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### Skill level — overview and sectoral context
- Despite one of the highest labor productivity levels globally, the Netherlands faces declining productivity growth and potential to boost productivity through worker- and firm-focused reforms.
- Key reform areas highlighted:
  - improving education outcomes; enhancing vocational training (especially in SMEs); reducing labor market duality (given lower productivity of the self-employed); maintaining high skills across generations amid population aging; better integration of migrants; promoting business dynamics; encouraging productivity-enhancing investment; completing the EU single market; addressing investment constraints (electricity grid, labor shortage, policy uncertainty); strengthening domestic and international productivity spillovers and SME engagement in R&D.
- Gas extraction timeline:
  - "started in 2014, turned off in October 2023, and permanently closed in 2024."
- Sectoral drivers of productivity slowdown:
  - Mining (phasing out of gas extraction), manufacturing (slowdown in chemicals and electrical engineering manufacturing), and transport and storage (more labor inputs for parcel transportation due to the rise of online ordering).
- Aggregate labor productivity decomposition (per Ando (2020)):
  - Around "80 percent of the total growth" in 2019–23 is attributed to within-sector productivity growth.
  - Reallocation effect: slight negative impact until 2019; trend after the pandemic is noisy.
- International comparisons and potential gain:
  - Netherlands ranks "fifth out of seven" in total growth and within-sector contributions among selected peers.
  - Achieving top-performer within-sector contributions could have raised Dutch productivity growth by "1.7 ppt (excluding mining)."
- Sectoral underperformance relative to top performers: "public, education, and social (PES), finance, real estate, trade, and manufacturing."
- Regional dispersion:
  - Groningen productivity declined by "23 percent from 2015 to 2023" due to gas field closure.
  - TL3 region dispersion: Netherlands labor productivity dispersion (ratio of max to min) is "1.6" vs median for 23 OECD countries "1.8."
- Reallocation effects by sector:
  - Positive allocation effects: "administrative & support services" and "hospitality".
  - Negative allocation effects: "health & social" and "construction".
  - Note: allocating more resources to "health and education" may be socially desirable despite lower measured productivity.

### Employment-level perspective — skill levels and use of skills at work
- Skill level metrics:
  - PIAAC: Dutch workers scored higher than other OECD countries; rankings across 31 countries/economies range between "second (numeracy in medium firms)" and "ninth (problem solving in large firms)"; average rank "fourth" based on average scores.
  - Eurostat: share of workers with above-basic digital skills among the highest across employment categories in 27 European countries.
  - PISA: average PISA score ranked "fifth in 2006 and 22nd in 2022."
  - School staffing (2022 vs 2018): "72 percent of Dutch students were in schools where principals reported instructional issues due to staff shortages and 46 percent were in schools with inadequately qualified staff; these ratios were 36 and 24 percent in 2018."
- Use of skills at work (PIAAC):
  - Index of use-of-skill rankings across firm sizes range between "10th (reading in micro firms)" and "22nd (numeracy in micro firms)"; average ranking "15th place out of 31 countries and economies."
  - Numeric and ICT skills usage particularly lower for workers in micro and small firms.
  - Cross-country relationship: higher learning opportunities correlate with higher ICT skill usage, but in the Netherlands skill usage tends to be lower than learning opportunities imply, especially in smaller firms.
- Adult learning participation:
  - EU-LFS: participation in the Netherlands among the highest in EU countries.
  - CBS: workers in smaller firms significantly less likely to participate in training and education.
- Index ranges reported:
  - Index of use of reading skills at work: "-3 to 7".
  - Index of use of numeracy skills at work: "1 to 6".
  - Index of use of influencing skills at work: "1 to 5".
  - Index of use of ICT skills at work: "1 to 5".

### Implications and priority policies on skills and labor market structure
- Priority policy recommendations:
  - Improve education outcomes and reverse declining PISA performance.
  - Enhance vocational training quality and broaden access, with emphasis on SMEs and micro firms.
  - Promote capital deepening (e.g., ICT equipment and software) to better utilize workers’ skills at work.
  - Continue policies to reduce labor market duality and address lower productivity of the self-employed.
  - Monitor and address regional productivity dispersion; leverage regional innovation systems.
  - Support business dynamics and productivity-enhancing investment; address constraints such as the electricity grid, labor shortages, and policy uncertainty.
  - Encourage productivity spillovers domestically and internationally and incentivize SME engagement in R&D.

### Aging, self-employment, migrants, and firm-level dynamics
- Aging and lifelong learning:
  - Workforce aging will reduce labor productivity growth (Aiyar et al., 2016).
  - Older workers use ICT skills less; decline larger for Dutch workers aged 55–65 (Figure 6, 31 countries/economies, 2023).
  - Index of learning at work constructed from: learning new things; learning by doing; keeping up to date at work.
  - Policy implication: support lifelong learning to increase potential, mobility, and employability (OECD, 2018).
- Labor market duality and self-employment:
  - Share of freelance self-employed (SE) increased over the last two decades, increasing labor market fragmentation (IMF, 2024a).
  - Regression among provinces (2010–2022, 11 provinces; Groningen excluded) shows statistically significant negative relationship between labor productivity and the SE share; coefficient of self-employed significant at the "5 percent" level.
  - Policy suggestions: tackle labor market duality; continue reducing false SE; introduce mandatory disability insurance for SE; strengthen pension arrangements for SE.
- Migrant integration:
  - Employment growth supported by increase in foreign workers (Employment Growth, yoy, aged 15-74, percent; nationals vs foreigners shown).
  - Population projection: medium-term growth driven by net migration with negative or near zero natural growth (CBS Projection).
  - Simulation by Caselli et al. (2024): GDP per capita drops if a TFP gap between natives and immigrants persists, but not if that gap gradually closes.
  - PIAAC: higher skills gap between natives and foreign-born in the Netherlands compared with OECD countries (PIAAC Score of Foreign-born relative to Native-born, 30 countries/economies, 2023).
  - Migrant Integration Policy Index: Netherlands between median and 75th percentile among EU27 except for family reunification and permanent residence where it is below the median.
  - Policy implication: stepped-up language training, vocational training, job search support, recognition of foreign qualifications.
- Firm-level productivity dispersion and dynamism:
  - Labor productivity dispersion (90th/10th percentile) increased among SMEs from 2010 to 2021; unchanged for large firms.
  - Frontier micro firms nearly "11 times" as productive as laggard micro firms in 2021.
  - Compound annual growth (2010–2021): positive correlation between growth rates and productivity levels in SMEs; negative growth for small and micro firms at the 10th and 20th percentiles.
  - Business churn: birth rate around EU median since ~2014; death rate at or below lower edge of interquartile range; contributions from business dynamics to sectoral productivity growth show a declining trend.
  - Cross-country correlates of dynamism: lower regulatory burdens, efficient insolvency, better access to finance, greater innovation support, and higher education levels (Calvino et al., 2020).
  - Policy implication: promote firm dynamism to improve resource reallocation and productivity.

### Investment, intangibles, and capital markets
- NFC capital stock and investment:
  - Capital stock for Non-Financial Corporations (NFCs) (as percent of NFC gross value added) declined from 2018 to 2023; level is the lowest among peers (NA data, Figure 11).
  - EU KLEMS: real growth rate of intangible assets between 2017–21 was almost zero for the Netherlands, while other countries grew.
  - NFCs: Gross Fixed Capital Formation (average 2021-23) places the Netherlands as the second lowest among EU countries.
  - Purpose of investment (avg financial year 2022 and 2023): Dutch firms’ investment mainly on replacement rather than capacity expansion or new products/services.
- Barriers to investment (percent of firms, 2024):
  - Availability of finance, digital infrastructure, transport infrastructure, demand, labour market regulation, business regulations, uncertainty, skilled staff, energy costs; energy costs linked to long queue for large scale electricity connections.
- Domestic capital market and SME finance:
  - SMEs, especially start-ups and innovative firms, have difficulties accessing finance (CBS, 2025).
  - Non-bank financing for SMEs increased by "16.4 percent in 2024" (SMF, 2025).
  - Suggested reforms: improve valuations, stimulate investor demand for equity and debt, simplify debt issuances.
- Intangible investment and R&D:
  - In 2021 intangible investment was about "1.2 times" higher than tangible investment (excluding residential structures) in the Netherlands (EU KLEMS).
  - Firm-level regression (Orbis, 2016–2022, sample 10,810): elasticity of labor productivity w.r.t. intangible assets tends to be higher for micro and small firms.
  - R&D expenditure: total and business sector R&D slightly lower than OECD average (R&D Expenditure, percent of GDP, 2023).
  - About "70 percent" of in-house R&D expenditure came from large firms in 2022.
  - Existing schemes (e.g., WBSO) support small businesses only to a limited extent (De Ridder, 2024).
- Policy implications:
  - Remove bottlenecks to investment: enhance electricity grid, address labor shortages, reduce policy uncertainty, streamline regulation.
  - Capital market reforms to improve SME financing.
  - Promote intangible investment, especially for micro and small firms.
  - Increase R&D investment and support R&D diffusion.

### Knowledge diffusion, spillovers, and international linkages
- Regression across 12 sectors (2010–2020) shows positive and statistically significant correlation between TFP and other sectors’ R&D stock after controlling for own innovative property capital stock; coefficient of R&D statistically significant at the "10 percent" level.
- Empirical findings:
  - Exporters have higher productivity due to interactions with foreign partners; domestic firms connected to export sector receive productivity benefits (Bettendorf and Polder, 2025).
  - Horizontal FDI has higher productivity effects compared to vertical FDI due to stronger linkages with domestic activities (Wache et al., 2025).
  - Brainport-Eindhoven cited as an effective example of spillovers.
- Policy suggestions:
  - Government support for investments with high spillovers (e.g., fundamental research).
  - Facilitate closer connections among firms.
  - Support completion of the EU single market and reduce trade barriers.

### Productivity constraints, trade costs, and consolidated policy recommendations
- Key constraints and findings:
  - Skill utilization gap: high skill levels but underuse at work (especially in SMEs).
  - Declining student skill levels.
  - Resource misallocation and low churn suggest value from higher business dynamics and capital deepening.
  - Investment impediments: electricity grid, labor shortages, nitrogen constraints, and policy predictability.
  - Average intra-EU trade costs estimated as high as tariff equivalent of "about 44 percent for goods" and "about 110 percent for services" (IMF, 2024b).
- Consolidated policy recommendations:
  - Improve education outcomes: invest in early childhood education, boost secondary attainment, address teacher shortages, align education with labor market needs, improve career guidance.
  - Enhance vocational training and lifelong learning: align training institutions with businesses, reorient active labor market policies, promote e-learning, provide financial assistance for disadvantaged groups and smaller-firm workers.
  - Continue reducing labor market duality: phase-out of self-employed person’s tax; reduce false self-employment; mandatory disability insurance and stronger pension arrangements for SE.
  - Integrate migrants: language training plus vocational training, job search support, recognition of foreign qualifications.
  - Promote firm dynamism and resource allocation: deepen single EU market, re-examine regulatory barriers to entry and insolvency regime, remove hurdles to scaling up (e.g., reduced profit tax rate for SMEs), facilitate labor mobility to priority sectors.
  - Encourage investment and R&D: address electricity grid and labor shortages, reduce policy uncertainty, tax reforms to incentivize productive investment, improve SME access to finance, promote R&D especially for smaller businesses.
  - Promote productivity spillovers: support research parks and networks to build firm-research-region connections.

### Climate, EU ETS expansion, CBAM, and distributional analysis — modeling approach
- EU ETS objectives and coverage:
  - EU ETS aims to reduce GHG emissions by "62 percent by 2030 relative to 2005."
  - Fourth trading phase (2021–30) covers power generation, manufacturing industries and aviation, accounting for "approximately 45 percent" of the EU’s total GHG emissions.
- Permit price evolution:
  - Permit prices averaged "€65 per metric ton in 2024."
  - Prices expected to rise to nearly "€150 per metric ton by 2030."
  - Bloomberg NEF forecasts "€149 per metric ton in 2030"; Morgan Stanley forecasts "€135 per metric ton."
- CBAM design and timeline:
  - CBAM phases in with full implementation expected in "2026."
  - Initially covered sectors: cement, iron, steel, aluminum, fertilizers, electricity and hydrogen.
  - Free allowances phased out from "2026 to 2034."
  - Transitional CBAM until "end-2025": importers report embedded emissions quarterly but do not pay; starting in "2026" importers purchase and surrender CBAM certificates.
  - EU plans to review CBAM, potentially expanding CBAM’s scope to include all sectors covered by the EU ETS by "2030."
- ETS2:
  - Separate ETS approved in 2023 to reduce emissions from fuels used in buildings and road transport by "42 percent by 2030, relative to 2005 levels."
  - Allowance trading under ETS2 expected to begin in "2027."
- Four-step modeling approach used:
  1. Evaluate impact of current ETS based on the "2024 average allowance price."
  2. Model introduction of an expanded CBAM by "2030" covering all sectors under the ETS.
  3. Assume gradual increase in allowance prices to "€100 per ton of CO2e by 2030."
  4. Assess impact of introduction of ETS2 expanding coverage to transport and buildings.
- Modeled additive scenarios:
  - Baseline: current EU ETS with permit price of "€65 per ton of CO2e."
  - Expanded CBAM: expanded CBAM by "2030" covering all products in the ETS.
  - CO2e price increase: existing ETS + expanded CBAM + gradual price increase to "€100 per ton of CO2e by 2030."
  - ETS2: additional introduction of ETS2 with expanded coverage to transport and buildings.
- Data and behavioral assumptions:
  - Netherlands Household Budget Survey, GTAP IO matrix, sector-specific passthrough assumptions.
  - CBAM assumed to increase passthrough; CBAM-covered sectors modeled as experiencing full passthrough.
  - Pass-back effects eliminated when passthrough increases.
  - Methodology limitations: results are upper-bound estimates; do not capture long-term structural transformation.

### Distributional and fiscal results across scenarios (key numeric outcomes)
- Baseline scenario (current ETS at "€65 per ton CO2e"):
  - Direct consumption-channel: lower-income households spend "about 9 percent" of budget on fuels vs "7.5 percent" for higher income households.
  - Rural-urban example: low-income rural household at 75th percentile spends "about 12.5 percent" on fuels; similar low-income urban household "about 10.6 percent"; high-income urban household "around 7.3 percent."
  - Overall impact across income groups: "around 0.3 percent" of household’s purchasing power once both direct and indirect channels considered.
  - Pass-back: 37 percent of total profit losses fall on the top income decile and 23 percent on the ninth.
  - Compensation: if "8 percent" of ETS revenues are used for targeted cash transfers to the two most vulnerable deciles, transfers would not fully offset negative impact but would nearly offset negative impact in some scenarios.
- Expanded CBAM scenario (expanded to all ETS sectors by "2030", without full phaseout of free allowances):
  - Average consumption-channel impact increases to "0.5 percent" of household spending.
  - Overall regressive impact due to higher passthrough and windfall profits concentrated among higher-income households.
  - If "8 percent" of ETS revenue used to compensate vulnerable households, support would nearly offset negative impact for the two lowest income deciles.
- Higher allowance price scenario (allowance prices reach "€100 per ton in 2030" with expanded CBAM):
  - Average burden on household consumption increases to "0.9 percent" of household spending.
  - Modeled "€100 per ton" is "€35 more" than the baseline.
  - 8 percent revenue compensation partially protects first two deciles.
  - Windfall profits benefit high income households; aggregate distributional effect follows a U-shaped pattern.
  - Comparative reference: carbon tax of "$75 per ton of CO2e" in other high-income countries yields average consumption-channel impacts broadly aligned: Italy "-1.53 percent", Japan "-2.24 percent", UK "-1.46 percent", US "-2.71 percent."
- ETS2 scenario (coverage extends to transport and buildings):
  - Average negative impact on household consumption increases to "1.9 percent."
  - The "1 percentage point" increase compared to the €100 scenario driven by direct effects as ETS2 covers gasoline, diesel and natural gas.
  - Additional support required to offset losses for the two most vulnerable deciles even accounting for Social Climate Fund revenues.
- Revenue recycling and SCF assumptions:
  - Modeling assumption: "8 percent" of ETS revenues allocated to targeted cash transfers for vulnerable households (targeted to lowest income quintile or two most vulnerable deciles in analyses).
  - SCF financed through auction revenues plus mandatory "25 percent" contribution from Member States.
  - EC goal: mobilize at least "€86.7 billion from 2026 to 2032."
  - SCF can provide temporary direct income support while structural measures developed.

### Road transport electrification, fiscal impacts, and road user charge (RUC) policy scenarios
- Fiscal context:
  - Taxes on vehicle purchases and fuel use currently raise "around 1.5 percent of GDP" but projected to nearly halve by "2035" with electrification.
  - EV electricity demand projected nationwide increase of "nine percent" by "2030" due to EVs; EV electricity demand reaches "10 and 20 TWh" by "2030 and 2035" respectively vs current all-sector demand of "110 TWh."
- Emissions and targets:
  - Road transportation emissions (second largest emitting sector) projected to exceed targets under current policies.
  - Under modeled policies, emissions fall by "15 and 35 percent by 2030 and 2035" respectively below current levels but still exceed targets in baseline.
- Modeled reform options (six policies; monetary values in constant 2024 US dollars):
  1. EV-only RUC: RUC of "€0.04 per kilometer" for passenger EVs only.
  2. EV-only RUC with subsidy: RUC "€0.04 per kilometer" for passenger EVs with subsidy of "€400 per ton (~€4,000 per EV in 2026, declining to €2,400 in 2030 and €720 in 2035)."
  3. All RUC: RUC of "€0.04 per kilometer" for all passenger vehicles.
  4. EV-only RUC and higher excise: RUC "€0.04 per kilometer" for passenger EVs; diesel and gasoline excises increase to efficient levels of "€2.14 and 1.43" for gasoline and diesel, respectively, in "2030."
  5. Increased heavy goods RUC and policy 2: RUC of "€0.04 per kilometer" for all passenger vehicles with a "€360 per ton of CO2" RUC for heavy goods.
  6. All RUC with congestion pricing: RUC of "€0.025 per kilometer" for all passenger vehicles and congestion pricing during peak hours in cities of "€0.13 per kilometer."
- Fiscal outcomes:
  - Evaluated policies can generate up to "0.4 percent of GDP" in additional fiscal revenues in "2030."
  - EV-only RUC yields smallest revenue increase ("0.15 percent of GDP" or no change when combined with EV subsidies) given EV share ~ "35 percent in 2030."
  - Congestion pricing raises around "0.2 percent of GDP" in revenue (may accrue to municipal governments).
- Welfare and emissions impacts:
  - EV-only RUC reduces EV share of sales by "11 percentage points in 2030" and increases emissions by "3 percent."
  - Policies with RUCs applied to all vehicles or higher fuel excises (policies 3–5) yield greater congestion, local air pollution and climate damage reductions that more than offset economic distortion.
  - Congestion pricing achieves largest welfare benefit ("0.7 percent of GDP") due to efficiency in reducing congestion.
  - Reduced EV driving under RUCs/congestion pricing reduces electricity demand by "2–3 percentage points" relative to current national demand.
- Total cost of ownership (TCO):
  - TCO increases by about "€8,000" with a RUC of "€0.04 per km" or excises at efficient levels.
  - Purchase costs dominate (~"60 percent" of TCO) vs about "20 percent" each for fuel and other costs.
- Policy design lessons:
  - Tax rates per km should increase with congestion costs, road accidents, and road maintenance costs.
  - RUCs ideally complemented with congestion pricing in urban areas.
  - Combining a RUC with means-tested EV subsidy may improve distributional outcomes while retaining welfare and fiscal benefits.
  - When choosing higher fuel excises, consider cross-border fueling risks vs slightly greater emissions reductions.

### Key takeaways and summary of policy findings
- Productivity policy takeaways:
  - Improve education outcomes, vocational training access (SMEs), lifelong learning, reduce labor market duality, integrate migrants, promote firm dynamism, remove investment bottlenecks (electricity grid, labor shortages), deepen EU single market, enhance R&D and spillovers, and improve SME financing and intangible investment.
- Climate and energy policy takeaways:
  - EU ETS, expanded CBAM, higher allowance prices, and ETS2 materially increase household consumption burdens (from "0.3 to 1.9 percent" of household expenditure across modeled scenarios).
  - CBAM increases passthrough and enables windfall profits in sectors receiving free allowances, making distributional outcomes more regressive unless compensated.
  - Well-designed revenue recycling (e.g., targeted cash transfers; modeled "8 percent" of ETS revenues) and Social Climate Plans are critical to mitigate distributional effects and maintain acceptability.
  - Road-sector reforms: an all-vehicle RUC and congestion pricing deliver larger welfare and fiscal benefits and reduce congestion and electricity demand pressures; combining RUCs with targeted subsidies helps equity.
- Fiscal and implementation notes:
  - SCF design, targeting, and national Social Climate Plans matter for distributional outcomes; Dutch budgetary rules emphasize non-earmarking of revenues.
  - Policy sequencing and complementary measures (energy efficiency, grids, charging infrastructure, targeted support) essential to manage distributional and supply-side constraints.

*Source: KINGDOM OF THE NETHERLANDS—THE NETHERLANDS (excerpts provided in source content).*

### 4. Skill Level _____________________________________________________________________________  7

### 4. Skill Level

### A. Overview and Context
- Despite one of the highest labor productivity levels globally, the Netherlands faces declining productivity growth and potential to boost productivity through worker- and firm-focused reforms.
- Key reform areas highlighted: improving education outcomes, enhancing vocational training (especially in SMEs), reducing labor market duality (given lower productivity of the self-employed), maintaining high skills across generations amid population aging, better integration of migrants, promoting business dynamics, encouraging productivity-enhancing investment, completing the EU single market, addressing investment constraints (electricity grid, labor shortage, policy uncertainty), and strengthening domestic and international productivity spillovers and SME engagement in R&D.

### B. Macro-level context (sectoral and regional)
- Phasing out of gas extraction: "started in 2014, turned off in October 2023, and permanently closed in 2024."
- Sectoral drivers of the productivity slowdown:
  - Mining (phasing out of gas extraction), manufacturing (slowdown in chemicals and electrical engineering manufacturing), and transport and storage (more labor inputs for parcel transportation due to the rise of online ordering).
- Decomposition of aggregate labor productivity (per Ando (2020)):
  - Around "80 percent of the total growth" in 2019–23 is attributed to within-sector productivity growth.
  - The reallocation effect had a slight negative impact until 2019; trend after the pandemic is noisy.
- International and peer comparisons:
  - The Netherlands ranks "fifth out of seven" in terms of both total growth and within-sector contributions among selected peers.
  - Achieving top-performer within-sector contributions could have raised Dutch productivity growth by "1.7 ppt (excluding mining)."
- Sectoral gaps where the Netherlands underperforms relative to top performers: "public, education, and social (PES), finance, real estate, trade, and manufacturing."
- Regional productivity dispersion:
  - Labor productivity dispersion among provinces has increased moderately over the past eight years.
  - Example: Groningen province productivity declined by "23 percent from 2015 to 2023" due to gas field closure.
  - TL3 region dispersion: labor productivity dispersion (ratio of max to min) in the Netherlands is "1.6", while the median for 23 OECD countries is "1.8."
- Reallocation effects by sector:
  - Positive allocation effects observed in "administrative & support services" and "hospitality".
  - Negative allocation effects observed in "health & social" and "construction".
  - Note on social priorities: allocating more resources to "health and education" may be socially desirable even if these sectors have lower productivity levels.

### C. Employment-level perspective — skills and use of skills at work
- Skill levels:
  - PIAAC: Dutch workers scored higher than other OECD countries; across 31 countries/economies the Netherlands' rankings range between "second (numeracy in medium firms)" and "ninth (problem solving in large firms)" and an average rank of "fourth" based on average scores.
  - Eurostat: share of workers with above-basic digital skills in the Netherlands is among the highest across employment categories in 27 European countries.
  - PISA: Netherlands' average PISA score ranked "fifth in 2006 and 22nd in 2022."
  - School staffing issues (2022 vs 2018): "72 percent of Dutch students were in schools where principals reported instructional issues due to staff shortages and 46 percent were in schools with inadequately qualified staff; these ratios were 36 and 24 percent in 2018."
- Use of skills at work:
  - Despite high skill levels, Dutch workers' indexes of use of skills at work (PIAAC) are around the median of OECD countries.
  - Rankings for use-of-skill indicators across firm sizes range between "10th (reading in micro firms)" and "22nd (numeracy in micro firms)", with an average ranking of "15th place out of 31 countries and economies."
  - Numeric and ICT skills usage is particularly lower for workers in micro and small firms.
  - Cross-country relationship: higher learning opportunities correlate with higher ICT skill usage, but in the Netherlands skill usage tends to be lower than what learning opportunities imply, especially in smaller firms.
  - Adult learning participation: EU-LFS shows participation in the Netherlands is among the highest in EU countries, but CBS data indicate workers in smaller firms are significantly less likely to participate in training and education.
- Index ranges (as reported in the source):
  - Index of use of reading skills at work ranges from "-3 to 7".
  - Index of use of numeracy skills at work ranges from "1 to 6".
  - Index of use of influencing skills at work ranges from "1 to 5".
  - Index of use of ICT skills at work ranges from "1 to 5".

### D. Implications and priority policies (drawn from analysis)
- Improve education outcomes and reverse declining PISA performance to sustain future worker skills.
- Enhance vocational training quality and broaden access, with emphasis on SMEs and micro firms where skill use and training participation lag.
- Promote capital deepening (e.g., ICT equipment and software) to better utilize workers’ skills at work.
- Continue policies to reduce labor market duality and address lower productivity of the self-employed.
- Monitor and address regional productivity dispersion; leverage regional innovation systems and supporting measures to promote regional balance.
- Support business dynamics and productivity-enhancing investment, including addressing constraints such as the electricity grid, labor shortages, and policy uncertainty.
- Encourage productivity spillovers domestically and internationally and incentivize SME engagement in R&D.

*Source: 4. Skill Level, BOOSTING DUTCH LABOR PRODUCTIVITY: DIAGNOSTIC AND POLICY OPTIONS (June 30, 2025).*

### 10.      Given population aging, older workers should be encouraged to keep their skill levels

### 10.      Given population aging, older workers should be encouraged to keep their skill levels

### Aging, skills use, and lifelong learning
- Workforce aging will reduce labor productivity growth (Aiyar et al., 2016).
- Older workers use ICT skills less compared to young and middle-aged workers; the magnitude of this decline is higher for Dutch older workers, especially those aged 55–65 (Figure 6, 31 countries/economies, 2023).
- Index of learning at work constructed from opportunities of: 1) learning new things, 2) learning by doing, and 3) keeping up to date at work.
- Policy implication: support lifelong learning to increase potential, mobility, and employability (OECD, 2018) and adapt technological innovation to benefit both young and older workers.

### Labor market duality and self-employment
- The share of freelance self-employed (SE) increased over the last two decades in the Netherlands, increasing labor market fragmentation (IMF, 2024a).
- Regression among provinces (2010–2022, 11 provinces; Groningen excluded) shows a statistically significant negative relationship between labor productivity and the SE share; the coefficient of self-employed is statistically significant at the 5 percent level.
- Possible cause: SE may lack sufficient opportunities for skill development compared with employees who receive company-specific training (Bovenberg and Groot, 2022; Bondt, 2018).
- Policy suggestions:
  - Tackle labor market duality.
  - Continue reducing false SE.
  - Introduce mandatory disability insurance for SE.
  - Strengthen pension arrangements for SE.

### Migrant integration and productivity
- Recent employment growth has been supported by the increase in foreign workers (Employment Growth, year-on-year, aged 15-74, percent; nationals vs foreigners shown).
- Medium-term population projected to grow due to net migration with negative or near zero contributions from natural growth (Population Growth chart; CBS Projection).
- Simulation by Caselli et al. (2024): GDP per capita drops if a TFP gap between natives and immigrants persists, but not if that gap gradually closes.
- PIAAC scores indicate a higher skills gap between natives and foreign born in the Netherlands compared with OECD countries (PIAAC Score of Foreign-born relative to Native-born, 30 countries/economies, 2023).
- Migrant Integration Policy Index: the Netherlands stands between the median and 75th percentile among EU27 countries, except for family reunification and permanent residence where it is below the median (Migrant Integration Policy Score, EU27).
- Policy implication: improve integration policies to close skills/TFP gaps and integrate migrants in productivity-enhancing ways.

### Firm-level perspective — productivity dispersion and firm dynamism
- Labor productivity dispersion (ratio of 90th percentile to 10th percentile) increased among SMEs from 2010 to 2021; remained unchanged for large firms (Figure 9).
- Frontier firms versus laggards:
  - Frontier micro firms were almost 11 times as productive as laggard micro firms in 2021.
- Compound annual growth of labor productivity (2010–2021) shows positive correlation between growth rates and productivity levels in SMEs; growth is negative for small and micro firms at the 10th and 20th percentiles.
- Business churn (births and deaths) is relatively low:
  - Firm dynamics in the Netherlands declined until around 2014; since then birth rate around EU median, death rate at or below lower edge of interquartile range.
  - Contributions from business dynamics (new and closing firms) to aggregated sectoral productivity growth show a declining trend (Contributions of Firm Dynamics to Productivity Growth).
- Cross-country correlations: business dynamism positively correlates with lower regulatory burdens, efficient insolvency resolution, better access to finance, greater support for innovation, and higher education levels (Calvino et al., 2020).
- Policy implication: promote firm dynamism to improve resource reallocation and productivity.

### Investment, capital stock, and intangibles
- Capital stock for Non-Financial Corporations (NFCs) (as percent of NFC gross value added) declined from 2018 to 2023; level is the lowest among peers (NA data, Figure 11).
- EU KLEMS estimates (including intangibles): real growth rate of intangible assets between 2017–21 was almost zero for the Netherlands, while other countries grew.
- NFCs: Gross Fixed Capital Formation (average of 2021-23) places the Netherlands as the second lowest among EU countries.
- Purpose of investment (average financial year 2022 and 2023): Dutch firms’ investment mainly focuses on replacement rather than capacity expansion or new products/services.
- Barriers to investment (percent of firms, 2024): availability of finance, digital infrastructure, transport infrastructure, demand, labour market regulation, business regulations, uncertainty, skilled staff, energy costs are identified; energy costs linked to long queue for large scale electricity connections.
- Domestic capital market issues:
  - SMEs, especially start-ups and innovative firms, have difficulties accessing finance (CBS, 2025).
  - Non-bank financing for SMEs increased by 16.4 percent in 2024 (SMF, 2025).
  - Suggested reforms: improve valuations, stimulate investor demand for equity and debt, simplify debt issuances.
- Intangible investment:
  - In 2021 intangible investment was about 1.2 times higher than tangible investment (excluding residential structures) in the Netherlands (EU KLEMS).
  - Firm-level regression (Orbis, 2016–2022, sample 10,810) shows elasticity of labor productivity w.r.t. intangible assets tends to be higher for micro and small firms.
  - R&D expenditure: total and business sector R&D slightly lower than OECD average (R&D Expenditure, percent of GDP, 2023).
  - About 70 percent of in-house R&D expenditure came from large firms in 2022.
  - Existing schemes (e.g., Research and Development Promotion Act (WBSO)) support small businesses only to a limited extent (De Ridder, 2024).
- Policy implications:
  - Remove bottlenecks to investment: enhance electricity grid, address labor shortages (training and mobility toward priority sectors), reduce policy uncertainty, streamline regulation.
  - Capital market reforms to improve SME financing.
  - Promote intangible investment, especially for micro and small firms.
  - Increase R&D investment and support R&D diffusion.

### Knowledge diffusion, spillovers, and international linkages
- Regression across 12 sectors (2010–2020) shows positive and statistically significant correlation between TFP and other sectors’ R&D stock even after controlling for own innovative property capital stock; coefficient of R&D statistically significant at the 10 percent level.
- Empirical findings:
  - Exporters tend to have higher productivity due to interactions with foreign partners; domestic firms connected to the export sector receive productivity benefits (Bettendorf and Polder, 2025).
  - Horizontal FDI has higher productivity effects compared to vertical FDI due to stronger linkages with domestic activities (Wache et al., 2025).
  - Brainport-Eindhoven cited as an example of effective spillovers.
- Policy suggestions:
  - Promote government support for investments with high spillovers (e.g., fundamental research).
  - Facilitate closer connections among firms.
  - Support completion of the EU single market and reduce trade barriers.

*International Monetary Fund — KINGDOM OF THE NETHERLANDS—THE NETHERLANDS (excerpts provided in source content)*

### 21.      The analysis highlights the Netherlands’ potential to enhance productivity by

### 21.      The analysis highlights the Netherlands’ potential to enhance productivity by

### Productivity constraints and key findings
- Despite having one of the highest productivity levels globally, the Netherlands faces challenges in enhancing its productivity growth.
- Skill-related issues:
  - Skill levels of Dutch workers are generally high, but they might not fully utilize their potential at work (especially in SMEs).
  - Declining skill levels of young students raise concerns.
  - Self-employed workers show lower productivity.
  - With population aging, it is crucial to maintain high skills across generations and integrate migrants effectively into the labor market.
- Resource allocation and firm dynamics:
  - Signs of resource misallocation imply that higher business dynamics and capital deepening will be important for firms, given low churn and investment levels.
  - Addressing factors impeding investment (e.g., electricity grid, labor shortage, and policy uncertainty) will be critical.
- Trade and market integration:
  - Average intra-EU trade costs are estimated to be as high as a tariff equivalent of about 44 percent for goods and about 110 percent for services (IMF, 2024b).

### Policy recommendations to enhance productivity growth
- Improve education outcomes to enhance skill levels of future workers:
  - Continue investing in education and improve outcomes by fostering early childhood education, boosting secondary educational attainment, and addressing shortages of teaching staff.
  - Align education with (future) labor market needs, and improve career guidance and counseling to mitigate labor shortages and reduce skill mismatch.
- Enhance vocational trainings and lifelong learning programs:
  - Facilitate close collaboration between training institutions and business representatives to align training with current and future market demands.
  - Reorient active labor market policies towards skills needed to address shortages and incorporate new technologies.
  - Promote e-learning resources and provide financial assistance, especially to those from disadvantaged backgrounds and workers in smaller firms.
  - Promote awareness and local initiatives to foster continuous education in SMEs.
- Continue to reduce labor market duality:
  - Authorities have introduced and accelerated a phase-out of the self-employed person’s tax.
  - Recent progress to address labor market duality, such as reducing false self-employment, are welcome.
  - Introduce mandatory disability insurance and strengthen pension arrangements for the self-employed to enhance social protection.
- Effectively integrate migrants into the labor market:
  - Provide stepped-up language training together with vocational training, support job search, and recognition of qualifications acquired abroad.
- Promote business dynamism and resource allocation:
  - Deepen single EU market, re-examine the efficiency of regulatory barriers to entry and insolvency regime, remove hurdles to scaling up businesses (e.g., eliminating the reduced profit tax rate for SMEs), and facilitate labor mobility toward priority sectors.
- Encourage productivity-enhancing investment for capital deepening:
  - Address factors affecting firms’ investment decisions, such as the electricity grid, labor shortages, nitrogen constraints, and domestic policy predictability.
  - Encourage investment in new technologies (e.g., digitalization), implement tax reforms incentivizing productive investment, enhance access to finance for SMEs through domestic capital market reform, and promote R&D activities, especially for smaller businesses.
- Promote productivity spillovers:
  - Implement and promote investments with large spillover effects (e.g., research parks and networks) to build connections among firms, research institutions, and regions.
  - Enhance the functioning of the EU single market to reap productivity gains.

### Box 1. Case Study of Brainport-Eindhoven — findings
- Regional R&D and intensity:
  - Noord-Brabant accounted for over 30 percent of private R&D expenditure in the Netherlands and ranks eighth in business R&D intensity among the 198 NUTS II regions in the EU (CBS, 2022).
- Historical and institutional roots:
  - Transformation rooted in Philips’ historical association; Philips’ initiatives led to Eindhoven University of Technology and later spin-offs (e.g., ASML, NXP Semiconductors).
  - Establishment of other research institutes strengthened the knowledge infrastructure and collaboration around innovation and entrepreneurship.
- Collaborative governance and infrastructure:
  - The “triple helix model” (local government, educational institutions, and industries as equal partners) and the Brainport Foundation (established in 2006) coordinate efforts and align initiatives with regional strategic goals.
  - Multiple physical hotspots (e.g., High Tech Campus Eindhoven) facilitate informal interactions and offer daily rentals for cleanrooms and testing instruments, attracting startups.
  - Hosting many knowledge brokers who seek to develop new value chains contributes to innovation.
- Replicability and policy implication:
  - The ecosystem is unique and location-based, making replication difficult, but collaboration among stakeholders as equal partners could be important for enhancing regional labor productivity.
- Attribution:
  - The box is summarized based on Romme (2022a and 2022b) and Stam et al. (2016).

### Emerging climate and energy transition issues — overview
- Macroeconomic interactions:
  - Scaling up mitigation policies and diffusion of clean technologies may interact adversely with existing policies and raise distributional and acceptability concerns.
- Scope of chapter:
  - Covers expansion of the EU Emission Trading System (ETS) and electrification of road transportation.
- Fiscal and purchasing power impacts:
  - In the Netherlands, these policies efficiently reduce emissions and raise additional revenue (0.7 percent of GDP in 2030), but at the same time put upward pressure on the cost of emitting activities (1.9 percent decrease in purchasing power in 2030). IMF Staff based on CPAT.
- Policy need:
  - To maintain acceptability, the government needs mitigating policies that address adverse distributional outcomes if they materialize.

### EU ETS expansion, targets, and price projections
- EU ETS trajectory and coverage:
  - The EU ETS aims to reduce GHG emissions by 62 percent by 2030 relative to 2005.
  - Now in its fourth trading phase (2021–30), the system regulates emissions from power generation, manufacturing industries and aviation, accounting for approximately 45 percent of the EU’s total GHG emissions.
- Permit price evolution:
  - Permit prices averaged €65 per metric ton in 2024.
  - As the supply of allowances tightens, prices are expected to rise to nearly €150 per metric ton by 2030.
  - Bloomberg NEF forecasts allowance prices to reach €149 per metric ton in 2030, while Morgan Stanley forecasts prices reaching €135 per metric ton.
- Free allowances and carbon leakage:
  - Concerns about competitiveness and carbon leakage led to allocating free allowances to trade-exposed sectors.
  - Historical allocation:
    - First phase (2005–07): allowances allocated through grandparenting.
    - Second phase (2008–12): 90 percent of allowances were allocated for free.
    - Third phase (2013–20): 57 percent of allowances were auctioned, with variations; free allowances provided in power sector of lower income member states and in industries classified as energy-intensive and trade-exposed.
    - Fourth phase (2021–30): percentage of auctioned permits remains consistent with that of the third phase, while free allowances continue to be granted contingent upon implementation of energy efficiency measures.

### Distributional implications of ETS reforms
- Transmission channels for distributional impacts:
  - Impacts operate via consumption, passthrough, “pass back” and free allowances.
- Heterogeneity across countries:
  - Distributional outcomes vary by national economic structures, sectoral carbon intensity, energy consumption patterns, and the extent governments use tax and transfer systems to redistribute income.
  - Countries with higher reliance on coal or less efficient housing and transport infrastructure may see greater household exposure, especially among the more vulnerable, compared with countries like the Netherlands or Germany.
- Role of policy design:
  - How revenues are recycled is critical in mitigating regressive effects and maintaining public support for carbon pricing.
  - Dutch budgetary rules emphasize separation of revenues and expenditure budgeting; suggested revenue recycling alternatives do not encourage earmarking of expenditure.
  - In the Dutch context, revenue recycling would imply that increased fiscal space from higher carbon price revenue could be used in part to manage distributional effects on vulnerable households, hence increasing public support for climate reforms.

### Road transport electrification: fiscal, power sector, and externalities
- Fiscal revenue trends:
  - Taxes on vehicle purchases and fuel use currently raise around 1.5 percent of GDP but this is projected to nearly halve by 2035 with improving fuel economy and switching to more lightly taxed EVs.
- Power sector demand:
  - A nine percent nationwide increase in demand is projected due to EVs alone by 2030.
- Emissions outlook:
  - Emissions by road transportation, the Netherlands’ second largest emitting sector, are projected to exceed targets under current policies.
- Policy options to address challenges:
  - Road user charges, potentially coupled with fuel tax increases, EV subsidies, and congestion pricing, are a promising option to maintain sectoral revenue, manage power sector demand, meet emissions targets and correct for non-climate externalities like congestion.

_Italic: IMF staff report excerpt contained in the provided PDF chapter._

### 8.      To address competitiveness and carbon leakage concerns, the EU designed the Carbon

### 8.      To address competitiveness and carbon leakage concerns, the EU designed the Carbon Border Adjustment Mechanism (CBAM).

### CBAM and EU ETS reforms
- CBAM imposes a carbon price on certain goods imported to the EU, equivalent to what domestic producers pay.
- Initially covered sectors: cement, iron, steel, aluminum, fertilizers, electricity and hydrogen.
- CBAM phased in with full implementation expected in 2026.
- CBAM recognizes explicit carbon taxation in foreign countries such that a country with the same carbon price as the EU would not need to pay at the point of import.
- CBAM’s theoretical objectives: prevent carbon leakage, protect exposed EU industry, and incentivize global decarbonization by encouraging domestic carbon pricing.
- Free allocation (free allowances) is set to be gradually phased out from 2026 to 2034, coinciding with CBAM’s introduction.
- The EU plans to review CBAM, potentially expanding CBAM’s scope to include all sectors covered by the EU ETS by 2030.
- Transitional CBAM phase: until end-2025 importers report embedded emissions quarterly but do not pay; starting in 2026 importers must purchase and surrender CBAM certificates corresponding to embedded emissions minus domestic carbon pricing.
- ETS2: separate ETS approved in 2023 to reduce emissions from fuels used in buildings and road transport by 42 percent by 2030, relative to 2005 levels. Allowance trading under ETS2 expected to begin in 2027.
- ETS2 features a rule-based market stability reserve; focuses on upstream emissions with responsibility to surrender allowances resting with fuel suppliers.
- Social Climate Fund (SCF) to support a fair transition; EU countries access its resources by submitting Social Climate Plans.

### Implementation and national implications for the Netherlands
- Most EU-level climate policies (ETS, CBAM, ETS2) enacted through directly applicable EU regulations requiring member states to align national legislation and administrative frameworks.
- Netherlands: ETS primarily implemented through the Environmental Management Act and accompanying regulations and decrees.
- ETS2 implementation requires Dutch authorities to:
  - establish or revise national systems for emissions monitoring and reporting;
  - administer auctioning and revenue collection of allowances;
  - operationalize a Social Climate Plan to address distributional impacts.
- For CBAM, the Dutch government must integrate CBAM obligations into import procedures and manage CBAM reporting, certificate surrender and compliance monitoring.

### Methodology (assessment framework)
- Four-step modeling approach:
  1. Evaluate impact of current ETS based on the 2024 average allowance price.
  2. Model introduction of an expanded CBAM by 2030 covering all sectors under the ETS.
  3. Assume gradual increase in allowance prices to €100 per ton of CO2e by 2030.
  4. Assess impact of introduction of ETS2 expanding coverage to transport and building sectors.
- Modeled scenarios (additive):
  - Baseline scenario: current EU ETS with a permit price of €65 per ton of CO2e.
  - Expanded CBAM scenario: introduction of expanded CBAM by 2030 covering all products in the ETS.
  - CO2e price increase scenario: existing ETS + expanded CBAM + gradual price increase to €100 per ton of CO2e by 2030.
  - ETS2 scenario: additional introduction of ETS2 with expanded coverage to transport and buildings.
- Transmission channels analyzed: direct and indirect effects on household consumption, role of free allowances, and cost passthrough.
- Data and modeling inputs:
  - Netherlands Household Budget Survey (HBS) to estimate household spending shares on fuels and other goods across income groups.
  - GTAP’s Input-Output (IO) matrix to capture sectoral carbon intensity and estimate embedded emissions in consumption bundles by income level.
  - Sector-specific passthrough assumptions to estimate price changes.
  - Framework for firm behavior for costs not passed on: firms may reduce wages, cut employment, or lower profits (pass-back), depending on trade intensity of the firm’s industry.
- Key behavioral assumptions:
  - CBAM allows higher passthrough; assumption that ETS-covered sectors would be able to fully reflect the costs of the ETS in their prices once CBAM is implemented.
  - When free allowances are granted and firms nonetheless increase prices, windfall profits largely benefit high-income households who own the majority of capital.
- Pass-back effects are eliminated when passthrough increases.
- Methodology limitations noted:
  - Results are upper-bound estimates; do not account for structural transformation from EU ETS reforms.
  - Does not capture deeper long-term economic shifts.
  - Could be strengthened with more recent microdata, distinctions between white- and blue-collar workers, sectoral market concentration, and data on wage stickiness.

### Revenue recycling and policy assumptions for support
- Well-designed revenue recycling can make carbon pricing growth-enhancing and progressive.
- Historical Netherlands supports:
  - 2022 temporary price cap: lump sum transfer through energy providers equal to €380 per household for November and December.
  - 2023 price cap on gas and electricity below certain use: electricity €0.40 per kWh up to an annual use of 2900 kWh; gas €1.45 per m³ up to an annual use of 1200 m³.
  - These supports expired in 2024.
  - 2025 Spring Memorandum included an increase in the energy tax reduction for households, companies and institutions of €200 million in 2026–28.
  - Energiesprong program (since 2010): sustainable housing retrofits targeting net-zero standards in social housing.
- Modeling assumption for transfers:
  - Assume that 8 percent of the ETS revenues are allocated to targeted cash transfers for vulnerable households.
  - Transfers directed to the lowest income quintile; modeled targeting the two most vulnerable deciles in some analyses.
  - Once SCF is operational, Dutch government required to increase support to vulnerable populations; assume Dutch government increases targeted cash transfers by an amount equal to its share of the Social Climate Fund as defined by EU guidelines.
- SCF financing and targets (as described):
  - SCF financed through auction revenues, supplemented by a mandatory 25 percent contribution from Member States.
  - Goal of mobilizing at least €86.7 billion from 2026 to 2032 according to the European Commission.
  - Social Climate Plans must include measures on energy efficiency, building renovations, zero- or low-emission mobility and transport, reduction of greenhouse gas emissions, and decrease in number of vulnerable households, micro-enterprises and transport users.
  - Temporarily, Fund can provide targeted direct income support to vulnerable households and transport users while structural measures are developed.

### Distributional context and fiscal capacity
- Dutch tax-benefit system characteristics:
  - Literature suggests the Dutch tax system (including tax expenditures but before transfers) is regressive overall due to high consumption taxes and relatively low taxation on capital income.
  - Regressivity is compensated by government spending; cash transfers strongly targeted at bottom reduce income inequality.
  - Average tax rate relatively flat across income distribution, ranging from approximately 45 percent to 48 percent of pre-tax income across deciles.
  - Benefit rate highly progressive: reaching 85 percent for the poorest decile and around 5 percent for the richest.
- Energy poverty metrics:
  - Around 7 percent of the population is in energy poverty.
  - Mulder et al. (2023) note 48 percent of households in the Netherlands are unable to participate in the energy transition on their own.

### Results — Baseline scenario (current ETS at €65 per ton CO2e)
- Consumption-channel impact:
  - Reduction in household purchasing power from the EU ETS is relatively uniform across income groups when looking exclusively at the consumption channel.
  - Direct effect: lower-income households spend a higher share of their budget on fuels — about 9 percent compared to 7.5 percent for higher income households.
  - Indirect effect: total emissions embedded in consumption are higher for wealthier groups.
  - Rural-urban differences:
    - Low-income rural household in the 75th percentile spends about 12.5 percent of total consumption on fuels.
    - Similarly placed low-income urban household spends about 10.6 percent.
    - High-income urban household spends around 7.3 percent.
  - Overall impact across income groups: around 0.3 percent of household’s purchasing power once both direct and indirect channels are considered.
- Pass-back effects:
  - Accounting for imperfect pass-through (pass-back) makes the ETS impact more progressive because higher-income households bear greater losses from reduced capital income.
  - Estimated distribution of profit losses from pass-back: 37 percent of total profit losses fall on the top income decile and 23 percent on the ninth.
  - Profit losses due to pass-back estimated to be higher than windfall profits from free allowances, which are small.
  - Labor costs from pass-back assumed to affect households uniformly.
- Compensation via cash transfers:
  - If 8 percent of EU ETS revenues in the Netherlands are used to compensate households via cash transfers (targeted to the two most vulnerable deciles in the model), transfers introduce an additional progressivity channel.
  - These transfers would not fully offset the negative impact of the ETS for the two most vulnerable income deciles but would nearly offset negative impact in some scenarios.

### Results — Expanded CBAM scenario (expanded to all ETS sectors by 2030, without full phaseout of free allowances)
- Overall regressive impact:
  - Implementing an expanded CBAM covering all ETS-covered sectors by 2030, without a full phaseout of free allowances planned for 2034, would have a regressive impact in the income distribution.
- Mechanisms:
  - CBAM allows for higher passthrough, increasing the consumption-channel impact, averaging 0.5 percent of household spending.
  - Higher passthrough eliminates negative impacts of pass-back and creates space for windfall profits in sectors receiving free allowances.
  - Additional windfall profits equal the value of the allowance net of the average corporate income tax.
  - Because capital ownership is concentrated among higher-income households, these gains disproportionately benefit wealthier households, driving regressivity.
- Mitigation via transfers:
  - If the Dutch government used 8 percent of ETS revenue to compensate vulnerable households, the support would nearly offset the negative impact for the two lowest income deciles.

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

### 22.      Raising the allowance price roughly doubles the impact through the consumption

### 22.      Raising the allowance price roughly doubles the impact through the consumption 

### Scenario results: higher allowance price and expanded CBAM
- Third scenario: allowance prices gradually increase, reaching €100 per ton in 2030 alongside expanded CBAM implementation.
- Average burden on household consumption increases to 0.9 percent of household spending.
- In this scenario, 8 percent of ETS revenues are used to compensate lower income households, partially protecting households in the first two deciles.
- Windfall profits benefit high income households in sectors that receive free allowances and can increase prices; aggregate distributional effect follows a U-shaped pattern (higher income households benefit more from windfall profits; lower-income households partially protected via targeted transfers; middle-income households are, on net, more affected).
- Comparative reference (IMF forthcoming): additional implementation of a carbon tax of $75 per ton of CO2e yields average consumption-channel impacts in other high-income countries broadly aligned with these estimates: Italy -1.53 percent, Japan -2.24 percent, UK -1.46 percent, US -2.71 percent.
- The allowance price increase modelled in Scenario 3 is €100 per ton, €35 more vis a vis the baseline scenario.
- For Scenarios 3 and 4, costs of passback are canceled as passthrough in each sector increases due to the implementation of an expanded CBAM.

### ETS2 Scenario: coverage expansion to transport and buildings
- Expanding the EU ETS to cover transport and buildings significantly increases the consumption-channel impact and revenues for compensation.
- When coverage extends to residential, road, rail, and domestic shipping sectors, the negative impact on household consumption increases to an average of 1.9 percent.
- The 1 percentage point increase compared to Scenario 3 is primarily driven by direct effects as ETS2 now covers gasoline, diesel and natural gas (primarily used for residential heating).
- Model estimates suggest additional support would be required to offset losses for the two most vulnerable deciles even accounting for increased revenues via the Social Climate Fund.

### Policy implications and key takeaways on ETS reforms
- Distributional impacts operate through multiple transmission channels: direct and indirect consumption channels, cost pass back, passthrough, windfall profits, and compensatory mechanisms.
- Across the baseline and three modeled scenarios, impacts on consumption rise as passthrough, prices, or coverage expand—from 0.3 to 2 percent of household expenditure.
- When both direct and indirect consumption are considered, effects remain broadly uniform across deciles; limited passthrough in the baseline yields a progressive outcome due to cost pass-back.
- CBAM increases passthrough and enables windfall profits in sectors receiving free allowances; higher allowance prices and ETS2 amplify effects on household purchasing power.
- Cash transfers are modeled as one protection option for vulnerable households, but windfall profits’ regressive effect raises questions about additional compensation needs for lower-income groups.
- High trade intensity of goods and concentration of capital ownership among higher income deciles in the Netherlands suggests passbacks mainly impact higher income deciles.
- Design choices for the Social Climate Fund and Social Climate Plan should consider overall progressivity of the tax-benefit system and tradeoffs between delivery mechanisms:
  - Use robust social benefit targeting methodologies to compensate affected households via cash transfers.
  - Consider cash transfers as temporary to avoid increased complexity of the social protection system.
  - Decreasing payroll taxes could increase tax efficiency, stimulate labor supply, and offset inflationary impacts of rising energy prices but would be mildly regressive (top quintile benefits most).
  - Reinvigorating and extending the Energiesprong program to private households could permanently increase energy efficiency and relax electricity demand and grid pressures, at the cost of higher capital cost per retrofitted house vis-à-vis compensation via cash transfers.
  - Remaining revenues could finance investment projects with positive impacts on growth or resilience.

### Road transport electrification — projected economic, fiscal, and power sector impacts
- Additional policies are needed to avoid falling revenue and worsening congestion while achieving climate targets and managing electricity demand.
- Road transport currently generates significant fiscal revenue but this is projected to slowly decline with improved fuel economy and the shift to more lightly taxed electric vehicles (EVs).
- Road transport CO2 emissions are projected to exceed the sectoral target by around 10 percent under existing policies (PBL 2024).
- Fiscal revenue projection: taxes on vehicles, electricity, and fuel are projected to remain at around 1.5 percent of GDP in 2027 due to EU ETS II introduction (raising 0.2 percent of GDP) and removal of temporary fuel excise reductions (0.05 percent of GDP); followed by a long-term decline as ICEV fuel economy improves and EVs grow.
- Emissions from road transport fall by 15 and 35 percent by 2030 and 2035, respectively, below current levels but still exceed targets.
- Policies generate net welfare gains of 0.5 percent of GDP in 2024; gains erode over the next decade from worsening congestion and tightening fuel economy standards.
- EV electricity demand reaches 10 and 20 TWh by 2030 and 2035, respectively, compared to current demand across all sectors of 110 TWh.
- EU ETS II price assumption: assumed to stay at EUR 55 after 2030.
- Without demand-side management (e.g., time of use pricing) and increased supply, EV uptake could further strain the electricity grid and increase prices.

### Existing and planned road transport policies (high-level)
- Domestic policies include taxes on vehicle ownership (MRB) and purchase (BPM); excises and VAT on fuels; and, from 2026, a tax per kilometer for heavy goods vehicles varying with CO2 emissions class.
- Significant EU-level policies: vehicle fuel economy standards tightened to reach zero-emissions by 2035 for passenger vehicles; an ETS applying to road transport and building fuels starting in 2027.
- 2025 Tax Plan reforms include phase-outs of MRB and BPM EV exemptions and discontinuation of EV subsidy schemes.

### Modelled reform options to meet objectives (overview of six analyzed policies)
- Rationale: Road user charges (RUC) per kilometer provide revenue resilient to electrification and regulate driving externalities; RUCs ideally combined with congestion pricing in cities.
- Six analyzed policy options (monetary values in constant 2024 US dollars):
  1. EV-only RUC: RUC of €0.04 per kilometer for passenger EVs only; €0.04 per kilometer is a similar rate to existing diesel and gasoline fuel excises.
  2. EV-only RUC with subsidy: RUC of €0.04 per kilometer for passenger EVs only with subsidy of €400 per ton (~€4,000 per EV in 2026, declining to €2,400 in 2030 and €720 in 2035).
  3. All RUC: RUC of €0.04 per kilometer for all passenger vehicles.
  4. EV-only RUC and higher excise: RUC of €0.04 per kilometer for passenger EVs only; diesel and gasoline excises increase to efficient levels of €2.14 and 1.43 for gasoline and diesel, respectively, in 2030.
  5. Increased heavy goods RUC and policy 2: RUC of €0.04 per kilometer for all passenger vehicles with a €360 per ton of CO2 RUC for heavy goods.
  6. All RUC with congestion pricing: RUC of €0.025 per kilometer for all passenger vehicles and congestion pricing during peak hours in cities of €0.13 per kilometer.
- Notes: EU level policies are maintained in all cases; existing domestic policies (vehicle ownership and registration taxes, energy taxes) are also maintained.

### Fiscal impacts of analyzed reforms
- The evaluated policies can generate up to 0.4 percent of GDP in additional fiscal revenues in 2030.
- EV road user charges of €0.04 per km lead to the smallest increase in revenue (0.15 percent of GDP or no change when combined with EV subsidies) because EVs make up only a modest share of vehicles given slow turnover (~35 percent in 2030).
- Policies that apply RUCs to ICEVs or increase fuel excises offer more resilient and larger fiscal revenue.
- Congestion pricing raises around 0.2 percent of GDP in revenue (may accrue to municipal governments; at least a portion likely needed to improve public transport for efficiency and acceptability reasons).
- The fiscal cost of EV subsidies in policy 2 is quantified in the model (see policy 2 details above).

*Source: KINGDOM OF THE NETHERLANDS—THE NETHERLANDS, INTERNATIONAL MONETARY FUND (excerpts).*

### 0.15 percent of GDP but this could be reduced, while promoting equity and acceptability, by making

### KINGDOM OF THE NETHERLANDS—THE NETHERLANDS

### Summary of key policy findings
- Evaluated transport-sector reforms can increase welfare by up to €11 billion in 2030 (0.7 percent of GDP) above current policies and reduce strain on the electricity grid.
- A road user charge (RUC) applied to all vehicles allows revenue to increase substantially (0.4 percent of GDP) and enables the Netherlands to meet climate targets while lessening congestion and electricity demand.
- A RUC applied only to electric vehicles (EVs) increases emissions, provides about half of the revenue benefits of an all-vehicle RUC, and limits congestion benefits and price increases for ICEVs.
- Combining a RUC with an EV subsidy (potentially means-tested) can improve distributional outcomes while maintaining most welfare and fiscal benefits.

### Emissions, electrification, and driving behavior
- The EV-only RUC:
  - Reduces EV shares of sales by 11 percentage points in 2030.
  - Increases emissions by three percent.
  - Even when combined with a sizable EV subsidy (€4,000 in 2025), emissions still exceed targets—highlighting need for policies that reduce driving levels of ICEVs in addition to electrification.
- RUCs applied to all passenger vehicles (policy 3) achieve sectoral targets as emissions fall due to reduced driving of ICEVs.
- Increasing fuel excises to efficient levels (policy 4), rather than applying a RUC to ICEVs, results in slightly greater emissions reductions but risks increased fueling in neighboring countries (cross-border leakage) — which is not an issue under the RUC.
- A higher RUC on heavy goods vehicles (policy 5) slightly reduces emissions without the cross-border leakage risk.
- Well-designed congestion pricing (policy 6) is extremely effective in reducing driving in congested areas, producing a large decline in emissions even though RUCs in non-congested areas are lower than under other policies.
- Under all policies, reduced EV driving due to the RUC and/or congestion pricing reduces electricity demand by 2–3 percentage points relative to current national demand.

### Fiscal and welfare impacts
- Welfare impacts by policy (2030):
  - EV-only RUC delivers welfare gains of around 0.25 percent of GDP; gains are offset by distortions caused by EV subsidies in policy 2.
  - Policies with RUCs applied to all vehicles or higher fuel excises (policies 3–5) yield greater reductions in congestion, local air pollution and climate damages that more than offset larger economic distortion.
  - Congestion pricing achieves the largest welfare benefit (0.7 percent of GDP) due to its efficiency in reducing congestion.
- Revenue composition and change:
  - Total revenue under reforms includes components such as Fuel tax, EU ETS, EV subsidy, Distance, Registration, Ownership, Congestion, VAT, and Total; a RUC applied to all vehicles raises revenue by 0.4 percent of GDP.

### Total cost of vehicle ownership (TCO) and distributional considerations
- The TCO over a vehicle’s lifecycle increases under all proposed policies.
- The TCO increases by about €8,000 with a RUC of €0.04 per km or excises at efficient levels.
- Purchase costs still dominate overall expenses, making up around 60 percent of the TCO, compared to about 20 percent each for fuel and other costs (mainly maintenance and insurance).
- The purchase cost per kilometer increases for ICEVs under the RUC because kilometers driven per vehicle declines while the purchase cost in € terms remains constant.
- Distributional implications:
  - Distortions will be higher for some households and firms and lower for others; a comprehensive distributional analysis should be undertaken before reform introduction.
  - Redistribution of a portion of expected gains to vulnerable households and firms made worse off, accompanied by careful communication and phase-in, can support political acceptability and promote equity.
  - Examples of targeted measures: investments (or higher subsidies) in locations that lack charging stations and higher EV subsidies for poor or rural households.

### Policy design lessons and recommendations
- Tax rates per km should optimally increase in line with congestion costs (value of time), road accidents (value of statistical life), and road maintenance costs.
- RUCs would ideally be complemented with congestion pricing in urban areas to more efficiently reduce congestion and reduce the needed economywide RUC.
- There is scope to progressively increase the stringency of the heavy goods RUC’s CO2 component.
- Combining a RUC with a means-tested EV subsidy may improve distributional outcomes while retaining most welfare and fiscal benefits.
- When opting for higher fuel excises, policymakers should consider the risk of cross-border fueling and weigh it against slightly greater emissions reductions relative to an ICEV RUC.

### Annex I — Methodology to estimate distributional impacts (summary)
- The distributional impact of the current EU ETS is driven by allocation of free allowances and the degree of sectoral passthrough to consumers.
- Windfall profits (market value of the permit price minus the corporate income tax) accrue to capital owners according to their share of capital ownership and tend to benefit higher income deciles.
- If firms cannot pass on costs, they face trade-offs between profits, wages, and employment, which affects distributional outcomes.
- Empirical procedure used:
  - Household budget survey and input-output matrix for the Netherlands were used to estimate distributional impacts.
  - Passthrough was estimated to be inversely correlated with trade exposure; tradability measured as (Exports + Imports) / Output.
  - Price changes across expenditure categories were mapped to household income groups via budget shares for fuels and other goods.
  - The assessment captured direct and indirect impacts through consumption and accounted for revenue recycling but did not incorporate changes in factor income or employment.
- CBAM effects:
  - With CBAM, foreign firms face equivalent cost increases, increasing international market prices and domestic firms’ ability to fully pass through costs.
  - CBAM-covered sectors are modeled as experiencing full passthrough; expectations are that CBAM will apply to all goods covered by the EU ETS in 2030.

*Source: IMF staff estimates.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1nldea2025002-source-pdf.pdf_