Europe and Central Asia pay their energy bills

The current energy cost shock presents a distinct and broad challenge in Europe and Central Asia (ECA). The crisis of surging energy prices will not only push many households into extreme poverty—it will also make it impossible for many nonpoor households to keep their homes warm. Household expenditure on energy is relatively high in ECA. And in many countries, the average shares of spending on energy were well over a threshold for energy poverty even before the current crisis. The energy price surge is also expected to create adverse effects on health and wellbeing. Research on excess winter deaths highlights the health risks to people—especially young children and the elderly—living at low indoor temperatures.

In the short term, many ECA governments will have no option but to scale up social assistance. However, there is a risk of governments mobilizing unsustainable, insufficient, and inefficient measures. Going into the heating season, the impulse in many ECA countries is to either extend benefits to the entire population by capping prices below cost-recovery levels or to support a narrow group of formally defined poor households. Price controls and finely targeted compensatory mechanisms represent two extremes. Price controls provide universal support, which is thus thinly spread out, regressive, and expensive. Finely targeted support, on the other hand, lacks the scale to cushion the shock that is adversely affecting up to 40 percent of the population (the bottom 40). In fact, the distinct challenge of this crisis is to ensure sufficient coverage and adequacy of energy assistance to those who need it while not onerously distorting the prices (Figure 1).

Figure 1. Price controls and poverty-targeted social assistance leave large gaps
Source: Author

ECA countries should mobilize energy assistance that is adequate in amount and population coverage, quickly scalable and targeted. Furthermore, mitigation measures should be designed not to create unintended consequences. If the market is transparent and competitive, less interference via price regulation is better. If markets are not competitive, then effort is needed to remedy market inefficiency.

Some of the social protection approaches being considered or adopted and categorized in Table 1 do not satisfy the criteria for effective energy assistance mentioned above. Some fall into the category of untargeted subsidies, indiscriminately subsidizing energy inputs via price controls that are below cost recovery and providing poorly designed tax reduction that is distributionally regressive and could lead to substandard supply and service interruptions; inadequate investment in production, transmission, and distribution infrastructure; adverse environmental consequences; and fiscal health issues. Therefore, responding to this crisis requires governments to consider the principles listed above in choosing appropriate social protection response options.