## 1. Natural Gas and Oil Imports

## Source details

**Canonical URL:** [1. Natural Gas and Oil Imports](https://www.imf.org/-/media/files/publications/cr/2025/english/1hunea2025002-source-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2025/english/1hunea2025002-source-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2025/english/1hunea2025002-source-pdf.pdf.json)

---

### Introduction
- Russia’s war in Ukraine raised Hungary’s energy-security risks and exposed macro vulnerabilities:
  - Current account deficit doubled to -8.5 percent of GDP in mid-2022.
  - Retail gas, electricity and fuel subsidies rose from 0.1 percent of GDP in 2021 to 1.1 percent in 2022 and 1.9 percent in 2023.
- Hungary remains heavily reliant on Russian energy imports:
  - In 2024, up to three-quarters of Hungary’s gas and oil consumption was imported.
  - 74 percent of gas and 86 percent of oil were sourced from Russia in 2024 (up from 64 and 66 percent in 2018).
- Energy flows are concentrated through a few transit routes (TurkStream via Serbia; Adria pipeline via Croatia).
- Hungary is one of the most energy-intensive economies in Europe, with industry-intensive final energy demand (chemicals, basic metals, automotive) making energy costs central to output and investment.
- IMF staff research cited indicates Hungary could face output losses exceeding 4 percent of GDP in an EU-wide Russian natural gas cutoff.

### Measuring Energy Security
- Two core dimensions used:
  - Security of Supply: composite energy insecurity index (weighted Herfindahl-type measure) combining energy import dependence and geographic concentration; imports from EU/EFTA/UK assigned zero risk weight, non-European suppliers unit weight.
  - Economic Resilience: energy expenditure share of nominal GDP as a proxy for macroeconomic vulnerability to energy price and supply shocks.
- Hungary’s performance:
  - Composite energy supply insecurity index nearly twice the average of the EU’s four largest economies and more than double that of the rest of Europe.
  - Energy expenditure share of GDP about twice that of Western European peers.

### Model Description
- Model: IMF-ENV, a recursive dynamic computable general equilibrium (CGE) model integrating production, consumption, trade, factor markets, energy module linking energy demand/supply to GHG emissions.
- Key features:
  - Armington differentiation of goods by origin.
  - Vintage capital structure separating new investment flexibility from existing capital rigidity.
  - Calibration sources: GTAP-Power database, IMF World Economic Outlook macro projections, JRC-GECO electricity generation projections.
  - Baseline versus policy counterfactuals through 2030; latest model version described in Chateau et al. (2025).
- Representative equations and mechanisms summarized:
  - CES production and nested CES for overall production including composite energy bundle allowing substitution across energy types.
  - Carbon pricing mechanism: region-specific instruments (carbon tax, ETS permit prices) applied to origin-differentiated goods; Pigouvian-type carbon tax levied on GHG emissions.

### Policy Options (calibrated scenarios)
- EU-level instruments:
  - Higher EU-wide carbon prices: ETS/UK price reaching €110 by 2030.
  - Deeper EU Energy Union: increased cross-border electricity trade via lower trade costs and deeper market integration.
- Complementary domestic policies:
  - Tighter standards for transport and buildings (stricter energy efficiency standards).
  - Accelerated renewables permitting: 40 percent faster permitting for wind and solar projects.
  - Tighter energy efficiency standards for households plus targeted public investment toward heat pump adoption.
  - Fossil fuel subsidy removal: full phaseout by 2030, calibrated using pre-crisis estimates.

### Simulation Results: Key Findings and Impacts
- Energy security and resilience:
  - A comprehensive policy package could reduce Hungary’s energy security risk by up to 30 percent and cut the energy expenditure share of GDP by up to 10 percent over the next five years.
  - Domestic measures are critical; household efficiency standards and heat pump investment deliver the largest benefits in reducing natural gas dependence.
  - Fossil fuel subsidy phaseout strengthens resilience by removing price distortions; faster permitting accelerates renewables deployment and reliance on domestic production.
- EU integration benefits:
  - Deeper EU electricity market integration can reduce supply risk by up to 7 percentage points and lower energy expenditure by up to 3 percentage points of GDP by 2030 for Hungary.
- Russia energy cutoff scenarios:
  - Business-as-usual: full cutoff of Russian energy raises import risk and energy expenditure substantially.
  - Full policy package: combination of domestic reforms and EU electricity market integration largely contains risks—transforming a severe disruption into a manageable adjustment.
- Growth and fiscal effects:
  - Policy package has a modest net impact on medium-term real GDP growth:
    - Removal of fossil fuel subsidies yields the largest GDP gains via allocation efficiency and lower government deficits.
    - Electricity market integration and streamlined permitting yield modest growth benefits through efficiency and private investment.
    - EU ETS can weigh on short-term output depending on revenue recycling; partial recycling to households supports political acceptability, while deficit reduction or public investment could yield better growth outcomes.
  - Fiscal outcomes:
    - Combined fiscal gains from fossil fuel subsidy removal (FFSR) and EU ETS revenues more than offset public investment for heat pump deployment.
    - By 2030, net improvement in the budget balance around 1.7 percent of GDP.
- Emissions and decarbonization:
  - EU-wide carbon pricing contributes to emissions reduction, but larger emissions and energy-security gains occur when EU instruments are combined with national measures.
  - Complementary domestic policies reduce energy intensity, promote cleaner energy sources, and help decouple GDP growth from emissions.
  - Hungary’s commitments: Fit-for-55 target of cutting national emissions by 55 percent (relative to 1990) by 2030 and achieving climate neutrality by 2050.

### Policy Implications and Priorities
- Priority domestic reforms to realize energy-security dividends:
  - Tighten household energy efficiency standards and scale heat pump deployment (EU RRF funds to cover upfront costs noted).
  - Phase out fossil fuel subsidies by 2030.
  - Accelerate permitting for renewables (target: 40 percent faster).
  - Strengthen building and transport energy-efficiency standards.
- Coordinate domestic reforms with EU-level measures:
  - Rapidly implement higher ETS carbon prices (target €110 by 2030) and deepen electricity market integration to maximize supply-diversification benefits and fiscal space.

### Annex I — Description of shocks and modeling assumptions
- Higher EU-wide carbon prices
  - Baseline assumption: implicit carbon prices from the EU (and UK) ETS are 70 euro per ton between 2024 and 2030.
  - Policy shock: carbon price is gradually increased to 110 euro in 2030.
  - All revenues from the EU-ETS are assumed to be transferred back to households.
- Deeper EU Energy Union
  - Assumption: overall electricity trade increases by 50 percent due to reduced barriers on electricity trade.
  - No explicit costs modeled, although investments in the European grid would be required.
- Tighter regulations on energy efficiency in road transport and buildings
  - Transport services sector: 13 percent reduction in consumption compared to the baseline.
  - “Other business services” sector (including real estate/activity that operates buildings): 5 percent reduction in energy consumption.
  - Households: adjust preferences to reduce energy consumption by 8 percent.
  - Cost estimates from Dolphin et al. (2024): 0.6 percent of yearly gross fixed investment for road transport and 2.2 percent for buildings; total 2.8 percent gross fixed investment is deducted from total investments in the model each year.
- Accelerated Permitting Procedures
  - Modeled as an increase in TFP of wind and solar operations, raising wind and solar power generation by 10 percent relative to the baseline by 2030.
  - The 10 percent improvement corresponds to a 40 percent improvement in the speed of renewable deployment (if median permitting times match the top quartile).
  - No explicit costs are modeled.
- Tighter energy efficiency standards for households
  - European households’ preferences shifted away from energy, reducing overall demand by 6 percent.
  - Achieved by simulating a 50 percent reduction in household demand for coal and gas and a 15 percent increase in electricity demand.
  - Public investment in heat pumps in residential buildings in Europe is estimated to cost 0.42 percent of gross fixed investment per year.
  - For Hungary this represents around USD 236 million per year.
- Removing fossil fuel subsidies
  - Total energy subsidies are estimated to be close to 2 percent of GDP in 2023.
  - Of this, 75 percent represent subsidies to household consumption of natural gas and 25 percent to household consumption of electricity.
  - Savings from removal: 50 percent transferred back to households and 50 percent used to reduce the budget deficit.

### Implications for Hungary
- Domestic reforms that increase energy efficiency, speed renewable deployment, and remove fossil fuel subsidies are needed to realize the resilience benefits of EU-wide policies such as deeper electricity market integration and higher EU-ETS carbon prices.
- Specific modeled measures include carbon pricing rising to 110 euro in 2030, a 50 percent increase in electricity trade under deeper integration, and a 10 percent boost in wind and solar generation by 2030 from accelerated permitting.
- Fiscal and investment implications include deducting 2.8 percent of gross fixed investment annually to reflect energy efficiency costs in transport and buildings, and an estimated USD 236 million per year for Hungary’s residential heat pump public investment.

*Source: IMF staff analysis (PROMOTING ENERGY SECURITY IN HUNGARY: A MODEL-BASED ANALYSIS), July 25, 2025.*

### 1. Natural Gas and Oil Imports __________________________________________________________ 2

### 1. Natural Gas and Oil Imports

### Introduction
- Russia’s war in Ukraine raised Hungary’s energy-security risks and exposed macro vulnerabilities:
  - Current account deficit doubled to -8.5 percent of GDP in mid-2022.
  - Retail gas, electricity and fuel subsidies rose from 0.1 percent of GDP in 2021 to 1.1 percent in 2022 and 1.9 percent in 2023.
- Hungary remains heavily reliant on Russian energy imports:
  - In 2024, up to three-quarters of Hungary’s gas and oil consumption was imported.
  - 74 percent of gas and 86 percent of oil were sourced from Russia in 2024 (up from 64 and 66 percent in 2018).
- Energy flows are concentrated through a few transit routes (TurkStream via Serbia; Adria pipeline via Croatia).
- Hungary is one of the most energy-intensive economies in Europe, with industry-intensive final energy demand (chemicals, basic metals, automotive) making energy costs central to output and investment.
- IMF staff research cited indicates Hungary could face output losses exceeding 4 percent of GDP in an EU-wide Russian natural gas cutoff.

### Measuring Energy Security
- Two core dimensions used:
  - Security of Supply: composite energy insecurity index (weighted Herfindahl-type measure) combining energy import dependence and geographic concentration; imports from EU/EFTA/UK assigned zero risk weight, non-European suppliers unit weight.
  - Economic Resilience: energy expenditure share of nominal GDP as a proxy for macroeconomic vulnerability to energy price and supply shocks.
- Hungary’s performance:
  - Composite energy supply insecurity index nearly twice the average of the EU’s four largest economies and more than double that of the rest of Europe.
  - Energy expenditure share of GDP about twice that of Western European peers.

### Model Description
- Model: IMF-ENV, a recursive dynamic computable general equilibrium (CGE) model integrating production, consumption, trade, factor markets, energy module linking energy demand/supply to GHG emissions.
- Key features:
  - Armington differentiation of goods by origin.
  - Vintage capital structure separating new investment flexibility from existing capital rigidity.
  - Calibration sources: GTAP-Power database, IMF World Economic Outlook macro projections, JRC-GECO electricity generation projections.
  - Baseline versus policy counterfactuals through 2030; latest model version described in Chateau et al. (2025).
- Representative equations and mechanisms summarized:
  - CES production and nested CES for overall production including composite energy bundle allowing substitution across energy types.
  - Carbon pricing mechanism: region-specific instruments (carbon tax, ETS permit prices) applied to origin-differentiated goods; Pigouvian-type carbon tax levied on GHG emissions.

### Policy Options (calibrated scenarios)
- EU-level instruments:
  - Higher EU-wide carbon prices: ETS/UK price reaching €110 by 2030.
  - Deeper EU Energy Union: increased cross-border electricity trade via lower trade costs and deeper market integration.
- Complementary domestic policies:
  - Tighter standards for transport and buildings (stricter energy efficiency standards).
  - Accelerated renewables permitting: 40 percent faster permitting for wind and solar projects.
  - Tighter energy efficiency standards for households plus targeted public investment toward heat pump adoption.
  - Fossil fuel subsidy removal: full phaseout by 2030, calibrated using pre-crisis estimates.

### Simulation Results: Key Findings and Impacts
- Energy security and resilience:
  - A comprehensive policy package could reduce Hungary’s energy security risk by up to 30 percent and cut the energy expenditure share of GDP by up to 10 percent over the next five years.
  - Domestic measures are critical; household efficiency standards and heat pump investment deliver the largest benefits in reducing natural gas dependence.
  - Fossil fuel subsidy phaseout strengthens resilience by removing price distortions; faster permitting accelerates renewables deployment and reliance on domestic production.
- EU integration benefits:
  - Deeper EU electricity market integration can reduce supply risk by up to 7 percentage points and lower energy expenditure by up to 3 percentage points of GDP by 2030 for Hungary.
- Russia energy cutoff scenarios:
  - Business-as-usual: full cutoff of Russian energy raises import risk and energy expenditure substantially.
  - Full policy package: combination of domestic reforms and EU electricity market integration largely contains risks—transforming a severe disruption into a manageable adjustment.
- Growth and fiscal effects:
  - Policy package has a modest net impact on medium-term real GDP growth:
    - Removal of fossil fuel subsidies yields the largest GDP gains via allocation efficiency and lower government deficits.
    - Electricity market integration and streamlined permitting yield modest growth benefits through efficiency and private investment.
    - EU ETS can weigh on short-term output depending on revenue recycling; partial recycling to households supports political acceptability, while deficit reduction or public investment could yield better growth outcomes.
  - Fiscal outcomes:
    - Combined fiscal gains from fossil fuel subsidy removal (FFSR) and EU ETS revenues more than offset public investment for heat pump deployment.
    - By 2030, net improvement in the budget balance around 1.7 percent of GDP.
- Emissions and decarbonization:
  - EU-wide carbon pricing contributes to emissions reduction, but larger emissions and energy-security gains occur when EU instruments are combined with national measures.
  - Complementary domestic policies reduce energy intensity, promote cleaner energy sources, and help decouple GDP growth from emissions.
  - Hungary’s commitments: Fit-for-55 target of cutting national emissions by 55 percent (relative to 1990) by 2030 and achieving climate neutrality by 2050.

### Policy Implications and Priorities
- Priority domestic reforms to realize energy-security dividends:
  - Tighten household energy efficiency standards and scale heat pump deployment (EU RRF funds to cover upfront costs noted).
  - Phase out fossil fuel subsidies by 2030.
  - Accelerate permitting for renewables (target: 40 percent faster).
  - Strengthen building and transport energy-efficiency standards.
- Coordinate domestic reforms with EU-level measures:
  - Rapidly implement higher ETS carbon prices (target €110 by 2030) and deepen electricity market integration to maximize supply-diversification benefits and fiscal space.

*Source: IMF staff analysis (PROMOTING ENERGY SECURITY IN HUNGARY: A MODEL-BASED ANALYSIS), July 25, 2025.*

### 18. Strengthening Hungary’s energy security will require a comprehensive domestic

### 18. Strengthening Hungary’s energy security will require a comprehensive domestic reform agenda

### Key findings and strategic message
- While EU-wide initiatives such as deeper electricity market integration and higher carbon pricing through the EU-ETS can support resilience, their full benefits depend on complementary national actions.
- Targeted domestic measures—enhancing energy efficiency, accelerating renewable permitting, phasing out fossil fuel subsidies, and tightening building standards—can significantly reduce Hungary’s energy security risks and energy expenditure while advancing decarbonization goals.
- Seizing these opportunities will be critical to building a more resilient, sustainable, and competitive economy.

### Recommended domestic measures (targeted policies)
- Enhance energy efficiency across sectors, including tighter regulations for road transport, buildings, and households.
- Accelerate renewable permitting to raise wind and solar power generation.
- Phase out fossil fuel subsidies, with savings partly returned to households and partly used to reduce the budget deficit.
- Tighten building standards and promote public investment in residential heat pumps.
- Complement EU-wide initiatives (deeper electricity market integration, higher EU-ETS carbon prices) with national reforms to capture full benefits.

### Annex I — Description of shocks and modeling assumptions
- Higher EU-wide carbon prices
  - Baseline assumption: implicit carbon prices from the EU (and UK) ETS are 70 euro per ton between 2024 and 2030.
  - Policy shock: carbon price is gradually increased to 110 euro in 2030.
  - All revenues from the EU-ETS are assumed to be transferred back to households.
- Deeper EU Energy Union
  - Assumption: overall electricity trade increases by 50 percent due to reduced barriers on electricity trade.
  - No explicit costs modeled, although investments in the European grid would be required.
- Tighter regulations on energy efficiency in road transport and buildings
  - Transport services sector: 13 percent reduction in consumption compared to the baseline.
  - “Other business services” sector (including real estate/activity that operates buildings): 5 percent reduction in energy consumption.
  - Households: adjust preferences to reduce energy consumption by 8 percent.
  - Cost estimates from Dolphin et al. (2024): 0.6 percent of yearly gross fixed investment for road transport and 2.2 percent for buildings; total 2.8 percent gross fixed investment is deducted from total investments in the model each year.
- Accelerated Permitting Procedures
  - Modeled as an increase in TFP of wind and solar operations, raising wind and solar power generation by 10 percent relative to the baseline by 2030.
  - The 10 percent improvement corresponds to a 40 percent improvement in the speed of renewable deployment (if median permitting times match the top quartile).
  - No explicit costs are modeled.
- Tighter energy efficiency standards for households
  - European households’ preferences shifted away from energy, reducing overall demand by 6 percent.
  - Achieved by simulating a 50 percent reduction in household demand for coal and gas and a 15 percent increase in electricity demand.
  - Public investment in heat pumps in residential buildings in Europe is estimated to cost 0.42 percent of gross fixed investment per year.
  - For Hungary this represents around USD 236 million per year.
- Removing fossil fuel subsidies
  - Total energy subsidies are estimated to be close to 2 percent of GDP in 2023.
  - Of this, 75 percent represent subsidies to household consumption of natural gas and 25 percent to household consumption of electricity.
  - Savings from removal: 50 percent transferred back to households and 50 percent used to reduce the budget deficit.

### Implications for Hungary
- Domestic reforms that increase energy efficiency, speed renewable deployment, and remove fossil fuel subsidies are needed to realize the resilience benefits of EU-wide policies such as deeper electricity market integration and higher EU-ETS carbon prices.
- Specific modeled measures include carbon pricing rising to 110 euro in 2030, a 50 percent increase in electricity trade under deeper integration, and a 10 percent boost in wind and solar generation by 2030 from accelerated permitting.
- Fiscal and investment implications include deducting 2.8 percent of gross fixed investment annually to reflect energy efficiency costs in transport and buildings, and an estimated USD 236 million per year for Hungary’s residential heat pump public investment.

*Source: 18. Strengthening Hungary’s energy security will require a comprehensive domestic reform agenda (IMF).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1hunea2025002-source-pdf.pdf_