Protecting EU energy consumers from high prices could backfire, economists warn
The EU’s four biggest countries have announced more than €80 billion in measures to protect consumers and businesses from soaring energy prices exacerbated by Russia’s invasion of Ukraine – but economists warn that many of these measures could prove counterproductive.
Germany, France, Italy and Spain have responded to soaring energy prices by announcing plans to cut taxes or fund rebates on fuel, electricity or natural gas , to protect their economies from soaring business costs and declining consumers. ‘disposable income.
Yet by cushioning the blow of rising energy prices, governments could make the problem worse by reducing the incentive for households and businesses to cut back on electricity and fuel consumption, while making it harder to wean off. of their reliance on Russian fossil fuels.
“It’s a terrible economy,” said Rüdiger Bachmann, professor of economics at the University of Notre Dame. “You want the price mechanism to have its effect, signaling that a good is scarce, so that people decide whether they want to change their behavior.”
Many European countries are transferring money to vulnerable groups to help them cope with rising consumer energy prices, which have risen by 45% in the eurozone over the past year, mainly due to tight supply. The Bruegel think tank found that only three of the 25 countries it assessed made no such payments.
But Bruegel found that 17 countries also reduced energy taxes or duties, while 10 countries regulated retail energy prices and three regulated wholesale prices.
The French government has gone further by capping the increase in household electricity bills. EDF, the French state energy group, estimated that the cap would cut profits by €10 billion when combined with an obligation to sell its nuclear energy below wholesale tariffs.
“The home energy subsidy is crazy – it reduces the incentive to reduce energy consumption,” said Klaus Adam, professor of economics at the University of Mannheim. “Give everyone an amount each month and let them decide if they want to use it to pay for higher gas prices or if they want to save energy and spend it on something else.”
Veronika Grimm, a member of the council of economic experts that advises the German government, criticized the latest package of measures announced by Berlin last week to help businesses with high energy prices.
The package will include “a time-limited and narrowly defined cost subsidy” for businesses whose electricity costs have at least doubled since last year. “It is very unfortunate to subsidize the use of fossil fuels by directly subsidizing energy consumption,” Grimm told Die Welt newspaper. “At the end of the day, it keeps gas prices high on exchanges.”
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As part of Spain’s €16bn ‘shock plan’ to deal with the fallout from the conflict in Ukraine, it plans to cut fuel price costs in an attempt to defuse an unofficial transport strike that started last month. Spain is also working on a new program with Portugal to cap gas prices.
France last month announced a scheme to provide a €0.15 per liter rebate on fuel for four months starting this month, while Germany’s €16 billion plan to help households includes a three-month reduction in fuel prices of €0.30 per liter for petrol and €0.14 for diesel. Italy said in February it would spend around 6 billion euros to help reduce taxes on energy bills, having already spent around 10 billion euros to try to cut electricity costs for consumers.
By keeping demand high, economists say such moves could undermine an EU-led push to steer away from Russian energy imports. Brussels recently agreed to a ban on Russian coal imports from August and is debating a similar embargo on oil imports while working on a plan to cut the country’s gas imports by two-thirds over the next year. ‘next year.
Germany is resisting calls for an immediate EU embargo on all Russian energy imports. Five German economic institutes recently warned that such a move would lead to a major recession in the country, causing output to plummet 2.2% next year and cut more than 400,000 jobs.
The fall in household energy consumption could be a key element of this abandonment of Russian imports. “Domestic gas consumption offers substantial savings potential, for example in heating, at low economic cost,” said Katharina Utermöhl, senior economist at Allianz.
If all German households reduced their room temperature by three degrees during the coldest months, Utermöhl estimated that this would save gas consumption equivalent to the amount used by the country’s base metals and food sectors, which employ about 1 million people.