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IMF urges Europe to pass on energy costs to consumers

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

European governments, which have tried to protect households from rising costs with price controls, tax cuts and subsidies “should pass on the full increase in fuel costs to end-users to encourage energy conservation and the phasing out of fossil fuels,” the deputy director in the statement said. European branch of the IMF.

Writing in an IMF blog post on Wednesday, Oya Celasun added that governments must simultaneously take emergency measures to support low-income households – who are least able to cope with rising energy prices – was a “priority”.

Consumer energy prices are rising by nearly 40 percent annually in the eurozone and 57 percent in the UK, reflecting the surge in wholesale gas and oil prices following the Russian invasion of Ukraine. This means that households will see a drastic reduction in their disposable income.

This is especially true for poorer households, who spend a higher proportion of their money on electricity and gas.

The IMF therefore urged a shift in policy from broad support measures to targeted aid.

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

“With fossil fuels likely to remain expensive for some time to come, governments should increase retail prices to promote energy conservation while protecting poorer households,” Celasun said.

Existing broad 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 combating rising energy prices will exceed 1.5 percent of economic output this year as a result of broad price suppression measures, the IMF estimates.

This is more expensive than fully offsetting the rise in the cost of living for the poorest 20 percent of households, which the IMF estimated to average about 0.4 percent of gross domestic product for 2022.

Andrew Kenningham, an economist at Capital Economics, thinks European governments will shift to more targeted aid in the coming months “simply because the cost of universal energy subsidies will become prohibitive”.

The IMF mentioned the UK along with Estonia, where the cost of living for the poorest 20 percent of households is expected to rise about twice as much as the cost for the richest.

Celasun also said that with prices expected to remain high for years to come, “the case for supporting businesses is generally weak.”

She explained that it was “appropriate” for governments to support companies in the midst of a short-lived price rise, because otherwise viable companies could fail. This would be the case in particular if Europe were faced with a complete shutdown of gas flows and countries had to temporarily ration gas to industry.

However, she added that in most cases it was difficult to implement a well-targeted support scheme without causing disruptions and watering down incentives for energy conservation.

Kenningham noted that the IMF offered only limited support for one-off windfalls on power generators, but said he thought “the case is very strong when companies make exceptional profits because of the marginal pricing system”.

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