating and transport.
  - Generate revenues to mitigate impacts on vulnerable consumers.
- Caution: fossil fuel externalities include energy security impacts; electrification and renewable deployment must avoid unduly increasing reliance on foreign inputs into electricity generation.

### Scenarios and model setup (IMF-ENV CGE, Annex 1)
- Framework: CGE model (IMF-ENV) with policy effort endogenized as an implied carbon tax needed to meet decarbonization targets.
- Reference scenarios:
  - Scenario 1: baseline reference (no decarbonization effort).
  - Scenario 2: reference + trade constraints with Russia (impact of Russian invasion of Ukraine).
- Poland-specific scenarios (3–6):
  - Scenario 3: G20 countries comply with NDCs → 55 percent GHG reduction; no directed electricity mix policies (electricity changes driven by carbon tax); EU electricity mix calibrated to PRIMES.
  - Scenario 4 (“PEP”): PEP2040 calibrated electricity mix; 30 percent GHG reduction ambition.
  - Scenario 5 (“Energy Security”): ambitious power-generation decarbonization with only a small increase in natural gas; EU-level 55 percent GHG reduction.
  - Scenario 6 (“Coal to Gas”): reduces coal replaced with imported natural gas; EU-level 55 percent GHG reduction.
- Calibration note: electricity mix in scenarios 4–6 fixed to pre-defined values; implied carbon tax operationalizes policy effort for non-electricity sectors.

### Key quantitative scenario findings and energy-security implications
- Imported energy share in 2030: between 29 and 35 percent (percent of domestic consumption) across scenarios.
- Reaching 55 percent GHG reduction would increase energy import dependency by 3-4pp.
- Import share lowest in scenario 4 (“PEP”) because of continued reliance on domestic coal and relatively smaller increase in electricity imports.
- Electricity-mix shifts towards renewables reduce required policy effort elsewhere:
  - High implied carbon tax in scenario 3 where power-sector changes are slow.
  - Scenarios 5 and 6 (stronger renewables push) imply much lower policy effort even with the same decarbonization ambition.
  - Implied carbon tax in the “PEP” scenario is very small, reflecting smaller coal share and lower GHG target.

### Macroeconomic and labor-market impacts (selected figures)
- War in Ukraine effect: higher imported energy prices reduce GDP by 0.8 percent in 2030 compared to baseline.
- Additional economic cost of carbon taxation in Poland-specific scenarios (percent change in GDP in 2030, relative to BaU):
  - Scenario 4 (“PEP”): 0.6 percent.
  - Scenario 5 (“Energy Security”): 0.8 percent.
  - Scenario 6 (“Coal to Gas”): 1.1 percent.
- Employment impacts depend on carbon tax revenue use:
  - Base assumption: implied carbon tax is fiscally neutral and receipts used to reduce the personal income tax (PIT) to improve labor market participation of less productive workers.
  - Under that assumption, PIT reduction more than offsets adverse employment impacts of carbon taxation.
  - In scenario 4, employment declines the most despite low climate ambition because the low implied carbon tax allows only a small PIT reduction.
- Alternative revenue use: directing part of carbon tax revenues to the most vulnerable households (policy trade-off highlighted).

### Sectoral and fiscal details (selected figures)
- Residential heating:
  - 3.8 million households use coal as the main heating fuel.
  - Coal heating in the residential sector generates 20 Mt of CO2; this accounts for two-thirds of the reduction needed to meet ESD targets by 2030 and half of the reduction envisaged in the Fit for 55 draft regulations.
  - Cohesion Funds and RRF Funds have earmarked over EUR5 billion for clean air and residential energy efficiency.
  - EU funds earmarked for “clean air” and residential energy efficiency program amount to some PLN6,500 per household using coal as primary heating source.
- State support for coal mining:
  - Transfers and tax credits for coal mining between 2017 and 2021 reached PLN27 billion (1.2 percent of annual GDP).
  - Further support until end-2031 (PLN29 billion) was approved in 2022.
  - State aid awarded to cover costs related to mine closures was PLN9 billion in 2017-21.
- Explicit fossil-fuel subsidies in Poland amounted to 0.2 percent of GDP.

### Policy considerations and recommendations
- Align energy security and decarbonization:
  - Fossil fuel imports are the main energy-security risk and are responsible for almost half of energy-related CO2 emissions; shifting away benefits both objectives.
  - Decarbonizing the power sector can be achieved without endangering energy security by switching to renewables, developing nuclear over a longer time frame, and further electrification.
- Power sector transition:
  - Coal phase-out appears unavoidable given EU net-zero by 2050 and economic pressures (high price of coal-fired power, wear and tear of coal assets, investment needs).
  - Natural gas role likely limited by energy-security concerns and unfavorable price outlook.
  - Renewable leapfrogging risks: weather-dependence creates balancing challenges; high concentration of supply chains for renewable technologies (rare earth metals; concentrated in China) poses vulnerabilities.
  - Authorities should remove obstacles to renewables deployment: revise overly constraining regulations, streamline administrative procedures, modernize the power grid, and increase energy storage capacity.
  - Market design: reduce state dominance and vertical integration in wholesale electricity market (SOEs account for three-quarters of wholesale market turnover) to foster competition and prevent anti-competitive practices.
- Coal-mining and transition management:
  - Define a well-delineated timeline including a coal phase-out date to reduce uncertainty and enable local planning.
  - Use EU’s Just Transition Fund for re-skilling coal-mining employees and diversifying local economies in coal-dependent regions.
- Beyond power sector:
  - Address coal use in residential heating (critical for meeting ESD and Fit for 55 targets).
  - Carbon tax is an efficient tool to correct market failures and raise fiscal revenues; revenues can finance the energy transition and support vulnerable consumers.
  - Fit for 55 proposes EU-wide carbon pricing for buildings and transport by 2027; countries with an equivalent carbon tax can be exempted from the new ETS until end-2030. Implementing a carbon tax in Poland on buildings and transport would supplement policies to achieve 2030 targets and smooth new EU ETS introduction.
- Consumer protection and revenue use:
  - Design consumer support schemes that are means-tested and do not distort price signals; IMF guidance recommends sustainable, targeted transfers conducive to decarbonization and energy efficiency.

### Carbon tax, fiscal revenues, and social protection (highlights)
- A carbon tax would address negative externalities and generate revenues to shield vulnerable groups during the energy transition.
- Decarbonization in the residential sector requires continued financial support for investments but should be complemented with carbon pricing measures to discourage fossil fuel use.
- Gradual phase out of coal in a socially responsible manner will require further financial support.
- Fit for 55 and scenario calibrations:
  - NDC/WAR scenario: EU target = 55 percent GHG reduction with carbon tax applied economy-wide; electricity mix for EU calibrated to PRIMES.
  - PEP: 30 percent GHG reduction vs 1990; same carbon tax applied to ETS and non-ETS sectors; electricity mix calibrated to strategy.
  - Energy Security: 55 percent GHG reduction; renewable generation share = 60 percent; coal = 30 percent; gas = 10 percent.
  - Coal to Gas: 55 percent GHG reduction; renewables = 60 percent; 10 percentage points of coal replaced with gas.

### Limitations and caveats
- Model limitations:
  - IMF-ENV CGE does not capture all costs of carbon emissions (climate change impacts, health effects of air pollution).
  - Does not fully capture EU ETS allowance costs on the electricity sector; electricity-sector effort is operationalized via calibrated electricity mixes in scenarios 4–6 and a carbon tax affecting other sectors.
  - Potential impacts on FDI attractiveness from delayed decarbonization relative to EU peers are not fully modeled.
  - The implied carbon tax represents policy effort but actual policy packages can include a wider set of instruments beyond carbon pricing.

### Conclusions
- Energy transformation can strengthen Poland’s resilience:
  - Diversified import infrastructure and high reliance on domestic energy helped Poland weather the 2022 energy crisis.
  - With technological advances and falling renewable costs, phasing out coal does not require sacrificing energy security.
  - Even in an ambitious decarbonization scenario, Poland’s energy import dependency remains low by European standards.
  - Investing in clean electricity generation contributes to decarbonization of other sectors and reduces reliance on imported fossil fuels.

*Source: IMF staff.*

### 1. Energy Strategy Update ______________________________________________________________ 8

### 1. Energy Strategy Update

### Introduction — strategic context and priorities
- Ensuring energy security is the top priority of Poland’s energy strategy (PEP2040), approved in February 2021.
- PEP2040 prioritized reducing dependence on a single supplier for natural gas and crude oil; a long-term natural gas contract from Russia expired in end-2022.
- The 2022 energy crisis prompted a reassessment of the role of natural gas as a transitional fuel and consideration of accelerated decarbonization balanced with energy security.

### 2022 Energy Crisis — impacts and resilience
- Natural gas prices increased 15-fold between early 2021 and mid-2022, with spillovers to electricity markets.
- Infrastructure investments (including LNG terminal and storage) and diversification measures avoided immediate shortfalls despite supply disruptions.
- Natural gas consumption dropped by 17 percent in 2022, mostly in power generation and industry (-31 percent).
- Russia’s share in oil supply fell from 60 percent in 2021 to 26 percent in Q4'2022.
- The import ban on Russian coal in April 2022 caused local shortages of higher-grade hard coal for small furnaces; government and SOE actions (imports from Colombia, South Africa, Australia) and a subsidized coal distribution program helped alleviate shortages by early-2023.

### Energy security: definition and measures
- The Polish Energy Law defines energy security (Art. 3.16) in terms of covering current and prospective demand in a technically and economically justified manner while maintaining environmental protection requirements.
- Energy import dependency is used in the analysis as the primary measure of energy security, reflecting vulnerability to supply disruptions and international price shocks.
- Growing crude oil imports (driven by road fuel demand) and increased natural gas demand in industry and households have tilted Poland’s energy consumption toward imported sources.

### Current energy structure and low-carbon gaps
- Electricity production relies mostly on domestically produced coal: 72 percent (including lignite) of coal-fired power generation.
- Poland has not used nuclear power historically; current project timelines envisage the first reactor connected to the grid in 2033.
- Renewable energy accounted for 12 percent of energy supply in 2021, below the EU average of 18 percent.
  - Biomass represents 74 percent of renewables, mostly for space heating.
  - Renewables in power generation accounted for 4 percent of total energy supply in 2020; wind and solar produced half of that.
- Poland’s carbon intensity of energy is the highest in the EU, despite energy dependency being below the EU average.

### GHG emissions: trends and targets
- From 1989 through 2022, GHG emissions in Poland declined by 31 percent while GDP roughly tripled.
- In electricity and heat production, the carbon footprint was reduced by a third while output increased by 10 percent.
- Transport is the only sector with consistently increasing emissions; imported fossil fuels account for an increasing share of GHG emissions.
- As an EU member, Poland participates in the EU Emissions Trading System (ETS) covering power sector and industry, and is subject to country-specific targets for other sectors.
- The emission reduction target for Poland in the Effort Sharing Decision is 7 percent compared to the 2005 level.
- The Fit for 55 legislative initiative (on track to be approved by end-2023) will require a steeper decarbonization path:
  - Faster reduction of ETS allowances.
  - Increased targets for renewable energy and energy efficiency.
  - Extension of GHG emission pricing to transport and buildings in 2027.

### Energy Strategy Update (PEP2040) — appraisal and assumptions
- PEP2040 prioritized energy security and outlined a relatively unambitious GHG reduction path:
  - Projected GHG emission reduction of 30 percent by 2030 compared to 1990 level (below the EU 55 percent target).
  - Planned increase in gas-fired electricity production from 4.2 percent to 9.3 percent by 2030.
- Measures to achieve decarbonization in the SOE-dominated power sector were estimated as a 25 percent reduction (in the high EU ETS prices scenario), with remaining sectors expected to achieve larger cuts though policies were not well specified.
- Assumptions for the PEP2040 update (expected in Q2 2023) strengthen energy security by: accelerated adoption of renewable energy, reduction in energy demand, and extending the lifespan of coal units to limit increases in natural gas consumption.

### Policy instruments and fiscal considerations
- Carbon pricing (EU ETS) currently covers power sector and industry; a domestic carbon tax could complement ETS by:
  - Partially internalizing externalities from carbon emissions and air pollution.
  - Creating incentives for energy efficiency and electrification of heating and transport.
  - Generating revenues that could be used to mitigate impacts on vulnerable consumers.
- Caution: fossil fuel externalities also include energy security impacts; policies must ensure that electrification and renewable deployment do not unduly increase reliance on foreign inputs into electricity generation.

### Scenario analysis (overview)
- The paper analyzes decarbonization scenarios to assess implications for energy import dependency and macro outcomes.
- Key analytical conclusions previewed:
  - A fundamental shift toward renewables in the power sector can materially contribute to decarbonization targets without substantially increasing import dependency.
  - Leapfrogging natural gas as a transitional fuel could accelerate decarbonization but requires policies to limit new energy security risks associated with higher shares of variable renewable energy.
  - The power sector is central to the success of an economy-wide decarbonization strategy because electrification of other sectors shifts reliance onto electricity generation.

*Prepared by Krzysztof Krogulski; International Monetary Fund, May 10, 2023.*

### 14.      We compare alternative decarbonization scenarios to analyze the impact on energy

### 14.      We compare alternative decarbonization scenarios to analyze the impact on energy

### Scenarios and model setup
- Framework: CGE model (IMF-ENV model; Annex 1) with policy effort endogenized as an implied carbon tax needed to meet decarbonization targets.
- Reference scenarios:
  - Scenario 1: baseline reference (no decarbonization effort).
  - Scenario 2: reference + incorporates the impact of the Russian invasion of Ukraine by imposing trade constraints with Russia.
- Poland-specific policy scenarios (scenarios 3–6):
  - Scenario 3: G20 countries (including all EU countries) comply with their NDCs, implying a 55 percent reduction in GHG emissions; no directed policies to change the electricity mix (electricity-sector changes driven entirely by the carbon tax). Electricity mix for EU countries calibrated to PRIMES.
  - Scenario 4 (“PEP”): Poland’s 2021 energy strategy calibrated electricity mix; GHG reduction ambition restricted to 30 percent.
  - Scenario 5 (“Energy Security”): more ambitious power-generation decarbonization path with only a small increase in the role of natural gas; EU-level ambition of 55 percent GHG reduction.
  - Scenario 6 (“Coal to Gas”): further reduces share of coal and replaces it with imported natural gas; EU-level ambition of 55 percent GHG reduction.
- Calibration note: The electricity mix in scenarios 4–6 is fixed to pre-defined values to reflect authorities’ plans (model does not directly capture EU ETS stringency effects on the electricity sector).
- Implied carbon tax: operationalizes the policy effort needed to reach GHG targets by changing actions in all sectors except the electricity sector (where direct measures are calibrated).

### Key quantitative findings and energy-security implications
- Imported energy share in 2030 varies narrowly across scenarios: between 29 and 35 percent (percent of domestic consumption).
- Reaching a 55 percent reduction in GHG emissions would increase energy imports dependency by 3-4pp.
- The import share is lowest in scenario 4 (“PEP”) because of continued reliance on domestic coal and a relatively smaller increase in electricity imports.
- Changes in the electricity mix towards renewables reduce required policy effort elsewhere:
  - High implied carbon tax in scenario 3 where power-sector changes are slow (burden falls on other sectors).
  - Scenarios 5 and 6 (stronger renewables push) imply much lower policy effort even with the same decarbonization ambition.
  - The implied carbon tax in the “PEP” scenario is very small, reflecting both the smaller share of coal-fired power and the lower GHG reduction target.

### Macroeconomic and labor-market impacts
- Impact of the war in Ukraine:
  - Higher imported energy prices from the war reduce GDP by 0.8 percent in 2030 compared to the baseline.
- Additional economic cost of carbon taxation in Poland-specific scenarios (percent change in GDP in 2030, relative to BaU):
  - Scenario 4 (“PEP”): 0.6 percent (smallest cost).
  - Scenario 5 (“Energy Security”): 0.8 percent.
  - Scenario 6 (“Coal to Gas”): 1.1 percent.
- Employment impacts depend critically on the use of carbon tax receipts:
  - Base assumption: implied carbon tax is fiscally neutral and receipts are used to reduce the personal income tax (PIT) to improve labor market participation of less productive workers.
  - Under that assumption, the PIT reduction more than offsets adverse employment impacts of carbon taxation (comparison of scenarios 2 and 3).
  - In scenario 4, employment declines the most despite low climate ambition because the low implied carbon tax allows only a small PIT reduction.
- Alternative use of revenues: directing part of carbon tax revenues to the most vulnerable households (policy trade-off highlighted; see Section 3 of source).

### Sectoral and fiscal details (selected figures)
- Residential heating:
  - 3.8 million households use coal as the main heating fuel.
  - Coal heating in the residential sector generates 20 Mt of CO2; this accounts for two-thirds of the reduction needed to meet ESD targets by 2030 and half of the reduction envisaged in the Fit for 55 draft regulations.
  - Cohesion Funds and RRF Funds have earmarked over EUR5 billion for clean air and residential energy efficiency.
  - EU funds earmarked for “clean air” and residential energy efficiency program amount to some PLN6,500 per household using coal as primary heating source.
- State support for coal mining:
  - Transfers and tax credits for coal mining between 2017 and 2021 reached PLN27 billion (1.2 percent of annual GDP).
  - Further support until end-2031 (PLN29 billion) was approved in 2022.
  - State aid awarded to cover costs related to mine closures was PLN9 billion in 2017-21.
- Explicit fossil-fuel subsidies in Poland amounted to 0.2 percent of GDP (source references in original text).

### Policy considerations and recommendations
- Aligning energy security and decarbonization:
  - Fossil fuel imports are the main energy-security risk and are also responsible for almost half of energy-related CO2 emissions; shifting away from these fuels benefits both objectives.
  - Decarbonizing the power sector can be achieved without endangering energy security by switching to renewables, developing nuclear power over a longer time frame, and further electrification across sectors.
- Power sector transition:
  - Phase-out of coal seems unavoidable given EU net-zero by 2050 and economic pressures (high price of coal-fired power, wear and tear of coal assets, investment needs).
  - Natural gas role likely limited by energy-security concerns and unfavorable price outlook.
  - Renewable leapfrogging risks: weather-dependence creates balancing challenges; high concentration of supply chains for renewable technologies (rare earth metals; concentrated in China) poses vulnerabilities.
  - Authorities should remove obstacles to renewables deployment: revise overly constraining regulations, streamline administrative procedures, modernize the power grid, and increase energy storage capacity.
  - Market design: reduce state dominance and vertical integration in wholesale electricity market (SOEs account for three-quarters of wholesale market turnover) to foster competition and prevent anti-competitive practices.
- Coal mining and transition management:
  - Define a well-delineated timeline including a coal phase-out date to reduce uncertainty and enable local planning.
  - Use EU’s Just Transition Fund for re-skilling coal-mining employees and diversifying local economies in coal-dependent regions.
- Beyond power sector:
  - Address coal use in residential heating (critical for meeting ESD and Fit for 55 targets).
  - Carbon tax is an efficient tool to correct market failures and raise fiscal revenues; revenues can finance the energy transition and support vulnerable consumers.
  - Fit for 55 proposes EU-wide carbon pricing for buildings and transport by 2027; countries with an equivalent carbon tax can be exempted from the new ETS until end-2030. Implementing a carbon tax in Poland on buildings and transport would supplement policies to achieve 2030 targets and smooth new EU ETS introduction.
- Consumer protection and revenue use:
  - Energy crisis of 2022 demonstrated need to protect consumers from high prices while avoiding untargeted, fiscally costly measures.
  - Design consumer support schemes that are means-tested and do not distort price signals; IMF guidance recommends sustainable, targeted transfers that are conducive to decarbonization and energy efficiency.

### Limitations and caveats
- Model limitations:
  - Does not capture all costs of carbon emissions (climate change impacts, health effects of air pollution) which would be partly mitigated under policy scenarios.
  - Does not fully capture the impact of EU ETS allowance costs on the electricity sector; electricity-sector policy effort is operationalized via calibrated electricity mixes in scenarios 4–6 and a carbon tax affecting other sectors.
  - Potential impacts on FDI attractiveness from delayed decarbonization relative to EU peers are not fully modeled.
  - The implied carbon tax represents policy effort but actual policy packages can include a wider set of instruments beyond carbon pricing.

### Conclusions
- Energy transformation can strengthen Poland’s resilience:
  - Diversified import infrastructure and high reliance on domestic energy helped Poland weather the 2022 energy crisis.
  - With technological advances and falling renewable costs, phasing out coal does not require sacrificing energy security.
  - Even in an ambitious decarbonization scenario, Poland’s energy import dependency remains low by European standards.
  - Investing in clean electricity generation contributes to decarbonization of other sectors and reduces reliance on imported fossil fuels.

*Source: IMF staff.*

### 34.      Introducing a carbon tax could support the phase-out of imported fossil fuels while

### Introducing a carbon tax could support the phase-out of imported fossil fuels while

### Carbon pricing, fiscal revenues, and social protection
- A carbon tax would address misallocation resulting from negative externalities and would generate revenues that could shield most vulnerable groups from the impact of the energy transition.
- Decarbonization efforts in the residential sector will require continued financial support for necessary investments but should be complemented with carbon pricing measures to discourage the use of fossil fuels.
- The gradual phase out of coal in a socially responsible manner will also require further financial support.
- Arregui et al. (2022) emphasize the role of price signals and proper targeting of measures when helping households during energy crises.

### Decarbonization targets and power-sector scenarios
- NDC and War in Ukraine: All G20 countries and Poland achieve their NDC emission targets through an increase in a single carbon tax rate for the entire economy; EU target is to reduce total GHG emissions by 55 percent with respect to 1990 values (applied to all EU countries separately). Electricity mix for EU countries calibrated to PRIMES (JRC-Seville) based on this carbon tax.
- PEP: Reflects the current government energy strategy (PEP2040). The emission reduction target is 30 percent with respect to 1990 values. The same carbon tax is applied to both ETS and non-ETS sectors. Electricity mix calibrated to the strategy (high ETS prices scenario). G20 countries achieve their NDC.
- Energy Security: Energy imports as a share of total domestic consumption are kept close to 2021 levels. The emission reduction target is 55 percent. The same carbon tax is applied to both ETS and non-ETS sectors. The share of renewable generation in the electricity mix is increased to 60 percent. Coal represents 30 percent and gas 10 percent of total generation.
- Coal to Gas: Ambitious power sector decarbonization with the same overall emission reduction target (55 percent). Share of renewables in electricity generation is set at 60 percent, but 10 percentage points of coal-fired power is replaced with generation from natural gas.

### IMF-ENV model: structure and data inputs
- Model type: IMF-ENV is a global recursive dynamic computable general equilibrium (CGE) model developed by the IMF Research Department.
- Key features:
  - Optimizes consumption and production decisions by households and firms within a neo-classical framework; deals mainly with real values and almost perfect markets for commodities and production factors (labor, capital, land).
  - Capital stocks have vintages so firms’ production and behavior differ in the short and long run.
  - Recursive dynamic: solved as a sequence of comparative static equilibria; factors of production are exogenous at each point in time and linked between periods with accumulation expressions.
  - Production modeled with nested constant-elasticity-of-substitution (CES) functions; international trade uses an Armington specification with bilateral flows and prices by traded commodity.
  - Links economic activity to environmental outcomes including emissions of greenhouse gases and other pollutants.
- Data and baseline:
  - Central input: GTAP 10 Power database.
  - Database contains country-specific input-output tables for 141 countries and 65 commodities and real macro flows.
  - For detailed energy modeling includes eight electricity generation technologies and an electricity transmission and distribution activity.
  - Includes main greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and fluorinated gases – hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs) and Sulphur hexafluoride (SF6).
  - This version of the model employs 36 activities, 28 commodities sectors and 26 country/regions.
- Adjustments for the study:
  - Updated Russian natural gas exports using UN-COMTRADE data for 2021.
  - Updated natural gas imports into the EU and the United Kingdom using IEA Natural Gas Information Statistics and Eurostat consumption statistics.
  - Poland was separated from the regional aggregate using GTAP data for Poland and macroeconomic projections from WEO 2022 (real GDP growth, investment share in GDP, current account balance, government budget balance, labor supply statistics).
  - GHG emission projections taken from CPAT (FAD).
  - Electricity generation and mix by power source taken from the European Commission, Joint Research Centre (JRC-Seville).

### Scenario uses and limitations
- The model projects up to 2050 and contains internally consistent trends of economic, sectoral, trade-related, and environmental variables.
- Uses:
  - Scenario analysis of structural changes (technical progress, living standards, preferences, production).
  - Quantitative economic and environmental policy assessment, including costs and benefits of instruments for reaching GHG emission reduction targets.
- Caveat: Projections for the very long run are especially uncertain since disruptive technology innovations could materialize at longer horizons.

### Monetary policy analysis (QPM adaptation for Poland)
- With inflation in Poland significantly above the target, a tight monetary policy stance is needed; the degree and path of tightening remain subject to debate.
- The IMF’s Quarterly Projections Model (QPM) was adapted to Poland to:
  - Construct a model baseline scenario for monetary policy.
  - Decompose projections to analyze factors driving policies and disinflation.
  - Examine alternative scenarios that may prompt adjustments to the policy path.
- Key observations:
  - Traditional measures of core inflation (excluding food and energy) averaged 4 percent in 2020-21, above Poland’s inflation target and tolerance range of 2.5 ± 1 percent.
  - Median HICP inflation and trimmed-mean CPI inflation were close to the target until mid-2021, but by mid-2021 high-frequency measures showed a clear increase suggesting more widespread underlying price pressures.
  - Around mid-2021 the estimated output gap had closed and labor markets tightened, indicating a more prominent role of demand in raising underlying inflation.
- Policy implication: The scenarios indicate the policy rate may need to be increased further or held at its peak for longer to reduce core inflation to the target; the NBP should continue to respond to changing data, monitor projection realism, and adjust the policy rate path as necessary.

*International Monetary Fund — Chapter excerpt*

### 5.      While energy and food price shocks

### 5.      While energy and food price shocks

### Inflation developments in 2022
- Headline inflation reached multi-decade highs in 2022 due to energy and food price shocks.
- Underlying inflation also further accelerated:
  - Month-on-month annualized median HICP inflation already exceeded 11 percent in Q1 2022.
  - Around this time, Poland’s economy was estimated to have been operating well above potential.
- Second-round effects from energy and food prices likely contributed to the high level of underlying inflation in 2022.
- The distribution of price increases in the HICP basket in 2022 exhibited a significant upward shift in the median.

### Headline and underlying inflation outlook for 2023
- Headline inflation is projected to decline significantly in 2023 on commodity price base effects.
- Drivers of projected headline inflation decline:
  - More moderate projected increases in food prices.
  - Stable fuel prices.
  - Government measures to cap natural gas and electricity prices.
- Projected headline inflation path:
  - Decline from 16.6 percent at end-2022 to 7.7 percent by end-2023.
- As of early 2023, high frequency measures of underlying inflation:
  - Appear to have stabilized but not yet declined.

### Overview of the Quarterly Projections Model (QPM)
- Purpose and heritage:
  - The QPM is one of the IMF’s workhorse models for monetary policy analysis.
  - Developed to provide core analytical support for a “forecasting and policy analysis system” (FPAS) to guide forward-looking monetary policy formulation.
  - Built on pioneering work of early inflation-targeting central banks in the 1990s (Maehle and others 2021).
- Model characteristics:
  - Reduced form, structural, neo-Keynesian model.
  - Reduced form advantage: straightforward economic interpretation and key relationships.
  - Structural: equations have economic interpretations with parameters estimated or set outside the model.
  - Neo-Keynesian: incorporates real and nominal rigidities (Berg, Karam, and Laxton 2006).
  - Assumes monetary policy is neutral over the medium term.

### QPM logic and gaps
- The QPM is a “gap” model estimating:
  - Output gap, inflation gap, real interest rate gap, and real exchange rate gap.
- The model takes potential output and trends as given and includes an endogenous monetary policy reaction function that suggests a path for interest rates based on estimated gaps.

### Core behavioral equations (summary)
- Aggregate demand (IS curve):
  - Output gap (푦ො
௧
) is a function of output persistence (푦ො
௧ିଵ
), a monetary conditions index (푚푐푖
௧
), foreign output gap (푦ො
௧
∗
), and aggregate demand shocks (휀
௧
௬
).
  - Monetary conditions index is a weighted average of the deviation of the real interest rate from its neutral rate (푟̂
௧
) and the deviation of the real effective exchange rate from its trend level (푧̂
௧
).
  - Equation form (as in source): 
    - 푦ො
௧
 = 푏
ଵ
푦ො
௧ିଵ
 + 푏
ଶ
푚푐푖
௧
 + 푏
ଷ
푦ො
௧
∗
 + 휀
௧
௬
    - 푚푐푖
௧
 = 푏
ସ
푟̂
௧
 + (1-푏
ସ
) (푧̂
௧
)
- Phillips Curve:
  - Inflation (휋
௧
) depends on persistence (휋
௧ିଵ
), expectations (휋
௧ାଵ
), real marginal costs (weighted average of output gap and real exchange rate gap 푧̂
௧
), and cost-push shocks (휀
௧
గ
).
  - Equation form (as in source): 
    - 휋
௧
 = 푎
ଵ
휋
௧ିଵ
 + (1-푎
ଵ
) E
௧
휋
௧ାଵ
 + 푎
ଶ
푟푚푐
௧
 + 휀
௧
గ
    - 푟푚푐
௧
 = 푎
ଷ
푦ො
௧
 + (1-푎
ଷ
)(푧̂
௧
)
- Uncovered interest parity (UIP):
  - Relates nominal exchange rate (푠
௧
) to expected future exchange rate, domestic and foreign nominal interest rate differential (푖
௧
 - 푖
௧
∗
), and risk premium (푝푟푒푚
௧
).
  - Nominal exchange rate defined as units of domestic currency per unit of foreign currency (euro as foreign currency).
- Taylor Rule (monetary policy reaction function):
  - Nominal policy interest rate (푖
௧
) set as a function of rate persistence (푖
௧ିଵ
), deviation of expected inflation (휋
௧ାସ
௘
) from target (휋ത
௧ାସ
), and the output gap.
  - Neutral interest rate (푖
௧
௡
) = trend real interest rate (푟̅
௧
) + model-consistent inflation expectations (휋
௧ାସ
௘
).

### Calibrating the QPM for Poland: steady-state and long-term parameter settings
- Focus: QPM for Poland centers on core inflation (inflation excluding food and energy).
  - Reason: non-core factors (food and energy price shocks) were primary drivers of headline inflation and are largely exogenous to monetary conditions and the domestic output gap.
- Steady-state values and long-term parameters set exogenously:
  - Potential output growth: 3.1 percent.
  - Domestic inflation target (NBP): 2.5 percent.
  - Foreign inflation target (Euro Area / ECB): 2 percent.
  - Equilibrium real exchange rate appreciation: 1 percent per year.
  - Domestic real neutral interest rate: 2 percent (implies nominal neutral interest rate of 4.5 percent).
  - Foreign real neutral interest rate (Euro Area): -1 percent (implies nominal neutral interest rate of 1 percent).

### Calibrated parameter values (Table 1 summary)
- IS Curve:
  - 푏
ଵ
 Output persistence: 0.8
  - 푏
ଶ
 Impact of monetary conditions on output gap: 0.3
  - 푏
ଷ
 Impact of external demand on output gap: 0.5
  - 푏
ସ
 Weight of real interest rate and REER gaps in monetary conditions index: 0.7
- Phillips Curve:
  - 푎
ଵ
 Core inflation persistence: 0.8
  - 푎
ଶ
 Passthrough of marginal costs to inflation: 0.3
  - 푎
ଷ
 Ratio of domestic costs in firms’ aggregate costs: 0.7
- Taylor Rule:
  - 푔
ଵ
 Policy rate persistence: 0.7
  - 푔
ଶ
 Policy reactiveness to core inflation: 1.1
  - 푔
ଷ
 Policy reactiveness to output gap: 0.4
- UIP:
  - 푒
ଵ
 Nominal exchange rate persistence: 0.4
- Sources for calibration: IMF staff calculations and estimates; Laxton, Rose, and Scott (2009).

### Model implications: sacrifice ratio and exchange rate pass-through
- Sacrifice ratio:
  - Defined in QPM as product of a
2
 and a
3
 in the Phillips Curve (sensitivity of inflation to real marginal costs times share of output gap in real marginal costs).
  - Calibrated values imply a sacrifice ratio of 0.2.
  - Interpretation: a moderate sacrifice ratio for Poland.
  - Consistent with NBP’s Small Structural Model estimate (Chmielewski and others 2020).
- Exchange rate pass-through:
  - In the Phillips Curve, pass-through = 0.3 * (1-0.7) = 0.09.
  - Compared to literature:
    - Greszta and others (2012) suggested pass-through coefficient of 0.13.
    - Ortega and Osbat (2020) estimated pass-through to overall consumer prices in Poland in range 0.05 to 0.07.
    - Chmielewski and others (2020) estimate pass-through approximately 0.06 to 0.08.
  - Conclusion: calibrated pass-through is comparatively low.

### Impulse response function (IRF) findings (responses to 1 percentage point or 1 p.p. shocks)
- Exchange rate shock (1 percent depreciation):
  - Output gap increases by about 10 bps, peaking after two quarters.
  - Core inflation (year-on-year) increases by about 25 bps, peaking four quarters later.
  - Policy interest rate increases about 25 bps, peaking four quarters after the shock.
- Aggregate demand shock (1 p.p. increase in output gap):
  - Core inflation (year-on-year) increases by about 20 bps, peaking after four quarters.
  - Policy rate increases about 35 bps after three quarters.
  - Nominal exchange rate appreciates by about 80 bps after three quarters.
- Cost-push shock (exogenous shock to core inflation of 1 p.p.):
  - Immediate feed-through to annualized quarter-on-quarter core inflation; peak impact on year-on-year inflation after four quarters.
  - Policy rate increases, peaking at about 55 bps after four quarters.
  - Nominal exchange rate appreciates by about 75 bps after two quarters.
  - Output gap decreases by about 30 bps after six quarters.
- Monetary policy shock (1 p.p. increase in policy interest rates):
  - Nominal exchange rate appreciates about 145 bps quarter-on-quarter immediately following the rate increase.
  - Output gap declines about 35 bps after three quarters.
  - Core inflation (year-on-year) declines 30 bps, with peak impact after five quarters.

*Source: IMF staff calculations and text from content unit "5.      While energy and food price shocks."*

### 19.      The QPM response to a monetary policy shock is broadly consistent with NBP research

### 19.      The QPM response to a monetary policy shock is broadly consistent with NBP research

### Consistency with NBP monetary policy transmission estimates
- Comparison (Table 2) of a 1 p.p. increase in the policy rate:  
  - Core inflation (y/y): QPM peak impact -0.3 (p.p.), Lag of peak impact 5 (quarter); NBP range -0.2 to -0.3, Lag 3 to 7.  
  - Nominal exchange rate appreciation (y/y): QPM peak impact 0.4 (p.p.), Lag of peak impact 1 (quarter); NBP range 0.9 to 1.1, Lag 2-4.  
  - Real GDP growth (y/y): QPM peak impact -0.35 (p.p.), Lag of peak impact 2 (quarter); NBP range -0.2 to -0.4, Lag 2-3.  
  - Output gap (percent): QPM peak impact -0.35 (p.p.), Lag of peak impact 3 (quarter); NBP range -0.2 to -0.4, Lag 4.  
  - Real exchange rate gap (percent): QPM peak impact 0.6 (p.p.), Lag of peak impact 4 (quarter); NBP range 0.7 to 1.0, Lag 2-3.  
- Summary finding: Impact on most endogenous variables is similar in scale and lag; the notable exception is the nominal exchange rate, where NBP models show a stronger response.

### Using the QPM: assessment of initial conditions (Kalman filter estimates)
- Output gap:
  - Large negative output gap at pandemic onset quickly closed, turning into a sizeable positive output gap by the beginning of 2022.
  - Output gap narrowed significantly during 2022, estimated about zero in Q4 2022.
  - QPM Kalman filter output gap broadly consistent with IMF (2022) production function approach.
- Real interest rate gap:
  - Real interest rates were extremely accommodative post-pandemic.
  - Gap began to narrow as rates increased in 2021-22 but had not turned positive as of Q4 2022.
- Real exchange rate gap:
  - Fairly small before and during the pandemic.
  - Large inflation differentials with trading partners contributed to real exchange rate appreciation in 2022.
- Real marginal costs:
  - Combination of output gap and real exchange rate gap was positive in 2022, contributing to inflationary pressures.
  - Real exchange rate appreciation partially offset the large positive output gap over 2022.

### Decomposition of recent movements
- Monetary conditions:
  - Fairly neutral prior to the pandemic; loosened significantly during the pandemic driven by a large negative real interest rate gap.
  - Tightened in 2022 due to interest rate increases and real exchange rate appreciation.
- Drivers of recent changes:
  - Pandemic-related swing in output gap largely attributed to a shock (the pandemic), not changes in monetary conditions or foreign output gap.
  - Negative real interest rates contributed modestly to closure of the output gap in 2021-22.
  - Large policy rate increases in 2021-22 partly attributed to deviation from estimated neutral rate and expectations for future inflation to exceed the target.
  - Increase in core inflation in 2022 not well explained by the model and partly attributed to shocks.

### QPM baseline projections and policy implications
- Baseline setup:
  - Unconditional forecast; no conditions imposed.
  - External sector assumptions for the Euro Area generated within the QPM through auto-regressive processes.
  - Projections begin in Q1 2023.
- Policy rate guidance from Taylor rule (based on initial conditions):
  - Policy interest rate held at 6.75 percent as of end-2022.
  - Taylor rule suggests raising the policy rate another 125 bps to 8 percent before easing in late 2023.
- Projected dynamics:
  - Further real exchange rate appreciation and policy rate hikes tighten monetary conditions.
  - Resulting negative output gap peaking around 1.5 percent of GDP in early 2024.
  - Core inflation returns near the 2.5 percent target at the end of 2024.

### Alternative monetary policy scenarios (tradeoffs between inflation and output)
- General result: Earlier, more aggressive tightening → larger negative output gap in near term and lower growth, but faster disinflation and more rapid recovery; output levels converge by 2026 in scenarios.
- Scenario: Policy rate held through 2023 Q4
  - Monetary conditions tighten (less than unconstrained baseline).
  - Once endogenous from Q1 2024, Taylor rule implies gradual reduction in 2024 toward neutral rate.
  - Comparative outcomes vs unconstrained baseline:
    - 2023 growth: -0.3 percent versus -1 percent (unconstrained baseline).
    - 2024 GDP growth: 2.4 percent versus 2.9 percent.
    - Core inflation approaches target in 2025 rather than 2024.
- Scenario: Policy rate held through 2024 Q2
  - Faster disinflation achieved, core inflation reaches the target by end-2024.
  - GDP growth in 2024 would be 1.9 percent (the slowest of the three scenarios).

### Exchange rate sensitivity and implications for policy
- Role of exchange rate:
  - Positive interest rate differential contributes to nominal appreciation against the euro in each scenario.
  - Nominal appreciation contributes more to near-term tightening of monetary conditions than the policy rate.
- If nominal exchange rate does not appreciate (empirical observation: no appreciation as of end-2022, possibly due to higher risk premium from regional geopolitical risks):
  - Smaller contribution of real exchange rate gap to tightening of monetary conditions.
  - Two possible consequences:
    - (1) Policy rate would need to be tightened further to achieve similar pace of disinflation.
    - (2) Absent additional tightening, the pace of disinflation would be slower than in the model baseline.
  - Model suggests that without nominal appreciation, if policy rate were held at its current level for 2023, monetary conditions may need to tighten at the beginning of 2024, implying further interest rate increases.

### Fiscal shock sensitivity
- Modeling assumptions for illustrative fiscal expansion:
  - Conventional fiscal multiplier of 0.5.
  - 1 p.p. reduction in the structural fiscal balance → 0.5 p.p. positive shock to the output gap.
  - Markets react negatively: 5 percent weakening of the nominal exchange rate relative to baseline.
- Illustrative impacts relative to baseline:
  - Weaker exchange rate initially loosens monetary conditions; combined with positive output gap shock, core inflation increases about 80 bps after three quarters.
  - Taylor rule implies policy rate would increase an additional nearly 100 bps relative to the baseline.
  - Monetary conditions tighten after initial loosening from exchange rate depreciation.

### Foreign interest rate shock sensitivity
- Illustrative foreign shock:
  - ECB tightens by an additional 100 bps relative to the model baseline.
  - UIP condition in the QPM suggests nominal exchange rate depreciation.
- Model implications:
  - Depreciation marginally increases the output gap due to loosened monetary conditions.
  - Core inflation increases relative to baseline mainly via exchange rate pass-through and higher output.
  - In reaction, domestic policy rate would increase by nearly 50 bps after four quarters.

*Sources: IMF staff calculations; and Chmielewski and others (2020).*

### 28.      Deviations in the calibration of the QPM can also have a significant impact on the

### 1polea2023002 - 28.      Deviations in the calibration of the QPM can also have a significant impact on the

### Model uncertainty scenarios and sensitivity of projections
- More backward-looking price formation
  - Captured by increasing the coefficient in the Phillips curve on lagged inflation from 0.8 to 0.9.
  - In this scenario, the policy rate would need to be increased by an additional 30 bps compared to the baseline.
  - Disinflation requires a higher cost to output compared to the baseline.

- Weaker monetary policy transmission
  - Captured by lowering the coefficient of monetary conditions on the output gap from 0.3 to 0.15.
  - In this scenario, the policy rate would need to increase about 60 bps further than in the baseline and remain at a higher level to achieve a similar path of disinflation.
  - Reflecting the higher interest rate differential, more of the disinflation in this scenario owes to exchange rate appreciation, rather than rate increases.
  - Example: the mortgage payment holiday implemented in Poland in 2022 weakens the transmission of interest rate increases by dampening the effect of rising floating mortgage rates on household disposable incomes.

- More output-weighted Taylor rule
  - Illustrated by decreasing the Taylor rule coefficient on inflation from 1.1 to 0.5 and increasing the weight on the output gap from 0.4 to 1.0.
  - Under this modified reaction function, the policy rate would be lower in the near term compared to the baseline, and the negative output gap would be smaller.
  - However, the disinflation process would be slower over the medium term.

### Key findings on model limitations and risks
- The QPM is a reduced form model; its projections are illustrative rather than precise and should inform but not dictate projections and policy recommendations.
- Key estimates in the model, including the output gap and real interest rate gap, are themselves subject to significant uncertainty.
- The QPM cannot capture certain global inflationary factors in core inflation that are independent of the output, real interest rate, or real exchange rate gaps.
- Recent movements in the output gap and core inflation are explained partially through “shocks” that the QPM cannot account for (for example, supply chain pressures independent of the output gap contributed to the increase in core inflation; the easing of such pressures could contribute to core disinflation).

### Policy implications and projections
- The range of scenarios analyzed point to the possibility that the policy rate may need to be increased further or held at its peak for longer to reduce core inflation to the target by the end of 2025.
- A scenario many market participants expect — constant rates through 2023 followed by rate cuts — could be consistent with such a reduction in inflation within the monetary policy horizon, but this path appears to be narrow.
- Under alternative developments (including the absence of exchange rate appreciation, a fiscal expansion, or greater-than-anticipated monetary policy tightening abroad), the policy rate may need to be increased further or held at its current level for longer.
- The QPM illustrates tradeoffs between output and inflation under various policy rate paths: a slower pace of tightening may improve growth in the near term, but if more tightening is needed later, the cost to growth will be delayed rather than avoided.
- Recommendation: The NBP should carefully monitor the realism of its projections under the current monetary policy path.
  - The Monetary Policy Council believes that tightening already delivered remains sufficient to return inflation near the target by the end of 2025.
  - Should the NBP’s current economic projections, in particular the path of core inflation, appear to overestimate the pace of core disinflation, the MPC should be prepared to raise the policy rate further to a level consistent with the desired projections.

*Source: NBP; and IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1polea2023002.pdf_