His price jump energy raised the cost of living for Europeans. As energy prices are expected to remain above pre-crisis levels for some time, Europe must adjust to rising fossil fuel bills. Governments should allow the increased cost of energy to be passed on to the end consumer to encourage energy conservation and the shift away from fossil fuels. Horizontal measures, such as price controls, must be removed and policies must be targeted, such as subsidizing low-income households that suffer the most.
So far, European governments have responded to rising energy prices with horizontal cost-cutting measures such as subsidies, tax breaks and price controls. However, they simply delay adjustment to the energy shock and dampen the incentives that households and businesses should have to conserve energy and improve energy efficiency. They also support strong energy demand and relatively high prices. In addition, the rising costs of these measures are reducing the economy’s fiscal margin as prices remain high. In some countries, the cost will exceed 1.5% of this year’s GDP.
Instead, governments should resort to targeted policies, such as raising the incomes of the most vulnerable. For example, if the government were to fully commit to covering rising costs of living for the poorest 20% of households, it would cost it an average of 0.4% of GDP for all of 2022. It would cost him as much as 0.9%. GDP to fully offset the bottom 40%. The proportion of the population that will be compensated for the increase in the cost of energy will vary depending on social differences and financial room for manoeuvre. Ideally, however, it should be designed in such a way as to progressively exclude higher incomes.
Some governments support business. This tactic is only appropriate when a short-term increase in energy prices could bankrupt some viable businesses. Such tactics would be necessary, for example, in the event of a complete cessation of Russian gas supplies to Europe, in which case energy would have to be rationed. Enterprises that play an important role in the import and distribution of energy may also need support.
* Mr. Oya Chelasun, Dora Yakova, and Ian Parry are IMF Economists. Text published on the IMF blog.
Source: Kathimerini
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