## sipea2023063

## Source details

**Canonical URL:** [sipea2023063](https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023063.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023063.pdf.md)
- [Structured JSON version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023063.pdf.json)

---

### A. Introduction
- Climate change is macro-critical for Romania as an EU member committed to cutting absolute greenhouse gas (GHG) emissions by 55 percent (relative to 1990) by 2030 and achieving carbon neutrality by 2050.
- Decarbonization investment needs: at least 3.2 percent of cumulative GDP by 2050 (World Bank, 2023).
- Exposure of corporate sector: over 40 percent of non-financial corporate gross value added (GVA) and 48 percent of total assets highly exposed to phasing out of fossil fuel sector activity (National Bank of Romania, 2022).
- Climate adaptation risks: floods, heatwaves, and droughts are significant given Romania’s high vulnerability.
- Public willingness to pay for climate action: just over 40 percent of Romanians indicate willingness to pay (2023 EU Climate Action Citizens Survey).
- Firm-level exposure (2021): flood-vulnerable sectors contributed 15 percent of GVA and held 13.7 percent of total assets; firms impacted by extreme heat risk contributed 9 percent of total GVA and held 9.2 percent of total assets (National Bank of Romania, 2022).
- Energy poverty: over 15 percent of households could not afford to keep their home adequately warm in 2022 (EU, 2023).
- Paper objective: identify complementary policies—especially tax-based measures—to strengthen Romania’s resilience and competitiveness in a growth-friendly and fiscally sustainable transition to a low-carbon economy (Schoder 2023; IMF, 2023).

### B. Greenhouse Gas Emissions and Energy Mix
- Trend and levels:
  - Romania’s absolute GHG emissions have been persistently declining since 1990.
  - Per capita emissions: 6.0 metric tons of CO2 equivalent in 2021, below the EU average of 7.8 metric tons of CO2 equivalent.
- Energy sources and shares:
  - Coal phase-out under 2022 Decarbonization Law: coal-fired power generation facilities scheduled to be decommissioned by 2032.
    - In 2022, coal accounted for approximately 20 percent of electricity generation but contributed up to 70 percent of electricity-related GHG emissions.
  - Renewable energy share in total energy mix: 23.6 percent in 2021, above the EU average of 21.8 percent.
  - Low-carbon electricity sources (hydro, biomass, nuclear, wind, solar) accounted for up to 64 percent of Romania’s electricity mix in 2021.
  - Biomass generation is small but growing rapidly; EU rules require strict sustainability criteria for woody biomass.
- Emerging technologies:
  - Green hydrogen and carbon capture and storage investments are critical for meeting growing energy demand in a climate-friendly manner.
  - Exploration of Black Sea natural gas reserves can help short-term energy security as a transitional fuel.

### C. Climate Policies and Targets
- EU-level requirements and instruments:
  - Fit-for-55 package: at least 55 percent GHG reduction by 2030 (relative to 1990) and a more stringent ETS regime.
  - Carbon Border Adjustment Mechanism (CBAM) phased introduction from 2026 and phaseout of free ETS allowances.
  - Separate ETS for transport and buildings (‘ETS 2’) to be introduced in 2027–28.
    - Early national carbon pricing in transport and buildings could generate revenues and potentially exempt countries from ETS 2.
- National plans and sectoral schemes:
  - Integrated National Energy and Climate Plan (INECP) and Long-Term Strategy (LTS).
  - National Hydrogen Strategy; contract-for-difference for renewables; District Heating Program; National Long-Term Renovation Strategy; National Adaptation Strategy.
- INECP 2030 targets:
  - Overall share of renewable energy in gross final energy consumption: 30.7 percent in 2030.
  - Renewable energy share targets: 49.4 percent in electricity, 14.2 percent in transport, 33.09 percent in heating and cooling.
  - Energy efficiency targets: primary energy consumption targeted to be cut by 45.1 percent by 2030; final energy consumption targeted to be cut by 40.4 percent by 2030 (to meet EU-wide target of 32.5 percent energy efficiency improvement).
- Institutional coordination: Inter-ministerial Committee on Climate Change (CISC) centralizes decarbonization efforts across ministries (Energy; Environment, Water, and Forests; Finance; European Investments and Projects).

### D. Decarbonization Challenges
- Emissions trajectory:
  - Non-ETS emissions continue to rise and in 2022 Romania was among EU countries whose non-ETS emissions exceeded the new ESR national limit.
  - Current level of emissions described as "relatively low."
  - EEA projection shows Romania is on track to exceed the 55 percent reduction target well before 2030 (Figure 9).
  - Beyond 2030, pathway to carbon neutrality by 2050 "remains highly uncertain" given continued high energy and emission intensity.
- Intensity metrics:
  - Energy use per unit of output: 0.19 kg of oil equivalent in 2021, about 60 percent more than the average EU economy.
  - Emission intensity: over 70 percent above the EU average in 2021.
- Sectoral challenges:
  - Transport:
    - Transport emissions projected to surge by 84 percent by 2030 relative to 1990 (EEA projection).
    - EV penetration: share of EVs in Romania’s total passenger vehicle fleet was well below 1 percent in 2021.
    - EV subsidy program (Rabla Plus): grants for battery electric vehicles can reach up to €4,450 (20,000 RON); plug-in hybrids €1,100; additional subsidy of €10,000 available for purchase of a new electric vehicle; extra €1,430 for scrapping vehicles over eight years old; funding covers up to 50 percent of the vehicle's value.
    - Infrastructure needs: more charging stations powered by low-carbon energy are required.
  - Buildings:
    - Romania has one of the most energy inefficient building stocks in the EU; emissions in the sector are projected to rise.
    - Renovation rates: current renovation rate 0.5 percent annually; target renovation rate 3½ percent annually by 2030 under the National Renovation Strategy.
    - Existing programs: "CasaVerde" provides grants for heat pumps and insulation.
- Investment needs: meeting renovation and electrification goals requires substantial investment and stronger incentives.

### E. CPAT Assessment and Tax Instruments Simulated
- Tool: IMF-World Bank Climate Policy Assessment (CPAT) used to examine decarbonization and macroeconomic effects of complementary green tax policy options.
- Rationale: tax-based decarbonization measures can complement the ETS and other national policies.
- Environmental tax revenue context: Romania’s environmental tax revenues were "below the EU average in 2021" (Figure 10).
- Two illustrative tax measures simulated:
  - Carbon tax in transport and building sectors:
    - Starts low at €25 in 2024, before linearly rising to €75/ton of CO2 by 2030.
    - Intended to be implemented before ETS 2 rollout in 2027–28 to facilitate early revenue collection and potential exemption.
  - Gradual phase-in of excise taxes on fossil fuels:
    - Reach 75 percent of the optimal price by 2030, phased in from 2024 to 2030.
    - On an equivalent basis, excise for coal, gasoline, and diesel would be €68.1, €257.7, and €474 per ton of CO2 in 2030, respectively.
- Cross-country context: Carbon taxes across EU member states vary from €9 in Latvia to €108 per ton of CO2 in Sweden.

### F. Decarbonization and Sectoral Impacts by 2030
- Emissions reductions:
  - Simulated carbon tax reduces transport and building emissions by 2030 by 6 percent.
  - Transport shows a relatively higher rate of emissions reduction due to stronger dependence on fossil fuels.
  - Coal contribution to heating in buildings continues to fall with its phase out.
- Excise tax effects:
  - The excise tax, covering a larger fossil fuel base, delivers faster emissions reduction.
  - Across fuels, diesel usage declines fastest, followed by coal.
- Energy security and infrastructure:
  - Tax measures could promote energy efficiency, increase renewable penetration, and reduce energy import dependence.
  - Increased intermittent renewables penetration requires "substantial investments in modern energy infrastructure to balance loads and store energy."

### G. Fiscal Impacts and Revenue Recycling
- Fiscal revenue potential by 2030:
  - The carbon tax could raise fiscal revenues of up to 1.1 percent of GDP by 2030.
  - The excise tax "could deliver up to twice" that revenue by 2030.
- Macro outcomes in CPAT simulations:
  - Measures can be "growth-friendly" and have a "net positive effect on output" (Figure 15).
- Illustrative revenue recycling in CPAT simulation:
  - 30 percent to public infrastructure
  - 30 percent to household transfers
  - 40 percent to labor income tax reduction
  - Note: Simulation allocations are "merely illustrative" and governments may choose alternatives, including fiscal deficit reduction.
- Strategic recycling can mitigate adverse distributional effects and broaden political support.

### H. Distributional, Welfare, and Co‑benefits
- Distributional risks:
  - Without mitigation, decarbonization policies can disproportionately impact vulnerable segments, including low-income households and vulnerable workers.
  - Revenue recycling and targeted support can mitigate negative distributional effects; strategic recycling can lessen impacts for both rural and urban consumers (Figure 16).
- Co‑benefits:
  - Improved economic efficiency and cleaner production processes.
  - Less air pollution and reductions in traffic congestion and accidents.

### I. Green Growth Opportunities and Comparative Advantages
- Size of low-carbon sector: in 2020, low-carbon goods and services amounted to "2½ percent of GDP" (Figure 18).
- Comparative advantage: Romania has high comparative advantage in production of low-carbon technologies (Figure 19).
- Green hydrogen potential: high potential given availability of low‑carbon sources like hydropower.
- Trade and competitiveness: The EU's CBAM beginning 2026 is noted to "transform trade into a lever for climate policy," incentivizing cleaner production and offering competitiveness benefits for greening production processes.

### J. Conclusions and Policy Implications (Summary)
- Short- and long-term outlook:
  - Romania is on course to meet the EU Fit-for-55 target by 2030 but achieving carbon neutrality by 2050 requires a more stringent and well-designed decarbonization agenda.
- Key policy recommendations:
  - Make greater use of tax-based instruments, including targeted carbon taxes (illustrated for transport and buildings) and fossil fuel subsidy removal to better price externalities.
  - Phase in tax measures gradually and communicate them clearly to build political support.
  - Recycle generated revenues strategically—options include reducing labor income taxes, providing transfers to vulnerable households, investing in green infrastructure, or reducing fiscal deficits.
  - Mobilize substantial green investments to decarbonize hard-to-abate sectors (transport, buildings, industry) and to finance energy system modernization (storage, grid balancing).
  - Leverage Romania’s comparative advantages to exploit opportunities in green value chains (wind energy, green hydrogen, low-carbon tech production).
- Overall conclusion: Complementing existing policies with stringent national measures and strategic revenue use would help put Romania on track to carbon neutrality while supporting fiscal sustainability and social inclusion.

*Prepared by Augustus Panton; source: IMF staff analysis in sipea2023063 (section 17–34).*

### References ____________________________________________________________________________ 18

### sipea2023063 - References ____________________________________________________________________________ 18

### A. Introduction
- Climate change is macro-critical for Romania as an EU member committed to cutting absolute greenhouse gas (GHG) emissions by 55 percent (relative to 1990) by 2030 and achieving carbon neutrality by 2050.
- Achieving decarbonization targets requires investments amounting to at least 3.2 percent of cumulative GDP by 2050 (World Bank, 2023).
- Over 40 percent of non-financial corporate gross value added (GVA) and 48 percent of total assets remain highly exposed to the phasing out of fossil fuel sector activity (National Bank of Romania, 2022).
- Climate adaptation risks—particularly floods, heatwaves, and droughts—pose significant challenges given Romania’s high vulnerability.
- Public willingness to pay for climate action is limited: just over 40 percent of Romanians indicate willingness to pay for climate action (2023 EU Climate Action Citizens Survey).
- Firm-level exposure (2021): flood-vulnerable sectors contributed 15 percent of GVA and held 13.7 percent of total assets; firms impacted by extreme heat risk contributed 9 percent of total GVA and held 9.2 percent of total assets (National Bank of Romania, 2022).
- Romania has one of the highest energy poverty rates in the EU; over 15 percent of households could not afford to keep their home adequately warm in 2022 (EU, 2023).
- Paper objective: identify complementary policies—especially tax-based measures—to strengthen Romania’s resilience and competitiveness in a growth-friendly and fiscally sustainable transition to a low-carbon economy (Schoder 2023; IMF, 2023).

### B. Greenhouse Gas Emissions and Energy Mix in Romania
- Romania’s absolute GHG emissions have been persistently declining since 1990.
- Per capita emissions fell to 6.0 metric tons of CO2 equivalent in 2021, below the EU average of 7.8 metric tons of CO2 equivalent.
- Coal phase-out: under Romania’s 2022 Decarbonization Law, coal-fired power generation facilities are scheduled to be decommissioned by 2032.
  - In 2022, coal accounted for approximately 20 percent of electricity generation but contributed up to 70 percent of electricity-related GHG emissions.
- Renewable energy share in total energy mix: 23.6 percent in 2021, above the EU average of 21.8 percent.
- Low-carbon electricity sources (hydro, biomass, nuclear, wind, solar) accounted for up to 64 percent of Romania’s electricity mix in 2021.
- Biomass generation is small but growing rapidly; EU rules require strict sustainability criteria for woody biomass.
- Green hydrogen and carbon capture and storage investments are critical for meeting growing energy demand in a climate-friendly manner.
- Exploration of Black Sea natural gas reserves can help short-term energy security as a transitional fuel.

### C. Climate Policies in Romania
- EU Fit-for-55 package requires at least 55 percent GHG reduction by 2030 (relative to 1990) and includes a more stringent ETS regime.
- Fit-for-55 implementation challenges for Romania:
  - Effort Sharing Regulation (ESR): requires emissions reductions in non-ETS sectors (transport, buildings, agriculture, waste management, small industries). Romania must reduce effort-sharing sectors by up to 12.7 percent relative to 2005 (versus 2 percent under the old directive).
  - Carbon Border Adjustment Mechanism (CBAM) phased introduction from 2026 and phaseout of free ETS allowances.
  - Separate ETS for transport and buildings (‘ETS 2’) to be introduced in 2027–28.
    - Early national carbon pricing in transport and buildings could generate revenues to support decarbonization and potentially exempt countries from ETS 2.
- All member states must become carbon-neutral by 2050; EU funding instruments include Romania’s National Resilience and Recovery Plan (NRRP) and the Just Transition Mechanism.
- National measures complementing EU ETS include:
  - Integrated National Energy and Climate Plan (INECP) and Long-Term Strategy (LTS).
  - Sectoral schemes: National Hydrogen Strategy; contract-for-difference for renewables; District Heating Program; National Long-Term Renovation Strategy; National Adaptation Strategy.
- Romania’s INECP 2030 targets:
  - Overall share of renewable energy in gross final energy consumption: 30.7 percent in 2030.
  - Renewable energy share targets: 49.4 percent in electricity, 14.2 percent in transport, 33.09 percent in heating and cooling.
  - Energy efficiency targets: primary energy consumption targeted to be cut by 45.1 percent by 2030; final energy consumption targeted to be cut by 40.4 percent by 2030 (to meet EU-wide target of 32.5 percent energy efficiency improvement).
- Institutional coordination: Inter-ministerial Committee on Climate Change (CISC) centralizes decarbonization efforts across ministries (Energy; Environment, Water, and Forests; Finance; European Investments and Projects).

### D. Decarbonization Challenges in Romania
- Non-ETS emissions continue to rise and in 2022 Romania was among EU countries whose non-ETS emissions exceeded the new ESR national limit.
- Romania is highly energy- and emission-intensive relative to the EU:
  - Energy use per unit of output: 0.19 kg of oil equivalent in 2021, about 60 percent more than the average EU economy.
  - Emission intensity: over 70 percent above the EU average in 2021.
- Transport sector:
  - Transport emissions projected to surge by 84 percent by 2030 relative to 1990 (EEA projection).
  - Electric vehicle (EV) penetration: share of EVs in Romania’s total passenger vehicle fleet was well below 1 percent in 2021.
  - EV subsidy program (Rabla Plus): grants for battery electric vehicles can reach up to €4,450 (20,000 RON); plug-in hybrids €1,100; additional subsidy of €10,000 available for purchase of a new electric vehicle; extra €1,430 for scrapping vehicles over eight years old; funding covers up to 50 percent of the vehicle's value.
  - Infrastructure needs: further investments in charging stations powered by low-carbon energy sources are required to incentivize uptake.
- Buildings sector:
  - Romania has one of the most energy inefficient building stocks in the EU; emissions in the sector are projected to rise.
  - Current renovation rate: 0.5 percent annually; target renovation rate: 3½ percent annually by 2030 under the National Renovation Strategy.
  - Existing programs: "CasaVerde" provides grants for heat pumps and insulation to foster residential energy efficiency.
- Meeting renovation and electrification goals requires substantial investment and stronger incentives.

*Prepared by Augustus Panton; sources drawn from the provided content unit.*

### 17.      In sum, while Romania appears to be on track to meet the EU’s Fit-for-55 target,

### sipea2023063 - 17.      In sum, while Romania appears to be on track to meet the EU’s Fit-for-55 target,

### Emissions trajectory and long‑term outlook
- Current level of emissions is described as "relatively low."
- EEA projection shows Romania is on track to exceed the 55 percent reduction target well before 2030 (Figure 9).
- Beyond 2030, Romania is expected to continue to converge to higher income levels elsewhere in the EU while its energy and emission intensity remains high.
- Pathway to carbon neutrality by 2050 "remains highly uncertain" and "underscoring the need for significant additional policy action and green investments."

### Complementary policy options assessed (CPAT)
- The IMF-World Bank Climate Policy Assessment (CPAT) tool is used to examine decarbonization and macroeconomic effects of complementary green tax policy options.
- Rationale: Tax-based decarbonization measures can complement the ETS and other national policies in driving transition to a low-carbon economy.
- Romania’s environmental tax revenues were "below the EU average in 2021" (Figure 10), reflecting underpricing of fossil fuel externalities.

### Tax instruments simulated (illustrative scenarios)
- Two tax-based measures simulated to reverse rising non-ETS emissions and put Romania on a firmer net-zero path:
  - A carbon tax in the transport and building sectors that "Starts low at €25 in 2024, before linearly rising to €75/ton of CO2 by 2030."
    - Intended to be implemented before the new EU ETS 2 is rolled out in 2027–28 to facilitate early revenue collection and potential exemption of transport and building sectors under ETS 2.
  - Gradual phase-in of excise taxes on fossil fuels to "reach 75 percent of the optimal price by 2030," phased in from 2024 to 2030.
    - On an equivalent basis, the excise for coal, gasoline, and diesel would be €68.1, €257.7, and €474 per ton of CO2 in 2030, respectively.
- Note: Carbon taxes across EU member states vary from €9 in Latvia to €108 per ton of CO2 in Sweden (contextual comparison).

### Decarbonization and sectoral impacts by 2030
- Simulated carbon tax reduces transport and building emissions by 2030 by 6 percent.
  - Transport shows a relatively higher rate of emissions reduction due to stronger dependence on fossil fuels (mainly gasoline and diesel).
  - Coal contribution to heating in buildings continues to fall with its phase out.
- The excise tax, covering a larger fossil fuel base, delivers faster emissions reduction.
- Across fuels, diesel usage declines fastest, followed by coal, reflecting their implicitly higher pre-policy subsidy levels.

### Energy security and infrastructure implications
- Well designed and communicated tax measures could enhance energy security by:
  - Promoting energy efficiency and reducing fossil fuel demand.
  - Increasing renewable energy penetration and reducing energy import dependence.
- Increased penetration of intermittent renewables requires "substantial investments in modern energy infrastructure to balance loads and store energy"—underscoring need for fiscally generated revenues to finance such investment.

### Fiscal impacts and revenue recycling
- Fiscal revenue potential:
  - The carbon tax could raise fiscal revenues of up to 1.1 percent of GDP by 2030.
  - The excise tax "could deliver up to twice" that revenue by 2030.
- Macro outcomes:
  - These measures can be "growth-friendly" and have a "net positive effect on output" in the CPAT simulations (Figure 15).
- Illustrative revenue recycling in CPAT simulation:
  - 30 percent to public infrastructure
  - 30 percent to household transfers
  - 40 percent to labor income tax reduction
  - (Simulation allocations are "merely illustrative" and governments may choose alternatives, including fiscal deficit reduction.)
- Strategic recycling can mitigate adverse distributional effects and broaden political support.

### Distributional and welfare considerations
- Without mitigation, decarbonization policies can disproportionately impact vulnerable segments, including low-income households and vulnerable workers.
- Revenue recycling and targeted support can mitigate negative distributional effects; Figure 16 shows strategic recycling can lessen impacts for both rural and urban consumers.

### Co‑benefits and green growth opportunities
- Co-benefits of the simulated measures include:
  - Improved economic efficiency and cleaner production processes.
  - Less air pollution and reductions in traffic congestion and accidents.
- Romania’s existing strengths:
  - In 2020, low-carbon goods and services amounted to "2½ percent of GDP" (Figure 18).
  - Romania has high comparative advantage in production of low-carbon technologies (Figure 19).
  - High potential in production of green hydrogen given availability of low‑carbon sources like hydropower.
- The EU's CBAM beginning 2026 is noted to "transform trade into a lever for climate policy," incentivizing cleaner production methods and offering competitiveness benefits for greening production processes.

### Conclusions and policy implications (summary)
- Romania is on course to meet the EU Fit-for-55 target by 2030 but achieving carbon neutrality by 2050 requires a more stringent and well-designed decarbonization agenda.
- Key policy recommendations:
  - Make greater use of tax-based instruments, including targeted carbon taxes (illustrated for transport and buildings) and fossil fuel subsidy removal to better price externalities.
  - Phase in tax measures gradually and communicate them clearly to build political support.
  - Recycle generated revenues strategically—options include reducing labor income taxes, providing transfers to vulnerable households, investing in green infrastructure, or reducing fiscal deficits.
  - Mobilize substantial green investments to decarbonize hard-to-abate sectors (transport, buildings, industry) and to finance energy system modernization (storage, grid balancing).
  - Leverage Romania’s comparative advantages to exploit opportunities in green value chains (wind energy, green hydrogen, low-carbon tech production).
- Overall conclusion: Complementing existing policies with stringent national measures and strategic revenue use would help put Romania on track to carbon neutrality while supporting fiscal sustainability and social inclusion.

*Source: IMF staff analysis in sipea2023063 (section 17–34).*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023063.pdf_