## 1.   Natural Gas and Oil Imports

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### Introduction and Context
- Russia’s war in Ukraine elevated energy security risks for Hungary; mid-2022 price spike coincided with:
  - Current account deficit doubling to -8.5 percent of GDP.
  - Retail gas, electricity and fuel subsidies rising from 0.1 percent of GDP in 2021 to 1.1 percent in 2022 and 1.9 percent in 2023.
- Hungary’s 2024 import dependence and source concentration:
  - Up to three-quarters of Hungary’s gas and oil consumption was imported.
  - 74 percent of gas and 86 percent of oil sourced from Russia—up from 64 and 66 percent in 2018.
  - Key transit routes: TurkStream via Serbia and Adria pipeline via Croatia.
- Structural characteristics:
  - Electricity generation largely domestic (nuclear, growing solar), but overall supply remains dominated by Russian energy.
  - Hungary is one of the most energy-intensive economies in Europe; industry (chemicals, basic metals, automotive) is a large share of final energy demand.
- Macro risk from EU-wide phaseout of Russian energy:
  - IMF staff research (Di Bella et al. 2024) shows Hungary could face output losses exceeding 4 percent of GDP in an EU-wide Russian natural gas cutoff.

### Measuring Energy Security
- Two dimensions used:
  - Security of Supply: composite energy insecurity index (weighted Herfindahl-type measure) that combines net energy import dependence and geographic concentration of non-European suppliers (non-EU/EFTA/UK suppliers receive unit weight; EU/EFTA/UK receive zero risk weight); higher index = greater vulnerability.
  - Economic Resilience: energy expenditure share of nominal GDP as proxy for macroeconomic vulnerability to energy price volatility; higher energy intensity = greater exposure.
- Hungary’s scores:
  - Composite energy supply insecurity index nearly twice the average of the EU’s four largest economies and more than double that of the rest of Europe.
  - Energy expenditure share of GDP about twice that of Western European peers.

### Model Description
- Model: IMF-ENV recursive dynamic CGE model (goods differentiated by origin; capital by vintage; energy module linking demand/supply to GHG emissions).
- Calibration: GTAP-Power database, IMF World Economic Outlook macro projections, JRC-GECO electricity generation projections.
- Time horizon: baseline and policy counterfactuals through 2030; compares impacts on GDP, energy mix and intensity, and emissions.
- Key model features and equations (as presented):
  - CES production function for sectoral output (Equation 3).
  - Nested CES aggregation for composite energy bundle allowing substitution across electricity and non-electricity sources (Equation 4).
  - Carbon pricing mechanism applying region-specific instruments (carbon tax/ETS) to origin-differentiated goods with Pigouvian-type carbon tax on GHG emissions (Equation 5).

### Policy Options Modeled
- EU-level instruments:
  - Higher EU-wide carbon prices: ETS and UK ETS reaching €110 by 2030.
  - Deeper EU Energy Union: increased cross-border electricity trade via lower trade costs and greater market integration.
- Complementary domestic measures:
  - Tighter standards for transport and buildings (stricter energy efficiency standards for road transport and buildings).
  - Accelerated renewables permitting: 40 percent faster permitting for wind and solar projects (deployment efficiency improvement).
  - Tighter household energy efficiency standards plus targeted public investment toward heat pump adoption (shift residential energy use toward electricity).
  - Fossil fuel subsidy removal: full phaseout by 2030, calibrated using pre-crisis estimates.

### Modelled policy shocks and assumptions (summary)
- Higher EU-wide carbon prices:
  - Baseline implicit carbon prices from the EU (and UK) ETS: 70 euro per ton between 2024 and 2030.
  - Policy shock: carbon price gradually increased to 110 euro in 2030.
  - Assumption: all revenues from the EU-ETS are transferred back to households.
- Deeper EU Energy Union:
  - Assumption: changes in regulation and internal market developments reduce barriers on electricity trade such that overall trade increases by 50 percent.
  - No explicit costs modeled; investment in the European grid would be required.
- Tighter regulations on energy efficiency in road transport and buildings:
  - Transport consumption reduced by 13 percent compared to the baseline.
  - Buildings ("other business services" sector) energy consumption reduced by 5 percent.
  - Households reduce energy consumption by 8 percent.
  - Estimated costs (Dolphin et al., 2024): 0.6 percent of yearly gross fixed investment for road transport and 2.2 percent for buildings; total 2.8 percent gross fixed investment deducted from total investments in the model each year.
- Accelerated permitting procedures:
  - Increases TFP of wind and solar operations, encouraging investment and raising wind and solar power generation by 10 percent relative to the baseline by 2030.
  - The 10 percent improvement is consistent with a 40 percent improvement in the speed of renewable deployment (matching median permitting times to top quartile).
  - No explicit costs modeled.
- Tighter energy efficiency standards for households:
  - European households’ overall demand reduced by 6 percent via preference shifts.
  - Simulated by reducing household demand for coal and gas by 50 percent and increasing electricity demand by 15 percent.
  - Public investment in heat pumps in residential buildings in Europe estimated to cost 0.42 percent of gross fixed investment per year.
  - For Hungary this represents around USD 236 million per year.
- Removing fossil fuel subsidies:
  - Total energy subsidies estimated at close to 2 percent of GDP in 2023 (authorities’ information).
  - Of this, 75 percent represent subsidies to household consumption of natural gas and 25 percent to household consumption of electricity.
  - Assumed use of savings: 50 percent of the savings are transferred back to households and 50 percent are used to reduce the budget deficit.

### Simulation Results: Energy Security and Macroeconomic Outcomes
- Aggregate gains from comprehensive policy package (EU instruments + domestic measures):
  - Energy supply security risk reduced by up to 30 percent.
  - Energy expenditure share of GDP cut by up to 10 percent over the next five years.
- Role of domestic policies:
  - Tighter household energy efficiency standards and heat pump investment deliver the largest benefits by reducing dependence on imported natural gas.
  - Fossil fuel subsidy phaseout strengthens resilience by removing price distortions.
  - Faster renewable permitting promotes secure domestic production.
- Benefits from deeper EU electricity market integration:
  - Supply risk falling by up to 7 percentage points.
  - Energy expenditure dropping by up to 3 percentage points of GDP by 2030.
- Russia energy flow cutoff scenarios (two simulations):
  - Business-as-usual (no additional measures): marked deterioration in energy security; full cutoff raises import risk and energy expenditure significantly.
  - Full policy package (domestic reforms + deeper EU electricity market integration): risks largely contained; shock becomes a manageable adjustment rather than a severe disruption.
- Growth and fiscal effects:
  - Overall impact on real GDP growth is modest and mixed across instruments:
    - Fossil fuel subsidy removal (FFSR) yields the largest GDP gains via improved allocation efficiency and reduced government deficit.
    - Electricity market integration and streamlined permitting produce modest growth benefits through efficiency and private investment.
    - EU ETS may weigh on short-term output depending on revenue recycling; partial recycling to households supports political buy-in; using revenues to reduce deficit/increase public investment could yield more favorable growth.
  - Fiscal outcome: combined fiscal gains from FFSR and EU ETS revenues more than offset public investment for heat pump deployment.
    - By 2030, net improvement in the budget balance is about 1.7 percent of GDP.
- Climate outcomes:
  - Hungary is committed to EU Fit-for-55 target: cutting national emissions by 55 percent (relative to 1990) by 2030 and achieving climate neutrality by 2050.
  - EU-wide carbon pricing lowers emissions; larger emissions and energy security gains occur when EU carbon pricing is combined with national measures that lower energy intensity and shift energy mix toward cleaner sources.

### Key Findings and Policy Recommendations
- Findings:
  - Hungary’s high import concentration and energy intensity make it particularly vulnerable to external energy shocks and price volatility.
  - A coordinated policy package combining EU-level instruments and domestic reforms can substantially reduce energy security risk and energy expenditure, contain the impacts of a Russian cutoff, generate modest growth benefits, improve the fiscal position, and advance decarbonization goals.
- Policy priorities (prioritized):
  - Implement tighter household energy efficiency standards and invest in heat pumps (financed by EU RRF funds for upfront costs).
  - Phase out fossil fuel subsidies by 2030.
  - Accelerate renewables permitting processes (targeting 40 percent faster permitting).
  - Support deeper EU electricity market integration (regulatory alignment and cross-border grid investment).
  - Design carbon pricing revenue use to balance short-term distributional impacts and long-term fiscal and investment benefits.
- Specific domestic targets and modeled reductions to achieve:
  - Transport consumption reduced by 13 percent.
  - Buildings energy consumption reduced by 5 percent.
  - Households reduce energy consumption by 8 percent (or household overall demand reduced by 6 percent under tighter household standards).
  - Wind and solar power generation raised by 10 percent relative to the baseline by 2030 (consistent with a 40 percent improvement in deployment speed).
  - Fossil fuel subsidies estimated close to 2 percent of GDP in 2023; assumed repartition of savings: 50 percent to households and 50 percent to deficit reduction.
  - Public investment in heat pumps for Hungary: USD 236 million per year.
  - Investment implication: energy efficiency measures imply a total 2.8 percent reduction in gross fixed investment each year in the model (0.6 percent for transport; 2.2 percent for buildings).
  - Deeper electricity trade assumption: overall trade increases by 50 percent; grid investments required though not explicitly costed.

*Source: PROMOTING ENERGY SECURITY IN HUNGARY: A MODEL-BASED ANALYSIS; IMF Selected Issues chapter "18. Strengthening Hungary’s energy security will require a comprehensive domestic reform agenda."*

### 1.   Natural Gas and Oil Imports __________________________________________________________ 2

### sipea2025121 - 1.   Natural Gas and Oil Imports __________________________________________________________ 2

### Introduction and Context
- Russia’s war in Ukraine elevated energy security risks for Hungary; mid-2022 price spike coincided with:
  - Current account deficit doubling to -8.5 percent of GDP.
  - Retail gas, electricity and fuel subsidies rising from 0.1 percent of GDP in 2021 to 1.1 percent in 2022 and 1.9 percent in 2023.
- Hungary’s 2024 import dependence and source concentration:
  - Up to three-quarters of Hungary’s gas and oil consumption was imported.
  - 74 percent of gas and 86 percent of oil sourced from Russia—up from 64 and 66 percent in 2018.
  - Key transit routes: TurkStream via Serbia and Adria pipeline via Croatia.
- Structural characteristics:
  - Electricity generation largely domestic (nuclear, growing solar), but overall supply remains dominated by Russian energy.
  - Hungary is one of the most energy-intensive economies in Europe; industry (chemicals, basic metals, automotive) is a large share of final energy demand.
- Macro risk from EU-wide phaseout of Russian energy:
  - IMF staff research (Di Bella et al. 2024) shows Hungary could face output losses exceeding 4 percent of GDP in an EU-wide Russian natural gas cutoff.

### Measuring Energy Security
- Two dimensions used:
  - Security of Supply: composite energy insecurity index (weighted Herfindahl-type measure) that combines net energy import dependence and geographic concentration of non-European suppliers (non-EU/EFTA/UK suppliers receive unit weight; EU/EFTA/UK receive zero risk weight); higher index = greater vulnerability.
  - Economic Resilience: energy expenditure share of nominal GDP as proxy for macroeconomic vulnerability to energy price volatility; higher energy intensity = greater exposure.
- Hungary’s scores:
  - Composite energy supply insecurity index nearly twice the average of the EU’s four largest economies and more than double that of the rest of Europe.
  - Energy expenditure share of GDP about twice that of Western European peers.

### Model Description
- Model: IMF-ENV recursive dynamic CGE model (goods differentiated by origin; capital by vintage; energy module linking demand/supply to GHG emissions).
- Calibration: GTAP-Power database, IMF World Economic Outlook macro projections, JRC-GECO electricity generation projections.
- Time horizon: baseline and policy counterfactuals through 2030; compares impacts on GDP, energy mix and intensity, and emissions.
- Key model features and equations (as presented):
  - CES production function for sectoral output (Equation 3).
  - Nested CES aggregation for composite energy bundle allowing substitution across electricity and non-electricity sources (Equation 4).
  - Carbon pricing mechanism applying region-specific instruments (carbon tax/ETS) to origin-differentiated goods with Pigouvian-type carbon tax on GHG emissions (Equation 5).

### Policy Options Modeled
- EU-level instruments:
  - Higher EU-wide carbon prices: ETS and UK ETS reaching €110 by 2030.
  - Deeper EU Energy Union: increased cross-border electricity trade via lower trade costs and greater market integration.
- Complementary domestic measures:
  - Tighter standards for transport and buildings (stricter energy efficiency standards for road transport and buildings).
  - Accelerated renewables permitting: 40 percent faster permitting for wind and solar projects (deployment efficiency improvement).
  - Tighter household energy efficiency standards plus targeted public investment toward heat pump adoption (shift residential energy use toward electricity).
  - Fossil fuel subsidy removal: full phaseout by 2030, calibrated using pre-crisis estimates.

### Simulation Results: Energy Security and Macroeconomic Outcomes
- Aggregate gains from comprehensive policy package (EU instruments + domestic measures):
  - Energy supply security risk reduced by up to 30 percent.
  - Energy expenditure share of GDP cut by up to 10 percent over the next five years.
- Role of domestic policies:
  - Tighter household energy efficiency standards and heat pump investment deliver the largest benefits by reducing dependence on imported natural gas.
  - Fossil fuel subsidy phaseout strengthens resilience by removing price distortions.
  - Faster renewable permitting promotes secure domestic production.
- Benefits from deeper EU electricity market integration:
  - Supply risk falling by up to 7 percentage points.
  - Energy expenditure dropping by up to 3 percentage points of GDP by 2030.
- Russia energy flow cutoff scenarios (two simulations):
  - Business-as-usual (no additional measures): marked deterioration in energy security; full cutoff raises import risk and energy expenditure significantly.
  - Full policy package (domestic reforms + deeper EU electricity market integration): risks largely contained; shock becomes a manageable adjustment rather than a severe disruption.
- Growth and fiscal effects:
  - Overall impact on real GDP growth is modest and mixed across instruments:
    - Fossil fuel subsidy removal (FFSR) yields the largest GDP gains via improved allocation efficiency and reduced government deficit.
    - Electricity market integration and streamlined permitting produce modest growth benefits through efficiency and private investment.
    - EU ETS may weigh on short-term output depending on revenue recycling; partial recycling to households supports political buy-in; using revenues to reduce deficit/increase public investment could yield more favorable growth.
  - Fiscal outcome: combined fiscal gains from FFSR and EU ETS revenues more than offset public investment for heat pump deployment.
    - By 2030, net improvement in the budget balance is about 1.7 percent of GDP.
- Climate outcomes:
  - Hungary is committed to EU Fit-for-55 target: cutting national emissions by 55 percent (relative to 1990) by 2030 and achieving climate neutrality by 2050.
  - EU-wide carbon pricing lowers emissions; larger emissions and energy security gains occur when EU carbon pricing is combined with national measures that lower energy intensity and shift energy mix toward cleaner sources.

### Key Findings and Policy Recommendations (from simulations)
- Findings:
  - Hungary’s high import concentration and energy intensity make it particularly vulnerable to external energy shocks and price volatility.
  - A coordinated policy package combining EU-level instruments and domestic reforms can substantially reduce energy security risk and energy expenditure, contain the impacts of a Russian cutoff, generate modest growth benefits, improve the fiscal position, and advance decarbonization goals.
- Policy priorities:
  - Implement tighter household energy efficiency standards and invest in heat pumps (financed by EU RRF funds for upfront costs).
  - Phase out fossil fuel subsidies by 2030.
  - Accelerate renewables permitting processes (targeting 40 percent faster permitting).
  - Support deeper EU electricity market integration (regulatory alignment and cross-border grid investment).
  - Design carbon pricing revenue use to balance short-term distributional impacts and long-term fiscal and investment benefits.

*Source: PROMOTING ENERGY SECURITY IN HUNGARY: A MODEL-BASED ANALYSIS, International Monetary Fund, July 25, 2025.*

### 18. Strengthening Hungary’s energy security will require a comprehensive domestic

### 18. Strengthening Hungary’s energy security will require a comprehensive domestic reform agenda

### Key message
- While EU-wide initiatives (deeper electricity market integration and higher carbon pricing through the EU-ETS) can support resilience, their full benefits depend on complementary national actions.
- Targeted domestic measures—enhancing energy efficiency, accelerating renewable permitting, phasing out fossil fuel subsidies, and tightening building standards—can significantly reduce Hungary’s energy security risks and energy expenditure while advancing decarbonization goals.
- Seizing these opportunities is critical to building a more resilient, sustainable, and competitive economy.

### Modelled policy shocks and assumptions (Annex I)
- Higher EU-wide carbon prices
  - Baseline implicit carbon prices from the EU (and UK) ETS: 70 euro per ton between 2024 and 2030.
  - Policy shock: carbon price gradually increased to 110 euro in 2030.
  - Assumption: all revenues from the EU-ETS are transferred back to households.
- Deeper EU Energy Union
  - Assumption: changes in regulation and internal market developments reduce barriers on electricity trade such that overall trade increases by 50 percent.
  - No explicit costs modeled; investment in the European grid would be required.
- Tighter regulations on energy efficiency in road transport and buildings
  - Transport consumption reduced by 13 percent compared to the baseline.
  - Buildings ("other business services" sector) energy consumption reduced by 5 percent.
  - Households reduce energy consumption by 8 percent.
  - Estimated costs (Dolphin et al., 2024): 0.6 percent of yearly gross fixed investment for road transport and 2.2 percent for buildings; total 2.8 percent gross fixed investment deducted from total investments in the model each year.
- Accelerated permitting procedures
  - Increases TFP of wind and solar operations, encouraging investment and raising wind and solar power generation by 10 percent relative to the baseline by 2030.
  - The 10 percent improvement is consistent with a 40 percent improvement in the speed of renewable deployment (matching median permitting times to top quartile).
  - No explicit costs modeled.
- Tighter energy efficiency standards for households
  - European households’ overall demand reduced by 6 percent via preference shifts.
  - Simulated by reducing household demand for coal and gas by 50 percent and increasing electricity demand by 15 percent.
  - Public investment in heat pumps in residential buildings in Europe estimated to cost 0.42 percent of gross fixed investment per year.
  - For Hungary this represents around USD 236 million per year.
- Removing fossil fuel subsidies
  - Total energy subsidies estimated at close to 2 percent of GDP in 2023 (authorities’ information).
  - Of this, 75 percent represent subsidies to household consumption of natural gas and 25 percent to household consumption of electricity.
  - Assumed use of savings: 50 percent of the savings are transferred back to households and 50 percent are used to reduce the budget deficit.

### Findings and policy implications
- EU-wide measures (higher EU-ETS carbon prices; deeper electricity market integration) provide important support for energy security, but their effectiveness for Hungary depends on national complementary reforms.
- Domestic actions that materially reduce energy consumption and cost exposure include:
  - Enhancing energy efficiency in road transport, buildings, and households (specific modelled reductions: transport 13 percent, buildings 5 percent, households 8 percent, household overall demand 6 percent).
  - Accelerating renewable permitting to achieve a 10 percent increase in wind and solar generation by 2030 (consistent with 40 percent faster deployment).
  - Phasing out fossil fuel subsidies (estimated near 2 percent of GDP in 2023), reallocating savings partly to households and partly to deficit reduction.
  - Tightening building standards and investing in residential heat pumps (estimated cost for Hungary: USD 236 million per year; Europe: 0.42 percent of gross fixed investment per year).
- Investment implications:
  - Energy efficiency measures in transport and buildings imply investment costs equivalent to a total 2.8 percent reduction in gross fixed investment each year in the model (0.6 percent for transport; 2.2 percent for buildings).
  - Grid investments would be required to realize deeper electricity trade integration, although no explicit costs were modeled in the scenario.

### Policy recommendations (prioritized)
- Implement targeted national reforms to complement EU-wide initiatives:
  - Accelerate permitting procedures for renewables to realize faster deployment and a 10 percent rise in wind and solar generation by 2030.
  - Tighten energy efficiency standards for buildings and households, and scale up public support for heat pump deployment (Hungary: USD 236 million per year).
  - Phase out fossil fuel subsidies (estimated close to 2 percent of GDP in 2023), with 50 percent of savings returned to households and 50 percent used for deficit reduction.
  - Strengthen regulations and incentives to achieve modeled consumption reductions: transport 13 percent, buildings 5 percent, and household energy demand reductions of 8 percent (or 6 percent when simulating tighter household standards).
  - Prepare for necessary European grid investments to support a 50 percent increase in electricity trade.

*Source: IMF Selected Issues chapter "18. Strengthening Hungary’s energy security will require a comprehensive domestic reform agenda."*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025121.pdf_