OECD Inventory of Support Measures for Fossil Fuels: Country Notes

Hungary

Energy resources and market structure

Hungary has limited fossil-fuel resources of its own, and its domestic production is declining. The country imports around 90% of its oil and natural gas, much of it from Russia. Latest data from the International Energy Agency (IEA) show the country’s energy import dependency in 2021 was around 54% and slightly over 56% for 2020. Following Russia’s war of aggression against Ukraine in February 2022, European Union countries agreed an embargo on Russian crude oil imports with effect by the end of 2022. Hungary as a landlocked country was able to secure exemption from this ban due to its dependency on pipeline supply.

Hungary sources most of its electricity from nuclear power plants. In 2022, 44.6% of the total electricity generation of the country was derived from this source. Gas-fired power plants ranked second, while solar energy was the third largest energy source in the country. That year, approximately 35% of Hungary's electricity production was fossil fuel-based. A significant portion of the country’s electricity supply is also imported, with over a quarter of its electricity supply originating from the Slovak Republic, Ukraine and Austria among its biggest suppliers.

 

Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).

Hungary’s energy sector is characterised by a mix of private and publicly owned companies. Hungarian Oil and Gas Public Limited Company (MOL), a former state-owned company that was privatised in the 1990s, is the dominant player in the upstream oil and gas industry. Its subsidiary, FGSZ Ltd., operates the national gas transmission system. State-owned MVM Hungarian Energetics Ltd. has bought back from E.On, a Hungarian gas trade and storage company, becoming one of the main players of the Hungarian gas and electricity market. By the end of 2016, universal service of natural gas was provided to eligible (small) consumers by companies under the management of the First National Utility Provider (ENKSZ). In 2019, the MVM became the owner of ENKSZ (later NKM – Nemzeti Közművek).

The Hungarian natural gas trade sector is liberalised, but the MVM Group remains a dominant player with 60% of market share. The sector has seen major reforms being put in place since 2013. As part of these reforms, the government started reducing end-user prices to reduce the cost of living for households. The first year, prices were reduced by 10% and then by 25% within the two subsequent years. Several service providers – such as FŐZÁG Zrt., E.ON Energiaszolgáltató Kft., GDG SUEZ Energia Magyarország Kft., TIGÁZ Tiszántúli Gázszolgáltató Zrt., az ISD Power Kft., OERG Kft. – incurred operational losses and subsequently handed back their licences to the national regulator. As a result, FŐGÁZ Zrt. became the sole service provider which then operated as NKM Földgázszolgáltató Zrt until being absorbed by MVM in 2019.

The electricity sector in Hungary is also dominated by the state-owned MVM. MVM controls approximately 57% of electricity production in the country, either directly or indirectly. It also holds 100% of Paks NPP, the operator of the country’s sole nuclear power plant; 100% of the former transmission system operator, National Powerline; 100% of the system operator and transmission network owner and operator, MAVIR; and 100% of the Vértes power plant. MVM is also the majority owner of several co-generation companies and, through a subsidiary, operates the reserve power plants that are meant to ensure reliable power supply. An MVM subsidiary is also one of the leading trading companies on the competitive power market.

Although the government has transposed EU directives regarding opening competition in the electricity and gas markets, it has failed to restrict the power of incumbents. The development of effective competition in these markets is therefore curtailed.

Energy prices and taxes

To address increasing fuel prices, the Government announced Decree 624/2021. (XI.11.) in November 2021 which has set a cap on the price of petrol and diesel oil at HUF 480/litre, initially for three months. This measure has been repeatedly extended thereafter. In August 2022, the administration decided to narrow the beneficiaries of this programme, with only privately-owned vehicles, farm machinery, tractors, and taxis eligible to benefit the scheme. The petroleum product price cap was phased out from 6 December 2022 in order to ensure balanced logistics of petroleum products and increase the import of fuels.

The Hungarian Energy and Public Utility Regulatory Authority acts as the regulator and sets prices for transportation tariffs, retail, and wholesale sales in the electricity and natural gas sectors. Small consumers have the freedom to choose between the regulated and the open market. All fuels and energy services are subject to the regular VAT of 27% since 2012. Gas, electricity, and heat prices to end-users are calculated through the regulated pricing formula. District heating service providers benefit from a VAT rate of 5%, as per the Act CXXVII of 2007 on VAT. A stockholding levy applies on liquid fuels and natural gas, with revenues earmarked to support the maintenance of stocks for these fuels. Up until June 2017, an energy tax was levied on commercial uses of natural gas, coal and electricity. From 1 July 2017 the energy tax has been merged into the excise tax as a new law on excise tax came into effect: LXVIII of 2016 law. In this new law, the excise regulation has been supplemented with the concept of an energy product, in which energy has become an excise product. From 1 July 2022, the excise duty on energy products was increased by an average of 15%, in order to reach the minimum tax level required by the European Union.

Figure 2. Total tax rebates and support for fossil fuels in Hungary

 

 

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Recent developments and trends in support

Hungary stopped direct subsidies to coal production in 2000. Nonetheless, indirect aid was given through a very favourable power-purchase agreement for Oroszlány power station, whose owner also operated the Márkushegy that provided the lignite used at the plant. In 2006, such indirect aid was remodelled after the German Coal Penny, with final non-residential consumers paying an additional fee added on the electricity tariff. Furthermore, in line with EU regulation on state support for uncompetitive coal mines, Vértes Power Plant Zrt. received financial assistance between 2011 and 2014 in order to cover operating losses, as well as between 2011 and 2018 to mitigate social and regional problems arising from mine closures. For example, Vértes Power Plant Zrt. closed the Márkushegy Mine at the end of 2014. The aim is to phase out coal completely by 2030.

The decrease in support between 2018 and 2019 is due to changes in the administration of a preferential VAT rate for sales of district heating, where the central government no longer provides direct energy-related support. This has since shifted to the local governments as part of their social support programmes, but at a much lower amount.

Since 2013, controlled price decreases were implemented on natural gas, heating and electricity for households at below market prices, while raising those for industrial users. It is attributed that these measures are implemented to address the issue of acute energy affordability problem particularly on small consumers. Due to the energy crisis in Europe and high energy prices the Government revised the price regulation, narrowed down the eligibility of public utility service and set the average consumption level in both electricity and gas supply. Under the new regime introduced from August 2022, the residential consumers pay regulated price until the average consumption level, and (higher) market price for the consumption above. This system is not yet extended to district heating, as the individual metering and controlling of heat consumption is technically not available for all apartments.

The COVID-19 pandemic has caused severe reduction in the Hungarian gross domestic product, mostly in the tourism, hotel and catering sector, as well as in the motor vehicle manufacturing industry, where the closing of the factories had a negative spill-over effect in the supplier chain. To ease the difficulties caused by the COVID-19 induced financial crises in certain economic sectors, the administration ordered a moratorium on loan payments (e.g. 47/2020 (III.18), 61/2020 (III. 24.), 637/2020 (XII.22.) Government Decrees, Act CVII of 2020) and granted temporary exceptions from taxes and other duties. In particular, certain companies whose economic position worsened, including those in the fossil fuel sectors, were given exemptions or deferrals from tax liability (e.g. 485/2020. (XI.10.) Government Decree).

In response to strong energy price pressures after economies re-opened and pandemic restrictions loosened, the Administration moved to implement a HUF 480/litre price cap on petrol and diesel oil in November 2020 (see Energy Prices and Taxes for more details). The petroleum product price cap was phased out from 6 December 2022 in order to ensure balanced logistics of petroleum products and increase the import of fuels.

In October 2022, the Hungarian Government launched the Energy Cost and Investment Support Programme for SMEs that provides non-refundable subsidies to compensate up to 50% of energy costs increases or cover up to 15% of investment in energy efficiency. The eligible companies are energy-intensive SMEs with energy costs amounting to 3% of sales revenues. The programme was extended also to the first quarter of 2023 with a total budget of HUF 120 billion. The eligibility criteria of the total amount of energy costs was lowered to 2% of sales of the applying company and the support was extended also to energy-intensive companies in the tourism sector.

In 2023, the government of Hungary allocated HUF 5 billion in subsidies to municipalities for the purchase of firewood and coal to help vulnerable communities amid the energy crisis. Until 28 April 2023, municipalities with under 5 000 inhabitants can apply for the non-refundable direct grants under the programme provided they have issued a municipal decree setting up the rules of distribution of the subsidies to their vulnerable residents. The government will pay out the grants to eligible municipalities by 15 September 2023. From March until September 2023, certain state, municipal and church institutions and universities in Hungary receive natural gas at a price fixed by the Ministry of Energy. A total of 1 100 beneficiaries can benefit from this measure. Electricity prices will be fixed from April to December 2023.

The fiscal cost of support measures for fossil fuels in Hungary was estimated at HUF 74.92 billion in 2022 (Table 1). Eighty-nine per cent (89%) was directed at end user beneficiaries, as opposed to 11% directed to firms. Support was mainly given out in the form of tax expenditures (HUF 61.71 billion) accounting for 82% of the total fiscal cost of support measures. Direct transfers amounted to HUF 13.21 billion.

The fiscal cost of support measures for fossil fuels has decreased by 21% since 2017. Since last year, tax expenditures have decreased by 14%, from HUF 71.34 billion to HUF 61.71 billion and direct transfers increased from HUF 13 billion to HUF 13.21 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.

Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)

	2017	2018	2019	2020	2021	2022
Tax expenditures	76.022	76.934	75.956	67.836	71.344	61.707
Direct transfers	18.806	24.716	15.594	45.375	13.002	13.208
Total	94.828	101.650	91.550	113.211	84.346	74.916

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.

Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)

Measures associated with large fiscal cost in 2022		2022	2017	Variation since 2017
Tax expenditures
	Fuel Tax Refund for Agriculture	28.250	28.268	-0.018
	Reduced Rate of VAT for District Heating	25.800	31.700	-5.900
	Fuel Tax Refund for Railways	4.055	5.771	-1.716
Direct transfers
	Early-Retirement Payments for Coal Miners	8.208	9.127	-0.918
	Household Energy Bill Subsidy	5.000	7.118	-2.118

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 3. Description of selected support measures for fossil fuels

Fuel Tax Refund for Agriculture	The off-road use of diesel fuel in farming activities is subject to refunds of up to 83.5% of the excise tax normally levied on sales of petroleum products. Farmers are entitled to claim a refund of 82% (if the world oil price is higher than USD 50/barrel) or of 83.5% (if the world oil price is lower than USD 50/barrel) of the taxes paid on the first 97 litres of purchased motor gasoline. This motor gasoline must be used either for farming, or for the transportation of harvested products or for activities of forestry or fishery.
Reduced Rate of VAT for District Heating	Sales of district heat in Hungary are subject to a preferential VAT rate of 5% instead of 27%. The district heating subsidy (tvhotmogats) was part of the broader energy-price subsidy (energiar-tmogats) which was terminated in 2011, when the central government stopped providing this type of subsidies directly to the population. However, the support of energy prices is still provided by local governments through social subsidies (measure HUN_te_05). Since about 98% of the country’s heat was generated using fossil fuels, the inventory considers this measure to be supporting the consumption of these fuels.
Fuel Tax Refund for Railways	Railways operating in Hungary are refunded the excise tax they pay on their purchases of diesel fuel. This scheme is administered by Hungary’s National Tax and Customs Administration (NAV). Any person or company providing services for the transport of goods or passengers by rail is entitled to this type of tax refund.
Early-Retirement Payments for Coal Miners	This measure (tmeneti bnyszjradk) comprises several social transfers benefitting coal miners in Hungary. These include wage subsidies, early-retirement payments, and coal emolument supplements. The transfers are meant to alleviate the social costs associated with the closure of several coal-mining sites. Before 2011 miners had the possibility to retire before the retirement age. The CLXVII Act of 2011 terminated this option and transformed it into another social subsidy: the early-retirement allowance for coal miners (tmeneti bnyszjradk). Miners eligible for this subsidy are those who worked in underground mines for at least 25 years (or who worked for at least 5 000 shifts), who have not yet reached the age of retirement.
Household Energy Bill Subsidy	The Household Energy Bill Subsidy was created in 2003 and was initially known as the Household Maintenance-cost Subsidy (HMS laksfenntartsi tmogats). Its aim was to subsidise the consumption of natural gas by low-income households. Since most district heating in Hungary extensively use natural gas, it was decided at the time that the programme would also cover residential heating. Starting in 2010, support was restricted to heat only. Payments were made to natural gas and heat suppliers who were then required to pass them on to final consumers. The HMS was terminated on 1 March 2015 as an independent subsidy provided by the central government. From that date, it was integrated in the local subsidy (teleplsi tmogats).

Data sources

Country data in OECD.stat

OECD Fossil Fuel Support Portal

National data sources

Note on the Methodology

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.