Measures to lessen the impact of the inflation and energy crisis on citizens

As governments across the EU continue to implement policies to support citizens and businesses in the face of rising food and energy prices caused by the COVID-19 crisis and intensified by the war in Ukraine, this article summarises the policy responses as reported in Eurofound’s EU PolicyWatch database from January to September 2022.

• Article: Policies to support refugees from Ukraine
• Article: First responses to cushion the impact of inflation on citizens
• Article: Policies to support EU companies affected by the war in Ukraine

Introduction

Support policies have been introduced throughout 2022 to help citizens deal with rising food and energy prices. At the end of September, EU energy ministers agreed to introduce temporary and extraordinary measures from December onwards to address the high energy prices. The Council regulation includes measures to reduce electricity demand; a solidarity levy for the fossil fuel sector, on top of the regular taxes that will be used to provide financial support for households and companies; support for SMEs’ electricity costs; and a cap on market revenues for ‘inframarginal’ technologies (such as renewables, nuclear technologies and lignite), for which gains have increased due to the final price of electricity being determined by coal and gas prices.

As it became evident that the rise in energy prices will continue into the winter season, more policies have been introduced to support the costs of household heating. In the meantime, it has been announced that anti-inflation measures in the euro zone will be coordinated, targeted and of a temporary nature. Many of the measures listed below would fit into this broad description, and so could be extended into the future, whereas others would have to be re-shaped.

Analysis of the measures introduced shows the following.

• Introducing one-off lump sum payments to both increase incomes in general and cover energy bills directly was common. Some of these payments target the population in general; some target low-income groups or groups on social benefits.
• Other measures to increase incomes in general have included increasing benefits or extending them to reach more citizens.
• Several Member States have introduced longer-term subsidies on households’ electricity, gas or heating, depending on consumption levels.
• Another common approach to reduce energy bills has been to reduce taxes, usually the VAT on electricity, but also other energy related tariffs, or to establish price caps. These measures will be affected by the recently agreed EU-wide energy price cap that will apply for one year from the 15 February 2023. The cap will come into force when the price of gas exceeds €180 megawatt-hour for three consecutive days and the price is €35 higher than the global reference price for liquefied natural gas over the same period.
• Some countries have also made efforts to reduce the cost of fuel for cars by regulating prices, changing taxation or subsidising costs for certain groups. Although this represents a clear departure from recent trends in environmental policies, several governments have implemented measures that promote the green transition while also preventing energy poverty. The measures address soaring energy prices by promoting renewable energy or improving energy efficiency and reducing energy consumption.
• Different approaches were commonly applied simultaneously, with many countries introducing general support measures alongside measures that target a specific expense or a particular group of citizens.

Social partners were not commonly involved in the design and implementation of the measures considered in this article.

• Article: Euro zone pledges temporary support to avoid making inflation worse, 3 October 2022
• Article: European Union fails to reach consensus on energy price cap, 13 October 2022
• Article: EU energy ministers reach agreement on gas price cap, 19 December 2022
• Council of the EU: Council agrees on emergency measures to reduce energy prices , 30 September 2022

Increasing income

When introducing measures to support households facing rising prices, many governments have opted to increase incomes in general, instead of focusing on supporting energy expenses directly. To do this, they have often applied different approaches simultaneously, with many countries introducing measures for citizens in general, and measures targeting vulnerable populations or specific necessities.

Malta, for instance, has introduced both a €200 financial support for people receiving pensions and people on social benefits, and a €100 financial support for other workers and students. Austria and Portugal have provided financial support for large groups of citizens, whereas France, Italy, Latvia, Portugal, Slovakia and Spain have provided targeted support to low-income groups or groups on social benefits.

From this last group of EU Member States, France, Slovakia and Spain have also indexed various social benefits to inflation, as has Finland. Other countries (Austria, Cyprus, Germany and Slovakia) have increased family allowances or ad hoc payments for families.

Other measures have focused on helping citizens maintain their homes. Czechia, for instance, has provided an allowance for low-income households to cover elevated monthly housing costs, Spain has limited the increase of rental payments to 2% and Luxembourg has frozen rent increases altogether. France and Ireland have introduced similar measures.

In addition to increasing the remuneration of public servants and encouraging different sectors to raise their minimum wages, France has allowed the monetisation of rest days, facilitated the deployment of profit-sharing from companies to employees and allowed employees to access some of their social security contributions. In a similar vein, Ireland and Luxembourg have increased minimum wages. Austria has allowed employers to pay a tax-free bonus to their employees and has effectively reduced tax burdens by changing the limits for certain tax brackets. Italy has foreseen possible contributions by companies for the payment of domestic utilities for the integrated water service, electricity and natural gas.

Austria, France and Slovenia have provided support for commuters/private transport; Ireland has done so for public transport.

Table 1: Overview of measures to increase income in general

Source: EU PolicyWatch database, as reported at the end of September 2022.

Reducing household energy bills

By far the most common measure to address the rising prices introduced by EU Member States has been to reduce households’ energy bills through direct contributions, energy tax reductions or setting price caps. Almost half of EU Member States have provided one-time direct contributions to households’ electricity bills: these range from up to €120 in Hungary to €800 in Denmark and up to €800 in the Netherlands. Belgium and Finland have implemented direct monthly payments: Belgium provides €135 for household gas and €61 for electricity, and Finland will provide up to €1,500 over four months.

Other countries have established monthly payments for households’ energy bills; the payments are dependent on the level of consumption. For electricity, these payments are usually determined by a fixed subsidy per kilowatt-hour once the average monthly price has exceeded a certain threshold. This is the case in Estonia, Greece, Latvia, Lithuania and Norway. Some of these countries have implemented similar schemes for gas and heating. Furthermore, Latvia has established financial support for households that utilise wood pellets, briquettes or firewood for household heating.

Several Member States have also reduced households’ energy bills through tax reductions, most commonly by reducing the value added tax (VAT) on electricity. This is the case in Belgium, Bulgaria, Cyprus, Finland, Poland and Spain. Other tax reduction schemes have been introduced in Austria, Finland, Lithuania, the Netherlands, Poland, Portugal and Slovenia.

This last group of countries provides some interesting examples, in particular from Austria, Portugal and Slovenia. In Austria and Slovenia, the measures impact environmentally minded policies. In Austria, the contributions dedicated to promoting the production of green electricity have been suspended, and in Portugal the update of the carbon emissions tax addition has been frozen. By contrast, Slovenia has introduced more sustainability-friendly measures by introducing a lower tax for producing electricity from renewable energy sources and through high-efficiency cogeneration, along with the other measures it has implemented to reduce households’ energy bills.

In a third set of measures, Austria, Estonia, Hungary, Malta, Romania, Slovenia and Sweden have capped electricity prices, and Poland has capped heating prices.

Table 2: Overview of measures to reduce household energy bills by country

Source: EU PolicyWatch database, as reported at the end of September 2022.

Fuel subsidies

The rise of fuel prices over the past year has sent shockwaves throughout the global economy. As EU governments aim to support citizens in dealing with rising prices, many countries have chosen to subsidise fuels, most commonly by providing discounts or tax reductions, but also by making direct payments to consumers or capping prices. Many of these subsidies were in place for most of 2022, and Slovenia has introduced regulations on fuel prices until at least June 2023.

At least six Member States have established discounts per litre of fuel applied at the pumps, ranging from 0.75 cents in Luxembourg to 25 cents in Bulgaria and France. Another seven Member States have decided to combat rising fuel prices by providing tax reductions. Two Member States have regulated fuel prices: Hungary has set a price cap of €1.23 per litre of fuel, and Slovenia has set trade margins at €0.0983 for diesel and €0.0994 for 98-octane unleaded fuel.

Greece and Sweden have opted for a different approach by providing payments directly to citizens. For April, May and June 2022, Greece provided a subsidy ranging from €30 to €50, depending on the vehicle and the beneficiary’s main place of residence. In Sweden, vehicle owners will receive a €96 payment, whereas people living in rural and sparsely populated areas, where there is a higher dependency on private vehicles to commute to work and education, will receive €145.

Table 3: Overview of measures involving fuel subsidies by country

Source: EU PolicyWatch database, as reported at the end of September 2022.

Measures to prevent energy poverty and promote green transition

Although fuel subsidies seem necessary given the current level of inflation, it is not difficult to see how these subsidies represent a departure from recent trends in environmental policies. Several governments have opted to introduce preventative measures for energy poverty and to promote the green transition simultaneously by providing direct financial support, promoting the development of renewable energy or creating guidelines on how to save energy. These measures predate the Council regulation addressing high energy prices, but many of them are directed towards reducing energy demand, which is one of the main goals of the regulation. They may therefore serve as examples for other Member States that are yet to implement these types of measures.

The most common approach has been to provide direct payments for households’ renewable energy. Cyprus, Hungary and Lithuania have programmes to promote the use of solar energy at home. Latvia has introduced two schemes to subsidise the purchase and installation of multiple types of equipment to produce renewable energy; Luxembourg provides homeowners and tenants with similar support.

Four other Member States have introduced measures to support green mobility, with Cyprus providing up to €4,550 to fund electric vehicles and France providing up to €4,000 to fund (electric) bicycles. Luxembourg will financially support companies that invest in charging infrastructure for electric vehicles, and Sweden has modified an existing bonus system to promote the continuing growth in sales of electric and hybrid cars.

Latvia, the Netherlands and Norway have introduced measures to improve household energy efficiency. Latvia is providing households with at least one child with up to €6,000 for improvements that will lead to an at least 20% reduction in heating consumption. Norway is investing in measures that can lower electricity bills in municipal housing, including insulation. The Netherlands has earmarked €300 million to help households, via the municipalities, to make their homes more sustainable through measures to save energy and adding further insulation. Greece seeks to promote households’ saving energy by providing up to €710 to replace old electric appliances.

A few other countries have developed guidelines on energy saving: Slovenia has set maximum cooling and heating temperatures in the public sector to promote frugal energy consumption; and Spain has implemented similar restrictions in administrative, commercial and public buildings, along with restrictions on lighting hours and information-sharing campaigns.

Table 4: Overview of measures to prevent energy poverty and promote the green transition by country

Source: EU PolicyWatch database, as reported at the end of September 2022.

Conclusion

The continued rise in food and energy prices in 2022 placed European households in precarious positions, and, as winter approached, the risk of energy poverty grew higher. To address the needs of their citizens, many EU Member States introduced emergency measures to address the energy crisis on both the supply and demand sides. Although governments have sought to cushion the impacts of the inflation and energy crisis on (vulnerable) citizens – almost half of EU Member States have provided one-time direct contributions to households’ electricity bills – there are also measures seeking to reduce energy demand in both the short and the longer term, such as measures aimed at both preventing energy poverty and promoting the green transition.

Time will tell if the general increase in prices is of a more permanent nature, or if prices will stabilise at this higher level or decrease if energy prices fall. However, as rising energy prices are trickling through the economy, more wide-ranging adaptations can be expected to allow wages and incomes to catch up with increasing prices. Although the first reactions from governments have mainly been to provide temporary support or lump sums, increasing wages and incomes to match increasing prices will be necessary to avoid a recession due to falling demand. Adaptations can be expected in the form of, for example, wage bargaining, the annual setting of statutory minimum wages, the uprating or indexing of social benefits, or further tax reforms to maintain people’s purchasing power. Future measures are also likely to be shaped by the decision to apply coordinated, temporary and targeted anti-inflation measures.

Economic uncertainty remains high, with severe social implications. Policymakers face problems not witnessed for decades and, although rising revenues have provided governments with extra funds to redistribute, these resources are limited, especially after the sums spent on measures combating COVID-19. In this regard, it is important not to lose sight of social partners’ roles, and their collective wisdom and ability to contribute to addressing these issues. Their limited involvement in the design and implementation of these measures (compared with those of the COVID-19 measures) should be more closely analysed.

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