Bonuses, Taxes, Price Capping
This is how Europe is reacting to the energy price shock
By Marina Zapf
2/13/2022, 4:22 p.m
Gas, electricity, oil – everything has become more expensive. Consumers groan throughout Europe. Households in Germany are hit the hardest. What are governments doing about it? And could they do more?
An average European household will have to put up with a bill of around 1850 euros for electricity and gas this year. Quite a chunk compared to the 1200 euros from 2020, as calculated by Bank of America Research (BofA). When it comes to electricity prices, Germany is the lone leader: in no other country do consumers have to pay more. According to the Federal Association of Energy and Water Industries, German households paid an average of 36.19 cents per kilowatt hour in January 2022 – more than ever before. For other Europeans it is currently less than 25 cents.
In the wake of the price increase for natural gas – according to BofA, an increase of 330 percent on the Dutch lead market in 2021 and more than 100 percent on Germany and France’s transshipment points – due to high global demand and economical supply on the world market, there is also a lot of electricity become more expensive. The end of the heating season may bring some relaxation to gas customers. But the boom in energy prices is not over since the rise in wholesale prices is reflected in the end customer with a time lag. The electricity bill in particular does not bode well.
In the case of electricity, it would be comparatively easy for politicians to absorb excessive additional costs: In this country, the price consists of only around 20 percent of the production costs, the rest are taxes and levies such as grid fees and the surcharge for the promotion of renewable energies (EEG). The federal government reduced the latter by almost half at the beginning of the year (from 6.5 cents/KWSt to 3.7 cents). A complete abolition before the end of this year is being discussed. The situation is similar in other EU countries, which have relieved consumers of tens of billions of euros since last year.
Energy and environmental experts such as Andreas Loeschel from the Ruhr University in Bochum warn against simply transferring the reactions of other EU countries to the domestic market. In principle, indirect subsidies for fossil fuels run counter to European climate protection goals. But in the short term it is about dampening the dissatisfaction of the citizens about the high burden. And most of the neighbors relieve their consumers more than the traffic light coalition is doing: above all Spain, which already in autumn reduced the electricity tax to the minimum of 0.5 percent permitted in the EU – in addition to VAT, mind you.
Eleven countries turned the tax screw
After a Compilation of the Bruegel think tank in Brussels Spain, Belgium, France and Romania have reacted the most comprehensively so that citizens do not go on the barricades like the French yellow vests did in 2018. The federal states have each taken more than four countermeasures, and some further steps are planned. A total of eleven of the 24 governments examined turned on the price screw by eliminating or drastically reducing energy or value added taxes. Southern countries are also less reluctant to tax energy companies more heavily – six governments levy windfall profit taxes, including Britain.
13 countries resorted to the ultimate price dictate and capped wholesale prices or retail tariffs, including France. The government there already decreed in September that gas and electricity tariffs should not be allowed to rise any further – in 2022 an increase of four percent will be tolerated. To make this possible, Paris lowered electricity taxes. Like France, Cyprus, Greece and Portugal still have to deal with state-owned energy companies. The French energy supplier EDF fears a gap of around 8 billion euros in earnings. The burden on the treasury so far is estimated at another 8 billion euros – including 3.8 billion euros for energy vouchers to 38 million French people. France will soon elect a new president.
Acted quickly too Belgium, where some energy taxes and a green levy were replaced by a fixed levy and a social tariff for low-income earners was extended to 500,000 households by June. Most recently, the government reduced VAT from 21 to 6 percent – initially until July. Together with direct payments to low-income households – an instrument used by 14 countries in Europe – such as a heating premium of 100 euros per household, the Belgian treasury will be burdened with more than 1 billion euros. Across the country, around one million households benefit from lower electricity, gas and oil prices. However, the rise in energy prices also brings additional tax revenue into the state’s coffers.
Italy most expensive
In Italy, where the increase would reach almost 80 percent compared to 2020 without countermeasures according to BofA, Prime Minister Mario Draghi started with immediate measures worth 3 billion euros: The state took over fees and charges on the electricity market and reduced taxes on gas. Further bonuses followed for households at risk of energy poverty. In January, Rome extended and supplemented cost dampers again. Bruegel writes that the state budget will be burdened with an estimated EUR 8.5 billion by March. At the end of January, tax rebates (20 percent) for energy-intensive companies with more than 30 percent additional costs compared to 2019 were added. For this, producers of solar, wind, water and geothermal energy will be asked to pay more from February to the end of 2022.
All of this leaves the analysts of the BofA study distributed by Reuters in January but skeptical. Energy market expert Harry Wyburd is quoted as saying that the measures announced in Europe so far will only absorb about a quarter of the price increases. Based on current wholesale prices, the price increase in 2022 will reach around 54 percent compared to 2020. “What you pay today when you boil water reflects the price about six to nine months ago. It’s like slow motion.”
Inflation inequality is increasing
In Italy, Greece and other southern EU countries, concerns prevail that the energy price crisis could stifle the economic recovery from the Covid-19 pandemic. Poorer countries have to nibble harder on the price crisis. According to the European Court of Auditors, the poorest families in the Czech Republic have to spend around 20 percent of their income on driving, electricity and heating. Prague abolished VAT on electricity and gas at the end of 2021 and is helping small businesses with guarantees whose energy bills have doubled.
On top of that, the energy price spiral is an important inflation driver, as well the experts at the Bruegel think tank remark: but stronger in some countries than others. The EU-wide increase in inflation in 2021 involves a jump in electricity, gas and fuel prices of 23 percent. “But inflation and energy costs for end customers have developed very differently across the euro zone.” The increase in energy costs in Belgium, at 60 percent, is more pronounced than the 33 percent in Italy and “only” 19 percent in France.
However, low-income households would have the greatest problems offsetting the burden in other ways. At the same time, energy costs eat up a larger part of their expenses, says Bruegel. This increases inflation inequality, with poor households bearing the brunt of rising prices.
reforms inevitable
This is an unsurprising finding, but one that politicians must take into account when looking for medium-term strategies for dealing with permanent – and potentially explosive – increases in the price of fossil fuels. In the short term, the traffic light coalition in Berlin is expected to take further steps to relieve end customers that go beyond the previous support for low-income people and the partially canceled EEG surcharges. A lower value added tax or the elimination of the electricity tax is also being discussed. Industrial customers are also increasingly calling for relief.
“Countries need to start thinking about more efficient measures to mitigate the future, potentially much more lasting impact of rising energy prices on inflation inequality,” the Bruegel experts warn in their blog. Germany’s auditors propose “fundamentally reforming” the system of state allocations and fees. And the European Court of Auditors also considers the current EU system of energy taxation to be outdated – and not adapted to climate goals. However, he expects a very difficult decision-making process.
The article first appeared at Capital.de.