By Cassandra Castle, Assia Elgouacem, Giuliana Sarcina, Enes Sunel, and Jonas Teusch

In the past few years, the global economy has experienced two major crises: the COVID-19 pandemic and Russia’s war of aggression against Ukraine. The recovery from the pandemic and the war have both amplified tensions in the energy sector and provoked a surge in energy prices.

The fiscal response to the energy crisis has been large, especially in Europe

The OECD Energy Support Measures Tracker, released on 6 June 2023, shows that in 2022, support measures in response to higher energy prices had a gross fiscal cost of 0.7% of GDP in the median OECD economy, rising to over 2.5% of GDP in some European countries (Figure 1). By way of comparison, these costs exceed what the median OECD country spends on unemployment benefits and are about half of the expenditure on family and child benefits. Comparable levels of fiscal support are foreseen for 2023 in the OECD as a whole. However, the actual cost of support will heavily depend on the evolution of energy prices.

The OECD Energy Support Measures Tracker provides comprehensive data and information on energy-crisis related fiscal support measures

Documenting the measures governments have implemented to face the energy price shock and being able to compare them across countries, remains critical to improving support policies and building resilience against future crises. The Tracker systematically catalogues support measures in place from February 2021 to May 2023 in 41 countries – 35 OECD countries and 6 non-OECD economies (Brazil, Bulgaria, Croatia, India, Romania and South Africa).[1] The data have been collected and processed by OECD country, fiscal and energy policy experts and validated by national administrations.

The new dataset provides granular information to comprehensively characterise individual support measures. These include start and end dates, gross fiscal costs, type of support and delivery mechanism, main beneficiaries of the measures (indicating whether vulnerable households or firms from specific sectors are targeted, and, where applicable, summary information on the differentiation of support between beneficiaries) and the impacted energy carriers (such as diesel, gasoline, electricity, natural gas). The sheer number and diversity of the measures makes classification challenging.

The Tracker classifies more than 550 support measures into two main categories: (1) price measures (e.g. reduced energy taxes and energy price caps), estimated to cost USD 422 billion in 2022-23; and (2) income measures (e.g. transfers and tax credits to consumers), estimated to total USD 383 billion in 2022-23. Within income measures, a distinction is made between measures that reduce the average price of energy in consumers’ energy bills and measures that are unrelated to the level of energy consumption (Figure 2).

The measures – which were implemented swiftly amidst uncertainty, political economy constraints, and a focus on administrative simplicity – affect the behaviour of firms and people in different and significant ways, and may contribute to or detract from important longer-term policy objectives. Income support can maintain incentives to save energy whereas price measures weaken them, propping up demand for fossil fuels and effectively acting as a negative carbon price. Among income measures, those that are unrelated to the level of energy consumption tend better to preserve incentives for energy efficiency improvements than those that reduce the average price in the energy bill paid by consumers.

Measures were rarely targeted and increased the incentive to consume fossil fuels

Untargeted support measures make up the majority of the estimated total cost of support in 2022-23 (Figure 3). Among these, energy price support measures account for over 50% of total spending and carry substantial non-fiscal implications. While price support measures are straightforward to design and often politically popular, they weaken incentives to save energy and are rarely targeted (over 92% of energy price support measures are untargeted), meaning that they tend to disproportionately support better-off households.

Click for Chart data

A clear taxonomy of measures and data can enable the design of better energy support policieswhen they are needed

Energy prices are receding, but possible renewed tensions in energy markets due to geopolitical developments and bottlenecks along the energy transition may result in higher energy price volatility in the future. Preparing government policy for possible new energy price spikes requires data and information on how support measures affect the behaviour of households and firms, their impact on public finances and their unintended consequences. The OECD Tracker is a resource for policymakers to do just that.

More information

OECD (2023), OECD Energy Support Measures Tracker, OECD database available at:

https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/economic-policy/658948-OECD_Energy_Support_Measures_Tracker.xlsx

OECD (2023), “Aiming Better: Government Support for Households and Firms During the Energy Crisis”, OECD Economic Policy Papers No. 32, OECD Publishing: Paris, https://doi.org/10.1787/839e3ae1-en

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[1] The government of Iceland has not taken any energy support measures. The Tracker also includes information on another five countries, for which it was either not possible to quantify the gross fiscal cost of the energy support measures (Argentina, China, Hungary and Indonesia) or these were deemed to have no impact on budget deficits, as is the case of measures providing credit and equity support (Switzerland).

By Daniel Nachtigall, OECD Environment Directorate and Antoine Dechezleprêtre, OECD Directorate for Science Technology and Innovation

The European Union (EU) put forward an ambitious climate mitigation target of reducing greenhouse gas (GHG) emissions by at least 55% below 1990 levels by 2030. How will the EU deliver? Carbon pricing – through the European Union Emissions Trading System (EU ETS) – is expected to deliver a large part of the emissions reductions. Under an ETS, installation operators can trade GHG emission permits with each other, ensuring that emissions are reduced cost-effectively. Launched in 2005, the EU ETS is the world’s first international ETS, covering over 14,000 energy-intensive plants across 30 European countries, accounting for around 40% of the EU’s total GHG emissions. From the outset the EU ETS raised concerns about its environmental effectiveness and potential negative economic effects for the European industry by putting regulated firms at a disadvantage vis-a-vis their foreign competitors.

A recent paper ‘The joint impact of the European Union emissions trading system on carbon emissions and economic performance’ published by OECD authors in the leading Journal of Environmental Economics and Management sheds light on this concern. Based on an earlier OECD working paper, the study is the first comprehensive, European-wide analysis of the impact of the EU ETS on both carbon emissions and economic performance of regulated companies during the first two phases of the system’s existence, from 2005 to 2012.

The study uses data for carbon emissions of installations from the national Pollutant Release and Transfer Registers (PRTR) of France, Netherlands, Norway and the United Kingdom, complemented with data from the European PRTR. It also includes economic data of firms for all European countries to investigate the impact of EU ETS on various economic dimensions, including employment, fixed assets, profits, and revenues. The study makes use of the EU ETS inclusion criteria, according to which installations below a certain capacity threshold do not need to participate in the carbon market. It compares installations or firms operating in the same country and the same sector and of similar characteristics, but which fall under different regulatory regimes since the launch of the EU ETS.

So what does the study tell us?

The EU ETS reduced emissions while not negatively affecting economic outcomes

The EU ETS led to a reduction of carbon emissions of around 10% between 2005 and 2012 but has not had any adverse impact on employment (see Figure 1). Most of the emissions reductions were observed in the second trading phase of the EU ETS and were primarily driven by larger installations. This is in line with the observation that pollution control technologies are capital-intensive and involve relatively high fixed costs. There is also evidence that a more generous allocation of free allowances results in a weaker reduction of emissions.

Figure 1. The impact of the EU ETS on jobs and CO2 emissions

The study also finds that the EU ETS has not had a negative effect on regulated firms’ revenue, profits, fixed assets and jobs. In fact, the EU ETS seemed to have led to an increase of revenues and fixed assets of regulated firms – contrary to what could have been expected. One explanation could be that the EU ETS induced regulated firms to increase investment – likely in carbon-saving technologies – which, in turn, may have increased productivity.

More research is needed to reflect more recent developments in carbon pricing

In its first eight years of existence, the EU ETS effectively reduced carbon emissions without negatively affecting the economic performance and competitiveness of European regulated firms. This is in line with recent literature reviews on the effects of carbon pricing on environmental and economic outcomes. While these results demonstrate that concerns about negative effects of the EU ETS on the competitiveness of the European industry have been vastly overplayed, more research is needed to assess these findings against new realities. In fact, the period between 2005-2012 was characterised by relatively low permit prices of EUR 20/tCO2 on average and a generous allocation of free allowances. From mid-2020, permit prices were fluctuating around EUR 80t/CO2, so it remains to be seen whether these findings hold true in a high price environment.

References:

This is in line with previous OECD work (OECD, 2021) and findings from recent literature reviews on the effects of carbon pricing on environmental and economic outcomes.

OECD (2021), Assessing the Economic Impacts of Environmental Policies: Evidence from a Decade of OECD Research, OECD Publishing, Paris, https://doi.org/10.1787/bf2fb156-en.

Dechezleprêtre, A., Nachtigall, D., & Venmans, F. (2023). The joint impact of the European Union emissions trading system on carbon emissions and economic performance. Journal of Environmental Economics and Management, 118, 102758. https://doi.org/10.1016/j.jeem.2022.102758.

Dechezleprêtre, A., D. Nachtigall and F. Venmans (2018), “The joint impact of the European Union emissions trading system on carbon emissions and economic performance”, OECD Economics Department Working Papers, No. 1515, OECD Publishing, Paris, https://doi.org/10.1787/4819b016-en.

This blog article was cross-posted on the OECD Environment Focus platform, which aims to increase dialogue on a variety of environmental topics among policy makers, experts and the general public.

By Tim Bulman, Timo Leidecker and Ilai Levin, OECD Economics Department

More intense and more frequent wildfires and floods, hotter and drier summers, and disrupted seasons are among the striking signs that the climate in Greece and globally is changing. Like other OECD countries, Greece is contributing to the global effort to mitigate climate change by becoming a net zero emission economy.

Reducing emissions from energy use to transition towards a net-zero economy

The green economy transition poses a particular challenge for Greece. The economic crisis of the last decade has limited public and private financial capacity to invest in renewable energy production, make infrastructure more resilient, improve energy efficiency, upgrade heating systems, and replace fossil-fueled with zero emission cars. Using public funds effectively, mobilising private capital, and raising additional revenues will be key for Greece. The just-released OECD Economics Working Paper on “Transitioning to a green economy in Greece“, drawn from the OECD Economic Survey of Greece (2023) presents a mix of the policies required to limit the financial and social coss of the transition. Achieving the transition is feasible with little long-term cost to incomes and employment, especially if continued reforms to improve the business environment and raise investment accompany the transition (discussed in this ECOSCOPE post).

The Paper identifies three policy priorities that would make substantial cuts to the more than two-thirds of Greece’s emissions that come from energy use:

1. Pricing greenhouse gas emissions consistently to encourage investment, innovation and savings. Average CO₂ prices from using fossil fuels are high in Greece but vary substantially across uses. For example, charges on CO₂ emissions from using gasoline are effectively double those from diesel; in turn, charges for using fossil fuels for heating or producing electricity are much lower than average charges for using fossil fuels for road transport. Introducing a minimum price floor to harmonise prices would encourage low-cost ways to cut emissions. Higher and more consistent prices for emissions would also generate more than enough revenues to compensate low-income households for rising living costs.

2. Giving a push to renovate buildings. Greece has an old housing stock with low energy efficiency. This harms residents’ well-being, especially when energy prices are rising, as experienced over the past year. It also contributes to high greenhouse gas emissions in Greece compared to countries with similar climates (Figure 1). Housing renovations can cut emissions, improve residents’ comfort, and usually pay for themselves through energy savings. The up-front costs of renovations, however, can be a major barrier to realising these savings. Substantially expanding the current financial support programmes and – to leverage more private financing – encouraging loans that are repaid through energy savings would boost renovations. Setting out a clear timeline of increasing minimum energy-efficiency standards to cover both new and existing buildings would provide certainty for investors and builders, bringing more resources to renovations and create green jobs.

Figure 1. Improving housing energy efficiency would reduce emissions and energy poverty

3. Moving transport onto low-emission modes. Cutting emissions from transport is costly and complex but, as it generates one-fifth of Greece’s total emissions, is central to Greece’s goals. More passengers and freight are carried on roads than in the EU on average. The car fleet is large and old, with Greeks spending less on buying cars than in most other OECD countries (Figure 2). Renewing the car fleet, especially with more expensive low-emission cars, is likely to be very slow, even if purchase subsidies were used more extensively. At the same time, modelling by the International Transport Forum and the OECD finds that improving public transport could cut transport emissions in Greece by 19% in 2030 relative to 2019 levels with an additional investment of about 0.2% of GDP annually.

Figure 2. Alternatives to road transport could cut emissions from transport cost effectively

Helping people and businesses adapt to the changing climate

Transforming the economy to net-zero emissions will affect how firms operate and which skills are needed. As some jobs bound to fossil fuels disappear, for example in lignite mining, new and potentially higher productivity job opportunities will be created, for example in housing renovations or greener technologies. Workers may need to up-skill for these new jobs, especially in regions highly dependent on fossil fuel industries such as Western Macedonia. Focused interventions such as those underway in Greece’s lignite mining areas are increasing access to quality training. and help hasten this transition and support incomes.

Damages from extreme weather events, such as wildfires or floods, are already mounting in Greece and are likely to further aggravate. Encouraging households and firms to anticipate these risks when they decide where and what to build will help reduce the disruption from a changing climate. Private insurance can help make the costs of climate-related risks clearer. Yet, insurance coverage in Greece is among the lowest in OECD countries (Figure 3). After past natural disasters the government has partly compensated damages, but this leaves people uncertain about how much and when they will receive compensation and weighs on public finances. Making insurance coverage compulsory could encourage people to take protective measures upfront, would leverage the skills of the private sector to assess reconstruction costs, and provide greater certainty to those afflicted. Public re-insurance, and ensuring that insurance markets remain competitive, can improve the accessibility of insurance.

Figure 3. Expanding insurance coverage would improve compensation for damages and encourage households and firms to minimise their exposure to a changing climate

Reference:

OECD (2023), OECD Economic Surveys: Greece 2023, OECD Publishing, Paris, https://doi.org/10.1787/c5f11cd5-en.

Leidecker, T., et al. (2023), “Transitioning to a green economy in Greece”, OECD Economics Department Working Papers, No. 1757, OECD Publishing, Paris, https://doi.org/10.1787/77cd54d8-en.

By Christophe André, Hélia Costa, Lilas Demmou, Guido Franco, OECD Economics Department

Rising energy prices resulting from the strong post-COVID19 economic recovery and the war in Ukraine threatened to derail the post-pandemic recovery. Beyond exogenous price changes, increasing reliance on environmental policies to achieve climate change goals has also meant that energy prices have been on an increasing trajectory and will probably continue to be. Coal, natural gas and electricity are critical inputs to production in various sectors and an increase in their price can strain firms’ profitability. High energy prices could also deter investment, undermining firms’ productivity and competitiveness even further.

Policymakers may push towards temporarily shielding corporations from energy price shocks to preserve their economic performance and industrial jobs, at the expense of blurring the price signal needed for the green transition. To design policies that reconcile the two goals of providing firm support when faced with energy price increases and promoting the green transition, it is key to understand the conditions under which the impacts of energy price increases on firms materialise.

Against this backdrop, our new paper (André et al. 2023) uses historical cross-country firm-level data to estimate the impacts of energy price changes on firm productivity, a key driver of firms’ performance. We distinguish between the short- and the medium- term impact, by explicitly modelling the dynamics of gains and costs, on which the current literature is limited. Our analysis relies on newly updated measures of sectoral energy prices estimated through country-level prices and sectoral energy mixes, based on Sato et al. (2019), allowing us to explore country-industry-year variation in energy prices.

How do energy prices affect firms’ productivity?

Following an energy price shock, firms adjust their capacity utilisation, affecting their productivity. Specifically, our estimates suggest that a 5% increase in energy prices reduces productivity by approximately 0.4% one year later. The firms most affected are those operating in energy-intensive sectors, as well as firms that are financially constrained or small. This impact is also contingent on macroeconomic conditions: for example, when a country’s economy runs above potential (i.e., has a positive output gap), energy price increases have a less negative impact in the short term.

However, this impact changes over time, and firms may display positive productivity gains in the medium term. In particular, a shock corresponding to a 10% increase in energy prices is associated with an increase in productivity growth of around 0.9 p.p. four years after the shock. These gains are more likely in less energy-intensive sectors and for firms that are more likely to invest in newer, more energy-efficient capital. In addition, they are less likely to materialise in the case of more severe shocks.

Figure 1. The medium-term response of productivity to energy price shocks

Our analysis offers some indications that investment could be a channel through which this sign reversal operates. Energy price shocks are more likely to affect productivity positively when coupled with favourable conditions for investment to take place, as for example in countries with more stringent environmental policy, where managers are more likely to be aware of energy efficiency technologies. Conversely, in environments of large economic policy uncertainty, firms face lower scope for productivity gains as they are likely to delay irreversible investment including energy efficiency investment.

These results offer insights into policies for promoting firm performance and avoiding the risks of productivity stagnation, while encouraging the green transition. First, governments could incentivise firm-level decarbonisation by letting price signals on fossil fuel energy operate, especially in expansionary periods of the business cycle when the cost of adjustment is lower. Further, the analysis outlines several directions to establish a green-investment-friendly environment, for example by easing access to finance, reducing policy uncertainty, improving predictability of retail electricity prices, and increasing awareness of environmentally related challenges and solutions through environmental policy. Finally, this work suggests that in the case of severe shocks, like the one experienced last year, costs are likely to be high and persistent. To reduce scars for the corporate sector, some support to vulnerable but productive firms may be needed, especially for small and financially constrained firms which are the most at risk.

References:

André, Christophe; Costa, Hélia; Demmou, Lilas; Franco, Guido, 2023. Rising energy prices and productivity: short-run pain, long-term gain?, OECD Economics Department Working Paper, no 1755, OECD Publishing, Paris, https://doi.org/10.1787/2ce493f0-en.

Sato, Misato; Singer, Gregor; Dussaux, Damien; Lovo, Stefania, 2019. International and sectoral variation in industrial energy prices 1995–2015. Energy Economics, 78, issue C, p. 235-258.

By Francesca Papa and Filippo Cavassini, OECD Economics Department

Russia’s war of aggression against Ukraine is strongly impacting energy prices worldwide. While relatively mild weather avoided rationing over the 2022-23 winter in European countries, challenges remain in securing sufficient storage levels for the 2023-24 winter (OECD, 2023). In some countries, high prices have already incentivised some demand reductions from firms and households. However, as argued in our recent paper (Cavassini and Papa, 2023), the crisis calls for additional changes in behaviour to accompany long-term technical and structural solutions to lower gas and electricity demand.

The current energy crisis calls for significant changes in behaviour

Diversifying energy sources and reducing energy demand will be critical. Some of these changes will take time to be implemented, such as improving buildings’ energy efficiency. However, the current crisis also calls for policies leading to more immediate demand reduction (Haas, Kozluk and Sarcina, 2022) (Figure 1).

Figure 1. Without demand reductions, Europe may risk gas supply interruptions

Some of these actions will need to come from changes in the behaviour of households, which account for almost 24% of energy consumption in the EU, with an even higher share in winter (OECD, 2022) (Figure 2).

Figure 2. Households account for a large share of electricity consumption

_{Electricity total final consumption by sector
1971-2018 (Mtoe)}

Reducing households’ energy use can not only help curb the current crisis, but, if sustained over time, it can also support the transition to net zero. Identifying the psychological factors that influence energy conservation behaviour is particularly important, because changing behaviour is the result not only of responses to prices but also of expectations, habits, and biases (Carrus, 2021).

How to facilitate a behavioural response to energy savings?

A range of structural and psychological barriers make it hard for consumers to change their energy consumption. For example, inattention, sheer habit or emulation can create a gap between the intention to reduce energy consumption – I will turn off the light when I exit the room – and the actual action – but in fact I leave it on. The capacity of individuals to process information can also be a barrier. Information campaigns that are not sufficiently clear on what can be done can be difficult to act upon.

There are, however, ways of counteracting these behavioural barriers.

Successful information campaigns tend to provide a set of clear and actionable guidelines, which can be important for emergency situations (Cornago, 2022). For example, after the 2011 earthquake and tsunami hit the Fukushima nuclear power plant in Japan, the government launched an information campaign to encourage households to save energy. Government and energy utilities disseminated checklists of energy saving tips with simple actionable steps, complemented by technical support to commercial and industrial consumers (Institute of Energy Economics, Japan, 2021). Overall, the campaign led to 15% less electricity being used in 2011 relative to the previous year in the most affected regions. This was achieved without price increases (Kimura and Nishio, 2016).

Social norms are strong determinants of action and can influence the effectiveness of information campaigns. For example, a study on the role of beliefs in energy conservation found that the belief that neighbours were reducing energy consumption correlated highly with energy saving efforts, a finding which has often replicated in real-life applications (e.g. Figure 3) (Jachimowicz, 2018).

Figure 3. Sample of redesigned energy bill emphasising social comparison

Behavioural change can also be promoted through a combination of price mechanisms (time of the day pricing) and user-centric technologies. A study conducted by the OECD in 2018 showed that smart meters providing real-time feedback on electricity consumption, price and expenditures induced households to reduce electricity demand by an average of about 3%, with results increasing to around 4% over a five-month period (OECD, 2019).

Table 1 presents possible responses that build on behavioural sciences and can be used to counteract different behavioural barriers affecting energy consumption.

Table 1. Examples of behavioural barriers that can affect energy consumption in the short and long term and possible responses

Conclusions

Governments should already concentrate on energy saving measures that will prepare us for the next winter. The choice of message that policymakers send to consumers, how and when the information is provided to households and through which channels can make a difference in changing consumption behaviours. The effectiveness of these campaigns and actions should be monitored to gauge evolutions in behaviours and identify solutions to behavioural barriers.

References:

Andor, M. (2018), Behavioral economics and energy conservation–a systematic review of non-price interventions and their causal effects, Ecological economics 148 (2018): 178-210. https://www.researchgate.net/publication/331999076_Behavioral_Economics_and_Energy_Conservation_-_A_Systematic_Review_of_Non-price_Interventions_and_Their_Causal_Effects.

Carrus, G. (2021), Psychological predictors of energy saving behavior: A meta-analytic approach., Frontiers in Psychology, 12, 648221. https://www.frontiersin.org/articles/10.3389/fpsyg.2021.648221/full.

Cavassini F. and Papa F. (2023), “Confronting the energy crisis: changing behaviours to reduce energy consumption“, OECD Policy Responses on the Impacts of the War in Ukraine. Available at: https://www.oecd.org/ukraine-hub/policy-responses/confronting-the-energy-crisis-changing-behaviours-to-reduce-energy-consumption-5664e8a9/#back-note-d1e350.

Cornago, E. (2022), HOW TO SAVE ENERGY IN A SMARTER WAY, Center for European Reform. https://www.cer.eu/insights/how-save-energy-smarter-way.

Feygina, I. (2010), System justification, the denial of global warming, and the possibility of “system-sanctioned change”., Personality and social psychology bulletin, 36(3), 326-338. https://journals.sagepub.com/doi/abs/10.1177/0146167209351435.

Gifford, R. (2011), The dragons of inaction: psychological barriers that limit climate change mitigation and adaptation., American psychologist, 66(4), 290. https://psycnet.apa.org/doiLanding?doi=10.1037%2Fa0023566.

Haas, Kozluk and Sarcina (2022), Emergency plans and solidarity: Protecting Europe against a natural gas shortage, OECD Ecoscope. https://oecdecoscope.blog/2022/10/21/emergency-plans-and-solidarity-protecting-europe-against-a-natural-gas-shortage/.

IEA (2021), Electricity total final consumption by sector, 1971-2019, IEA, Paris https://www.iea.org/data-and-statistics/charts/electricity-total-final-consumption-by-sector-1971-2018, IEA. Licence: CC BY 4.0.

Institute of Energy Economics, Japan (2021), CERT Thematic Discussions: The role of ʻbehavioural aspectsʼ for reaching net zero emissions by 2050, https://iea.blob.core.windows.net/assets/d65c0edb-50fc-46e4-90db-d7df8933af4d/1.Naoko_DOI_ImpactofSetsuden.pdf.

Jachimowicz, J. (2018), The critical role of second-order normative beliefs in predicting energy conservation., Nat Hum Behav 2, 757–764 (2018). https://doi.org/10.1038/s41562-018-0434-0.

Kimura, O. and K. Nishio (2016), Responding to electricity shortfalls: Electricity-saving activities of households and firms in Japan after Fukushima., Economics of Energy & Environmental Policy, 5(1), 51–72. https://www.jstor.org/stable/26189398.

Mol, Jantsje M., et al. (2020), Insights into flood risk misperceptions of homeowners in the Dutch River Delta., Risk analysis 40.7 (2020): 1450-1468. https://onlinelibrary.wiley.com/doi/full/10.1111/risa.13479.

OECD (2023), OECD Economic Outlook, Interim Report March 2023: A Fragile Recovery,, OECD Publishing, Paris, https://doi.org/10.1787/d14d49eb-en.

OECD (2022), Emergency plans and solidarity: Protecting Europe against a natural gas shortage, OECD, Paris. https://www.oecd.org/economy/outlook/Briefing-Note-Gas-Emergency-Plans-and-Solidarity.pdf.

OECD (2019), Delivering Better Policies Through Behavioural Insights: New Approaches,, OECD Publishing, Paris, https://doi.org/10.1787/6c9291e2-en.

OECD (2019b), Tools and Ethics for Applied Behavioural Insights: The BASIC Toolkit, OECD Publishing, Paris, https://doi.org/10.1787/9ea76a8f-en.

Acknowledgments

Valuable comments, inputs and support were received from colleagues across the OECD Economics Department: special thanks go to Tomasz Kozluk; Mauro Pisu; Enes Sunel; Filippo Maria D’Arcangelo; Tobias Kruse; Jonas Teusch; Fátima Talidi and Jesús Calderón Argüello. The authors gratefully acknowledge Cassandra Castle for her important contributions. Isabell Koske, Acting Director, Country Studies, Economics Department, provided guidance and inputs to the policy brief. Antonia Vanzini prepared the blog for publication.

By Geoff Barnard and Patrice Ollivaud, OECD Economics Department

The estimated ratio of energy expenditures to GDP in OECD economies surged in 2022. The prices of oil, natural gas, electricity and coal had already risen strongly during 2021, and soared further after Russia’s invasion of Ukraine in February 2022. Even though by the end of 2022 prices had fallen well below their intra-year highs, for the year as a whole all four energy components contributed to the estimated increase in the OECD-wide expenditure-to-GDP ratio relative to 2021: 2½ percentage points of GDP for electricity, 2¼ for crude oil and oil products, 2 for natural gas and 1 for coal.

It is possible that the 2022 energy-expenditure estimates are somewhat overstated. First, full-year volumes are not yet known and are assumed to be equal to the average of 2019 and 2021 (leaving out the COVID-affected year of 2020). However, in some cases, such as gas and electricity consumption in Europe, high prices have been curtailing consumption in recent months. Moreover, end-user prices for 2022 are not yet available and have therefore been proxied by wholesale prices. To the extent that retail prices have been held down by government policies and/or that industrial users buy energy under long-term price contracts, actual end-user prices and expenditure may have risen by less than suggested by wholesale prices. Nonetheless, it is clear that expenditures on energy as a proportion of GDP will have risen rapidly, and to a high level, in 2022, both in the OECD as a whole and in the typical economy.

Experience suggests that this represents a warning about the potential risk of recession in OECD economies in 2023. Over the past 50 years, the share of incomes in OECD economies taken up by energy expenditures has been closely related to the incidence of economic downturns (Figure 1). As shown in the latest OECD Economic Outlook (OECD, 2022), end-use expenditures on energy in the OECD have been high and rising whenever an OECD-wide recession has occurred since 1970, with the sole exception of the pandemic-affected year of 2020. There were surges in energy expenditures during the first (1973-74) and second (1979-80) oil crises in many countries, both of which preceded an OECD-wide recession, while the global financial crisis occurred at the culmination of an upward trend in energy expenditures that began in the early-2000s, reaching 13% in 2008. The surge in energy expenditures seen in 2022 is thus a cause for concern.

The association between energy expenditures and the economic cycle is readily explicable: with energy an important input for firms, a rise in energy prices may represent an adverse supply shock, lowering output and raising the price level. At the same time, higher energy prices erode the purchasing power of households. While there are winners from higher energy prices, their propensity to spend their windfalls is typically low (Cookson et al., 2022), so that the net effect on aggregate demand is negative.

Figure 1. Periods of high energy expenditures are often associated with a recession

Estimated energy end-use expenditures for the OECD economies

There are, however, some differences with previous episodes of sharp increases in energy expenditure. First, past surges in the expenditure-to-GDP ratio were mostly driven by oil, while this time the contributions are more evenly spread across energy sources. If the link to economic activity is stronger for oil than for the other energy components, this might mean that the negative growth impact is smaller than for past energy expenditure shocks of similar size. The impact on particular countries will also differ from the past depending on their endowments of the various energy components: for example, net exporters of natural gas, including the United States, are likely to suffer less of a negative impact from the current energy price spike than in the past.

Second, because the market for oil (as well as coal) is much more global than those for electricity and gas, the incidence of the OECD-wide energy price increase is more regionally focussed than in the past, with most European economies particularly severely affected. The recession signal may therefore turn out to be more regional than global on this occasion.

Finally, the energy intensity of OECD economies (defined as energy consumed per unit of GDP) has trended down over the past five decades (Figure 2), reflecting rising energy efficiency. A large part of this downtrend is driven by oil and coal; the use of natural gas intensified until the end of the 1990s, when it stabilised, while electricity intensity has remained relatively constant. The downtrend in energy intensity is often masked by swings in the relative price of energy. For example, energy intensity fell by nearly 15% from the mid-1990s to the early 2000s, but energy expenditures remained roughly stable in relation to GDP because of an offsetting increase in the relative (weighted) price of energy. And the spike in the expenditure-to-GDP ratio in 2022, reflecting the unprecedented rises in some energy prices, obscures the ongoing decline in energy intensity. To the extent that OECD economies have become less energy intensive, the impact of an energy price shock on output may be expected to be smaller than in the past.

Bearing these differences in mind, the latest OECD Economic Outlook projections do not show a global or OECD-wide recession in 2023. A sharp slowdown is, however, expected in Europe – GDP growth for the euro area is projected to decline from 3.3% in 2022 to 0.5% in 2023, with quarterly output declines projected in several European countries. In addition, the Economic Outlook points to a range of downside risks, including the risk that the impact of lower energy imports to Europe from Russia is more severe than expected.

Figure 2. Energy intensity has declined, especially for oil and coal

Energy volume consumed per unit of real GDP, index, 2015=100

References:

OECD (2022), OECD Economic Outlook, Volume 2022 Issue 2, OECD Publishing, Paris.

Cookson, J., E. Gilje and R. Heimer (2022), “Shake Shocked: Cash Windfalls and Household Debt Repayment”, Journal of Financial Economics, Vol. 146, Issue 3.

By Filippo Maria D’Arcangelo, Mauro Pisu (OECD Economics Department), and Anasuya Raj, Kurt Van Dender (OECD Centre for Tax Policy and Administration)

Limiting global warming and avoiding its potentially catastrophic damages hinges on reaching net-zero emissions by mid-century (IPCC, 2022). Achieving this ambitious global target requires a wide range of mitigation policies to overcome market failures, path dependencies and coordination problems (D’Arcangelo et al., 2022).

Carbon pricing can play an important role in a well-coordinated mitigation policy mix for two main reasons. First, in many instances, carbon pricing can induce lower emissions at lower economic costs than alternative mitigation policies. Second, it can generate additional government revenues, at least until emissions start falling appreciably.

Available evidence on the responsiveness of CO2 emissions and government revenues to carbon pricing is fragmented and difficult to compare across countries and sectors. Thus, tracking and comparing countries’ progress towards emission reduction targets and assessing the contribution of carbon pricing to emission reductions is challenging. We tackle this challenge in our recent paper, Estimating the CO2 emission and revenue effects of carbon pricing: new evidence from a cross-country dataset.

The paper provides fresh evidence on the long-run responsiveness of CO2 emissions and government revenues to carbon pricing within a unified framework across countries, sectors and fuels. The analysis relies on the OECD Effective Carbon Rates (ECR) database, containing comprehensive and detailed information on instruments pricing carbon emissions from energy use in 44 OECD and G20 countries. The ECR database contains data on carbon taxes, permit prices resulting from emissions trading systems, and fuel excise taxes and covers about 80% of global CO2 emissions from energy use.

Broad-based carbon pricing is an effective measure to reduce emissions in most sectors and will accelerate coal phase-out

Baseline estimates suggest that a EUR 10 per tonne of CO2 increase in carbon prices decreases CO2 emissions from fossil fuels by 3.7% on average in the long term. Policy simulations indicate that introducing a EUR 60 per tonne of CO2 global carbon price floor (about three times the 2018 average effective carbon rate) would lower total CO2 emissions from fossil fuels by about 17% compared to 2018 levels, after firms and people have fully adjusted to the increase in ECRs. This is a sizeable reduction in emissions but far from what is required to reach net-zero.

Estimates of the responsiveness of CO2 emissions to carbon pricing vary across sectors and fuels. For example, emissions in the buildings sector are about three times less responsive to carbon pricing than those in the agriculture and fisheries sector. Increasing carbon prices can be expected to have the largest effects on emissions from the Electricity and Industry sectors (Figure 1) due to a confluence of factors: the low carbon prices these sectors still face in most countries; their high emission responsiveness compared to other sectors; and their large share in total emissions. A high price floor in the Road transport sector, where effective carbon rates are already elevated due to excise taxes, would also contribute substantially to reducing emissions.

Emissions from coal are more responsive to carbon pricing than those from all other types of fossil fuels. Even mild, broad-based carbon prices would contribute significantly to coal phase-out, given its high responsiveness to carbon pricing: a floor of EUR 60 per tonne of CO2 can be expected to reduce global emissions from coal by half.

Figure 1: Effect of different ECR floors on emissions by sector

Broadening carbon pricing to unpriced emissions has large effects on emissions and revenues in some countries

Moderate increases in carbon pricing would initially translate into large government revenue increases, as carbon prices are still generally low. Globally, carbon-related revenues could triple, relative to 2018 levels, with a EUR 60 global carbon price floor. Over time, if carbon price floors keep on increasing, these carbon-related revenues would dwindle in tandem with the reduction of emissions.

The broadened coverage of carbon pricing to currently unpriced emissions would contribute to around two thirds of the total estimated effects on emissions and revenues. Emission-intensive countries that do not yet price a large share of their emissions would observe a larger reduction in emissions and greatly contribute to the increase in fiscal revenues.

Figure 2: Impacts of a EUR 60 ECR floor on carbon-related revenues

Easing the substitution of clean energy sources for fossil fuels requires policies complementary to carbon pricing

The estimated responsiveness of emissions to carbon pricing suggests that even large carbon prices (about EUR 1000 per tonne by late 2030s) will not suffice to meet net-zero emission targets.

Complementing steady but moderate increases in ECRs with policies that markedly increase the emission responsiveness to carbon pricing is crucial to put emissions on a downward path towards net-zero targets. In this respect, innovation and reallocation-friendly policies have a major role to play, as they can ease the substitution of clean energy sources for fossil fuels, thus reducing emission abatement costs and making carbon price more effective. For instance, policy simulations show that an emission responsiveness twice as large as the baseline estimate, combined with an ECR floor of EUR 40 on priced and unpriced emissions, would result in the same emission reduction as the baseline responsiveness estimates combined with an ECR floor of EUR 175 on priced emissions and EUR 60 on unpriced emissions.

References

D’Arcangelo, F.M., Ilai Levin, Alessia Pagani, Mauro Pisu, and Åsa Johansson (2022), “A framework to decarbonise the economy”, OECD Economic Policy Papers, No. 31, OECD Publishing, Paris, https://doi.org/10.1787/4e4d973d-en.

IPCC, 2022: Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press, Cambridge, UK and New York, NY, USA. doi: 10.1017/9781009157926.

By Jörg Haas, Tomasz Kozluk, Giuliana Sarcina, OECD Economics Department

The dramatic decline in Russian gas exports to Europe threatens to create a natural gas shortage this coming winter (Birol, 2022; European Commission, 2022a). In a recent paper (Haas, Kozluk and Sarcina, 2022), we argue that filling storage will be insufficient to eliminate that risk. Unless European countries reduce demand now, they might have to ration gas this winter. The emergency plans and solidarity provisions in place in case of a shortage offer strong protection for households and social services but would leave firms bearing the brunt of the burden of adjustment. The economic and employment costs could be severe, which underlines the need to reduce demand across all sectors of the economy now in order to prevent the risk of rationing during the winter. Moreover, solidarity between EU members is well-established on paper but may prove challenging to implement. It needs to be made operational by putting the necessary bilateral agreements in place or agreeing on EU legislation to this effect.

Storage and supply are limited

Replenishing gas storage levels to prevent a shortage in winter is a salient approach in the public debate, but it offers only a partial solution. EU gas storage levels currently stand at above 90%, with most member states well in excess of the 80% target set by the European Commission for November 2022 (GIE, 2022). This equals about 100 billion cubic meters (bcm) of gas, while the European Union typically consumes about 290 bcm between November and April. In most countries, gas reserves are seasonal rather than strategic: they decline in winter amid continued imports. If imports from Russia cease completely and the European Union does not reduce its gas consumption, it risks a shortage in early 2023. Consumption would have to shrink by between 10 and 20%, depending on gas flows from Russia, deliveries from alternative suppliers, and winter temperatures (Figure 1) (Kennedy, 2022; McWilliams and Zachman, 2022). A further consideration is the fact that the United Kingdom typically imports substantial amounts of gas throughout winter and may need to rely on EU storage due to its very limited own storage capacities. Finally, even if consumption is reduced sufficiently at the aggregate EU level, individual countries could still face shortfalls as the EU internal gas grid has limited transmission capacity between member states.

Figure 1. Without demand reductions, Europe risks gas supply interruptions

Stylised scenarios of EU and UK gas storage level developments, %

National emergency plans

What happens if demand reduction turns out to be insufficient and gas must be rationed? National emergency plans define which consumers will lose access (European Commission, 2022b). As a last resort, the gas supply to certain customer groups can be reduced, while “protected customers” should still be supplied in full. EU countries typically protect households, social services, essential infrastructure, and district heating systems from cuts (Figure 2) (European Commission, 2019). By contrast, firms would have to bear the brunt of the adjustment. The order in which unprotected customers are supplied is not specified in emergency plans, although the European Commission suggests prioritising customers that provide socially critical products like food or medicine, as well as those that could have large downstream effects on value chains (European Commission, 2022c).

Figure 2. Households are protected against gas cuts, but most firms are not

Share of EU member states with regulation that protects customer groups against gas cuts, %

EU solidarity

EU solidarity provisions aim to provide additional protection across borders. They oblige EU members to ensure that households, social services, infrastructure and heating systems everywhere in the European Union are able to access gas, even in the worst-case scenario of a severe shortage (EU Council Regulation 2017/1938). If an EU member state requests solidarity, connected member states are obliged to reduce gas supply to non-protected customers and pump the gas that has been saved to a member state in need. In return, natural gas providers are entitled to financial compensation. Flows must be ensured until the demand of protected customers in the requesting member state is satisfied (Fleming, 2019).

The details of gas-sharing under the solidarity mechanism have to be specified in bilateral agreements between neighbouring countries. However, as of now, only six such agreements have been concluded. The list includes Germany and Denmark; Germany and Austria; Estonia and Latvia; Lithuania and Latvia; Italy and Slovenia; as well as Finland and Estonia (European Commission, 2022b). The European Commission has therefore proposed harmonised clauses that would be directly applicable in the absence of bilateral agreements, but these have not yet been signed into law.

As long as the coverage of bilateral agreements is sparse and there is no additional European legislation to fill that gap, solidarity may face practical and political challenges. An agreement on and enforcement of common standards (e.g. minimum acceptable interior temperature standards) across the European Union may help alleviate this problem. Solidarity could be crucial not just to avoid major disruptions in individual countries, but also to help limit the severity of disruptions in the extreme scenario of widespread shortages.

What can governments do?

While emergency plans and solidarity provisions are crucial in ensuring that citizens and critical infrastructure will not lose access to energy, they can only serve as measures of last resort. Rationing the gas consumption of firms would imply large economic costs and unpredictable cascading effects along supply chains. Governments should thus aim to ensure energy savings now and spread them across all sectors of the economy, rather than risk burdening firms with the costs of a sudden emergency adjustment in early 2023. High prices will and already are incentivising demand reductions. However, some government support policies blur or weaken the price signal. To this extent, they merit a review as they may discourage energy savings and can be fiscally costly. In addition, governments have a wide range of measures at their disposal, including appeals for voluntary reductions and restrictions on certain uses of gas or electricity, as well as investment in energy efficiency.

References

Birol, F. (2022b). Coordinated actions across Europe are essential to prevent a major gas crunch: Here are 5 immediate measures. Available at: https://www.iea.org/commentaries/coordinated-actions-across-europe-are-essential-to-prevent-a-major-gas-crunch-here-are-5-immediate-measures.

EU Regulation 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02017R1938-20220701.

European Commission (2019). Commission’s opinions on the preventive action plans and emergency plans submitted by EU countries in 2019. Available at: https://energy.ec.europa.eu/topics/energy-security/secure-gas-supplies/commissions-opinions-preventive-action-plans-and-emergency-plans-submitted-eu-countries-2019_en.

European Commission (2022a). Opening remarks of Commissioner Simson at the press conference of the Extraordinary Energy Council of 26 July 2022. Available at: https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_4727.

European Commission (2022b) Secure Gas supplies. Available at: https://energy.ec.europa.eu/topics/energy-security/secure-gas-supplies_en.

European Commission (2022c). A European gas demand reduction plan. Available at: https://ec.europa.eu/commission/presscorner/detail/en/fs_22_4611.

Fleming R. (2019). A legal perspective on gas solidarity. Energy Policy 124, pp.102-110. Available at: https://doi.org/10.1016/j.enpol.2018.09.037.

GIE (2022). Aggregated Gas Storage Inventory. Available at: https://agsi.gie.eu/.

Haas, J., Kozluk, T., and Sarcina, G. (2022). Emergency plans and solidarity: Protecting Europe against a natural gas shortage. OECD Policy Spotlight, October 2022. Available at: https://read.oecd-ilibrary.org/view/?ref=1160_1160374-3tkm8gj0xp&title=Briefing-Note-Gas-Emergency-Plans-and-Solidarity.

Kennedy, C. (2022). IEA chief: Europe must cut gas usage 20% to survive winter. Oilprice.com, 21 July 2022. https://oilprice.com/Latest-Energy-News/World-News/IEA-Chief-Europe-Must-Cut-Gas-Usage-20-To-Survive-Winter.html.

McWilliams, B., and Zachmann, G. (2022). European Union demand reduction needs to cope with Russian gas cuts. Bruegel Blog Post, July 2022. Available at: https://www.bruegel.org/2022/07/european-union-demand-reduction-needs-to-cope-with-russian-gas-cuts.

By Hélène Blake and Tim Bulman, OECD Economics Department.

In the 12 months leading to March 2022, average home energy costs jumped by 41% in the European Union, and the price of fuels for private transport by 38%. These rises have strongly contributed to the return of inflation after more than two decades of subdued price growth across EU countries. The cost of the average consumption basket rose by between 4.5% to 15.6% across EU countries in the year to March 2022, and available data for April suggest that stronger price growth has continued.

While everyone is experiencing rising living costs, energy makes up a larger share of some households’ budgets than others, so this shock risks amplifying existing inequalities. As governments across the OECD introduce measures to buttress households from this price shock (Boone and Elgouacem, 2021), it is important to understand which households are most exposed.

Analysing household budget surveys across the EU shows marked differences in spending on energy between countries and across households. Interestingly, low-income households are not systematically the hardest hit (Figure 1).

Figure 1. The impact of the recent energy price surge on household budgets differs between countries and income groups

Impact of the increase in energy prices on households’ budget for rural and urban households (as a % of total spending)

Which households experience the largest losses in real incomes depends on the type of energy consumed, the price increases of different types of energy, and the share of energy in overall consumption. Home energy prices affect the poorest 20% of households more than higher income households in each country across the EU (Figure 2). For transport costs, the picture is less clear-cut, with increasing transport costs affecting high-income more than low-income households in several countries (Figure 3). Indeed, in a third of European countries higher income households spend larger shares of their income on running their car than lower income households, generally reflecting car ownership that is less common and is concentrated among higher-income households in these countries (Figure 3).

Figure 2. Across the EU, lower income households spend a larger share of their budgets on home energy, higher income households a larger share on transport costs, and remoter households spend larger shares on both

Average share of home energy and transport costs as a % of total spending, across income and geographical groups, EU average (2015)

Higher energy prices also exacerbate inequalities between urban and rural areas. Households in rural areas and small towns spend 10% to 80% larger shares of their overall budget on home energy and transport costs than their urban counterparts (Figure 4). In some EU countries (e.g. Bulgaria, Hungary or Spain), households in rural areas and small towns are more likely to have low incomes than urban households, exacerbating their loss of purchasing power from rising energy prices.

Figure 3. Higher transport costs have a larger impact on high-income households in countries where car ownership is less common

Share of budget spent on running cars by households with highest 20% of incomes relative to lowest 20% of incomes (2015)

The distributional analysis can help governments respond to the recent price rises with measures that target the most exposed and vulnerable households, while limiting the cost of these measures to public finances and sustainability. Means-tested cash transfers are the most cost-efficient tool to reduce inequalities in the loss of purchasing power between income groups. Austria, for instance, gave a lump-sum support to the beneficiaries of social transfers, while Ireland increased the mean-tested payment helping households on their energy bill. Other countries are providing a mean-tested voucher for energy expenses (for example, France and Italy). By not distorting the price signal, such support measures also have the advantage that they do not discourage households from saving energy. Accelerating support to vulnerable households to improve their energy efficiency and to rely less on fossil fuel could bring the greatest and longest-lasting benefits, such as Greece’s support for insulating housing and to develop new photovoltaic stations to provide power for vulnerable households (Bruegel, 2022).

By contrast, price subsidies and tax expenditures (such as cuts to excise taxes) reduce households’ incentives to save energy (Pototschnig, A. et al., 2022). Moreover, price support for transport fuels risks supporting the highest income households the most.

Figure 4. Higher home energy and transport prices disproportionately affect rural households in all countries

Impact of the increase in energy prices on households’ budget for rural and urban households (as a % of total spending)

References

Boone, L. and A. Elgouacem (2021), At the cross-roads of a low-carbon transition: what can we learn from the current energy crisis?, ECOSCOPE, https://oecdecoscope.blog/2021/10/22/at-the-cross-roads-of-a-low-carbon-transition-what-can-we-learn-from-the-current-energy-crisis/ (accessed on 14 April 2022).

Bruegel (2022), National policies to shield consumers from rising energy prices, https://www.bruegel.org/publications/datasets/national-policies-to-shield-consumers-from-rising-energy-prices/ (accessed on 11 April 2022).

Pototschnig, A. et al. (2022), “Consumer protection mechanisms during the current and future periods of high and volatile energy prices | Florence School of Regulation”, EUI Policy Brief, https://fsr.eui.eu/publications/?handle=1814/74376 (accessed on 11 April 2022).

By Laurence Boone and Assia Elgouacem, OECD Economics Department

When it rains it pours. The energy crisis we face today is the result of a confluence of several forces at play: persistent underinvestment in the energy sector and fragile market regulation coupled with unfavourable weather events and insufficient buffers (Figure 1A) (IEA, 2021b). Together with the strong COVID-related demand recovery, they created an unsettling mismatch in our global energy markets leading to skyrocketing energy prices, in particular in Europe (Figure 1B). The crisis has brought to bear the multiple sources of tension that could threaten the stability and reliability of our energy system. It has also triggered a multiplicity of emergency measures to contain costs for households and firms at a time when the energy transition is set to accelerate. As countries embark on what promises to be the most ambitious energy transformation of our times, the current events show how transition to a climate neutral world needs to minimise the risk of such disruptions while securing public support.

Between calls for greater energy security and energy affordability, particularly at a time when mounting inflation pressures are already raising concerns about people’s purchasing power (OECD, 2021c), this crisis is very much exposing difficulties governments will face to stay on course towards a climate neutral world. Countries representing around 70% of the world’s global carbon emissions have already announced climate neutrality targets by mid-century (IEA, 2021a), which necessitates a rapid and unprecedented transformation of the way we produce and consume our goods and services. Yet the steps to achieving this transformation remain unclear in many jurisdictions.

According to the recently published IEA World Energy Outlook, a net-zero emissions world requires accelerating clean electrification of many energy uses, improving energy efficiency, substantially reducing methane emissions and boosting innovation (IEA, 2021c). This requires a major shift in investment (Figure 2), R&D, regulation and carbon pricing.

Reasons for the current shortages are multiple, but some of them reflect future challenges that could be linked to decarbonisation. The post-Covid demand surge is partly responsible for a global shortage of energy, but it coincides with an undersupply due to a lack of investment in clean energy at a time when investment in brown energy has been receding over the past decades (IEA, 2021b) .

In short, the current situation should provide lessons to prepare better for the transition to a climate neutral world through strengthening our energy systems as our energy infrastructure morphs into one that relies much more on variable renewable energy sources. Policy makers thus need not only steer incentives towards clean energy but they should also ensure that as energy systems become cleaner they remain reliable and affordable. This requires larger and more timely investment, a focus on electricity system flexibility, and better pricing systems. The IEA estimates that investment in clean energy projects and infrastructure needs to more than triple over the next decade to reach net-zero emissions (Figure 2).

Failure to better prepare our energy system would only exacerbate public finances pressure while weakening the price signals. Countries are currently scrambling to provide aid to their citizens to soften the blow from rising energy prices at the cost of higher emissions. Interventions range from means-tested transfers to low-income households, energy tax cuts, caps on energy prices, and excess profit taxes on energy companies (Table 1). While protecting vulnerable households is necessary, it is important that such measures remain time limited and not undermine incentives for clean energy.

The OECD has long since highlighted the importance of policy alignment and how a comprehensive, inclusive and cost-effective strategy to address climate change will require bringing in complementary policy areas and exploiting synergies among them (OECD, 2015e) (OECD, 2021a). The current episode highlights this further, especially since higher energy prices could render already contentious policies, such as carbon taxes, even less palatable and politically tenable (Politico, 2021). To this end, governments need to strengthen targeted social support to vulnerable populations, including through well-designed revenue-recycling schemes, and to bolster active labour market support to help workers and encourage a more efficient reallocation of labour (OECD, 2021d) (Vona, forthcoming). They need to upgrade market regulation to ensure greater stability as well as competition, and to encourage investment in energy system flexibility. Reforming financial sector regulation is also key, such as requiring greater disclosure in financial markets to better account for climate risk and mobilise private funds (OECD, 2021b). Lastly, transparency, better communication and carefully assessing compensation packages would be necessary for garnering public support so as to not derail the energy transition.

References

IEA (2021a), Net Zero by 2050: A Roadmap for the Global Energy Sector, OECD Publishing, Paris, https://doi.org/10.1787/c8328405-en.

IEA (2021b), What is behind soaring energy prices and what happens next?, https://www.iea.org/commentaries/what-is-behind-soaring-energy-prices-and-what-happens-next.

IEA (2021c), World Energy Outlook 2021, OECD Publishing, https://doi.org/10.1787/14fcb638-en.

OECD (2021a), Economic Policy Reforms 2021: Going for Growth: Shaping a Vibrant Recover, OECD Publishing, https://doi.org/10.1787/3c796721-en.

OECD (2021b), Financial Markets and Climate Transition, https://www.oecd.org/finance/Financial-Markets-and-Climate-Transition-Opportunities-Challenges-and-Policy-Implications.pdf.

OECD (2021c), OECD Economic Outlook, Interim Report September 2021: Keeping the Recovery on Track, OECD Publishing, https://doi.org/10.1787/490d4832-en.

OECD (2021d), The Inequalities-Environment Nexus, https://www.oecd-ilibrary.org/environment/the-inequalities-environment-nexus_ca9d8479-en.

OECD (2015e), Aligning Policies for the Low-carbon Economy, https://www.oecd.org/fr/gov/aligning-policies-for-a-low-carbon-economy-9789264233294-en.htm.

Politico (2021), Soaring power prices drive anxiety over EU climate plans, https://www.politico.eu/article/soaring-power-prices-anxiety-eu-climate-plans/.

Vona, F. (forthcoming), Managing the Distributional Effects of Environmental and Climate Policies: The Narrow Path for a Triple Dividend.