Italy
Italy produces small volumes of natural gas and oil but virtually no coal, hence the domestic production only met 23% of its primary energy needs in 2021. Yet, the country is among Europe’s largest energy consumers. Most of the country’s fossil-fuel supplies – as well as a significant share of its electricity – are increasingly imported. Although the country’s oil imports are diverse, around 70% originate from the Russian Federation (hereafter “Russia”), Azerbaijan, Libya, Iraq, and the United States. Russian imports more than doubled in 2022 compared to 2021 because of an exponential increase in oil purchases by Italy’s second biggest refinery, owned by the Russian oil company LUKoil. However, because of the European Union’s1 embargo on Russian oil, imports from Moscow were zeroed out in December of 2022. To alleviate the country’s dependency on oil imports, the demand for natural gas has been steadily rising since 1973, exceeding domestic production. Ninety-four per cent (94%) of domestic consumption of natural gas was met by imports in 2021, primarily from Algeria and Russia. This changed dramatically in 2022 following Russia’s war of aggression against Ukraine, with a 61% decrease of gas imports from Russia. Russian natural gas imports have mainly been replaced by an increase in imports from Algeria, Northern Europe, and LNG primarily from the United States.2
In 2017, Italy released a new National Energy Strategy (SEN) based on four pillars: fostering the competitiveness of the Italian economy, protecting the environment, promoting green growth, and strengthening the security of energy supply. In practice, the government made the natural gas market more competitive, promoted the development of a European-integrated electricity market and the increase of fossil fuels production in the country, as well as the restructuring of the downstream oil market. The state still holds about 30% of four important players in the energy and electricity market: Snam S.p.A, which dominates the downstream gas market; Eni, which leads the oil industry from extraction to marketing and the upstream gas sector; Enel, which accounts for 25% of the production of electricity; and Terna S.pA., the primary owner and operator of the national high voltage transmission grid. Small generators account for 35% of the total national generation. Electricity trade with Malta started in 2015, following the opening of the Malta-Sicily submarine power cable during the same year.
Although the Italian oil and gas market is fully liberalised, it is dominated by Eni, which retains about 85% of total extraction activities and 30% of the oil refining market. In a similar vein, more than 90% of the physical gas infrastructure, including almost the entire transmission network and underground gas storage capacity, but also the leading local distribution-network operator, is controlled by Snam S.p.A.
Italy has liberalised its electricity and gas sector progressively to conform to EU directives. Transmission and distribution of natural gas and electricity have been unbundled and a regulator, Autorità di Regolazione per Energia Reti e Ambiente (ARERA)—which succeeded the AEEG authority in 2018—supervises access to networks and regulates tariffs. Electricity consumers have a choice of supply from incumbent suppliers at regulated tariffs or from alternative suppliers at market rates. On average, VAT and excise taxes accounted for 36% of the price of electricity for residential consumers in 2020, but their share in electricity bills has been going down all throughout 2021 and 2022 as a consequence of rising energy prices and exceptional measures to contain them, with VAT and excise taxes coming to account for 11-12% of the final prices in 2022.3 Multiple pricing schemes exist to encourage the production of electricity from renewable resources and are managed by the Energetic Services Manager (Gestore Servizi Energetici), under the full ownership of Italy’s Ministry of Finance.
Since 2013, gas users also have the choice between regulated and market prices. Vat on natural gas has been momentarily reduced to 5% in response to the energy and Covid crisis whereas it previously4 was set at a 10% rate for residential and commercial consumers and at 22% for industries. The excise tax varies according to whether it is a household or a business user, and additional regional taxes5.
In 2020, the Italian customs office announced an increase in tax rates on lubricating oils, from EUR 120/tonne to EUR 150/tonne. This change in benchmark tax rate for lubricating oil is expected to drive an increase in the revenue foregone of measures exempting lubricating oils used in the petrochemical sector in the following years ahead.
The energy crisis started in 2022 along with the COVID-19 economic effects has led the Italian government to repeatedly introduce each quarter of the year several temporary fossil fuels support measures, mostly benefitting transports, households, and firms. The transportation sector has been assisted especially through the reduction of excise duties on fuels. Even though they still have tripled in some cases when compared to 2021, households’ energy bills have been contained thanks to electricity and natural gas vouchers which saw an increase in the total support amount and the number of eligible consumers of the already existing social bonus (Bonus Luce e Gas). Moreover, households benefitted from the previously mentioned VAT reduction on natural gas, the elimination of system charges in electricity bills and reduced natural gas bills. These latter three measures supported the industrial and tertiary sector along with tax credits ranging from 15% to 40% for electricity and from 10% to 40% for natural gas, depending on the quarter and the energy intensity of firms.
The fiscal cost of support measures for fossil fuels in Italy was estimated at EUR 47.59 billion in 2022 (Table 1). Forty-eight per cent (48%) was directed at end user beneficiaries, as opposed to 52% directed to firms. Support was mainly given out in the form of tax expenditures (EUR 43.80 billion) accounting for 92% of the total fiscal cost of support measures. Direct transfers amounted to EUR 3.79 billion.
The fiscal cost of support measures for fossil fuels has increased by 437% since 2017. Since last year, tax expenditures have increased by 437%, from EUR 11.09 billion to EUR 43.80 billion and direct transfers increased by 63%, from EUR 2.55 billion to EUR 3.79 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.
Notes
← 1. Source: Analisi trimestrale 1/2023 (enea.it), p 23. IEA sources not available or accessible.
← 2. Source: Analisi trimestrale 1/2023 (enea.it), p. 26-30 . IEA sources not available or accessible.
← 3. Source, NormalSegreteria (camera.it) page 16
← 4. Source, law-decrees between 2021 and 2022 that lowered the VAT rate
← 5. Revoked with budget law 2021. Source ID0014a (camera.it), p. 13