20230921-IMF-Energy_Support_for_Firms_in_Europe_Best_Practice_Considerations_and_Recent_Experience_27页_1mb

Energy Support for Firms in Europe: Best Practice Considerations and Recent Experience

Core Content

This IMF Working Paper, authored by Anil Ari, Philipp Engler, Gloria Li, Manasa Patnam, and Laura Valderrama, examines the role of government intervention in supporting European firms during the recent energy price surge caused by Russia's invasion of Ukraine. It evaluates the design and implementation of energy support schemes, identifies best practices, and proposes a framework for future interventions that balance firm support with broader economic and environmental objectives.

Main Points

• Energy Price Surge: The invasion of Ukraine led to a significant increase in energy prices, particularly natural gas and electricity. Despite a decline from peak levels, prices remain higher than pre-2021 levels, with volatility expected to persist.

• Impact on Firms: Energy costs constitute over 5% of production value in some countries, disproportionately affecting small businesses and energy-intensive sectors. The 2022 EIB survey showed that 87% of firms reported energy costs as a barrier to investment.

• Government Support: Over EUR 600 billion was allocated across the EU to support firms and households. The European Commission provided a "toolbox" for energy support, which was widely used by member states.

• Need for Caution: While government support is justified in cases of market imperfections, it should be limited in size, strictly temporary, narrowly targeted, and accompanied by strong safeguards and conditionality to avoid market distortions and encourage energy conservation.

• Best Practices in Design:

  • Targeting: Support should be directed at firms most affected by the energy shock, using historical energy usage data or sectoral classification.
  • Instrument Choice: Liquidity support (grants, subsidies, tax relief) is preferable for small firms, while equity instruments are more suitable for larger or listed firms.
  • Conditionality: Support should be conditional on energy efficiency investments, carbon reduction, and other sustainability goals.
  • Exit Strategy: Clear sunset clauses and phase-out mechanisms are essential to avoid dependency and ensure that support is not prolonged unnecessarily.
  • Burden Sharing: Support should be capped at a level that ensures the continued viability of firms as going concerns, avoiding overcompensation.

• Risks and Costs of Intervention:

  • Undermining climate and energy security objectives.
  • Adverse spillovers in trade blocs.
  • Tensions with macroeconomic policy goals.
  • Fiscal costs and potential for double compensation.
  • Moral hazard and the risk of zombie firms.

• Recommendations:

  • Support should be limited in scope and duration.
  • Price signals must be preserved to incentivize energy efficiency.
  • Conditionality and safeguards are critical to ensure that support is used effectively and responsibly.
  • Governments should phase out support as soon as energy prices stabilize.

Key Information

• Fiscal Impact: Over EUR 600 billion was allocated across the EU for energy support, with Bruegel estimating the scale of such measures.
• Market Imperfections: These include financial frictions, impaired balance sheets, supply chain externalities, and lack of internalization of energy security and green transition goals.
• Sectoral and Firm-Level Targeting: The paper advocates for a combination of sectoral and firm-level targeting to ensure efficiency and fairness.
• International Coordination: Coordination is necessary to prevent cross-border competitive distortions and ensure a level playing field within the EU.
• Governance and Transparency: Public disclosure, ex-post audits, and claw-back clauses are recommended to reduce fraud and ensure accountability.

Conclusion

The paper concludes that while government support is necessary to address the immediate impacts of the energy crisis on firms, it must be carefully designed and implemented. The focus should be on minimizing distortions, ensuring long-term viability, and supporting the transition to a more sustainable energy model. The principles outlined can guide policymakers in both introducing and exiting support schemes in a way that aligns with economic and environmental goals.

Summary of Best Practices

• Limit the size and duration of support to avoid long-term dependency.
• Preserve price signals to promote energy conservation and efficiency.
• Narrowly target support to firms most affected by the energy price shock.
• Implement conditionality on energy efficiency and green transition investments.
• Use clear exit strategies, such as sunset clauses or price floors.
• Encourage private sector involvement and "skin in the game" to align incentives.
• Ensure transparency and accountability through public disclosure and audits.
• Cap the fiscal burden and ensure support does not undermine competition or sustainability goals.

Annex Highlights

• Annex I: Discusses the impact of the energy crisis on corporate health post-pandemic, emphasizing the need for targeted support.
• Annex II: Compares the energy crisis with the pandemic, highlighting the different nature of the two shocks and the implications for policy design.
• Annex III: Outlines best practice considerations for designing energy support schemes, including targeting, conditionality, and governance.

References

• Bruegel (Sgaravatti et. al., 2023)
• European Commission (COM, 2021; EC, 2022b)
• Ebeke et. al. (2021)
• Araujo et. al. (2022)

Key Takeaways

• Temporary and targeted support is crucial to avoid long-term market distortions.
• Conditionality should be applied to ensure support aligns with energy transition goals.
• Phasing out support is necessary as energy prices stabilize to reduce fiscal burdens and promote self-adjustment.
• Private sector involvement and "skin in the game" can enhance the effectiveness of support schemes.
• Transparency and accountability mechanisms are essential to prevent misuse and ensure legitimacy.