## Governments risk worsening the energy crisis by seeking to suppress price rises—there are better options ## Source details **Canonical URL:** [Governments risk worsening the energy crisis by seeking to suppress price rises—there are better options](https://www.imf.org/-/media/files/publications/fandd/article/2022/december/celasun.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2022/december/celasun.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2022/december/celasun.pdf.json) --- ### Energy price shock and impact - Wholesale prices for natural gas were on average seven-and-a-half times higher in the summer of 2022 than they were in early 2021. - Even after falling from end-summer highs, prices remain well above their early 2021 levels and could rise again ahead of the 2023–24 winter. - There have been steep rises in the cost of coal and crude oil as well. - IMF staff estimates that high energy prices have raised the cost of living for the average European household by about 7 percent this year relative to early 2021. - Futures contracts suggest prices will stay above pre-invasion levels for the foreseeable future. - The energy price shock implies a persistent loss of national income for energy importers. ### Problems with price suppression - If all European countries suppress the pass-through of the current wholesale gas price increases to retail prices only marginal consumption reductions would occur; with limited supply this would push global gas prices even higher. - Price suppression would increase fiscal costs and reduce the effectiveness of domestic consumer protection while worsening outcomes internationally. - Measures that mute price signals (capping retail energy prices; reducing fees, charges, and taxes) have been adopted in nearly all countries and have often been extended or expanded. - Broad-based, untargeted support tends to add more to aggregate demand, complicating the fight against inflation. - Countries with highly regulated retail tariffs (for example Hungary and Malta) that allow little or no pass-through keep demand higher than warranted during scarcity. ### Current policy responses and fiscal costs - In some countries the fiscal cost of the energy crisis response is set to exceed 1.5 percent of GDP in the first year alone—with more than half of that in costly non-targeted measures. - The IMF staff estimates that it would cost 0.9 percent of GDP in 2022 and 1.2 percent in 2023 to fully compensate the bottom 40 percent of Europe’s households for the surge in the price of energy since early 2021—about half the average cost of Europe’s current policies. - Chart summaries in the source indicate direct and indirect increases in households’ cost of living due to energy in 2022 vary across European countries. ### First-best policy recommendation - Let price signals operate and provide lump-sum transfers to vulnerable households rather than broad-based price suppression. - Support should ideally be designed so that benefits taper off gradually at higher income levels. ### Practical second-best options - Extend income transfers quickly to households already receiving social benefits where possible. - Send bank transfers or checks based on income tax information where data and capacity permit; allow households to sign up and provide income information where feasible. - Provide a uniform lump-sum rebate on energy bills or a lump-sum check unrelated to energy bills (to avoid perception as a consumption subsidy), with additional transfers to the poorest through the welfare system and clawbacks from higher-income households via the tax system. - Implement block pricing: discounted price for energy up to a subsistence level and market price above that level; subsistence levels can be uniform or proportionate to recent consumption as a proxy for household size. Complement block pricing with progressive tax measures to claw back support to higher-income households. - Use auctions to pay users to reduce energy consumption or shift it to times with greater renewable supply and less reliance on gas; large-scale European auctions could reduce overall demand and lower global energy prices. Example: Germany is considering auctions for energy savings by firms. ### Design principles and longer-run strategy - Shift rapidly from price-suppressing measures to income relief targeted to the vulnerable while providing strong incentives to save energy and switch out of fossil fuels. - Given the high-inflation environment, relief should be provided within a non-expansionary fiscal stance so as not to add to aggregate demand. - Some households outside current safety nets may need support given the scale of the shock. - In the longer run, increasing the supply of non-fossil-fuel energy sources is the most reliable way to bring energy prices down and ensure energy security; maintaining clear price signals will aid the transition. *OYA CELASUN is deputy director of the IMF’s European Department, where DORA IAKOVA is an assistant director. This article draws on an update of IMF Working Paper 2022/152 (“Surging Energy Prices in Europe in the Aftermath of the War: How to Support the Vulnerable and Speed up the Transition away from Fossil Fuels”).* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/december/celasun.pdf_