Europe has ‘survived’ the much-feared winter without energy shortages, power cuts, or a recession, demonstrating a considerable level of resilience. The European Trade Union Institute (ETUI) and the European Climate Foundation (ECF) have conducted a research project on short-term national measures that aimed to respond to the surge in energy costs.
According to the Bruegel think tank database, between September 2021 and March 2023, EU Member States allocated 646 billion euros to shield consumers from rising energy prices. The focus of the ETUI study was how these substantial resources were targeted and how far they managed to align climate policy and social objectives.
The national case studies included in this project show that measures were mostly broad-based: subsidies, tax cuts, and price controls. Apparently, the main political objective was to avoid a recession by maintaining economic growth, while at the same time limiting energy cost inflation in order to minimise secondary inflation effects. Huge resources were mobilised, yet targeting of the measures was weak.
The case studies reveal a wide range of practices. Some were good, indicating that it is possible to align social protection with longer-term ecological concerns. Seven of the studies provide insight into how Member States attempted to balance social and ecological objectives.
Some governments, including the French, have pointed out that dampening the market price signal of the recent energy crisis prioritises a more social objective (limiting the loss of purchasing power for certain groups) at the expense of the reduction in energy consumption that will be required in order to achieve climate objectives.
In France, the total gross cost of the measures launched by the government to limit the impact of the energy shock on households and firms amounts to more than 100 billion euros (3.6% of GDP) from the end of 2021 to the end of 2023. Of these 100 billion euros, more than 80% can be regarded as non-targeted (price measures) while less than 20% is targeted (one-off support payments to households in lower income groups; certain conditional measures to support companies).
Table 1 below shows the price effect of government measures for different income quintiles (in euros per household and as a share of household income). These figures reveal that the greatest support in absolute terms (in euros) was received by the richest income quintile and that the net price shock was highest for the poorest quintile.
Table 1: Assessment of the energy shock and the effects of public measures, by standard-of-living quintile in France
Source: Madec et al. (2023), based on the 2017 French Family Budget Survey.
It is difficult to describe the distributive effects of these measures as socially balanced, since the negative welfare effect was harshest on the first decile and absolute support was highest for the richest income quintile. This generous support to rich households’ fossil fuel consumption is also controversial for climate policy objectives, as it suppressed price incentives for energy efficiency (even where rich households could have afforded this).
Spain has set a good example with the ‘Iberian exception’, through which it aims to control wholesale prices and decouple electricity from the gas price.
The government has promoted a wide range of measures to reduce inflation and alleviate its impacts on the disposable income of households, especially the most vulnerable, and on the viability of companies in the sectors most affected. Measures to reduce inflation have focused on energy markets, mainly electricity prices: indirect taxes and the regulated proportion of the bill have been reduced, while discounts for vulnerable consumers have been increased. Action has also been taken to limit the rise in international gas prices being passed on to natural gas consumers. The most relevant decision, however, has been the introduction of a cap on the price of gas in the wholesale electricity market, which has allowed electricity prices to be decoupled from changes in the international gas market price. It was hoped that this could lead to a reduction of nearly 20% in the retail price of electricity.
According to official estimates, these measures have allowed the electricity bill of an average domestic consumer on the regulated tariff to be reduced by 30% from what it would otherwise have been. Vulnerable consumers pay 67% less than they did before the price crisis, while for severely vulnerable ones the reduction is 75%.
Still, in absolute terms, most of the benefit of the non-targeted measures accrues to higher-income households, as they consume more. However, to analyse whether or not these measures are redistributive, we should also take into account the proportion of the household budget represented by consumption of the goods in question. For example, lower-income households spend a much higher percentage of their income on energy and food. Therefore, the amounts received also represent, in relative terms, a higher percentage of their income – which justifies the conclusion that taken overall, the effect of these measures has been redistributive. In another similar study, AIReF (2022) calculated that the help received by households in the lowest income decile accounts for 17% of their income, while for households in the second decile, it is 7%. In contrast, for the two highest income deciles, the figures would be 1.6% and 0.9% respectively. Thus, measures in Spain were partially targeted at vulnerable and severely vulnerable groups – even though only 15-20% of the measures were officially categorised as targeted (Bank of Spain 2023).
In Italy, the reduction of VAT and excise duties on gas and electricity and the elimination of general system charges were the main – and most controversial – broad-based measures. A study by the Bank of Italy (Curci et al. 2022) found that measures addressing purchasing power disparities between Italian households had a limited effect. As is to be expected, inflation has widened income inequalities, and mitigation measures, although significant, have only partially contained this increasing gap. Moreover, not all measures have had the same effect in social and environmental terms: the reduction in value-added tax (IVA) and excise duties on gas and electricity and the initial elimination of general system charges are the most problematic in this regard. From an environmental perspective, using public resources (including lost tax revenues) to reduce market prices for consumers has eliminated the incentive to reduce energy use. In social terms, the benefit to richer households was greater than to poorer ones, and this has allowed high-income Italians to maintain their energy consumption habits without making any changes or more sensible decisions. One shortcoming of Italy’s measures was a lack of action to regulate prices and avoid volatility in the energy market. Even though short-term measures provided some temporary relief for the poorest households, the fact that broad-based measures predominated also led to large amounts of public support for high-income groups, without any incentive for the latter to reduce their energy consumption
In Greece, the more short-term measures have mostly been based on price subsidies for residential and non-residential users. Price subsidies have also targeted households whose electricity consumption is subject to a social tariff scheme, and therefore this policy remains in line with the 2021 Action Plan to Combat Energy Poverty. For a long time during the crisis, these subsidies were granted without any conditions on reducing consumption, even for households (well) above the energy poverty threshold, including those with more than one home. This meant that national measures aimed to alleviate the impact of high energy prices on residential consumers but had a questionable impact on promoting decarbonisation and energy efficiency objectives. This is not only because higher-income households tend to have consumption patterns that give them a higher carbon footprint, but also because it was only in autumn 2022 that the policy of linking price subsidies to consumption reduction conditions emerged. The case of Greece shows that using mostly blunt instruments in a very generous way is both socially unjust and detrimental to climate objectives. Subsidising energy consumption for the upper-income quintiles fails to apply energy efficiency incentives to those who could afford to reduce their consumption, given how much higher it is. Most of the public money was used to support people who did not need it, thus squandering the scarce resources of a country under fiscal constraints: the money could have been put to better purposes.
Poland made radical cuts in the taxes and duties imposed on energy and gave only modest financial support to the poorest households. Individual measures were broadly defined and not particularly targeted at shielding the most vulnerable sections of the population. As a result, the measures had relatively high (and partially avoidable) fiscal costs, were not socially balanced, and led to increased consumer demand for energy and, consequently, to greater use of fossil fuels.
We can conclude that social and climate policy objectives are not necessarily in conflict with each other. But the reports showed that, in reality, both were sidelined, since the ultimate effect of national measures on prices tended to be regressive, and the biggest beneficiaries (in absolute amount) of public fossil fuel subsidies were higher income groups. Their higher carbon footprints were co-financed by scarce public resources, with consistent failures to provide incentives to reduce fossil fuel consumption.