## dpea2024seegt

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### Context and scope
- Russia’s invasion of Ukraine in 2022 sparked an energy crisis in Europe on the back of a long-term deterioration in energy security.
- Two dimensions of energy security analyzed:
  - security of supply: dependence on energy imports and concentration of suppliers;
  - economic resilience to energy shocks: the weight of energy spending in GDP.
- Analytical tool: a global multicountry, multisector general equilibrium model (ENVISAGE) to simulate impacts of climate mitigation policies on energy trade, consumption, production, and GHG emissions over the medium term.
- Geographical scope: the European Union, the United Kingdom, and the European Free Trade Association (EFTA).

### Recent crisis and prewar trends (selected facts)
- Pipeline gas flows from Russia to Europe began dropping in the second half of 2021; flows to many countries were suspended in 2022.
- Natural gas prices traded on the Dutch Title Transfer Facility increased over 20-fold between 2019 and August 2022.
- Electricity prices rose from €45 to €598 per megawatt hour in August 2022.
- Energy consumption responses in the crisis: gas consumption fell by 15 to 20 percent; electricity and coal consumption fell by 5 to 10 percent.
- The IMF revised down forecasts for GDP growth by over 1 percent in 2022 and 2023, and ½ percent in 2024.
- Markets expect energy prices in Europe to remain about 60 percent above prewar levels.
- EU 2023 targets: renewable energy target revised to 42.5 percent and energy efficiency target to 11.7 percent.
- Legally binding emission reduction targets:
  - European Union: by 55 percent of 1990 levels by 2030;
  - United Kingdom: by 68 percent of 1990 levels by 2030;
  - Both aiming for climate neutrality by 2050.

### Measurement approach to energy security
- Security metrics used:
  - Composite energy supply insecurity index S = sum over non-European supplier country i of (net positive energy imports_i / energy consumption)^2, with European suppliers assigned zero risk weight.
  - Economic resilience: ratio of energy consumption expenditures of firms and households to GDP (current prices), related to the Domar weight.
- Interpretation and sensitivity:
  - Composite index summarizes import dependence and geographic concentration (Herfindahl-like with European countries zero-weighted).
  - Example: a 10 percent increase in energy prices increases energy expenditures by 2 percentage points of GDP for an economy starting with a 20 percent energy expenditure share, and by 0.5 percentage point for one with a 5 percent share.
- Limitations: indicators ignore infrastructure constraints and price volatility; the model is deterministic and cannot capture price volatility.

### Modeling framework and baselines
- Model: ENVISAGE, a recursive dynamic CGE model covering 31 countries/groups, 28 commodities, electricity from fossil fuels, wind, solar, hydro, and nuclear; yearly focus with emphasis on 2030.
- Baseline scenarios:
  - Baseline 1 (prewar baseline): calibrated to IEA, EU Reference Scenario 2020, IMF January 2022 WEO. Model: geographic concentration ≈ 12 percent in 2021; energy expenditures 6 percent in 2019; import dependence ≈ 54 percent in 2021.
  - Baseline 2 (intermediate): EU countries phase out Russian oil and coal; gas imports not adjusted.
  - Baseline 3 (postwar baseline): bilateral trade adjusted for observed Russian gas shutoffs; Europe phases out all remaining Russian fossil fuels by 2030; economic activity follows April 2023 WEO.

### Calibration of individual climate policy instruments (each simulated against Baseline 3)
- Higher carbon prices in EU and UK ETS:
  - End at €110 per ton in the European Union (instead of €33 in the EU Reference Scenario).
  - Reach €118 in the United Kingdom.
  - Reduce emissions by about 4 percent in 2030 (vs baseline).
- Tighter emissions and energy performance standards (road transport and buildings):
  - Transport services energy consumption reduced by 13 percent vs baseline.
  - “Other services” sector energy consumption reduced by 5 percent.
  - Households reduce energy consumption by 8 percent.
  - Overall emissions reductions of 4 percent in 2030.
- Accelerated renewables permitting:
  - 10 percent more wind and solar generation by 2030 vs baseline (consistent with a 40 percent improvement in speed of deployment if median permitting times match the top quartile).
- Public investment in heat pumps:
  - Households’ overall energy demand reduced by 6 percent in both the EU and EFTA region and the United Kingdom.
  - Households shift away from coal and gas toward electricity.
  - Emissions reduced by 4 percent in 2030.
- Removing fossil fuel subsidies:
  - Subsidies phased out in 2030, calibrated to prewar estimates.
  - Example: coal production subsidies in Germany = 0.1 percent of GDP (or €3.6 billion) and 1.3 euros per gigajoule of domestic coal use (~25 percent of retail price).
  - Temporary crisis-era energy subsidies assumed fully phased out before 2030.

### Effects of individual instruments on energy security and expenditures
- Carbon pricing:
  - Cuts emissions at least cost; improves supply security and economic resilience in most of Europe.
  - Can weaken energy security temporarily in some energy- and emissions-intensive Central and Eastern European economies (e.g., Poland; CSH block) due to accelerated coal phase-out when domestic production is more fossil-fuel-intensive than imports.
  - Raises energy prices by design, but medium-term price responsiveness typically lowers energy expenditures as a share of GDP in most of Europe.
- Sector-specific energy efficiency regulations (road/building):
  - Economically costlier than carbon pricing but deliver larger energy security co-benefits and distribute benefits more evenly across countries.
  - Reduce both energy price and consumption, lowering energy expenditures more than carbon pricing.
- Accelerated permitting:
  - Improves energy security across regions; effects smaller than carbon pricing or sector regulations.
  - Raises domestic supply, lowers energy prices, expands activity, and reduces geographic concentration (notably US natural gas share).
- Public investment in heat pumps:
  - Reduces fossil fuel imports and import dependency; strong effects in the United Kingdom (households account for 44 percent of gas consumption in 2030 projection).
  - Needs concurrent power-sector decarbonization; otherwise increased electricity demand can raise electricity and gas prices and increase energy expenditures relative to GDP (gas supply modeled as rather inelastic).
  - Rising energy costs are most noticeable in Poland and the BCR region.
- Removing fossil fuel subsidies:
  - Negligible effect on energy security in most of Europe given small expected subsidy size by 2030 after crisis-era phase-out.
  - Material impacts limited to Germany and the United Kingdom where subsidies are largest relative to consumer fuel expenditure.
  - Removal can slightly reduce GHG emissions (by 0.3 percent in the simulation) but may increase import dependency where subsidies favor domestic production.
  - A simple flat fossil fuel consumption tax (illustrative: 3 percent of the price) tends to reduce import dependency throughout Europe.

### Projected medium-term (2030) war and sanctions effects (Baseline comparisons)
- Trade and supplier diversification:
  - Shift toward the United States overall; France and Italy import more from Africa; Germany, CSH bloc, and Poland import more from Norway.
  - Geographic concentration of Europe’s energy imports among non-European suppliers reduced by about two-thirds.
- Commitments and observed shifts:
  - EU reduced Russian oil imports by 90 percent (seaborne oil sanctions).
  - Russia’s share in EU gas imports fell from 41 percent in 2021 to 15 percent in the first 10 months of 2023.
  - EU committed to phasing out all remaining Russian fossil fuels before 2030.
- Price and expenditure effects:
  - War could persistently increase energy prices, raising the energy spending share in GDP; model projects Europe will produce more energy in response, reducing import dependence in the medium term.
- Quantified postwar baseline projection:
  - Reductions in geographic concentration and import dependence drive down the projected 2030 composite index of energy insecurity by some 8 percent in Europe as a whole.
  - Reduction in import dependence ratio quantified as 1.2 percentage points.
  - Despite rising European energy supply, energy prices remain higher in Baseline 3 than Baseline 1; energy expenditures projected to rise by about 0.2 percent of GDP overall (Norway an exception).

### A broad policy package calibrated to 55 percent emissions cut by 2030
- Package components:
  - Carbon prices in EU ETS rise to €185 per ton in 2030.
  - Energy/emissions efficiency standards calibrated to reduce 2030 energy demand vs baseline by:
    - 13 percent in transport services,
    - 8 percent in other private services,
    - 15 percent in households.
  - Accelerated permitting: 10 percent more wind and solar generation by 2030.
  - Public investments: households’ energy demand further reduced by 11 percent and electricity demand increased.
- Climate and energy security impacts by 2030:
  - The package improves the two energy security metrics studied by close to 8 percent for Europe as a whole.
  - Import dependence falls by 0.6 percentage point overall.
  - Geographic concentration of imports reduced by some 7 percent overall and by as much as 25 percent in Germany.
  - Energy expenditures to GDP fall by 10 percent of baseline level, or by 0.4 percentage point (from 4.7 to 4.3 percent).
  - Poland: energy spending share of GDP falls by 7 percent of its baseline level; composite supply insecurity index deteriorates by 5 percent because increased import dependence from coal phase-out outweighs concentration gains.
- Distributional and regional notes:
  - All European energy importers benefit on energy expenditures, including energy- and emissions-intensive Central and Eastern European economies.
  - Norway: energy expenditures fall in nominal terms but rise relative to GDP as the economy shrinks due to lower exports.
- Global price effects:
  - The simulated European package does not materially affect global fossil fuel prices; energy security gains are not offset by driving high-cost suppliers out of the market.

### Overinvestment in fossil fuels and policy responses
- Simulation finding:
  - Europe’s fossil fuel capital stock in 2030 is projected to be almost 20 percent larger than implied by the broad climate policy scenario achieving a 55 percent emission cut.
  - Cumulative overinvestment: almost 40 percent for fossil fuel power generation and 15 percent in fossil fuel extraction.
- Policy concerns and options:
  - Reexamine some gas infrastructure projects to avoid carbon lock-in; require new gas infrastructure to be “hydrogen-ready” with clear certification.
  - Rapidly phase out government tax incentives for coal or oil investment.
  - Strengthen regulatory review of fossil fuel investment plans in national energy plans.
  - Regulatory oversight example: ENTSOG’s proposed €110 billion investments in 2022 plans “likely to exceed reasonable needs” given expected gas demand reduction from 2030.

### Electricity market integration (Box 1 findings)
- Simulated closer energy union: cross-border electricity trade increases by 50 percent (reduced trade costs).
- Impacts:
  - Import dependence increases, but geographic concentration among non-European suppliers falls; net effect reduces exposure to foreign supply disruptions in most of Europe.
  - Energy prices and expenditures fall; larger electricity price declines in economies with higher baseline electricity prices (e.g., Italy, United Kingdom).
  - Electricity production shifts to competitive economies (e.g., Germany, BNL): emissions rise by 0.3 percent in competitive economies and fall by 0.4 percent in others like Italy.
  - Overall: closer electricity market integration enhances energy security with negligible effects on Europe’s greenhouse gas emissions.

### Policy implications and recommendations
- Keep carbon pricing at the forefront for economic efficiency.
- Complement carbon pricing with:
  - sector-specific regulations and energy efficiency standards (especially for cars and buildings) to increase energy security co-benefits and spread them more evenly;
  - accelerated permitting procedures for green infrastructure to amplify benefits.
- Strengthen multilateral cooperation within Europe:
  - Expand common financial capacity at the EU level to accelerate green transition and share energy security co-benefits more evenly.
  - Deeper integration of electricity markets and connect grids; seven member states still do not meet the EU target of cross-border capacity to export 15 percent of electricity production.
  - Harmonize power capacity mechanisms, standardize reliability criteria, develop common “resource adequacy” methodologies, and establish rules for electricity shortages between neighbors.
- Further actions beyond modeled instruments:
  - Improve electricity market design and support technologies addressing renewables’ intermittency: batteries, green hydrogen, demand-side flexibility.
  - Guard against overinvestment in fossil fuel infrastructure to avoid carbon lock-in.
  - Deepen cooperation with other regions to secure minerals critical for the green transition.
- Joint financing and redistribution:
  - An EU-level fund for energy security and climate could finance decarbonization (e.g., buildings) and new technologies, abating emissions at minimum cost while spreading gains.
  - Central and Eastern European energy- and emissions-intensive economies have lower marginal abatement costs; targeted support could enhance their gains at low cost.

_ IMF Departmental Papers — The Energy Security Gains from Strengthening Europe’s Climate Action _

### Executive Summary ...............................................................................................iv

### Executive Summary

### Context and scope
- Russia’s invasion of Ukraine in 2022 sparked an energy crisis in Europe on the back of a long-term deterioration in energy security.
- The paper analyzes two dimensions of energy security:
  - security of supply: dependence on energy imports and concentration of suppliers;
  - economic resilience to energy shocks: the weight of energy spending in GDP.
- The analysis uses a global multicountry, multisector general equilibrium model to simulate impacts of climate mitigation policies on energy trade, consumption, production, and GHG emissions over the medium term.
- Geographical scope: the European Union, the United Kingdom, and the European Free Trade Association (EFTA).

### Recent crisis and prewar trends (selected facts from the Executive Summary)
- Pipeline gas flows from Russia to Europe began dropping in the second half of 2021; flows to many countries were suspended in 2022.
- Natural gas prices traded on the Dutch Title Transfer Facility increased over 20-fold between 2019 and August 2022.
- Electricity prices rose from €45 to €598 per megawatt hour in August 2022.
- Responses included buying gas, financing energy firms, requiring filling of gas storage, leasing floating import terminals, and activating standby generation.
- Energy consumption responses: gas consumption fell by 15 to 20 percent; electricity and coal consumption fell by 5 to 10 percent.
- The IMF revised down forecasts for GDP growth by over 1 percent in 2022 and 2023, and ½ percent in 2024.
- Markets expect energy prices in Europe to remain about 60 percent above prewar levels.
- EU 2023 targets: renewable energy target revised to 42.5 percent and energy efficiency target to 11.7 percent (previously discussed targets included raising the 2030 renewable target from 32 to 45 percent and energy efficiency from 9 to 13 percent).
- EU and UK legally binding emission reduction targets: EU by 55 percent of 1990 levels by 2030; United Kingdom by 68 percent of 1990 levels by 2030; both aiming for climate neutrality by 2050.

### Model approach and policy instruments analyzed
- The model simulates:
  - carbon pricing;
  - sector-specific emissions and performance standards (for road transport and buildings);
  - accelerated permitting for renewables;
  - public investment in heat pumps;
  - combinations that resemble the EU “Fit for 55” agenda and broader policy packages.
- Energy security metrics: risk of foreign supply disruptions; exposure of economic activity to energy supply disruptions.

### Key findings
- Climate change mitigation policies are expected to help Europe’s energy security in the medium term.
  - Higher carbon prices, tighter sector-specific energy efficiency regulations, and accelerated permitting all improve energy security along the two dimensions studied.
- Heterogeneity across instruments and countries:
  - Carbon pricing:
    - Cuts emissions at least cost.
    - If used alone, can weaken energy security for a while in some energy- and emissions-intensive economies in Central and Eastern Europe, partly due to accelerated phasing out of domestic coal.
    - Raises energy prices by design, but over the medium term energy demand is relatively elastic, so carbon pricing lowers the amount spent on energy in most of Europe.
  - Sector-specific energy efficiency regulations:
    - Economically costlier than carbon pricing but deliver larger energy security co-benefits.
    - Spread benefits more evenly across countries because they lower both the price and the consumption of energy.
  - Public investment in heat pumps:
    - Enhances security of supply by reducing fossil fuel imports.
    - Needs to be combined with accelerated decarbonization of the power sector; otherwise it could raise electricity and gas prices and thereby the weight of energy spending in GDP.
- Why a broad package works:
  - Combines carbon pricing’s economic efficiency with sector regulations’ larger and more evenly distributed energy security benefits.
  - Effects of such a package include:
    - Lower dependence on imported energy because renewables are produced domestically while fossil fuel consumption tends to be imported.
    - Diversification of remaining imports away from non-European suppliers (Norway’s share rises while top non-European producers reallocate exports away from Europe as demand falls).
    - Lower energy expenditures as energy efficiency investments reduce demand and accelerated renewables deployment raises supply, helping lower energy prices.
    - Decarbonization of the power sector ensures that heat-pump deployment enhances energy security rather than raising fossil fuel demand.
- Quantified illustrative impact:
  - An illustrative package that would cut emissions by 55 percent vis-à-vis 1990 levels by 2030 (close in spirit to policy mixes in the EU, UK, or EFTA) is estimated to improve the two energy security metrics studied by close to 8 percent by 2030.
  - This improvement would reverse 13 years of deterioration in the European Union’s economic resilience, and 8 years of deterioration in the European Union’s security of supply.

### Policy implications and recommendations
- Keep carbon pricing at the forefront given its economic efficiency benefits.
- Complement carbon pricing with:
  - sector-specific regulations and energy efficiency standards (especially for cars and buildings) to increase energy security co-benefits and distribute them more evenly across countries;
  - accelerated permitting procedures for green infrastructure to amplify benefits.
- Strengthen multilateral cooperation within Europe:
  - Expand common financial capacity for green investment at the EU level to accelerate the green transition and ensure energy security co-benefits are shared more evenly across countries.
- Further actions needed beyond modeled instruments:
  - Improve electricity market design and support deployment of technologies to address renewables’ intermittency, such as batteries, green hydrogen, and demand-side flexibility.
  - Guard against overinvestment in fossil fuel infrastructure to avoid carbon lock-in.
  - Deepen cooperation with other regions to secure supplies of minerals critical for the green transition.

_ IMF Departmental Papers — The Energy Security Gains from Strengthening Europe’s Climate Action _

### 2. Europe’s Deteriorating Energy

### 2. Europe’s Deteriorating Energy

### Measurement approach to energy security
- Energy security is measured along two main dimensions:
  - Security of supply: captured by the composite energy supply insecurity index of Cohen, Joutz, and Loungani (2011), defined as S = sum over non-European supplier country i of (net positive energy imports_i / energy consumption)^2, with all non-European countries treated identically and European suppliers assigned a risk weight of zero.
  - Economic resilience: measured as the ratio of energy consumption expenditures of firms and households to GDP (both in current prices), closely related to the Domar weight.
- Rationale and interpretation:
  - The composite index summarizes both import dependence (net energy imports / consumption) and geographic concentration (Herfindahl index with European countries zero-weighted).
  - Example sensitivity: a 10 percent increase in energy prices would increase energy expenditures by 2 percentage points of GDP in an economy starting with a 20 percent energy expenditure share, and by 0.5 percentage point in an economy with a 5 percent share.
- Limits: these two indicators ignore amplification effects from physical infrastructure constraints and price instability; the model used is deterministic and cannot capture price volatility.

### Prewar deterioration: empirical findings
- Composite energy supply insecurity and expenditures:
  - In the European Union, the composite energy supply insecurity index increased fivefold between 1990 and 2019.
  - Energy expenditures increased from 5.5 percent of GDP in 1970 to 6.6 percent in 2019.
  - The composite insecurity index increased between 1990 and 2019 for 25 of the 29 European countries.
  - Energy expenditure shares increased in 17 out of 22 countries with available data.
- Energy intensity:
  - The United Kingdom experienced a 50 percent reduction in energy intensity (real energy consumption / real GDP) since 1990.
- Geographic concentration and import dependence:
  - The European Union’s energy import dependence increased from about 56 percent in 1990 to 76 percent in 2021, driven by gas, oil, and coal imports from Russia.
  - The (weighted) geographic concentration of EU energy imports doubled between 1990 and 2021.
  - Germany replaced Norwegian gas with Russian gas between 2010 and 2015, contributing to a 20 percent increase in the geographic concentration of its overall energy imports.
  - Most European countries (including Germany, Italy, and the United Kingdom) increased the weighted geographic concentration of their energy imports between 1990 and 2015; France’s concentration remained stable as Russian imports substituted Saudi Arabian imports.
- Fuel contributions to rising concentration (shift-share analysis, 1999–2021):
  - The upward trend in EU import concentration since 1999 is due to increasing concentrations of coal and oil imports.
  - Changes in the energy import mix contributed negligibly to the increase in concentration for the EU as a whole; Italy is an exception where the shift into natural gas drove up concentration and the insecurity index.
  - About 1.9 percentage points of the 3.1 percentage point change in energy import concentration can be explained by the shift-share decomposition (with a noted nonlinear component).

### Modeling framework and scenarios
- Model used:
  - A global multicountry, multisector recursive dynamic computable general equilibrium model called “ENVISAGE”, developed by the World Bank and adapted at the IMF.
  - Model coverage and features: 31 countries or country groups (including 10 in Europe), production/consumption/trade in 28 commodities (including crude oil, oil products, gas, coal), electricity generation from fossil fuels, renewable (wind, solar, hydro), and nuclear sources.
  - Temporal focus: yearly model with results emphasized for the year 2030 (the “medium term”).
- Baseline scenarios for estimating war effects:
  - Baseline 1 (prewar baseline): calibrated using IEA energy trade estimates and projections from EU Reference Scenario 2020 and IMF January 2022 World Economic Outlook. In the model, geographic concentration of Europe’s energy imports ≈ 12 percent in 2021 and energy expenditures are 6 percent in 2019. The model’s import dependence ratio is about 54 percent in 2021 (22 percentage points below its level in the data); about half the discrepancy is due to definitions (model double counts energy used in electricity generation) and the other half likely due to trade costs.
  - Baseline 3 (postwar baseline): bilateral energy trade adjusted to reflect observed shutoff of Russian gas flows in Eurostat monthly data; Europe is assumed to phase out all remaining Russian fossil fuels by 2030. Economic activity follows April 2023 World Economic Outlook, while emissions and electricity mix respond endogenously.
  - Baseline 2 (intermediate): gas imports are not adjusted, but EU countries continue phasing out Russian oil and coal; used to disentangle gas shutoffs from sanctions and other war effects.

### Projected medium-term (2030) effects of the war and sanctions
- Trade and supplier diversification:
  - The war and associated restrictions are projected to shift Europe’s energy imports toward the United States overall; France and Italy are projected to import more from Africa; Germany, the Czech Republic/Slovak Republic/Hungary bloc, and Poland are projected to import more from Norway.
  - Net effect: reduce the geographic concentration of Europe’s energy imports among non-European suppliers by about two-thirds (Annex Figure 2.1, panel 2).
- Recent observed shifts and commitments:
  - EU phased out Russian coal and imposed sanctions on seaborne oil, reducing imports of Russian oil by 90 percent (European Commission 2023b).
  - Russia’s share in EU gas imports fell from 41 percent in 2021 to 15 percent in the first 10 months of 2023 (European Commission 2023a).
  - The European Union committed to phasing out all remaining Russian fossil fuel imports before 2030.
- Price and expenditure effects:
  - The war could persistently increase energy prices in Europe, which would raise the energy spending share in GDP and weaken economic resilience (making activity more sensitive to energy disruptions).
  - The model projects that Europe will respond to war-induced higher energy prices by producing more energy, which reduces its energy import dependence in the medium term.
- Limitations of the model projections:
  - The model’s deterministic structure cannot capture price volatility or intrayear price instability; energy price volatility rose in the two decades before the pandemic (Figure 2, panel 4).
  - Pipeline imports and seaborne imports are treated symmetrically in the indices, though pipeline imports can be harder to substitute; the model attempts to capture infrastructure constraints via calibrated iceberg trade costs.
  - Annex 3 (outside the model) examines technologies—hydrogen, batteries, demand-side flexibility—that Europe will need to maintain price stability while adopting intermittent renewables.

*IMF DEPARTMENTAL PAPERS • The Energy Security Gains from Strengthening Europe’s Climate Action*

### 3. Energy Expenditures

### 3. Energy Expenditures

### Energy expenditures and the postwar baseline
- Reductions in geographic concentration and import dependence together drive down the projected 2030 composite index of energy insecurity by some 8 percent in Europe as a whole.
- The reduction in import dependence ratio is quantified as 1.2 percentage points (Annex Figure 2.1, panel 1).
- Despite rising European energy supply, energy prices remain higher in the postwar world (Baseline 3) than in the counterfactual no-war scenario (Baseline 1).
- As a result, and despite some reduction in energy consumption, European countries’ energy expenditures are projected to rise by about 0.2 percent of GDP overall.
- Norway is an exception: a boom in economic activity (associated with higher energy exports) reduces its share of GDP spent on domestic energy use.
- Note on Baselines: Baseline 1 = counterfactual no-war scenario; Baseline 2 and Baseline 3 are successive postwar scenarios used to isolate effects of shutoffs and sanctions.

### Drivers of improved supply security after the war
- Oil and coal sanctions on Russia play a larger role than gas shutoffs in improving Europe’s energy security, though both contribute positively.
  - Evidence: composite energy security index drops for most of Europe between Baseline 1 and Baseline 2 but changes less between Baseline 2 and Baseline 3, implying sanctions (oil and coal) diversify imports more across non-European suppliers than gas shutoffs do.

### Calibration of individual climate policy instrument scenarios (simulated one at a time against Baseline 3)
- Higher carbon prices in the EU and UK ETS:
  - Prices assumed to rise more steeply to end at €110 per ton in 2030 in the European Union instead of €33 as in the EU Reference Scenario.
  - Prices reach €118 in the United Kingdom.
  - These higher prices reduce emissions by about 4 percent in 2030, compared to baseline.
- Tighter emissions and energy performance standards for road transport and buildings:
  - Transport services energy consumption reduced by 13 percent compared to baseline.
  - “Other services” sector energy consumption reduced by 5 percent.
  - Households reduce energy consumption by 8 percent.
  - These demand reductions yield overall emissions reductions of 4 percent in 2030 (matched to the carbon pricing scenario for comparability).
- Accelerated renewables permitting processes:
  - Increase total factor productivity of wind and solar power, leading to 10 percent more such generation compared to baseline by 2030.
  - The 10 percent generation increase is consistent with a 40 percent improvement in the speed of renewables deployment (if median permitting times match the top quartile).
- Public investment in heat pumps in residential buildings:
  - Households’ preferences shift away from energy, reducing overall demand by 6 percent in both the EU and EFTA region and the United Kingdom.
  - Within energy, households’ preferences shift away from coal and gas and toward electricity.
  - These demand changes reduce emissions by 4 percent in 2030 (matched to other 4 percent scenarios).
- Removing fossil fuel subsidies:
  - Subsidies on fossil fuel production and consumption are phased out in 2030, calibrated to prewar estimates.
  - Example: coal production subsidies in Germany make up 0.1 percent of GDP (or €3.6 billion) and 1.3 euros per gigajoule of domestic coal use, which is about 25 percent of the retail price.
  - Assumes temporary energy subsidies introduced during the energy crisis are fully phased out before 2030.

### Key comparisons and model caveats for the individual instruments
- Carbon pricing, road/building regulations, and heat pumps reduce emissions by similar amounts (about 4 percent), facilitating direct comparisons of energy security effects.
- Accelerated permitting and fossil fuel subsidy removal are expected to reduce emissions by smaller amounts due to:
  - Limits on how much permitting can speed deployment.
  - Fossil fuel subsidies being small in the medium term once recent crisis-era support is phased out.
- Model simulations do not analyze:
  - Direct effects of the EU Carbon Border Adjustment Mechanism on energy security (electricity imports are very small; hydrogen is not modeled).
  - Potential energy security implications of green-transition supply chain risks (these could affect flows of renewables equipment but are not expected to have acute implications for energy consumption because installed plants can keep operating).
- Empirical note: Over 99 percent of the European Union’s electricity consumption is met through EU production.

### Effects of individual instruments on energy supply security and energy expenditures
- Higher carbon prices:
  - Tend to improve supply security and economic resilience to disruptions in most of Europe.
  - Reduce import dependence by causing substitution toward cleaner sources; this effect is largest where imports are dirtier than domestic production.
  - Exceptions: energy- and emissions-intensive economies in Central and Eastern Europe (Poland and Czech Republic/Slovak Republic/Hungary block) where domestic production is more fossil-fuel-intensive than imports; in Poland energy expenditures rise relative to GDP in the model because the coal-intensive electricity mix is modeled as rather rigid.
  - Geographic concentration of imports falls (lower US and African shares in some cases); Norway’s share rises.
  - Energy expenditures to GDP tend to fall because medium-term energy demand is price-responsive, especially in Western Europe.
- Tighter road transport and building regulations:
  - Cause larger improvements in energy security than carbon pricing and distribute benefits more evenly across European regions.
  - Reduce dependence on imports (less gas for heating; less oil for transport) and lower geographic concentration of imports, including reduced US import shares.
  - By reducing both energy consumption and energy prices, these regulations reduce energy expenditures more than carbon prices do.
- Accelerated permitting for renewables:
  - Improves energy security in all European regions, though effects are smaller than the top instruments.
  - Increases domestic energy supply, bringing down energy prices and expanding economic activity; reduces geographic concentration of imports (especially US natural gas).
  - Composite energy supply insecurity index improves for all of Europe.
- Public investment in heat pumps:
  - Improves energy supply security by expanding electricity production and replacing imported fossil fuels; reduces import dependency ratios and demand for US natural gas.
  - Effects especially strong in the United Kingdom, where 44 percent of gas consumption is accounted for by households in the 2030 projection.
  - Without concurrent power-sector decarbonization, energy expenditures can rise relative to GDP because increased electricity demand can drive up gas-fired power generation and gas prices (gas supply is modeled as rather inelastic).
  - Rising energy costs are most noticeable in Poland and the Bulgaria/Croatia/Romania region.
- Removing fossil fuel subsidies:
  - Has negligible effect on energy security in most of Europe given small expected subsidy size by 2030 after phasing out crisis measures.
  - Material impacts limited to Germany and the United Kingdom, where subsidies are largest relative to consumer expenditure on fuels (reaching a tenth of the gas price in the United Kingdom and a quarter of the coal price in Germany).
  - European subsidies tend to target production (50 percent in the EU) rather than consumption (35 percent), so removal can reduce domestic production and raise import dependency in Germany and the United Kingdom.
  - Removing subsidies slightly reduces GHG emissions (by 0.3 percent in the simulation) and benefits the economy but can increase import dependency where subsidies are skewed toward domestically produced fuels.
  - In contrast, a simple flat fossil fuel consumption tax (illustrative example: 3 percent of the price of each fossil fuel) tends to reduce import dependency throughout Europe.

_italic_IMF DEPARTMENTAL PAPERS • The Energy Security Gains from Strengthening Europe’s Climate Action_italic_

### 5. A Broad Policy Package

### 5. A Broad Policy Package

### A. Calibrating a Broad Policy Package
- Objective: target an emissions reduction for Europe as a whole of 55 percent of 1990 levels by 2030.
- Components of the illustrative package (calibrated more ambitiously than preceding individual scenarios):
  - Higher carbon prices in electricity and manufacturing sectors:
    - Carbon prices in the EU ETS are assumed to rise to €185 per ton in 2030 (rather than €33 in Baseline 1 and the EU Reference Scenario).
  - Tighter energy and emissions efficiency standards in road transport and buildings:
    - Calibrated to reduce energy demand in 2030, compared to baseline, by:
      - 13 percent in the transport services sector,
      - 8 percent in the “other private services” sector (which includes real estate services),
      - 15 percent in households.
    - Assumption: firms improve energy efficiency while households prefer less energy.
  - Accelerated permitting procedures for renewables:
    - Calibrated to result in 10 percent more wind and solar power generation in 2030 than in the baseline.
  - Public investments in technologies like heat pumps and building renovation:
    - Approximated through a further reduction in households’ energy demand by 11 percent and an increase in their electricity demand.

### B. Climate and Energy Security Impacts
- Headline simulation results:
  - The package would enhance energy security by reducing by at least 8 percent the risk of a disruption to Europe’s foreign energy supply and the sensitivity of European economic activity to any energy disruptions; gains would be widespread across Europe.
- Security of supply:
  - The broad package reduces the composite energy supply insecurity index substantially for all European countries, except Poland, by 2030.
  - The overall composite index for Europe drops by about 8 percent by 2030.
  - Underlying drivers:
    - Import dependence falls in most of Europe and by 0.6 percentage point overall.
    - Geographic concentration of imports is reduced by some 7 percent overall and by as much as 25 percent in Germany.
    - Italy lowers concentration through reduced reliance on Africa; the Czech Republic/Slovak Republic/Hungary group lowers it through cuts in imports coming from Eurasian and Middle Eastern regions.
- Economic resilience:
  - The package reduces Europe’s ratio of energy expenditures to GDP by 10 percent of its baseline level (or by 0.4 percentage point, from 4.7 to 4.3 percent).
  - All European energy importers benefit, including energy- and emissions-intensive economies in Central and Eastern Europe.
  - Norway: energy expenditures fall in nominal terms, but rise relative to GDP because the economy becomes smaller as less energy is produced domestically for export.
- Country-specific note — Poland:
  - Energy spending share of GDP falls by 7 percent of its baseline level.
  - The composite energy supply insecurity index deteriorates by 5 percent (driven by increased import dependence as domestically produced coal is phased out, outweighing reduced geographic concentration).
  - Poland starts from a strong third place in Europe on the security-of-supply dimension in the postwar baseline and would remain a solid fourth under the broad package.
  - Policy responses noted as helpful:
    - Ramp up domestic electricity generation (renewables and/or nuclear).
    - Expand electricity interconnections with neighboring countries; an example target is raising the 2030 interconnection target to 15 percent of electricity production (in line with the European Union’s target).
- Relationship to global analyses:
  - The simulated European package does not affect global fossil fuel demand enough to materially affect global fossil fuel prices, so energy security gains are not offset by driving high-cost suppliers out of the market.
- Complementary finding referenced:
  - Kim, Panton, and Schwerhoff (2024) find raising global carbon prices could increase geographic concentration of energy exports and imports, but reduced reliance on imported energy dominates that effect.

### C. Overinvestment in Fossil Fuels
- Simulation finding on capital stock:
  - Europe’s fossil fuel capital stock in 2030 is projected to be almost 20 percent larger than implied by the broad climate policy scenario that achieves a 55 percent emission cut.
  - Cumulative overinvestment reaches almost 40 percent for fossil fuel power generation (versus 15 percent in fossil fuel extraction).
- Policy concerns:
  - New investments in natural gas infrastructure can be useful as a bridging source, but the 20 percent overinvestment signal calls for reexamining some projects to avoid carbon lock-in.
  - Regulatory oversight is needed because industry plans may overstate investment needs.
  - Example assessment: the European Network of Transmission System Operators for Gas’ proposed investments at €110 billion in its 2022 plans were “likely to exceed reasonable needs for such infrastructure, considering the expected reduction in gas demand in Europe from 2030.”
- Policy options to combat overinvestment:
  - Require that new gas infrastructure be “hydrogen-ready” (as in Germany) and provide clear definitions and regulations for certification.
  - Rapidly phase out any government tax incentives for investment in coal or oil production or distribution.
  - Strengthen regulatory review of fossil fuel investment plans in national energy plans.

### Box 1 — Simulating a Closer Energy Union through Electricity Market Integration
- Scenario: cross-border electricity trade increases by 50 percent (captured by reduced trade costs).
- Security of supply impacts:
  - Even though import dependence increases, geographic concentration of energy imports among non-European suppliers falls.
  - Net effect: reduce exposure to foreign supply disruptions in most of Europe (composite energy supply insecurity index improves).
- Economic resilience impacts:
  - Energy prices and hence energy expenditures fall; economies become less sensitive to energy supply disruptions.
  - Electricity price effects:
    - The fall in electricity prices tends to be greater in economies with higher baseline electricity prices (e.g., Italy, United Kingdom).
    - With electricity production shifting to more competitive economies like Germany and the Belgium/The Netherlands region:
      - Emissions increase in those competitive economies by 0.3 percent.
      - Emissions fall symmetrically in other economies such as Italy by 0.4 percent.
- Overall: a closer energy union enhances energy security with negligible effects on Europe’s greenhouse gas emissions.

### Conclusions and Policy Implications
- Main conclusion:
  - A broad policy package that cuts emissions by 55 percent vis-à-vis 1990 levels by 2030—combining carbon pricing and sector-specific regulations and other instruments—could enhance Europe’s energy security along the two metrics studied by some 8 percent and spread gains widely across the continent.
- Trade-off and instrument choice:
  - For a given GHG reduction, a trade-off exists between economic efficiency and energy security:
    - Greater weight on economic efficiency favors carbon pricing.
    - Greater concern for energy security favors sector-specific emissions and energy efficiency regulations.
  - This trade-off provides rationale for coexisting multiple instruments and targets (e.g., the EU’s 2030 renewables and energy efficiency targets).
- Multilateral cooperation and market integration:
  - Deeper integration of European electricity markets would improve energy security by diversifying imports from non-European suppliers and reducing energy prices.
  - Progress needed: connect electricity grids between EU member states; seven member states still do not meet the EU target of cross-border capacity to export 15 percent of their electricity production.
  - Better coordination of predominantly national energy policies is necessary:
    - Set targets to measure progress toward EU energy import diversification objectives.
    - Harmonize and integrate power capacity mechanisms (standardize reliability criteria, develop common methodologies for “resource adequacy assessments,” establish rules for dealing with electricity shortages between neighbors).
- Joint financing and redistribution:
  - An EU-level fund for energy security and climate could help fund projects to decarbonize private capital (like buildings) and develop new technology, abating emissions at minimum cost while spreading economic and energy security gains.
  - Central and Eastern European energy- and emissions-intensive economies often enjoy smaller energy security co-benefits and have lower marginal abatement costs; supporting investments in these economies could enhance their gains and accelerate Europe’s green transition at low cost.

*IMF Departmental Papers — The Energy Security Gains from Strengthening Europe’s Climate Action (chapter 5).*

### Annex 1. The Composite Energy Insecurity Index

### Annex 1. The Composite Energy Insecurity Index

### Definition and construction
- The composite energy insecurity index for a given importing country in a given year is defined as
  S supplier country i ((net positive energy imports)i ___ energy consumption)2,
  where the summation runs across each non-European energy supplier i, and net positive energy imports denotes imports net of exports if these are positive, otherwise zero.
- This definition is equivalent to that proposed in Cohen, Joutz, and Loungani (2011), except that European countries are assigned zero risk and all non-European supplier countries are assigned equal (unit) risk weight.
- Rationale: European suppliers get zero weight; non-European suppliers get unit risk weight (see main text for explanation).

### Algebraic decomposition and interpretation
- The index can be written equivalently as
  (total net positive energy imports ___ energy consumption)2 [ S supplier country i ((net positive energy imports)i ___ total net positive energy imports)2 ],
  where total net positive energy imports is the sum (across non-European supplier countries i) of net positive energy imports.
- Interpretation of the two multiplicative terms:
  - The first ratio (total net positive energy imports ___ energy consumption)2 is similar to import dependence (with European imports given zero weight).
  - The second term [ S supplier country i ((net positive energy imports)i ___ total net positive energy imports)2 ] is similar to the (risk-weighted) Herfindahl index of geographic import concentration (European countries zero risk; non-European countries unit risk).
- Key distinction: the first term gives zero weight to imports from European countries, whereas the standard import dependence ratio used elsewhere in the paper does not differentiate between European and non-European imports.

### Approximate weighted-geometric-average representation
- In other words, the composite index is approximately equal to (import dependence)2 [geographic import concentration].
- Therefore, the cube root of the composite index is approximately equal to (import dependence)2/3 [geographic import concentration]1/3, showing that the (cube root of the) composite index is approximately equal to a weighted (geometric) average of import dependence and geographic import concentration, with a weight of two-thirds placed on import dependence and one-third on geographic import concentration.

### Validity and limitations of the approximation
- The approximation will be better for countries that are net energy importers (because then net positive energy imports are similar to net energy imports), especially those who are net energy importers with respect to each trading partner.
- The approximation might be worse for energy exporters or for countries heavily engaged in energy re-export activity (importing energy from one supplier country and then re-exporting it to other consumer countries).

*IMF DEPARTMENTAL PAPERS • The Energy Security Gains from Strengthening Europe’s Climate Action — Annex 1. The Composite Energy Insecurity Index*

### Annex Figure 2.4. Permitting Procedures Duration and Effects of Accelerating Them

### Annex Figure 2.4. Permitting Procedures Duration and Effects of Accelerating Them

### Permitting procedures duration (figure panel 1)
- Headline label: "1. Permitting Procedures Duration (Years)"
- Text as presented in the figure:
  - Wind onshoreSolar
  - Ground-mounted
  - RooftopUnspecified
  - 6
  - 2
  - 4
  - 5
  - 3
  - 0
  - 1

### Effect of faster permitting on energy import dependence (figure panel 2)
- Headline label: "2. Faster Permitting Causes Energy Import Dependence to Fall More in Countries with More Existing Installed Wind and Solar Capacity"
- Axes and labels as presented in the figure:
  - Horizontal axis label (figure text): "Share of wind and solar in electricity generation (percent)"
  - Vertical axis label (figure text): "Percentage change in energy import dependency in 2030"
  - Tick/scale markers and numbers shown in the figure:
    - "0102040305060708090"
    - "1.0"
    - "0"
    - "0.5"
    - "–1.5"
    - "–1.0"
    - "–0.5"
- Note text presented with the figure:
  - "Sources: Tallat-Kelpšaitė and others (2022); and authors’ calculations."
  - "Note: In panel 2, the share of wind and solar generation is from Baseline 3 in 2030. The percentage change in import dependency is between Baseline 3 and the scenario with accelerated permitting procedures. Labels in the figure use International Organization for Standardization (ISO) country codes. BCR = Bulgaria, Croatia, and Romania; BNL = Belgium and The Netherlands; CSH = Czech Republic, Slovak Republic, and Hungary; REU = rest of Europe."

### Key findings and interpretation (from figure captions and notes)
- Faster permitting procedures are associated with reductions in energy import dependency in 2030 relative to Baseline 3 (percentage change shown in panel 2).
- The reduction in import dependency from faster permitting is larger in countries with a higher share of wind and solar in electricity generation (share measured from Baseline 3 in 2030).
- Country group labels used in the figure: BCR (Bulgaria, Croatia, and Romania); BNL (Belgium and The Netherlands); CSH (Czech Republic, Slovak Republic, and Hungary); REU (rest of Europe).
- The percentage change in import dependency reported is the difference between Baseline 3 and the accelerated permitting scenario.

*Sources: Tallat-Kelpšaitė and others (2022); and authors’ calculations.*

### References

### dpea2024seegt - References

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### Data, projections, and datasets from international agencies
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- IEA. 2023d. SDG7: Data and Projections. IEA, Paris https://www.iea.org/reports/sdg7-data-and-projections, License: CC BY 4.0
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*References as listed in the source PDF "dpea2024seegt - References."*

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_Source: https://www.imf.org/-/media/files/publications/dp/2024/english/dpea2024seegt.pdf_