IMF urges Europe to pass on energy costs to wealthier consumers

The IMF has urged European governments to pass on rising energy costs to wealthier consumers to encourage “energy saving” and a shift towards greener power.

Governments across Europe have tried to protect households from soaring costs with broad price controls, tax cuts and subsidies.

Oya Celasun, assistant director in the IMF’s European department, said governments “should allow the full increase in fuels costs to pass to end users to encourage energy saving and switching out of fossil fuels”, in a blog post on Wednesday.

However, putting in place relief measures to support low-income households — who have the least means to cope with spiking energy prices — was “a priority”, said Celasun.

Policies should shift from the existing broad-based support measures to targeted relief, the IMF official added.

The existing broad-based support measures not only delay the needed adjustment to the energy shock, they keep global energy demand and prices higher than they would otherwise be, the IMF warned.

In many countries, the cost of combating the rising price of energy will exceed 1.5 per cent of economic output this year due to broad price suppressing measures.

Fully offsetting the increase in the cost of living for the bottom 20 per cent of households would cost governments 0.4 per cent of gross domestic product on average for 2022. It would cost 0.9 per cent of GDP to fully compensate the bottom 40 per cent.

The IMF singled out the UK along with Estonia, where living costs for the poorest 20 per cent of households are expected to rise about twice as much as the cost for the wealthiest.