Targeted, Implementable, and Practical Energy Relief Measures for Households in Europe

IMF Working Papers, December 16, 2022

Source details

Canonical URL: Targeted, Implementable, and Practical Energy Relief Measures for Households in Europe

Authors: Nicolas Arregui, Oya Celasun, Dora M Iakova, Aiko Mineshima, Victor Mylonas, Frederik G Toscani, Yu Ching Wong, Li Zeng, Jing Zhou
Published: December 16, 2022
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400227400.001

Recommended approach: allow price signals to operate freely while providing targeted compensation to the vulnerable.
Observed practice: institutional, political, and technical constraints have led many European governments to adopt broad, price-suppressing measures.
Consequences of broad price-suppressing measures:
- impede the adjustment in demand,
- have high fiscal costs,
- widen cross-country gaps in prices.
Focus of the paper: easy-to-implement, second-best policies.

Simple, implementable options that improve on current policy design include:
- bonuses or rebates on energy bills that are not linked to the current volume of consumption,
- block tariffs.
To avoid stoking inflation, fiscal policy should not add to aggregate demand; relief for energy bills should be targeted and coupled with offsetting fiscal measures.
One offsetting option presented: reclaim the relief from the better-off through income taxation, which would also make support more progressive.

Prioritize targeted compensation to vulnerable households rather than broad, price-suppressing interventions.
Implement bonuses or rebates on energy bills that are independent of current consumption volume as a simple, second-best option.
Consider block tariffs as another straightforward design that can improve outcomes relative to broad price caps or subsidies.
Pair energy-bill relief with offsetting fiscal measures to avoid adding to aggregate demand and stoking inflation.
Use income taxation to reclaim relief from higher-income households to increase progressivity of support.

Subjects: Consumption, Economic sectors, Energy prices, Energy pricing, Expenditure, Income, National accounts, Natural gas sector, Prices
Keywords: Consumption, distributional analysis, energy cost support measure, energy prices, Energy pricing, EU government, Europe, household incidence, I. consumer energy price inflation, Income, Natural gas sector, price pass-through, price signal, price-suppressing measure, social safety nets