## POTENTIAL GROWTH—ADJUSTING TO AGING

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### Introduction
- Real GDP growth declined from above or around 2 percent in the 1980s and 1990s to below 1 percent in 2024.
- Italy’s economic growth of 0.7 percent in 2024 was among the lowest in the euro area.
- Per capita real GDP fell behind peers after the global financial crisis and the euro crisis; TFP and capital contributions generally subdued; labor’s contribution recently supported by a strong labor market.
- Demographics:
  - United Nations’ low-fertility projection: population projected to decline by 10 percent by 2040 and 17 percent by 2050 relative to 2024—equivalent to a loss of 6 million people relative to the 2024 level.
  - Working-age population projected to decline by 19 percent (31 percent by 2050).
  - Fertility: 1.18 children born per woman in 2024 (Istat Demographic indicators, 2024) versus replacement rate of 2.1 births per woman (United Nations, 2024b).
- Implication: as population ages, fewer people will support economic activity and demands on pension and healthcare systems will likely increase.

### Methodology
- Framework: skill-augmented Cobb-Douglas production function decomposing long-term real GDP growth into contributions from skill-augmented labor, capital, and TFP.
- Demographic baseline: UN low fertility population projection scenario, with medium scenarios for mortality and migration.
- Labor heterogeneity:
  - Analysis accounts for age, gender, and skill-level heterogeneity.
  - Female labor force participation: 58 percent in 2024, about 13 percentage points below the EU average.
  - Share of skilled labor allowed to increase as higher-skilled young entrants age into older brackets.
- Capital:
  - Capital stock via perpetual inventory method using ISTAT historical data and staff forecast of gross fixed capital formation through 2030.
  - Two passive capital scenarios from 2031:
    - Low capital: constant investment ratio of 23 percent of GDP and depreciation rate equal to historical average of 5.2 percent.
    - High capital: capital replacement embodies new technologies, keeping capital’s effective contribution to growth unchanged at the 2030 level (keeping constant combined contributions from capital and TFP).
- Total factor productivity (TFP):
  - Historical TFP is the residual of real GDP not explained by capital and skill-augmented labor.
  - Scenario: full implementation of the NRRP provides a boost to TFP amounting to around 0.65 percent higher level of TFP by 2030.
  - After 2031, annual TFP growth assumed to remain constant at 0.2 percent (allowing for lasting reform impact).
- Production function parameters:
  - ν_K = 0.48
  - ν_L = 0.52
  - Shares computed from Penn World Tables (v10.0, data through 2019) and held constant at 2015–2019 average levels.

### Passive Scenarios — Key Findings
- Skill improvements mitigate labor-force decline: higher-skilled entrants raise share of high-skilled workers over time, partially offsetting shrinking labor force.
- Skill-augmented labor growth falls less than non-augmented labor growth but still declines over time.
- Projections:
  - After an initial period of broadly constant annual potential growth at about 0.7 percent, labor contributions steadily diminish.
  - Under passive scenarios, potential growth by the early 2040s ranges from just above zero to above 0.4 percent.

### Alternative Scenarios — Policy Simulations and Impacts
- Three policy scenarios considered: (i) increase female labor force participation; (ii) accelerate skill upgrading; (iii) boost TFP growth via higher investment and reform.
- Increasing female labor force participation:
  - Policies: expand access to publicly-provided childcare during standard working hours; make parental leave benefits more gender neutral; remove disincentives such as tax credits for dependent spouses.
  - Italy has expanded access to childcare centers under the National Recovery and Resilience Plan.
  - Simulation: gradually raise female activity rate from current level to the EU average by 2050.
  - Impact: could boost annual potential growth by about 0.1 percentage points.
  - Additional evidence: IMF (2025) shows an additional impact of slightly above 0.1 percentage point on Italian average annual real GDP growth over 2025–2100 from closing Italy’s gender gap in labor force participation by three-fourths by 2040.
- Accelerating skill upgrading:
  - Education reform scenario starting 2025: proportion of low-skilled entrants at age 25 declines annually by 0.2 percentage point; 30 percent of that reduction shifts to medium-skilled entrants and 70 percent to high-skilled entrants.
  - Example outcomes:
    - Share of high-skilled male entrants rises from 13.6 percent in 2024 to 17.2 percent in 2050.
    - High-skilled female entrants rise from 18.9 percent to 22.5 percent.
  - Impact: lifts annual potential growth relative to baseline on average by about 0.1 percentage points, with gains increasing over time.
- Boosting TFP growth (investment and reform package):
  - Based on Draghi report simulations: initial increase in private and public investment by approximately 2 percentage points of baseline GDP, rising to 3.6 percentage points of baseline GDP by 2034 and beyond.
  - Additional investment targeted to innovative sectors raises TFP level by a cumulative 2 percent above the baseline over a 10-year horizon, and then TFP grows at a higher annual rate of 0.2 percentage points above baseline beyond the 10-year period.
  - Result: potential growth lifted by slightly more than 0.2 percentage points each year on average, with larger near-term impact from the investment surge.
- Combined reforms:
  - Multipronged package raising female participation, boosting skills, and generating permanently higher TFP could lift average annual potential growth by around 0.4 percentage points during 2025–2050.
  - Interaction and sequencing of reforms could produce effects larger than simple addition of individual impacts.

### Impact on Per-Capita Income and Macroeconomic Considerations
- Passive scenarios: real GDP per capita increases by 55 and 65 percent by 2050 relative to the 2025 level—corresponding to an average annual growth rate of between 1.8 and 2 percent.
- With the package of reforms: real GDP per capita increases by 65 and 74 percent by 2050 relative to the 2025 level—corresponding to an average annual growth rate of between 2 and 2.2 percent.
- Fiscal implication: amid high debt and aging-related expenditures ahead, decisively bringing down debt as a share of GDP will require expansion of aggregate output, not only per capita output.

### Demographics, Labor Supply Policies, and Additional Simulations
- IMF (2025) finds an effect for Italy of more than 0.5 percentage points higher average annual real GDP growth over 2025–2100 from implementing a package of labor supply policies that includes:
  - (i) implementing healthy-aging policies;
  - (ii) increasing the effective retirement age; and
  - (ii) closing by three-fourth the gender labor force participation gap.
- Net migration could also increase, helping to offset the underlying population decline.
- Key interpretation:
  - Population aging with a low natural replacement rate will shrink the labor force and compress potential growth.
  - Policies already in place (e.g., indexing of the retirement age to longevity) could support labor force participation beyond captured analysis, but fully counteracting the drag from the declining population remains challenging.
- Policy implication:
  - Carefully designed measures—boosting female labor force participation and skill levels, targeting investment toward innovating sectors—are essential; actions at both European-wide and national levels can make a lasting impact.

### Annex I — Technical details (population projections, production function, skill-augmentation)
- Population projections:
  - Based on UN low-fertility projections; low fertility assumption: fertility rate declines from 0.96 births per woman in 2025 to 0.79 in 2037 and gradually increases to 0.85 in 2050.
  - “Medium” mortality: life expectancy at birth increasing from current 84 years to over 87 years in 2050.
  - “Medium” international migration: net migration at 1 percent per 1,000 population in 2050, equivalent to about 50,000 migrants, from the current 1.87 percent per 1,000 population.
  - Historical population data up to 2024 from Eurostat extended by applying annual growth rates from UN projections segmented by five-year age intervals to estimate 2025–2050.
- Production function:
  - Cobb-Douglas with competitive product and factor markets.
  - Output growth expression: ΔlnY = ΔlnA + ν_K ΔlnK + ν_L ΔlnL.
  - ν_K = 0.48; ν_L = 0.52.
- Skill-augmented labor methodology:
  - Skill levels: high, medium, low proxied by educational attainment; historical data from Eurostat by gender and age cohort.
  - Skill-augmented labor L defined as weighted sum of workers by skill type; ΔlnL = Σ ω̄j ΔlnLj, where ω̄j are labor cost premia based on hourly earnings.
  - Wage and weight estimates:
    - Wage premium high vs medium ≈ 2.
    - Wage discount low vs medium ≈ 0.9.
    - Gender wage gap (medium-skilled woman vs medium-skilled man) ≈ 0.6.
  - Weights fixed at 2022 values.
  - Labor input Lj = (working-age population_j) * (lfpr_j) * (1 − uempr_j) * hours_j.
- Passive scenarios assumption: all components of Lj held constant at 2024 values except working-age population_j.
- Additional assumptions:
  - Population distribution evenly distributed within 5-year age brackets.
  - New entrants ages 15–25; entrants at age 15 may acquire skills until age 25; entrants in 20–24 cohort have, on average, higher skills than those entering at age 15.
  - No skill upgrading for most workers except entrants at age 15.
  - Consequence: share of medium-skilled workers increasingly dominates; share of high-skilled workers rises over time while low-skilled share declines.

### Unlocking productivity potential of Italian firms — overview and drivers
- Key finding: Italy has a significant and widening productivity gap: a shortfall of 30 percent in labor productivity (output per total hours worked) and a gap of more than 20 percent in TFP relative to the United States.
- Aggregate context: working-age population could shrink by over 30 percent by 2050 per UN projections; without productivity- and employment-boosting policies, aggregate output growth likely to decrease, affecting pensions and healthcare affordability.
- Micro-level focus: Schumpeterian “creative destruction” framework emphasizes role of large leading firms and young high-growth “gazelles” in innovation and diffusion.
- Bottlenecks hampering leading and young high-growth firms:
  - Shortage of high-skilled workers.
  - Lack of risk capital.
  - Limited market size.
- Policy recommendation: additional coordinated policy actions at domestic and regional levels needed to lift productivity and revive the private sector.

### Investment procyclicality, R&D, and innovation gaps
- Private investment fell by 13 percent from 2007 to 2009 during the GFC, nearly twice the 7 percent output decline.
- Gross fixed capital formation reached its lowest point since 1995 in 2014; capital formation caught up to pre-GFC levels in 2022 (excluding sectors benefiting from the Superbonus).
- Intangible investment trends (1995–2020s):
  - United States: tripled in real terms relative to 1995.
  - France and Germany: nearly doubled.
  - Italy: grew by only 80 percent (with a dent in 2020).
- Policy measures:
  - Transition 4.0 (launched 2021): tax credits 20–50 percent, generating robust demand of €13.3 billion (amount covered by RRF funds).
  - Patent box regime: partial tax deduction of 50 percent from corporate income tax for qualifying intangible income.
  - NRRP allocates €103.3 billion related to Milestones 1 and 2 combined and Transition 5.0, out of a total NRRP envelope of €194.4 billion.
- Instability concern: tax incentives subject to frequent changes (example: ACE introduced in 2011 and repealed again in the 2024 budget).
- R&D, ICT, and patents:
  - R&D: Italy’s gross domestic expenditure on R&D ≈ 1.3 percent of GDP in 2023 (EU average 2.2 percent).
  - ICT investment: 2.4 percent of GDP in 2022 in Italy (France 4.6 percent; United States 3.7 percent).
  - Patent activity 2024: Italy ≈ 82.3 patents per million inhabitants (Germany 300; France 160.5).
  - Patent applications in Italy grew by 8.6 percent over the last five years vs EU27 average 2.8 percent.

### Firm-level productivity patterns and financing
- TFP and R&D intensity in high-tech firms:
  - US-listed high-technology firms: TFP increased nearly 40 percent over last two decades.
  - European listed high-tech firms: TFP remained flat.
  - Italian listed high-tech firms: TFP declined by approximately 20 percent.
  - US-listed tech firms accelerated R&D investment relative to sales by four times more than European counterparts and by ten times more than Italian ones.
- Business dynamism:
  - Share of highly successful young firms (~90th percentile employment growth among firms <10 years old): ≈ 1 percent in Italy vs ≈ 5 percent in the United States.
  - Among firms >25 years, average firm size in Italy fewer than 10 employees (European average ≈ 10; United States ≈ 70).
  - Micro-sized enterprises (<10 employees) account for roughly 16 percent of total employees in Italy vs 10 percent in the United States.
- Financing structure:
  - Financial system remains heavily bank-centered with reliance on bank financing above European average and low equity financing.
  - Venture capital can increase intangible investment by as much as 100 percent upon receiving funding; venture capital in Italy grew by 36 percent between 2023 and 2024 but remains limited relative to European peers.
- Drivers from Tobit regional analysis:
  - Number of gazelles positively correlated with population growth and negatively correlated with median age and old-age dependency ratio.
  - Highly educated workforce and higher female labor force participation support gazelle formation.
- Policy emphasis: predictable incentive schemes and expanded access to market-based financing critical to support long-gestation, risk-taking productivity-enhancing investments.

### EU and regional complementarities; Domestic reform priorities
- EU-level actions that would help Italy:
  - Deepening the Single Market in services to create scale opportunities.
  - Developing the European Capital Markets Union to diversify financing beyond banks.
  - EU initiatives on AI and frontier technologies to close innovation gaps.
  - European labor mobility reforms to address skill mismatches.
  - Supporting the EU Competitiveness Compass to lower intra-EU trade barriers.
- Domestic reform priorities (three critical bottlenecks):
  - (i) Reduce size-based regulatory thresholds to eliminate growth disincentives.
  - (ii) Expand access to market-based financing: venture capital, private equity, public equity.
  - (iii) Invest in human capital.
- Intended outcome: coordinated policy action to help close productivity gap with leading economies and ensure long-term resilience.

### Climate and energy: macro-critical challenges and policy responses
- Climate impacts and trends:
  - Average temperatures climbed by almost 1.5°C over past six decades.
  - 2023 "Cerberus" heat wave led to over 18,000 heat-related deaths and widespread wildfires.
  - Severe storms and floods in Emilia-Romagna in 2023 affected nearly 50,000 people.
- National strategies:
  - NRRP channels EU funds into green investments, energy efficiency, and sustainable mobility.
  - National Energy and Climate Plan aims to cut emissions and scale renewables by 2030.
  - National Climate Change Adaptation Plan boosts resilience to heatwaves and floods.
  - Mattei Plan aims to secure diversified and reliable energy supplies.
- Emissions trajectory and mitigation gap:
  - Net GHG emissions declined by 30.5 percent between 1990 and 2023.
  - Italy contributed about 0.8 percent of global GHG emissions in 2021.
  - To achieve 2030 climate goals, Italy’s emissions would need to be reduced by nearly 30 percent relative to levels in 2023.
- Energy specifics:
  - Energy sector accounts for 21 percent of total emissions.
  - 45 percent of electricity generated from natural gas in Italy, of which 94 percent is imported.
  - Net imports nearly 80 percent of gross available energy in 2022 (EU average 63 percent).
  - Italy leads among major euro area economies in share of domestic energy production from renewables: 75 percent of its energy production in 2022 from renewable sources.
  - Italy cut net energy imports by nearly 10 percent between 2022 and 2023.
- Transport and buildings:
  - Transport emissions rose nearly 6 percent since 1990; in 2023 transport accounted for 30 percent of total GHG emissions; private cars responsible for almost 60 percent of sectoral emissions.
  - Buildings: Italy spent about €220 billion on the Superbonus and other renovation tax credits through 2024 (around 10 percent of GDP); around 60 percent of buildings fall into the two lowest energy efficiency classes (Germany 12 percent); over 70 percent of dwellings built before 1980; heating and cooling responsible for 44 percent of total energy use in 2022.
- Policy instruments and funding:
  - NRRP allocates over €31 billion to sustainable mobility.
  - 2024 budget: €1 billion subsidy scheme temporarily boosted EV uptake.
  - 2025 budget: €1.6 billion to support the automotive supply chain.
  - Planned update to strategy for energy retrofitting; Italy to benefit from forthcoming EU Social Climate Fund financed through EU ETS 2.
- Energy security and integration:
  - Only 30 to 70 percent of capacity was available for cross-border electricity trading in 2024, with Italy less integrated than many peers.
  - Studies suggest cost savings from shift to renewables and further electricity market integration could amount to around 40 billion euros annually by 2030 across the EU.
  - A reform package aimed at cutting emissions by 55 percent from 1990 levels by 2030 could enhance Italy’s energy security metrics by 5 percent by 2030 and lower energy expenditure by 0.35 percentage points of GDP.
- Draghi report note: natural gas sets the price 63 percent of the time despite comprising only 20 percent of the electricity mix.

### Agriculture, financial sector exposures, and disaster insurance
- Agriculture:
  - Gross value-added dropped by a cumulative 5.2 percent during 2019–2024 while broader economy grew by 6.2 percent over same period.
  - Bank of Italy (2023): yields for corn, durum wheat, grapevines may increase up to thresholds (29°C for cereals; 32°C for grapevines); beyond thresholds yields decline.
  - Irrigation accounts for 50 percent of water usage in the South; without smart farming targeted irrigation will need to increase under higher temperatures.
- Agrivoltaics:
  - May enhance crop yields via microclimates, rejuvenate land, and reduce water consumption; May 2024 regulatory change restricts large-scale solar on productive agricultural land unless at least 2.1 meters above ground.
  - Policy support: €1.1 billion NRRP-funded incentive scheme offering capital grants up to 40 percent of investment costs; Agrisolare initiative provides over €2.35 billion for photovoltaic systems on agricultural rooftops.
- Financial sector exposure:
  - Between 1980 and 2023 Italy suffered €134 billion in economic losses from weather- and climate-related disasters; only 4 percent of these losses were insured (EU average 18 percent).
  - EIOPA flagged Italy as having the second largest weather-related insurance protection gap in the EU.
  - Italy issued sovereign green bonds first in 2021 and mobilizes green lending.
- New mandatory disaster insurance scheme (businesses):
  - Effective March 31, 2025: all firms operating in Italy—except agricultural companies—must insure assets against natural disasters and catastrophic weather events (floods, earthquakes, landslides).
  - Coverage compulsory for buildings, equipment, and land.
  - Insurers must offer policies at market price, supported by up to €5 billion in reinsurance from SACE on market conditions.
  - Noncompliance may result in penalties for insurers and loss of government incentives for companies.
  - Implementation deadlines postponed for some firms: October 1, 2025 for medium-sized enterprises; January 1, 2026 for small and micro enterprises; deadline for large enterprises remains March 31, 2025 but sanctions will not be triggered until 90 days after the deadline.
- Scheme design risks:
  - Geographic inequality: high-risk areas may face prohibitive premiums; risk mutualization across firms can mitigate concentration risk.
  - Moral hazard: guaranteed coverage could reduce private prevention efforts; pricing structures rewarding mitigation can mitigate this risk.
  - Residential vulnerability: only 6 percent of residential homes in Italy insured against natural disasters.

### Annex I — Emissions Intensities and Climate Risks (summary)
- Italy is among the top 20 largest GHG emitters and faces a significant mitigation gap: to meet 2030 NDC target, emissions need to be reduced by nearly 30 percent relative to 2023.
- Vulnerability and readiness:
  - Italy faces very low vulnerability and strong readiness to face climate risks per the annex charting.
- Energy and sectoral emissions:
  - Over 65 percent of Italy’s emissions originate from households, manufacturing, and electricity.
  - Methane emissions: Italy ranks 41st out of 90 methane emitters; primary sources agriculture and waste.
- Pricing and policy instruments:
  - Explicit carbon prices align with other large emitters, but high fuel excise taxes position Italy at the forefront of effective carbon pricing.
  - Consumer prices for most fuels are well above supply costs in explicit consumer fuel subsidy analysis.

*Source: POTENTIAL GROWTH—ADJUSTING TO AGING (Selected Issues Paper), July 1, 2025; Extracts and Annexes from the source PDF.*

### References_________________________________________________________________________________10

### POTENTIAL GROWTH—ADJUSTING TO AGING

### Introduction
- Growth in Italy has been on a declining trend for the past decades; real GDP growth declined from above or around 2 percent in the 1980s and 1990s to below 1 percent in 2024.
- Italy’s economic growth of 0.7 percent in 2024 was among the lowest in the euro area.
- Per capita real GDP fell behind peers after the global financial crisis and the euro crisis, with generally subdued contributions from total factor productivity (TFP) and capital; labor’s contribution was recently supported by a strong labor market.
- Demographics: United Nations’ low-fertility projection implies Italy’s population is projected to decline by 10 percent by 2040 (17 percent by 2050) relative to 2024—equivalent to a loss of 6 million people relative to the 2024 level.
- Working-age population is projected to decline by 19 percent (31 percent by 2050).
- Fertility and replacement: 1.18 children born per woman in 2024 (Istat Demographic indicators, 2024) versus replacement rate of 2.1 births per woman (United Nations, 2024b).
- As population ages, fewer people will support economic activity and demands on pension and healthcare systems will likely increase.

### Methodology
- Framework: skill-augmented Cobb-Douglas production function decomposing long-term real GDP growth into contributions from skill-augmented labor, capital, and TFP.
- Demographic baseline: UN low fertility population projection scenario, with medium scenarios for mortality and migration.
- Heterogeneous, skill-augmented labor:
  - Analysis accounts for heterogeneity across age, gender, and skill level.
  - Female labor force participation: 58 percent in 2024, about 13 percentage points below the EU average.
  - Allows share of skilled labor to increase over time as higher-skilled young entrants age into older brackets.
- Capital:
  - Capital stock computed via perpetual inventory method using ISTAT historical data and staff forecast of gross fixed capital formation through 2030.
  - Two passive capital scenarios from 2031 onwards:
    - Low capital scenario: constant investment ratio of 23 percent of GDP and depreciation rate equal to historical average of 5.2 percent.
    - High capital scenario: capital replacement embodies new technologies, keeping capital’s effective contribution to growth unchanged at the 2030 level (i.e., keeping constant combined contributions from capital and TFP).
- Total factor productivity:
  - Historical TFP is residual of real GDP not explained by capital and skill-augmented labor.
  - Scenario assumptions: full implementation of the NRRP provides a boost to TFP amounting to around 0.65 percent higher level of TFP by 2030.
  - After 2031, annual TFP growth assumed to remain constant at 0.2 percent (allowing for lasting reform impact).

### Passive Scenarios — Key Findings
- Skill improvements mitigate labor-force decline: new higher-skilled entrants raise share of high-skilled workers over time, partially offsetting shrinking labor force.
- Decomposition shows skill-augmented labor growth falls less than non-augmented labor growth but still declines over time.
- Passive projections combining labor, capital, and TFP imply a marked weakening in potential growth:
  - After an initial period of broadly constant annual potential growth at about 0.7 percent, labor contributions steadily diminish.
  - Under passive scenarios, potential growth by the early 2040s ranges from just above zero to above 0.4 percent.

### Alternative Scenarios — Policy Simulations and Impacts
- Three policy scenarios considered: (i) increase female labor force participation, (ii) accelerate skill upgrading, (iii) boost TFP growth via higher investment and reform.
- Increasing female labor force participation:
  - Policies: expand access to publicly-provided childcare during standard working hours; make parental leave benefits more gender neutral; remove disincentives such as tax credits for dependent spouses.
  - Italy has expanded access to childcare centers under the National Recovery and Resilience Plan.
  - Simulation: gradually raise female activity rate from current level to the EU average by 2050.
  - Impact: could boost annual potential growth by about 0.1 percentage points.
  - Consistent evidence: IMF (2025) shows an additional impact of slightly above 0.1 percentage point on Italian average annual real GDP growth over 2025–2100 from closing Italy’s gender gap in labor force participation by three-fourths by 2040.
- Accelerating skill upgrading:
  - Education reform scenario: starting 2025, proportion of low-skilled entrants at age 25 declines annually by 0.2 percentage point; 30 percent of that reduction shifts to medium-skilled entrants and 70 percent to high-skilled entrants.
  - Example outcomes: share of high-skilled male entrants rises from 13.6 percent in 2024 to 17.2 percent in 2050; high-skilled female entrants from 18.9 percent to 22.5 percent.
  - Impact: lifts annual potential growth relative to baseline on average by about 0.1 percentage points, with gains increasing over time.
- Boosting TFP growth (investment and reform package):
  - Based on Draghi report simulations: initial increase in private and public investment by approximately 2 percentage points of baseline GDP, rising to 3.6 percentage points of baseline GDP by 2034 and beyond.
  - Additional investment targeted to innovative sectors raises the level of TFP by a cumulative 2 percent above the baseline over a 10-year horizon, and then TFP grows at a higher annual rate of 0.2 percentage points above baseline beyond the 10-year period.
  - Result: potential growth lifted by slightly more than 0.2 percentage points each year on average, with larger near-term impact from the investment surge.
- Combined reforms:
  - A multipronged package raising female participation, boosting skills, and generating permanently higher TFP could lift average annual potential growth by around 0.4 percentage points during 2025–2050.
  - Interaction and sequencing of reforms could produce effects larger than simple addition of individual impacts.

### Impact on Per-Capita Income and Macroeconomic Considerations
- Passive scenarios: real GDP per capita increases by 55 and 65 percent by 2050 relative to the 2025 level—corresponding to an average annual growth rate of between 1.8 and 2 percent.
- With the package of reforms: real GDP per capita increases by 65 and 74 percent by 2050 relative to the 2025 level—corresponding to an average annual growth rate of between 2 and 2.2 percent.
- Fiscal implication: amid high debt and aging-related expenditures ahead, decisively bringing down debt as a share of GDP will require expansion of aggregate output, not only per capita output.

### Concluding Remarks — Policy Implications
- Population aging will materially weigh on potential growth by reducing labor’s contribution unless countered by policy.
- Effective reform implementation across female labor force participation, skills upgrading, and policies that raise TFP (including higher private and public investment and capital market reforms) can materially mitigate aging’s adverse effects.
- A carefully sequenced, multipronged policy package could deliver sustained improvements to Italy’s potential growth and per-capita incomes, with scope for interaction effects that amplify individual reform impacts.

*Source: POTENTIAL GROWTH—ADJUSTING TO AGING (Selected Issues Paper), July 1, 2025.*

### 9.      In addition to the policies considered

### 9.      In addition to the policies considered

### Demographics, labor supply policies, and impact on growth
- IMF (2025) finds an effect for Italy of more than 0.5 percentage points higher average annual real GDP growth over 2025–2100 from implementing a package of labor supply policies that includes:
  - (i) implementing healthy-aging policies;
  - (ii) increasing the effective retirement age; and
  - (ii) closing by three-fourth the gender labor force participation gap (Figure 8).
- Net migration could also increase, helping to offset the underlying population decline.
- Key interpretation:
  - Italy’s significant demographic challenges put a premium on policy actions to help boost potential growth.
  - The downward trend in growth is clear: an aging population with a low natural replacement rate will shrink the labor force and compress potential growth.
  - Policies already in place (e.g., the indexing of the retirement age to longevity) could support labor force participation beyond what is captured in the analysis, but fully counteracting the drag on growth from the declining population remains challenging.
- Policy implication:
  - Carefully designed policy measures can help reverse the trend, including boosting female labor force participation and skill levels and targeting investment toward innovating sectors.
  - Policy actions at both the European-wide and national levels are essential and can help make a lasting impact.

### Figures and illustrative outcomes (as presented)
- Figure 7. Impact on Per-Capita Income (Per Capita Real GDP Index: 2025=100) shows scenarios:
  - Baseline: Low Capital
  - Baseline: High Capital
  - Reform: Low Capital
  - Reform: High Capital
- Figure 8. Impact of Labor Supply Policies (Average Impact of Labor Supply Policies on GDP Growth over 2025-2100; Deviation from baseline scenario, percentage points) lists country-specific impacts and policy components:
  - Policy components shown: Healthy aging policies; Increasing effective retirement age; Closing gender LFP gaps; Combined labor supply policies.
  - Italy (ITA) is included among countries with relatively smaller average impacts compared to many peers in the figure.

### Annex I — Technical details: population projections, production function, and skill-augmentation
- A. Population Projections
  - Population projections are based on UN low-fertility population projections, pointing to a steady decline in the population (Annex Figure 1).
  - Low fertility assumption: fertility rate declines from 0.96 births per woman in 2025 to 0.79 in 2037 and gradually increases to 0.85 in 2050.
  - Scenario incorporates:
    - “medium” mortality assumption: life expectancy at birth increasing from the current 84 years to over 87 years in 2050;
    - “medium” international migration assumption: net migration at 1 percent per 1,000 population in 2050, equivalent to about 50,000 migrants, from the current 1.87 percent per 1,000 population.
  - Historical population data up to 2024 from Eurostat are extended by applying annual growth rates derived from UN population projections, segmented by five-year age intervals, to estimate 2025–2050 projections.

- B. Production Function
  - The assessment employs a standard Cobb-Douglas production function with competitive product and factor markets.
  - Output growth expression used:
    - ΔlnY = ΔlnA + ν_K ΔlnK + ν_L ΔlnL
    - Where ν_K and ν_L are shares of capital and labor in income.
  - Shares computed from Penn World Tables (v10.0, data through 2019) and held constant for projection years at the 2015–2019 average levels, resulting in:
    - ν_K = 0.48
    - ν_L = 0.52

- C. Skill-Augmented Labor Methodology
  - Labor input L is heterogeneous across age cohort, gender, and skill. Skill levels (j) grouped into three categories—high, medium, low—proxied by educational attainment, with historical data reported by Eurostat and further divided by gender and age cohort.
  - Skill-augmented labor (L) defined as the weighted sum of the number of workers by skill type:
    - L = L1 ω1 L2 ω2 ⋯ (notation as in source)
  - Growth rate: ΔlnL = Σ ω̄j ΔlnLj, where ω̄j = the labor cost premium/discount to reflect marginal productivity and Lj = hours worked for each skill-type j.
  - Computing the weights:
    - Hourly earnings used as proxy for the labor cost premium/discount; data from Eurostat differentiated by age, gender, and skill level.
    - Due to limited hourly-earnings-by-education data, skill levels matched to occupations per Annex Table 1.
  - Wage-related computed values:
    - Wage premium for high-skilled workers relative to medium-skilled workers is around 2 (high-skilled earn about twice as much as medium-skilled of same gender).
    - Wage discount for low-skilled workers relative to medium-skilled workers is around 0.9 (low-skilled earn 10 percent less than medium-skilled counterparts).
    - Gender wage gap (ratio of wages for a medium-skilled woman relative to a medium-skilled man) computed value is around 0.6 (medium-skilled women earn about 40 percent less than their male counterparts).
  - Weights for projection years are fixed at their 2022 values (latest available year).
  - Labor input for skill-type j, Lj, computed as:
    - Lj = (working-age population_j) * (lfpr_j) * (1 − uempr_j) * hours_j (notation and variables as in source)
  - Assumptions applied in passive scenarios:
    - All components of Lj held constant at their 2024 values, except working-age population_j.

### Annex I — Additional modeling assumptions and outcomes
- Other assumptions:
  - Population distribution is evenly distributed within the 5-year age brackets.
  - New entrants arrive during ages 15 through 25. Entrants at age 15 may acquire skills and transition upward until age 25. Entrants in the 20-24 age cohort have, on average, higher skills than those entering at age 15.
  - No skill upgrading for most workers: with the exception of those entering at age 15, workers maintain their entry skill levels throughout their working life.
- Implications:
  - The share of medium-skilled workers increasingly dominates the workforce with an improved skill composition over time.
  - Skill composition varies as cohorts age and exit at age 65 and new entrants arrive; future entering cohorts at age 15 are assumed to have the same skill mixes as the cohort that entered in 2023, producing a propagation mechanism that raises average skill levels over time.
  - Result: while the size of the overall working-age population gradually shrinks, the share of high-skilled workers increases over time and the share of low-skilled workers declines (Annex Figure 2).

### Unlocking productivity potential of Italian firms — overview and drivers
- Key finding:
  - Italy has a significant and widening productivity gap compared to peers. A shortfall of 30 percent in labor productivity (measured as output per total hours worked) and a gap of more than 20 percent in total factor productivity (TFP) relative to the United States.
- Aggregate context:
  - Italy’s workforce is expected to shrink markedly amid rapid population aging and an extended period of low fertility; current United Nations population projections suggest Italy's working-age population could shrink by over 30 percent by 2050.
  - Unless offset by productivity- and employment-boosting policies, aggregate output growth would likely decrease, with implications for sustainability and affordability of pensions and healthcare.
- Micro-level focus:
  - The study examines firm-level roots of productivity weakness via a Schumpeterian “creative destruction” framework, focusing on:
    - Large, leading firms (producers of innovations and conduits for knowledge diffusion).
    - Young, high-growth firms (“gazelles”) that introduce new business models and disruptive technologies.
- Identified bottlenecks hampering leading and young high-growth firms:
  - Shortage of high-skilled workers.
  - Lack of risk capital.
  - Limited market size.
- Policy recommendation:
  - Additional policy actions, carefully coordinated at domestic and regional levels, are urgently needed to lift productivity and revive Italy’s private sector.

*Source: Excerpt from the IMF Selected Issues chapter and Annex I (technical details) provided in the source PDF.*

### 6.      Private investment growth has generally been highly procyclical in Italy, reflecting

### 6.      Private investment growth has generally been highly procyclical in Italy, reflecting

### Investment procyclicality and capital formation
- Private investment fell by 13 percent from 2007 to 2009 during the Global Financial Crisis (GFC), nearly twice the 7 percent output decline.
- Gross fixed capital formation was pushed to its lowest point since 1995 in 2014 during the Sovereign debt crisis, further depleting the capital stock.
- More recently, capital formation caught up to pre-GFC levels in 2022 (also after excluding sectors that benefited from the Superbonus).
- Factors contributing to pronounced procyclicality:
  - High public debt with limited fiscal space to cushion shocks.
  - A previously weak banking sector that cut back on lending to firms.

### Gaps in productivity-enhancing investment and innovation
- Over the last three decades:
  - Intangible investment in the United States tripled in real terms relative to 1995.
  - Intangible investment nearly doubled in France and Germany.
  - Intangible investment grew by only 80 percent in Italy over the same period, with a dent in 2020 related to the COVID-19 pandemic.
- Policy measures introduced:
  - Transition 4.0 (launched in 2021 as part of the NRRP) offered tax credits ranging from 20 to 50 percent, generating robust demand of €13.3 billion (amount covered by RRF funds).
  - Patent box regime: partial tax deduction of 50 percent from corporate income tax for incomes arising from direct use or licensing of qualified intangible assets.
  - NRRP allocates nearly half of the total funds to digital and green transition: €103.3 billion related to Milestones 1 and 2 combined and Transition 5.0, out of a total NRRP envelope of €194.4 billion.
- Instability of incentive schemes:
  - Tax incentives have been subject to frequent changes, including repeals, re-introduction, and modifications (example: ACE introduced in 2011 and repealed again in the 2024 budget; patent box experienced a similar stop-and-go cycle).

### Key gaps in R&D, technology adoption, and patent activity
- Research and development (R&D):
  - Italy's gross domestic expenditure on R&D stood at approximately 1.3 percent of GDP in 2023, below the EU average of 2.2 percent.
  - Countries at global frontiers spend between 3 and 4 percent of GDP (Germany, Sweden, United States, Japan) and Korea is close to 5 percent of GDP.
  - The government aims to boost public R&D investment in the context of its Medium-Term Fiscal-Structural Plan (MTFSP).
- Technology adoption (ICT investment):
  - ICT investment as a share of GDP stood at 2.4 percent of GDP in 2022 in Italy.
  - Comparators: France 4.6 percent; United States 3.7 percent (OECD).
- Patent activity:
  - Based on European Patent Office applications for 2024, Italy generates approximately 82.3 patents per million inhabitants.
  - Comparators: Germany 300 patents per million inhabitants; France 160.5 patents per million inhabitants.
  - Patent applications in Italy have grown by 8.6 percent over the last five years, versus the EU27 average of 2.8 percent over the same period.

### Firm-level roots of Italy’s productivity weakness
- Composition of leading firms:
  - Predominantly concentrated in traditional manufacturing: machinery, automotive components, textiles and apparel.
  - Few leading firms active in the global ICT sector; most top listed firms founded more than two decades ago.
- Total factor productivity (TFP) and R&D intensity among listed tech firms:
  - TFP in US-listed high-technology firms increased by nearly 40 percent over the last two decades.
  - TFP of European listed high-tech firms remained flat over the same period.
  - TFP of Italian listed high-tech firms declined by approximately 20 percent.
  - US-listed tech firms accelerated R&D investment relative to sales by four times more than European counterparts and by ten times more than Italian ones.
- Low share of young, high-growth firms:
  - Share of highly successful young firms (90th percentile in employment growth among firms operating for less than 10 years) is approximately 1 percent in Italy versus around 5 percent in the United States.
  - Among businesses operating for more than 25 years, average firm size in Italy is fewer than 10 employees (European average around 10 employees; United States about 70 employees).
  - Micro-sized enterprises (firms with less than 10 employees) account for roughly 16 percent of total employees in Italy, compared to 10 percent in the United States.
- Business dynamism weaknesses:
  - Limited growth of initially productive firms, prolonged survival of low productivity firms, and slow adoption of new technologies contribute to resource misallocation and reduced "churn".

### Drivers of subdued firm-level productivity growth
- Structural constraints limiting scaling up and adoption of ideas:
  - Insufficient effective market size due to incomplete intra-EU integration.
  - Difficulties accessing finance, particularly shortage in risk capital for young high-growth firms.
  - Relative lack of high-quality human capital.
  - Size-based tax incentives that may distort incentives.
- Intra-EU market frictions:
  - Persistent and high intra-EU barriers for both goods and services stemming from regulatory fragmentation and disparate national standards, which disproportionately affect high-productivity firms with growth potential.
- Bank-dependent financing model:
  - Italy's financial system remains heavily bank-centered with reliance on bank financing above the European average and low equity financing.
  - Bank financing favors tangible assets over intangible investments, hindering financing for R&D and knowledge-intensive investments.
  - European firms exhibit greater volatility of R&D expenses than US counterparts, even when income volatility is similar.
- Role of venture capital:
  - Venture capital can increase intangible investment in firms by as much as 100 percent upon receiving funding (Akcigit and others, 2022; Adilbish and others, 2025 for European firms).
  - Venture capital investment in Italy grew by 36 percent between 2023 and 2024, but the market remains limited relative to European peers in total funding and average investment per fund.
- Demographics and human capital:
  - Tobit model results (NUTS2-level regional analysis) show:
    - Number of gazelles positively correlated with population growth.
    - Number of gazelles negatively correlated with median age and old-age dependency ratio.
    - Highly educated workforce and higher female labor force participation rate support gazelle formation.
  - Italy’s adverse demographic trends underscore the need to ramp up investments in human capital to offset a declining and aging workforce.
- Predictability of incentive measures:
  - Frequent changes to incentive measures, legal amendments, or repeals impede firms’ long-gestation, risk-taking productivity-enhancing investments.
  - A regulatory environment that promotes predictability of incentive schemes is critical to support persistent investment.

*International Monetary Fund*

### 20.      Some of Italy’s ongoing productivity challenges require solutions at the regional level.

### Some of Italy’s ongoing productivity challenges require solutions at the regional level.

### EU and regional complementarities
- Deepening the European Single Market, particularly in services, would create scale opportunities with Europe for Italian firms.
- Development of the European Capital Markets Union would help diversify financing options beyond bank dependence.
- EU-wide initiatives on artificial intelligence and other frontier technologies could help close innovation gaps.
- European labor mobility reforms could help address skill mismatches that constrain firm growth.
- Supporting the EU Competitiveness Compass to lower remaining intra-EU cross-country barriers to trade in goods and services would help Italian firms—particularly those with the high potential to scale up—to expand beyond national borders.

### Domestic reforms to address persistent productivity weakness
Findings:
- Progress under the NRRP on the judicial system, particularly significant reductions of the backlog of cases, is helpful and will accelerate the exit of unproductive firms.
- Markedly boosting productivity requires a comprehensive approach targeting three critical bottlenecks.

Policy priorities (three critical bottlenecks):
- (i) Reducing size-based regulatory thresholds to eliminate growth disincentives to help firms grow.
- (ii) Expanding access to market-based financing options, such as venture capital, private equity, and public equity markets.
- (iii) Investing in human capital.

Intended outcome:
- By addressing these priorities through coordinated policy action, Italy could work towards closing its productivity gap with leading economies and ensuring long-term economic resilience.

### Climate and energy: macro-critical challenges and policy responses
High-level context:
- Italy faces macro-critical climate shocks and increased pressures on energy resources due to heat waves, droughts, floods, and storms.
- Over the past six decades, average temperatures have climbed by almost 1.5°C.
- Recent unprecedented events include the 2023 "Cerberus" heat wave, which led to over 18,000 heat-related deaths and widespread wildfires; severe storms and floods in Emilia-Romagna in 2023 affected nearly 50,000 people.

National strategies referenced:
- The National Recovery and Resilience Plan (NRRP) channels EU funds into green investments, energy efficiency, and sustainable mobility.
- The National Energy and Climate Plan aims to cut emissions and scale up renewables by 2030.
- The National Climate Change Adaptation Plan boosts resilience to growing risks like heatwaves and floods.
- The National Plan for Infrastructure Investments and Water Sector Safety targets infrastructure modernization and improved water resource management.
- The Mattei Plan aims to secure diversified and reliable energy supplies while supporting climate cooperation with partner countries.

B — Adapting agriculture and the financial sector

Agriculture — findings and interventions:
- Agriculture’s gross value-added dropped by a cumulative 5.2 percent during 2019–2024, while the broader economy grew by 6.2 percent during the same period.
- A Bank of Italy 2023 study found yields of some main agricultural products—corn, durum wheat, and grapevines—may increase up to a threshold of 29°C for cereals and 32°C for grapevines; beyond these thresholds, yields will decline.
- The G-20 Climate Risk Atlas estimates real GDP could decline by 0.7 percent with an additional 2°C increase and by 1.9 percent with a 4°C increase above current levels.
- Irrigation already accounts for 50 percent of water usage in the South; without smart farming and targeted irrigation, higher temperatures will necessitate a significant increase in irrigation.

Agrivoltaics as an adaptation and mitigation tool:
- Agrivoltaics combines farming with solar energy production, can enhance crop yields via beneficial microclimates, rejuvenate underutilized land, and reduce water consumption through shading.
- Regulatory change in May 2024 restricted large-scale solar panels on productive agricultural land unless installed at least 2.1 meters above ground, creating technical and cost challenges.
- Policy support:
  - A €1.1 billion NRRP-funded incentive scheme offering capital grants of up to 40 percent of investment costs.
  - The Agrisolare initiative provides additional national funding—over €2.35 billion—for installing photovoltaic systems on agricultural rooftops.

Financial sector — exposure and policy measures:
- Between 1980 and 2023, Italy suffered €134 billion in economic losses from weather- and climate-related disasters; only 4 percent of these losses were insured (EU average: 18 percent).
- EIOPA flagged Italy as having the second largest weather-related insurance protection gap in the EU.
- The financial sector supports decarbonization via green lending and Italy has mobilized capital through sovereign green bonds first issued in 2021.

New mandatory disaster insurance scheme (businesses):
- Effective March 31, 2025, all firms operating in Italy—except agricultural companies—must insure their assets against natural disasters and catastrophic weather events, including floods, earthquakes, and landslides.
- Coverage is compulsory for buildings, equipment, and land.
- Insurers must offer these policies at market price, supported by up to €5 billion in reinsurance from the state-owned insurance and finance company SACE on market conditions.
- Noncompliance may result in penalties for insurers and the loss of government incentives for companies.
- Implementation deadlines were postponed for some firms: October 1, 2025 for medium-sized enterprises, and January 1, 2026 for small and micro enterprises. The deadline for large enterprises remains March 31, 2025 but sanctions will not be triggered until 90 days after the deadline.

Design considerations and risks of the scheme:
- Geographic inequality: high-risk areas may face prohibitive premiums, risking economic desertification; risk mutualization across many firms can mitigate concentration risk and stabilize premiums.
- Moral hazard: guaranteed coverage could reduce private investment in prevention; pricing structures that reward mitigation efforts can mitigate this risk.
- Residential vulnerability: the scheme focuses on businesses; only 6 percent of residential homes in Italy are insured against natural disasters, leaving a large societal resilience gap.

C — Emissions trajectory and mitigation gap
Key statistics:
- Net greenhouse gas (GHG) emissions declined by 30.5 percent between 1990 and 2023.
- Italy contributed about 0.8 percent of global GHG emissions in 2021.
- Carbon intensity crept up in recent years due to increased fossil fuel usage, though it remains below the EU average.
- To achieve 2030 climate goals, Italy’s emissions would need to be reduced by nearly 30 percent relative to levels in 2023.

Drivers of past emissions changes (Kaya decomposition):
- Past progress was mainly driven by improved energy efficiency and structural shifts away from energy-intensive industries; greening of energy sources played a lesser role.
- The Kaya decomposition tables in the source show contributions from carbon intensity (GHG/Energy), energy intensity (Energy/GDP), GDP per capita, and population to overall GHG changes in periods 1990–2000, 2000–2010, 2010–2019, and 2019–2023.

_Italic: Source: 1itaea2025002-source-pdf_

### 11.      Greenhouse gas reductions have been

### 11.      Greenhouse gas reductions have been

### Uneven sectoral progress
- Energy and manufacturing sectors, subject to the European Union’s Emissions Trading System (ETS), have delivered the largest reductions since 1990.
- Transport and building (i.e., housing) sectors, which account for nearly half of total emissions, have been relatively slow to decarbonize so far.
- Transport and buildings are scheduled to be covered under a new emissions trading system, ETS2, starting in 2027, with the monitoring and reporting of emissions beginning this year.

### Energy
- The energy sector remains the second largest carbon emitter, accounting for 21 percent of total emissions.
- Italy has the highest share of electricity generated from natural gas among major economies: 45 percent, of which 94 percent is imported.
- Net imports accounted for nearly 80 percent of Italy's gross available energy in 2022, compared to the EU average of 63 percent.
- A relatively high share of GDP in Italy is spent on energy consumption: 7.1 percent in 2019, compared to the EU average of 6.7 percent.
- Italy cut net energy imports by nearly 10 percent between 2022 and 2023 as it reshaped its energy strategy to reduce reliance on Russian gas.
- Italy leads among major euro area economies in the share of domestic energy production from renewables: 75 percent of its energy production in 2022 from renewable sources.
- Renewables account for a smaller share of Italy’s total final energy consumption compared to some European counterparts.

### Industry
- Manufacturing reduced its emissions by 43 percent since 1990 and accounted for 20 percent of total emissions in 2023.
- “Climate laggards” are firms with higher emissions relative to the scale of their operations and typically operate older physical capital, are less knowledge-intensive, have weaker management practices, and exhibit lower productivity.
- Counterfactual firm-level analysis: if Italian firms above the 25th percentile of emission intensities reduced to the 25th percentile (keeping production constant), total emissions by Italian firms in the sample could fall by:
  - 43 percent in manufacturing
  - nearly 67 percent in other sectors (excluding finance, energy, and utilities)
- The analysis is based on firm-level data for over 3,000 listed firms headquartered in 65 countries from 2010 to 2022; firms in financial, utilities, and energy sectors are excluded.

### Transport
- Emissions from the transport sector have risen by nearly 6 percent since 1990.
- Private cars are responsible for almost 60 percent of sectoral emissions.
- In 2023, the transport sector accounted for 30 percent of total GHG emissions, making it the largest contributor.
- Italy's National Energy and Climate Plan aims to boost the share of renewables in transport to 34.2 percent by 2030.
- A €1 billion subsidy scheme in the 2024 budget provided a temporary boost to EV uptake.
- The 2025 budget earmarked €1.6 billion to support the broader automotive supply chain, focusing on production investments and technological advancements.
- The NRRP allocates over €31 billion to sustainable mobility, including high-speed rail, regional network electrification, and fleet renewal, with an emphasis on the South.
- The multi-year strategic infrastructure plan (annexed to Italy’s 2025 Public Finance Document) supports development of modern, low-emission transport systems.

### Buildings
- Italy spent about €220 billion on the Superbonus and other renovation tax credits through 2024 (around 10 percent of GDP).
- Around 60 percent of buildings fall into the two lowest energy efficiency classes, compared to 12 percent in Germany.
- Over 70 percent of Italian dwellings were built before 1980.
- Heating and cooling were responsible for 44 percent of total energy use in 2022.
- Italy has one of the highest shares of gas-based residential heating in Europe.
- Policy tools and programs:
  - Ecobonus and Renovation bonus tax deductions (scaled back since 2024) for energy efficiency and renovations.
  - Conto Termico program supports installation of heat pumps, biomass, and solar thermal systems.
  - Tradable white certificates incentivize improvements via obligations on electricity and gas distributors.
  - Planned update to strategy for energy retrofitting of the national building stock.
  - Italy stands to benefit from the forthcoming EU Social Climate Fund—financed through EU ETS 2—to support targeted building upgrades and clean heating solutions for vulnerable households.

### Concluding remarks and policy implications
- Italy’s National Climate Change Adaptation Plan (finalized in 2024) guides achievement of 2030 climate goals: a 33 percent reduction in greenhouse gas emissions from 2005 levels and a 30 percent share of renewable energy sources.
- Current policies are unlikely to meet the 2030 targets; more ambition and acceleration are required.
- Deeper integration of electricity markets in Europe can improve energy security and better utilize renewables; only 30 to 70 percent of capacity was available for cross-border electricity trading in 2024, with Italy less integrated than many peers.
- Studies suggest cost savings from the shift to renewables and further electricity market integration could amount to around 40 billion euros annually by 2030 across the EU.
- Addressing insufficient energy storage capacity and grid infrastructure limitations is essential to avoid price cannibalization and encourage renewable investments; measures include increased storage (batteries, hydrogen) and enhanced interconnection capacity.
- The Draghi report notes natural gas sets the price 63 percent of the time despite comprising only 20 percent of the electricity mix; decoupling green electricity prices from natural gas could be facilitated through long-term power purchase agreements but may require significant regulatory changes and could create stranded-asset concerns for fossil-fuel stakeholders.
- A well-calibrated comprehensive package of reforms (carbon pricing, energy efficiency standards, accelerated permitting for renewables) aimed at cutting emissions by 55 percent from 1990 levels by 2030 could:
  - enhance Italy’s energy security metrics by 5 percent by 2030
  - lower energy expenditure by 0.35 percentage points of GDP

*Source: Extract from PDF chapter "11.      Greenhouse gas reductions have been", IMF.*

### Annex I. Emissions Intensities and Climate Risks

### Annex I. Emissions Intensities and Climate Risks

### Overview
- The annex provides detailed data on emissions intensities and climate risks, complementing the main text.
- The IMF’s Comprehensive Surveillance Review notes that an update on climate change mitigation issues should be presented every three years for the world’s 20 largest emitters of greenhouse gases.
- Italy is one of the top 20 largest GHG emitters.

### Emissions intensity and climate risks (Annex I. Figure 1)
- Italy faces very low vulnerability and strong readiness to face climate change risks.
- Bubble chart visualization notes:
  - Bubble size indicates total GHG emissions excluding land-use and land-use change and forestry.
  - Outlier Palau is excluded.
- Vulnerability and readiness scores:
  - The Vulnerability Score assesses a country’s current vulnerability to climate, reflecting exposure, sensitivity, and adaptive capacity.
  - The Readiness Score assesses a country’s readiness to leverage public and private sector investment for adaptative actions.

### GHG emissions, NDC targets, and mitigation gap
- Italy contributes 0.8% of global GHG emissions.
- Italy faces a significant mitigation gap between business-as-usual (BAU) emissions and its NDC target.
- To achieve its 2030 target, Italy’s emissions would need to be reduced by nearly 30%.
- Notes on data and estimation:
  - Sources: IMF Climate Change Dashboard with data from the UNFCCC, EDGAR, FAO and IMF Staff-calculations.
  - GHG emissions exclude Land Use, Land-Use Change and Forestry.
  - CPAT estimations are indicative as they are based on uniform assumptions across all countries across the globe (i.e., no new mitigation policies, 50% reduction in explicit subsidies if applicable, energy prices based on average IMF-WB forecasts, and macroeconomic projections from the latest WEO).

### Key natural hazard statistics and impacts
- Italy's most prevalent hazards are floods and storms, with floods historically affecting a larger population.
- In 2023, severe storms, floods and landslides struck the Emilia-Romagna region, impacting nearly 50,000 people.
- Note on intensity metric:
  - Intensity is defined as (Total death+30% Total Affected)/Total population.
  - Sources: EMDAT and Staff calculations using Pondi and others (2022).

### Energy mix and emissions by sector
- Italy ranks among the largest energy importers in the EU and globally.
- Italy has gradually shifted energy production away from natural gas, with renewables, biofuels and geothermal.
- Over 65 percent of Italy’s emissions originate from households, manufacturing, and electricity; emissions in these three sectors have declined since early 2000s.
- Sources: IEA World Energy Balances.
- Note: GHG emissions excluding land-use and land-use change, and forestry are shown. Rather than presenting emissions by UNFCCC sector, the chart shows emissions by economic activity.
- Source data: OECD Air Emission Accounts; UNFCCC; EDGAR; IMF staff calculations.
- Notes: M=Mitigation, T=Transition, A=Adaptation.

### Cross-country comparison and pricing (Annex I. Figure 2)
- Multilateral component:
  - The NDC target implies GHG emissions reductions comparable to those of key peer countries and exceeds the global reductions outlined by all current NDCs.
  - Chart basis: CPAT estimations are indicative as they are based on uniform assumptions across all countries (i.e., no new mitigation policies, 50% reduction in explicit subsidies -if applicable-, energy prices based on average IMF-WB forecasts, and macroeconomic projections from the latest WEO).
- Explicit consumer fuel subsidies:
  - Consumer prices are well above supply costs for most fuels.
  - Sources: IMF Climate Change Dashboard (2021) and IMF Fossil Fuel Subsidies database.

### Effective carbon pricing and instruments
- Although Italy's explicit carbon prices align with those of other large emitters, the markedly higher fuel excise taxes position the country at the forefront of effective carbon pricing.
- Fuel excise taxes are highest in the road transportation sector, while explicit carbon pricing focuses on the electricity, industry and off-road transportation sectors.
- Source: OECD Effective and Net Effective Carbon Rates.
- Notes: M=Mitigation, T=Transition, A=Adaptation.

### Electricity generation mix and methane emissions
- Gas remains the dominant source of electricity generation.
- Methane emissions:
  - Ranking 41st out of 90 methane emitters, Italy’s methane emissions primarily originate from agriculture and waste.
- Sources: IEA World Energy Balances; IMF staff calculations.

*Annex I. Emissions Intensities and Climate Risks*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1itaea2025002-source-pdf.pdf_