## How Europe Can Protect the Poor from Surging Energy Prices

_IMF Blog, August 3, 2022_

## Source details

**Canonical URL:** [How Europe Can Protect the Poor from Surging Energy Prices](https://www.imf.org/en/blogs/articles/2022/08/03/how-europe-can-protect-the-poor-from-surging-energy-prices)

## Other formats

- [Markdown version](/en/blogs/articles/2022/08/03/how-europe-can-protect-the-poor-from-surging-energy-prices/index.md)
- [Structured JSON version](/en/blogs/articles/2022/08/03/how-europe-can-protect-the-poor-from-surging-energy-prices/index.json)
- [Bundle manifest](/en/blogs/articles/2022/08/03/how-europe-can-protect-the-poor-from-surging-energy-prices/bundle-manifest.json)

## Bibliographic details
- Authors: Oya Celasun, Dora Iakova, Ian Parry
- Published: August 3, 2022

---

### Overview of the shock and key findings
- Since early last year, global oil prices doubled, coal prices nearly quadrupled and European natural gas prices increased almost seven-fold.
- With energy prices likely to remain above pre-crisis levels for some time, Europe must adapt to higher import bills for fossil fuels.
- Governments cannot prevent the loss in real national income arising from the terms-of-trade shock.
- The authors estimate that the average European household will see a rise of about 7 percent in its cost of living this year relative to what was expected in early 2021. This reflects the direct effect of higher energy prices as well as their pass-through to other goods and services.
- Large differences in impact across countries reflect different regulations, policy responses, market structures, and contracting practices.
- The spike in the cost of living could get worse in the event of a cutoff in gas supplies from Russia.
- In most European countries, higher energy prices impose an even heavier burden on low-income households because they spend a larger share of their budget on electricity and gas.
- In Estonia and the United Kingdom, living costs for the poorest 20 percent of households are set to rise by about twice as much as those for the wealthiest.

### Assessment of policy responses to date
- Policymakers have largely used broad-based, price-suppressing measures, including subsidies, tax cuts and price controls.
- Suppressing the pass-through to retail prices:
  - Delays needed adjustment to the energy shock by reducing incentives for households and businesses to conserve energy and enhance efficiency.
  - Keeps global energy demand and prices higher than they would otherwise be.
  - Is increasingly costly and is squeezing fiscal space as high prices persist.
- In many countries the cost of broad price-suppressing measures will exceed 1.5 percent of economic output this year.

### Recommended policy direction: let retail prices rise and target relief
- Allow the full increase in fuel costs to pass to end-users to encourage energy saving and switching out of fossil fuels.
- Shift from broad-based support to targeted relief such as transfers to lower-income households who suffer the most from higher energy bills.
- Targeted income support estimates:
  - Fully offsetting the increase in the cost of living for the bottom 20 percent of households would cost governments 0.4 percent of GDP on average for the whole of 2022.
  - Fully compensating the bottom 40 percent would cost 0.9 percent of GDP.
- Design of support:
  - The share of the population that receives compensation would vary across countries depending on societal preferences and fiscal space.
  - Support should ideally avoid “cliff effects”, with benefits tapering off gradually at higher income levels.

### Role of support for businesses and caveats
- Support for businesses can be appropriate if a short-lived price surge would cause otherwise viable firms to fail (for example, if a complete cutoff of gas flows forced temporary rationing to industry).
- Firms that play a critical role in importing and distributing energy may also need support when prices spike.
- In most cases, implementing well-targeted support for firms is difficult without introducing distortions and blunting incentives for energy conservation.
- Since prices are expected to remain high for several years, the case for supporting businesses is generally weak.

*This blog reflects research contributions by Anil Ari, Nicolas Arregui, Simon Black, Aiko Mineshima, Victor Mylonas, Iulia Teodoru, and Karlygash Zhunussova.*

---


## References

- [working paper](https://www.imf.org/en/Publications/WP/Issues/2022/07/28/Surging-Energy-Prices-in-Europe-in-the-Aftermath-of-the-War-How-to-Support-the-Vulnerable-521457)
- [cutoff in gas supplies from Russia](https://blogs.imf.org/2022/07/19/how-a-russian-natural-gas-cutoff-could-weigh-on-europes-economies/)
- [https://www.imf.org/wp-content/uploads/2022/08/Impact-energy-prices-EUR-blog_2.png](https://www.imf.org/wp-content/uploads/2022/08/Impact-energy-prices-EUR-blog_2.png)

_Source: https://www.imf.org/en/blogs/articles/2022/08/03/how-europe-can-protect-the-poor-from-surging-energy-prices_