Current energy crisis and the transition to a carbon neutral economy: Same challenges?

The OECD ´s “Tax policy Reforms 2022” report provides comparative information on tax reforms and tax policy developments across OECD countries. This year includes a special feature that examines government responses to rising energy prices and offers some policy recommendations. In this regard the key message is that governments will need to shift from policies that directly seek to limit price increases to those that cushion their impact through targeted income support restricting the number of beneficiaries while limiting effects on government budgets.

Summary of the main take aways from the report:

• More developed fiscal and welfare systems were better able to adopt target support measures to “at-risk” populations more vulnerable to raising energy prices.
  
  
• Trends by tax category: Personal income taxes and social security contributions were reduced in most countries to support low-income households; in the Corporate income tax many countries increased the generosity of tax incentives to stimulate investment and innovation, particularly to promote environmental sustainability; a common government response has been to temporarily reduce fuel and electricity excises; a small number of European countries have also announced plans to implement windfall profits taxes on energy companies to support the cost of the measures they have introduced.
  
  
• Significant government budget impact: OECD estimates that the aggregate fiscal cost of measures provided since October 2021 to December 2022 amounts to a total of USD 246 billion. Out of which 66% have focused largely on non-targeted price control measures, which tends to support rather than curb demand contributing to raise fossil fuel subsidies. The remaining 34% has been devoted to income support measures – i.e., transfers to households and businesses.
  
  
• OECD recommendation going forward: Governments will need to shift from policies that directly seek to limit price increases to those that cushion their impact through targeted income support (restricting the benefit of the measures to certain specific categories of energy consumers based on some criteria, such as energy consumption, income…). This approach will ensure that the support provided is fair and effective, while limiting its effects on government budgets and maintaining price signals to encourage the transition to carbon neutrality.