Economy · August 3, 2022

The IMF urges Europe to pass energy costs on to consumers

The IMF has urged European governments to pass on rising energy costs to consumers to encourage “energy savings” and a shift towards greener energy while protecting poorer households.

European governments that have tried to protect households from the spike in costs with price controls, tax cuts and subsidies “should allow the entire increase in fuel costs to pass to end users to encourage energy savings and the transition from fossil fuels, “the deputy director in the European Department of the IMF said.

Writing in an IMF blog post on Wednesday, Oya Celasun added that at the same time governments should put relief measures in place to support low-income families – who are less able to cope with rising household prices. energy – as “a priority”.

Consumer energy prices are rising at an annual rate of nearly 40% in the eurozone and 57% in the UK, reflecting the surge in wholesale oil and gas prices following the Russian invasion of Ukraine . This is drastically consuming household disposable income.

Poorer households, who spend more of their money on electricity and gas, are particularly affected.

As a result, the IMF has called for a change in government policy from wide-ranging support measures to targeted relief efforts.

Existing measures include energy price caps in France, Spain and Portugal, electricity tax cuts in Germany and the Netherlands, energy subsidies in Italy and Greece, and energy incentives in Germany and the UK.

However, “with fossil fuels likely to remain expensive for some time, governments should let retail prices rise to promote energy conservation while protecting poorer households,” Celasun said.

Existing wide-ranging support measures not only delay the necessary adjustment to the energy shock, but also keep global energy demand and prices higher than they would otherwise be, the IMF warned.

In many countries, the cost of fighting the rise in energy prices will exceed 1.5 percent of economic output this year due to extensive price suppression measures, according to IMF estimates.

This is more expensive than fully offsetting the rising cost of living for the poorest 20% of households, which the IMF has estimated at around 0.4% of gross domestic product on average for 2022.

Andrew Kenningham, an economist at Capital Economics, predicted that European governments will move towards more targeted support in the coming months “simply because the costs of universal energy subsidies will become prohibitive.”

The IMF has pinpointed the UK alongside Estonia, where the cost of living for the poorest 20% of households is expected to rise by around double the cost for the richest.

Celasun also said that as prices are expected to remain high for several years, “the reasons for supporting businesses are generally weak”.

It was “appropriate” for governments to support companies during a short-lived price hike, as that could otherwise cause profitable businesses to fail, he said. This would be especially true if Europe were to face a complete shutdown of gas flows and countries were to temporarily ration gas to industry.

However, he added that in most cases it was difficult to implement a well-targeted support scheme without introducing distortions and blunting the incentives for energy saving.

Kenningham noted that the IMF has offered only limited support for one-time taxes on electricity producers, but said he believes that “the case is very strong where companies make exceptional profits due to the marginal pricing system” .