New findings on fossil fuels and inflation in Italy

New Cambridge Econometrics analysis for the European Climate Foundation explores the role of energy prices in recent consumer price inflation in Italy, with a view to understanding the potential for faster energy transition measures to ease inflationary pressures and risks. 

Cambridge Econometrics analysed energy system and inflation data from a variety of sources to understand the role of energy prices in Italian consumer price inflation.  

The report also reviews Italy’s wider energy transition strategy, the Italian government’s response to the recent energy price increases, and discusses how the future energy system can better protect consumers from sudden price hikes. 

Key findings

Fossil fuels, including natural gas and coal, are responsible for a large share of consumer price inflation in Italy in the past 12 months. 

  • Fossil fuels accounted for roughly 30% of Italy’s overall rate of inflation this Spring, which stands at over 8%. Electricity prices also rose sharply, as a result of the high share of natural gas in Italy’s electricity mix. 

The increase in energy and fuel prices currently makes an average Italian household €1,400 worse off in 2022 compared to 2020.

  • We estimate that the lowest income households in Italy now spend around 50% more on energy and transport fuels than 2020.
  • In response to rising energy prices, the Italian government has heavily intervened in retail markets, by cutting energy taxes and charges, as well as introducing cash transfers to households and a ‘social bonus’ discount on energy bills and disadvantaged groups.
  • The measures are estimated to cost the Italian Government more than 3% of GDP.

Renewables are now much cheaper than fossil fuel-based electricity production and the cost of renewables is forecasted to fall further. 

  • The rapid deployment of renewables could bring significant benefits to Italy, such as: 
    • Reducing Italy’s dependence on natural gas in power generation.
    • Reducing consumer exposure to volatile fossil fuel prices, if the deployment of renewables is coupled with an increased electrification of transport and household heating. 
    • Increasing the share of technologies with very low marginal cost in the electricity production, which can lower the average cost of electricity production
  •  In the long term, the widespread deployment of renewables could bring down energy prices and limit the need for costly government intervention during times of high fossil fuel prices. 
Stijn Van Hummelen Managing Director (Belgium) [email protected]