Gabriele Ciminelli
Cyrille Schwellnus
OECD Economic Surveys: Italy 2024
OECD Economic Surveys: Italy
2. Achieving the energy and climate transition
Abstract
Italy is committed to reduce greenhouse gas emissions by 55% relative to 1990 by 2030 and reach net-zero by 2050. Achieving these goals requires a significant strengthening of decarbonisation policies. Fully implementing plans to make carbon tax rates more similar across sectors, including by aligning fossil fuel excise taxes more closely with emissions content, would promote carbon abatement where costs are lowest. Boosting green electricity generation requires further streamlining of permitting processes, notably by defining suitable areas for renewable power plants and raising capacity ceilings for simplified permitting. Continuing to strengthen public transport and regional train networks, reducing the number of highly polluting vehicles and aligning car-related taxes with emissions would contribute to the decarbonisation of transport. In the buildings sector, recently reformed tax credit schemes should be complemented with subsidised loans and grants to promote energy-efficient retrofitting, especially for low-income households. In parallel to strengthening decarbonisation policies, Italy needs to reinforce adaptation policies, notably by mitigating risks from flooding, landslides and extreme heat.
Italy is committed to decarbonising the economy, and its National Recovery, and Resilience Plan includes many large investments and structural reforms that are geared towards this objective. Nevertheless, achieving the energy and climate transition is a major challenge and requires substantial further policy action, as in many other countries. While Italy has reduced greenhouse gas emissions considerably over the past two decades, progress has slowed in recent years. The electrification of the economy and the shift towards renewable energy to generate electricity need to accelerate substantially. Major efforts to reduce emissions from the buildings and transport sectors, including by decreasing energy consumption, are also needed. Overall, the transition will have limited effects on long-run GDP but will require large investments and have a significant fiscal impact. There will be a large-scale shift in employment across sectors, which will require the government to put in place policies to facilitate this structural transformation and protect vulnerable households. At the same time, Italy will benefit from lower dependence on imported energy and better air quality. Italy is more exposed than many countries to extreme weather events and needs to strengthen its framework to adapt to climate change.
2.1. The current state of the transition in Italy
Italy has made significant inroads in reducing greenhouse gas emissions over the past two decades, but progress has slowed in recent years. Economy-wide emissions in 2021 were about 30% lower than their 2007 peak (Figure 2.1, Panel A). The decline in emissions was steep over 2007-14, thanks to an important reduction in the emissions intensity of GDP and aided by negative GDP growth. Progress in emissions reduction has slowed considerably since 2014, with emissions in 2021 being only marginally lower than in 2014. This slowdown in emissions reduction is partly explained by the economic recovery but also by slower progress in reducing the emissions intensity of GDP (Figure 2.1, Panel B). Electricity generation and manufacturing and construction industries experienced the largest declines of emissions among the biggest emitting sectors, while emissions declined the least in buildings and transport (Figure 2.2, Panel A). Transport, electricity generation, manufacturing and construction and buildings currently each account for about 20%-25% of emissions (Figure 2.2, Panel B).
Italy has a goal to reduce economy-wide emissions by 55% by 2030 relative to 1990 and reach net-zero emissions by 2050. Further, the EU Effort Sharing Regulation sets a legally binding target for Italy to reduce greenhouse gasses emitted from specific sectors – road transport, buildings, agriculture, waste management and non-energy-intensive industries – by 44% by 2030 relative to 2005. Emissions from energy-intensive industries, the power sector and aviation are not covered by the Effort Sharing Regulation, as they are regulated by the EU-wide Emission Trading System (ETS), which sets an EU-wide target but not country-specific ones. The EU Land Use, Land Use Change and Forestry Regulation sets a legally binding target for Italy to increase the removal of emissions through land use by 1% over 2005-30.
The distance between 2021 realised emissions reductions and 2030 targets is large, meaning that a strong acceleration in emissions reduction is needed (Energy & Strategy, 2023). Italy’s economy-wide emissions declined by 25% over 1990-2021 against a 55% target over 1990-2030, while those from sectors covered by the EU Effort Sharing Regulation declined by 20% over 2005-21, against a 2005-30 target of 44%. Projecting Italy’s GDP to 2030 using OECD long-term scenarios, it appears that, in the remaining years up to 2030, Italy would need to reduce the emissions intensity of GDP at a pace more than five times faster than the one observed over 2014-21 in order to meet its decarbonisation targets (Figure 2.1, Panel B).
Figure 2.1. Emissions reduction has decelerated in the mid-2010s
Economy-wide greenhouse gas emissions
Note: Path needed to reach 2030 is calculated assuming a given trajectory for real GDP over 2023-30.
Source: OECD calculations based on OECD Long-Term Model, OECD Emissions Database, OECD IPAC Climate Action Dashboard (Maes et al., 2022) and IMF World Economic Outlook.
Figure 2.2. Transport, energy industries and buildings account for almost two thirds of emissions
Greenhouse gas emissions by sector
Note: Indirect CO2 emissions are excluded.
Source: OECD Emissions Database.
Fossil fuels account for almost three quarters of Italy's energy supply and almost all fossil fuels use is covered by imports (Figure 2.3). Natural gas is Italy’s single largest energy source, providing more than 40% of total energy supply. While Russia was the largest natural gas import source before its war against Ukraine, Italy reduced Russian gas imports to about 15% of all gas imports by end-2022 and aimed to completely halt them by end-2023. Oil is the second largest energy source, while coal has a relatively low share. Renewable energy sources account for about 20% of total energy supply. Biofuels, including solid biomass, are Italy’s main renewable energy sources, while solar and wind still account for a low share. Electricity imports make up 2% of total energy supply. Italy does not produce electricity from nuclear energy.
Figure 2.3. Fossil fuel imports account for almost three quarters of total energy supply
Overview of energy production, supply, and demand in Italy, 2021
Source: IEA World Energy Balances database.
A smart mix of financial incentives, standards, regulations, and infrastructural upgrades is needed to decarbonise the economy. The rate at which greenhouse gas emissions from fossil fuels use is taxed in Italy is high on average, but the large heterogeneity across sectors leads to suboptimal emissions reduction efforts. Aligning effective carbon rates across sectors, as foreseen in the ongoing tax reform, would promote emissions reduction where it is less costly. Electrifying the economy, while ensuring that electricity is produced from green energy sources, will be key to reduce fossil fuels use. For this, it will be important to continue streamlining Italy’s complex permitting process for renewable energy projects, which has slowed the uptake of solar and wind electricity in recent years, modernise the electricity transmission grid and develop an electricity storage infrastructure. In transport, deepening infrastructural upgrades would contribute to providing alternatives to road and air transport, while reforming taxes and purchase subsidies would incentivise the penetration of zero-emissions vehicles, which is currently low. In the buildings sector, where the most energy-inefficient third of Italy’s buildings stock would be required to undergo deep retrofitting by 2033 if a proposed reform of the EU Energy Performance of Buildings Directive was approved, it will be important to devise complementary policies to encourage retrofitting in a way that is sustainable for public finances and equitable across households. In industry, the scheduled tightening of the EU Emissions Trading System (ETS) is expected to keep providing strong decarbonisation incentives.
Achieving the transition will have important co-benefits in terms of reduced energy dependence and improved wellbeing. Italy’s dependence on fossil fuel imports exposes it to external shocks and instability. By doubling the share of renewable energy produced domestically in overall energy supply, in line with its 2030 target, Italy could reduce its dependency on fossil fuel imports from more than 70% of energy supply in 2021 to less than 60% in 2030 (MASE, 2023). This will strengthen energy security and improve the current account balance, which in 2021 featured a deficit of about 2½ per cent of GDP in energy products. Italy is exposed to high degrees of air pollution from burning fossil fuels, particularly in northern regions, where specific climatic and atmospheric conditions hinder the dispersion of pollutants. This results in a high share of premature deaths and many hospital admissions (Figure 2.4), with the total annual cost from exposure to fine particulate matter (PM2.5) alone, including of healthcare, estimated at 5% of GDP in 2019 (World Bank, 2022). Decreasing fossil fuels use will significantly contribute to higher wellbeing and reducing healthcare costs.
Figure 2.4. The costs of air pollution are high in Italy
Welfare costs of premature deaths caused by ambient particulate matter, USD per capita, 2019
Note: The health cost of PM2.5 is calculated by estimating the cost of mortality and morbidity. The cost of mortality is estimated using the Value of Statistical Life (VSL) approach, which is the average willingness to pay per individual for a mortality-risk reduction of magnitude R. The cost of morbidity is estimated by multiplying the number of cases of illness by the cost per case.
Source: OECD Green Growth Indicators.
Achieving the transition also requires adapting to climate change. Italy is more exposed than other countries to the increased frequency of extreme weather events due to climate change. Extreme weather events damage the economy and can cause the loss of human lives. Concrete adaptation measures will need to prioritise interventions to manage hydrogeological risks and improve resilience to heatwaves, including boosting water retention and drainage systems.
2.2. Meeting Italy’s ambitious energy and emissions targets will be challenging
Currently planned policies underscore the government’s commitment to accelerate the energy and climate transition but may be insufficient to meet some of Italy’s ambitious emissions reduction targets (Table 2.1). Italy’s National Energy and Climate Plan (NECP) defines the short-term strategy to abate emissions and has been recently updated (Box 2.1). The NECP projects an emissions reduction of around 47% economy-wide and of 35-37% in sectors covered by the EU Effort Sharing Regulation over 2005-30 under planned policies. Achieving these emissions reductions implies a significant acceleration relative to what has been achieved in recent years and what can be achieved under current policies. Italy could in principle buy emissions allocations from other EU Member States with excess emissions abatements if it failed to reach its targets, but this would be fiscally costly and should be seen as a last-resort option. An even more ambitious policy effort than currently envisaged is therefore needed, including to boost the penetration of renewable energy, improve energy efficiency, and further electrify the economy.
Box 2.1. Italy’s climate change institutions
The National Energy and Climate Plan (NECP) is the main strategic document guiding Italy’s transition. It was first adopted in 2019 to guide policy up to 2030 and is now being updated following the adoption of the EU Climate Law in 2021. In June 2023, the government sent a first draft of the updated NECP to the European Commission. The final version is expected by June 2024.
In addition to the NECP, Italy has two other strategic climate change mitigation documents. The Ecological Transition Plan states that Italy aims to reduce emissions by 55% by 2030 relative to 1990 and reach carbon neutrality by 2050, while the Long-Term National Strategy on Reducing Greenhouse Gas Emissions outlines possible pathways to reach carbon neutrality by 2050. Only the NECP is legally binding.
The National Adaptation Strategy to climate change sets out the broad vision to deal with the impacts of climate change. A more concrete framework is outlined in the National Climate Change Adaptation Plan, which has been recently finalised but not yet approved.
Climate policy is a shared responsibility among several institutions
The Ministry of the Environment and Energy Security oversees energy, climate, and other environmental policies, setting the main principles and directions. Several other ministries have climate-related competencies, while regions have concurrent legislative powers along with the central government on matters such as energy, transport, and land use (‘governo del territorio’). Municipalities also have relevant implementing functions.
The Italian energy information system includes several institutions that are coordinated by the Ministry of the Environment and Energy Security, while the Italian Institute for Environmental Protection and Research (ISPRA) is an administrative body with technical capacity in charge of emissions inventory and projection. It is also responsible for monitoring climate change and hydrogeological risk.
Table 2.1. Planned policies are unlikely to be enough to meet Italy’s emissions reduction targets
Changes in greenhouse gas emissions, 2005-21 actual data and 2005-30 targets
Note: 1 The economy-wide target is for the 1990-30 period and is not legally binding; the ETS sectors target is EU-wide; the ESR sectors and the LULUCF removal targets are EU-mandated legally binding targets; ESR indicates the EU Effort Sharing Regulation; ETS indicates the EU Emission Trading System; LULUCF indicates land use, land use change and forestry.
Source: MASE (2023) and OECD calculations.
The penetration of renewable energy was broadly flat over 2013-21 (Figure 2.5) but has picked up somewhat over the last two years and is expected to further accelerate under plans in the NECP. The NECP foresees the consumption of renewables to increase by 70% by 2030 relative to 2021. Together with a reduction in overall energy consumption, this would double the share of renewable energy in total energy supply, allowing Italy to meet its renewable energy targets (Table 2.2). A big share of the increase in renewable energy is expected to come from renewable electricity. Biomethane and biofuels are also expected to provide an important contribution, especially in the thermal and transport sectors. Although these fuels meet renewable energy criteria, they require feedstock to be produced and emit local air pollutants.
Figure 2.5. Progress in renewables penetration has stalled in the second half of the 2010s
Renewable energy sources in total energy supply
Source: IEA World Energy Balances 2022.
Table 2.2. Renewables penetration is expected to pick up significantly under current plans
Renewable energy share in gross final energy consumption, 2021 status and 2030 targets
Note: 1 Targets for heating and cooling and transport are legally binding. Shares are calculated using Eurostat’s accounting rules.
Source: MASE (2023).
Planned policies in the NECP imply more than doubling the pace of energy savings achieved in recent years (Table 2.3). Total energy supply is projected to decrease by more than a quarter over 2005-30, relative to about a fifth under current policies. This is very ambitious but still less than the EU’s binding target of a reduction of almost a third, underscoring that more efforts are needed. The consumption of fossil fuels is projected to almost halve over 2021-30. Despite this, natural gas would still account for a third of primary energy consumption in 2030.
Table 2.3. Although ambitious, planned policies fall short of achieving energy efficiency targets
Energy consumption changes, 2005-21 actual data and 2005-30 targets
Note: 1 Legally binding targets, calculated according to formulas in Annex I of the EU Energy Efficiency Directive III.
Source: MASE (2023) and OECD calculations.
By electrifying end uses while increasing the share of electricity generated from renewable sources, Italy can make significant progress in decarbonising the economy. The NECP projects electricity consumption to increase somewhat and its share in final energy consumption to rise by about 5 percentage points over 2021-30. Albeit achieving this would require an acceleration in the electrification of the economy relative to the last decade, it is less than the 7 percentage points increase that Terna, Italy’s transmission grid operator, estimates to be required for Italy to meet its 2030 decarbonisation targets (Terna; Snam, 2022). Electricity penetration in industry, which increased significantly over 2005-21 (Figure 2.6), is expected to increase further. Some progress is also foreseen in buildings, while electricity penetration in transport is expected to stay relatively low. The NECP foresees the share of renewable energy in electricity generation to almost double from its 2021 level to reach 65% by 2030. This implies a significant pick up in renewables penetration, which has essentially stalled over 2013-21 due to complex permitting processes that are now being streamlined, and is fully in line with EU requirements. Yet, the planned share of renewables in electricity generation in 2030 is below plans in similar EU countries, including Spain, which aims at a share of 80% (Ministerio de la Transición Ecológica y el Reto Démógrafico, 2023).
Figure 2.6. The electrification of the economy is proceeding slowly
Share of electricity in final energy use, by sector
Source: IEA World Energy Balances and OECD IPAC Climate Action Dashboard (Maes et al., 2022).
The NECP estimates total public and private investments needs of almost 5% of GDP per year from now until 2030 to achieve Italy’s 2030 energy and emissions targets (MASE, 2023), and efforts will need to continue in later years. About 65% of these investments are for the replacement of the car fleet, about 20% for buildings retrofitting and about 10% for renewable electricity generation.
Italy’s National Recovery and Resilience Plan (NRRP) features public expenditure worth around 85 billion EUR, or almost 5% of annual GDP, for the energy and climate transition in total over 2021-26. Investments in renewable energy production, the development of hydrogen, zero-emissions vehicles and electric charging stations constitute the largest share of the programme. Tax credits and grants to finance investments in energy efficiency in public and private buildings make up another important part. Together, these two pillars may reduce yearly economy-wide emissions by about 1% (Accetturo and Alpino, 2023) and are likely to also boost growth. The NRRP also plans substantial investments to further develop the railway network, with an expected emissions reduction worth about ½ per cent of Italy’s yearly emissions (Accetturo and Alpino, 2023). Other investments aim to strengthen the electric and water infrastructures, encourage sustainable agriculture and the circular economy, and adapt to climate change.
The European Commission recently endorsedJ a proposal by the Italian government to restructure its NRRP and equip it with a new REPowerEU Chapter. The Chapter, which may be further expanded, encompasses reforms and public expenditure worth more than 1% of GDP. The reforms aim to further simplify the permitting of renewable energy production, reduce environmentally harmful subsidies, and enhance employees’ green skills in both the private and public sectors. Public expenditure under the Chapter will largely be financed by shifting some existing NRRP investments to the European Structural and Investment Funds and is made up of projects to improve network infrastructure, such as the electricity and gas transmission, bolster renewable energy production, and boost critical raw materials value chains, especially in the agri-food and net-zero-technology sectors. The Chapter also finances tax credits to improve the energy efficiency of buildings and incentivise firms’ green investments.
To achieve carbon neutrality by 2050, Italy’s Long-Term National Strategy on Reducing Greenhouse Gas Emissions prioritises further reducing energy consumption and electrifying the economy. However, while there is potential to fully eliminate emissions from electricity generation and largely electrify light industry, alternative fuels, including hydrogen and e-fuels produced through renewable energy, will be needed in transport and some industrial sectors in which full electrification is not viable. According to government guidelines, hydrogen could account for 20% of final energy consumption by 2050 (MIMIT, 2020), and Italy’s NRRP finances hydrogen-specific projects worth 0.2% of GDP. Carbon capture and storage will be necessary to offset emissions deriving from industrial processes (IEA, 2023a), as in other countries.
Italy should consider enshrining its 2050 economy-wide carbon-neutrality target in law, following the example of other major EU countries. Currently, Italy's emissions reduction targets lack legal binding, and EU-wide targets, although legally binding, are directed to the emissions in the EU as a whole and not specifically to those of Italy. By enshrining its carbon-neutrality goal in national law, Italy can enhance the clarity of its policy objectives, reinforce its commitment to climate action, promote accountability, and increase the domestic ownership of EU climate policies. Although causality is hard to establish empirically, OECD research suggests that countries that legally codify economy-wide emissions reduction targets tend to achieve more substantial emissions reductions due to robust implementation of climate mitigation policies (Box 2.2). Italy could also establish additional intermediate targets to be reached between the 2030 goal to reduce emissions by 55% relative to 1990 and the 2050 net-zero target. This would enable regular assessments of progress toward carbon neutrality and facilitate policy adjustments as necessary (D’Arcangelo et al., 2022).
Box 2.2. Climate laws, mitigation policy and greenhouse gas emissions
Setting an economy-wide emissions reduction target and enshrining it in law (adopting a climate law) allows governments to communicate their intention to strengthen climate action, thus reducing policy uncertainty. It also serves as a legislative means to commit future governments to action. For instance, the current UK government needed to adopt a more detailed implementation plan of its mitigation strategy after three NGOs filed and won a case against it for not having complied with the 2008’s Climate Change Act (Higham, Setzer and Bradeen, 2022).
Ciminelli and D’Arcangelo (forthcoming) estimate the relationship between the presence of climate laws, GHG emissions and mitigation policy in a difference-in-differences setting. Countries that adopt climate laws experience significantly larger emissions reductions in subsequent years than those that do not, whereas there is no difference in the years before (Figure 2.7, Panel A). This difference is statistically and economically significant (-6% on average) and increases progressively over time.
Furthermore, countries with climate laws increase the ambition of mitigation policies. Policy ambition increases on average by 0.35 standard deviations after a climate law is passed (Figure 2.7, Panel B, blue dot). Mitigation policies become progressively more stringent when governments promoting climate laws take office and this trend persists in the years following the adoption of a climate law (red dot). The increases in policy stringency persist even after a change in government (green dot). This finding is consistent with climate laws having long-lasting effects even after political changes and supports the view that enshrining emissions targets into law is an effective commitment device.
Figure 2.7. Emissions fall steeply and mitigation policy becomes tighter after climate laws
Note: The two graphs show the differences between countries that adopt a climate law and those that do not with respect to their difference before the introduction of the climate law. Panel A: average yearly log GHG emissions. Panel B: differences in average mitigation policy stringency since (i) a climate law is adopted (blue dot); (ii) a climate law is adopted in countries that later experience a change in government (orange dot); (iii) a climate law is adopted in countries that later do not experience a change in government (yellow dot). Bars are 90% confidence intervals. Estimates from a panel of OECD countries in the years 2000-20 using the method of Callaway and Sant’Anna (2021). Data is from Gütschow et al (2016) and Nachtigall et al. (2022).
Source: Ciminelli and D’Arcangelo (forthcoming).
Reinforcing the governance of climate change mitigation policy would help Italy to achieve the transition. Italy should include actionable measures in the NECP and clearly identify financing needs and sources for each measure (ECCO, 2023). Further, it can expand the role of the Interministerial Committee for the Ecological Transition, which was established in early 2021 but has been dormant over the past two years, and make it responsible for steering the implementation of the climate policy agenda.
Having an independent climate council monitoring the advancement of the energy and climate transition, as in the United Kingdom and Sweden among others, would be more effective than setting up a NECP Observatory within the Ministry of the Environment and Energy Security, as in current plans. This independent climate council can also be tasked to monitor and advise regarding the implementation of climate change adaptation policies and be allowed to leverage on the Italian Institute for Environmental Protection and Research (ISPRA) to conduct technical background research. The government also plans to set up a monitoring platform for the diffusion of data regarding the achievement of targets and the effectiveness of the different policies. This would introduce a monitoring system with automated data collection and reporting, which is now lacking, and reduce the current fragmentation of the energy information system, which adds to transaction costs (IEA, 2023a). Access to this platform should be made readily available on the websites of the Italian National Institute of Statistics (ISTAT) and Italy’s Energy Service Manager (GSE).
2.3. Policies to achieve the transition
After accounting for both the burning of fossil fuels and by-product emissions from industrial processes, energy industries (mainly electricity generation), transport, buildings and manufacturing and construction industries each contribute 20%-25% to Italy’s overall emissions (Figure 2.2, Panel B). Emissions from agriculture and the management of waste account for the remaining 10%. A big part of emissions from electricity generation and manufacturing and construction industries are covered by the EU Emissions Trading System (ETS). The ETS contributed to a sharp fall of emissions from these sectors over 2005-21 and a recent reform should ensure that it will keep providing the right financial incentives to decarbonise. Emissions from transport and buildings declined little over 2005-21 (Figure 2.2, Panel A). The share of buildings in total emissions stands out as being substantially higher in Italy than in the rest of the EU and OECD.
A policy mix tailored to each large emitting sector is required to abate emissions. This includes (i) market-based policies, such as, for instance, carbon pricing, feed-in schemes and congestion charges, (ii) standards and regulations, such as, for instance, bans on polluting activities, energy certificates on buildings and car speeding limits, and (iii) complementary policies to facilitate the reallocation of capital, labour and R&D towards low-carbon activities (D’Arcangelo et al., 2022). Pricing emissions is used fairly widely in OECD countries to abate emissions, as it makes low-carbon technologies relatively more competitive, thereby incentivising shifts in production and consumption towards lower-carbon options (Arlinghaus, 2015; Martin, Muûls and Wagner, 2016). If the price of emissions is the same across sectors, marginal abatement costs are equalised, and emissions abatement is pursued where it is less costly. Additionally, pricing emissions has the advantage of generating fiscal revenues, and might thus positively contribute to public finances.
However, pricing emissions at the same rate across the economy can be technically and politically difficult. Moreover, while emissions pricing works relatively well in industry, it may not be enough to decarbonise other parts of the economy due to the presence of market failure. Households, especially if credit-constrained, are less responsive to price signals. Hence, other market-based policies, including subsidies and tax incentives, standards, and regulations, as well as complementary policies are attractive options to decarbonise buildings and transport, where household activity accounts for most of the emissions.
Action on climate change mitigation should be significantly strengthened. OECD synthetic indicators measuring the stringency of mitigation policy increased less in Italy than in the rest of the EU and OECD over 2010-20 (Figure 2.8). These synthetic indicators consider policy action in different domains, broadly divided in market-based policies, standards and regulations and others relating to climate targets, governance, and institutions, with higher values indicating more stringent policies (Nachtigall et al., 2022). Among OECD EU countries, only the Slovak Republic, Czech Republic, Poland, and Greece increased policy stringency less than Italy over 2010-20. The modest increase in climate change mitigation policy stringency over 2010-20 in Italy was particularly evident in the transport sector and for public green R&D spending. Several studies show that policy stringency has important effects on emissions (Nachtigall et al., 2023; Frohm et al., forthcoming; Le Quéré et al., 2019).
Figure 2.8. Italy lagged in the tightening of climate change mitigation policy in the 2010s
Change in the index measuring the stringency of climate change mitigation policy
Note: Index units (0 to 10). The latest available data point is used when 2020 data is not available. OECD and EU are simple averages. EU average excludes non-OECD countries.
Source: Nachtigall et al. (2022).
2.3.1. Aligning effective carbon rates across fuels and sectors
The EU Emission Trading System (ETS), which currently covers large power plants, energy-intensive manufacturing industries and intra-EU aviation, has proved successful in bringing emissions down in the covered sectors (Bayer and Aklin, 2020; Dechezleprêtre, Nachtigall and Venmans, 2018). The system is currently being expanded to maritime transport and the cap on emissions is being tightened. Further, a new EU-wide ETS covering emissions from buildings, road transport, small power plants and non-energy-intensive industries will enter into force in 2027. Of the big sectors, only agriculture will be left out, mostly due to technical difficulties in measuring agricultural emissions. The new system targets an EU-wide emissions reduction of 42% by 2030 relative to 2005. While the two schemes will initially run separately, they may be merged in one in 2030, potentially leading to the same ETS price across most of the economy. The reform of the EU ETS is complemented by the introduction of an EU-wide carbon border adjustment mechanism starting in 2026. This will reduce the risk of carbon leakage – that is, the replacement of goods covered by the ETS by imports from other countries with a lower carbon tax (OECD, forthcoming).
The demand for emissions depends on cyclical conditions and developments in individual EU countries, while the supply of ETS emissions certificates is predetermined, which may lead to some volatility in the evolution of the ETS price. In 2019, the EU introduced the market stability reserves to manage surplus emissions and reduce downward price swings, which might hamper investment in low-carbon technologies. Italy may consider introducing an ETS price floor, in the form of an explicit carbon tax in ETS sectors to be levied whenever the EU ETS carbon price falls under a predetermined level. Emitters would pay the difference to the Italian government, thus setting a floor under the carbon price. Setting a gradually raising trajectory for this price floor would further give room to businesses to prepare for higher carbon prices in the future to avoid competitiveness losses. At the same time, the price floor should not be too high as that would increase the risk of carbon leakage. The United Kingdom and the Netherlands have devised an ETS price floor in 2013 and 2021 respectively (D’Arcangelo et al., 2022), and Denmark plans to introduce one in 2025. Canada introduced a carbon price floor in 2019 (Parry and Mylonas, 2017). Having a carbon price floor would also generate fiscal revenues.
In Italy, effective carbon rates – the total tax that applies to carbon dioxide emissions from energy use – are high in some cases (Figure 2.9). The effective carbon rate depends both on the ETS price and the level of country-specific taxes that are levied on fossil fuels, while also considering rebates and exemptions (OECD, 2021a; D’Arcangelo et al., 2022). Italy has steep excise taxes on certain fossil fuels, which result in higher effective carbon rates on energy-related emissions than in the rest of the EU in all sectors except off-road transport. Compared to the rest of the OECD, Italy has higher effective carbon rates in all sectors.
Figure 2.9. Effective carbon pricing in Italy is high but differs greatly across sectors
Rates at which the average emission from fossil fuels use is taxed across sectors, EUR per tonne of CO2
Note: The ETS effective ETS price is not the same across countries as not all emitters within sectors participate to the EU ETS.
Source: OECD Effective Carbon Rates Database.
However, fossil fuels excise taxes relative to fossil fuels emissions content are highly heterogenous across sectors and fuels (Table 2.4). While this is also the case in other countries, it leads to suboptimal emissions reduction efforts. On average across fuels, excise taxes in Italy are highest on gasoline and diesel – but significantly lower on diesel than on gasoline – while they are relatively low on natural gas. Considering both the ETS price and excise taxes, in Italy as in other countries, road transport has by far the highest effective carbon rate (Figure 2.9). Buildings, industry, and electricity generation have effective carbon rates that are about five times smaller than road transport. However, Italy stands out for having a particularly high effective carbon rate in buildings compared to other countries, largely due to high excise duties (Figure 2.9).
Italy should fully implement recent plans to align fossil fuel excise taxes more closely with fossil fuel emissions content, by raising them where possible. Differences in sector-specific effective carbon rates result in dispersion of marginal abatement costs and inefficient emissions reductions. From 2030 differences in effective carbon rates across large emitting sectors might be driven solely by national taxes, following the potential merging of the two ETS systems. The government recently approved a tax reform to be carried out within the next two years. In line with the general principles of the proposed revision of the EU Energy Taxation Directive, the reform states that excises on energy products and electricity should be set with the goal of reducing emissions. Bearing in mind social implications and possible impacts on firm competitiveness, Italy should implement the reform by gradually increasing excises on fossil fuels where they are low compared to the fuel emissions content, prioritising cases in which the overall effective carbon rate is below the social cost of carbon, which was estimated at 60 EUR per tonne of CO2 in 2018 (OECD, 2021a). Setting excise taxes based on fuels’ emissions content would also contribute to aligning effective carbon rates across fuels within the same sector. This would end the favourable treatment of diesel, which has more negative health effects than gasoline.
Table 2.4. Excise taxes are heterogenous across sectors and fuels
Excise taxes (EUR per tCO2eq)
Note: Offroad transport includes maritime transport, railway, and aviation. LPG indicates liquefied petroleum gas.
Source: OECD Effective Carbon Rates Database.
Heterogeneity in effective carbon rates can be further reduced by removing implicit fossil fuel subsidies, as in government plans. Italy’s Ministry of the Environment and Energy Security estimates that implicit fossil fuel subsidies were worth about 0.4% of GDP in 2021 (MASE, 2022). Reducing implicit fossil fuel subsidies, for instance the rebate on part of the diesel excise duty paid by freight and road passenger transport operators, would free important fiscal resources that could partly be used to incentivise low-carbon technologies or be redistributed to lower-income households that suffer disproportionally from the climate transition. The tax reform mandates that excise tax concessions on energy products, and particularly those that constitute environmentally harmful subsidies, should be reviewed and reorganised. The NECP further identifies 18 fossil fuel subsidies that need to be phased out, and authorities plan to draw up a roadmap outlining plans to remove all implicit subsidies. In drawing up this roadmap, it will be important to consider the level of energy prices and ensure that subsidies are phased out in a gradual way.
2.3.2. Boosting green electricity generation
The abundance of sunlight, especially in southern regions, and wind, off some parts of its long coastline, put Italy in a favourable position to generate the large volumes of renewable electricity that are needed to electrify and decarbonise the economy. Emissions from electricity generation are largely covered by the EU ETS. Additionally, medium- and large-scale renewable electricity producers benefit from a two-way contract-for-difference system to reduce revenue volatility, while generation by smaller-scale producers is partly subsidised by the Italian government. This means that the financial incentives to scale up green electricity generation are already in place. However, the take up of renewable electricity has been hampered by long and complex permitting procedures and local opposition to big renewable power plants in recent years, with large-scale projects authorised between 2017 and 2020 having had to wait 7½ years on average before receiving the administrative authorisation (Althesys, 2021). The government has taken some steps to streamline permitting, but the backlog of projects waiting to receive authorisation is still large. Switching to renewable electricity also requires significant investment in transmission and storage capacity.
Emissions from electricity generation have been on a steadily decreasing trend since 2008, despite a broadly stable output, and are targeted to drop by a further 40% over 2021-30 (MASE, 2023). The emissions reduction over 2008-21 was achieved thanks to the gradual phasing out of coal- and an increasing reliance on natural gas and renewables. In October 2017, the government pledged to close all remaining coal-fired power plants by 2025 (IEA, 2023a). The updated NECP broadly confirms this objective, except for coal plants in Sardinia, which will be phased out only once the island will be connected to the rest of the country through the Tyrrhenian link, which is envisaged to start operating in 2028. Around 15% of electricity consumption is covered by imports from neighbouring countries.
The share of renewables in Italy's gross electricity generation almost doubled between 2008 and 2014 but has stalled in recent years, hovering around 40% (Figure 2.10, Panel A), in line with other EU countries. Hydro accounts for most of renewable electricity, generating about 15% of overall electricity. Solar photovoltaic and wind are the next two most important renewables, together generating about 15% of overall electricity. Their strong growth over 2008-14 was achieved thanks to the installation of utility-scale (industrial) solar plants and individual solar panels on buildings as well as onshore wind plants, aided by generous incentives that were later phased out. Over 2014-21, the installation of larger plants slowed down significantly, and the expansion of solar and wind capacity was barely enough to compensate for the decrease of electricity production from hydro sources due to persistent droughts and below average water levels in lakes. The NECP foresees renewable generation to reach 65% of electricity generation by 2030 (MASE, 2023). Solar is expected to account for most of the growth in renewable generation capacity, with onshore wind accounting for most of the rest (Figure 2.10, Panel B). The potential for offshore wind and other renewables is expected to be left largely untapped in the short term compared to scenarios developed by independent institutions (Terna; Snam, 2022; Althesys, 2021).
Italy provides a guaranteed fixed income over a 20-year period to renewable producers through a two-way contract-for-difference system to incentivise the installation of new renewable generation capacity. Specific targets for additional capacity are decided each year and contract prices are set through a reverse auction, with the lowest bid being awarded the contract. When the wholesale electricity market price is below the contract price, producers receive a premium, while they pay the difference if it is above (IEA, 2023a). Thanks to reverse auctioning, the contract price is the lowest possible to meet the participation constraint of renewable producers. The current system targets mature technologies such as photovoltaic solar, onshore wind and hydropower, while a proposal for a separate system to incentivise offshore wind, biofuels, thermodynamic solar and geothermal was submitted to the European Commission for review in early 2023. The updated NECP also foresees the promotion of power purchase agreements between producers and consumers as another way to promote renewable penetration. The diffusion of power purchase agreements will also be supported by the proposed reform of the EU electricity market design.
A large backlog of renewable energy projects awaits administrative authorisation in Italy. As of September 2023, overall pending grid connection requests submitted by renewable producers to Terna, the transmission system operator, were worth about four times what is needed to meet the target of new installed renewable capacity by 2030, which highlights the potential for renewable electricity production in Italy (Figure 2.11). Out of these pending requests, requests for projects with capacity worth about 40% of what is needed to meet the 2030’s target had already received the green light from Terna but were awaiting administrative authorisation (see Box 2.3 for details on permitting), with southern regions having the largest backlogs.
Figure 2.10. Renewables electricity generation capacity is planned to double over 2022-30
Renewable electricity generation and installed capacity
Source: IEA World Energy Balances database (Panel A), Mase (2023) and OECD calculations (Panel B).
Figure 2.11. Projects worth 40% of planned additional renewable capacity await authorisation
Envisaged 2022-30 capacity additions and status of pending grid connection requests to Terna, as of October 2023
Note: Envisaged capacity addition are as in NECP plans.
Source: OECD calculations based on MASE (2023) and Terna Econnextion.
The backlog of projects awaiting administrative authorisation is partly due to the time-consuming process of obtaining a positive environmental impact assessment, which often is a necessary but not sufficient condition for administrative authorisation. In principle, the environmental impact assessment should be completed within 330 days. However, as of end-2022, approximately 70% of projects that had initiated the environmental impact assessment between 2019 and 2021 were still awaiting a decision according to independent institutions (Figure 2.12, Panel A). Additionally, projects with a positive environmental impact assessment are often not authorised. Landscape considerations are often used by local governments as reasons to block a project, despite the positive environmental impact assessment. A list defining valid reasons to oppose a project is lacking, leaving room to the decision-maker for subjective decisions. Local communities often oppose renewables projects, leading local governments to block the projects (Bartolamai, 2022). These issues are particularly relevant for wind projects (Figure 2.12, Panel B).
Box 2.3. Italy’s complex permitting of renewable power plants
The permitting process starts with the renewable electricity producer submitting a request to Terna, Italy’s transmission system operator, to prepare an estimate of the time and cost for grid connection. If the producer decides to move forward after receiving the cost estimate from Terna, it presents a project that needs to get Terna's approval. Getting an estimate of the time and cost for grid connection and the project approved by Terna may take up to 240 days. Following Terna’s approval, the project needs to obtain administrative authorisation. This is granted by the concerned region at the end of a single procedure (‘single authorisation’) in which all concerned administrations participate. This procedure should not take more than 90 days, excluding the time provided for the environmental impact assessment, if needed.
Projects with capacity above a certain threshold (30 MW for wind and 10 MW for solar farms) need to receive a positive environmental impact assessment from the central administration before being authorised. Projects with capacity below the threshold undergo a screening to determine whether the environmental impact assessment is necessary. The screening, the assessment (if needed) and final authorisation for these smaller projects are all responsibility of the regions. Very small-scale projects (below 60 kW for wind and 50 kW for solar) only require a written communication to the municipality (‘simplified enabling procedure’). In absence of a negative response by the municipality within 30 days from the communication, the project is authorised.
The suitable areas reform has the potential to speed up permitting
The suitable areas reform (‘riforma aree idonee’ in Italian), adopted in 2021 but only partially implemented, establishes that renewable power plants with capacity below 10 MW to be built in suitable areas can be authorised with the tacit consent principle through the ‘simplified enabling procedure’. Projects with capacity between 10 MW and 30 MW submitted before July 2024 need to be authorised through the standard authorisation procedures but are exempted from the environmental impact assessment. The legal time limit to carry out the environmental impact assessment and for granting authorisation is reduced by a third and the authority dealing with landscape considerations is withheld veto powers. Further, offshore wind projects with capacity below 50 MW in areas identified by the new marine spatial plans do not need to undergo the environmental impact assessment.
The government has taken some actions to speed up permitting. It approved the so-called suitable areas reform (‘riforma aree idonee’). This reform (i) requires regions to identify suitable and unsuitable areas for renewables capacity installations based on uniform criteria to be issued by the central government and provides for lighter authorisation procedures for projects in suitable areas, (ii) defines some areas as already suitable pending the issuance of implementing decrees (for instance, former mining sites), and (iii) sets a burden-sharing principle through which each region has to meet a target for the installation of new renewables capacity by 2030, which should increase regional ownership of renewables projects (Viganò et al., 2021). The government also established a special commission within the Ministry of the Environment and Energy Security to conduct the environmental impact assessment and another one to deal with cultural and landscape considerations for NRRP and NECP projects. Additionally, it set up a single contact point for the submission of authorisation requests and removed the need for authorisation for the installation of small-scale solar panels on buildings, which is less opposed by local communities (REF, 2022).
Figure 2.12. Wind projects with positive environmental impact assessment are often not authorised
Status of projects submitted for environmental impact assessment over 2019-21, as of end-2022
Note: Shares are computed in terms of capacity rather than number of projects.
Source: OECD calculations based on Legambiente (2023).
The recent reforms to speed up permitting contributed to accelerate the installation of new renewable generation capacity, but more efforts are needed. Yearly additions of renewable generation capacity almost quadrupled over 2021-23 but are still considerably less than plans in the NECP, and most of the increase in the pace of installations was driven by solar, while wind has been lagging behind (Figure 2.13). The suitable areas reform has the potential to further streamline permitting, and Terna estimates that about a quarter of Italy’s territory could qualify as suitable area (Terna; Snam, 2022). The government should quickly issue the decrees establishing the criteria for the identification of suitable areas and defining the burden-sharing system across regions.
The government can take further actions to fully unlock Italy’s renewable energy potential. The suitable areas reform would have deeper effects if the capacity ceiling below which projects in suitable areas can be authorised through the ‘simplified enabling procedure’ (see Box 2.3 for details) was higher, given that the median capacity of solar projects with pending grid connection request is about two times the current threshold. Further, the exemption from the environmental impact assessment for projects in suitable areas with capacity up to 30 MW, currently set to expire in July 2024 (Box 2.3), should be made permanent. Finally, to ensure that the environmental impact assessment is not delayed, each of its phases should be subjected to the tacit consent principle. The same principle should apply to the preliminary screening, if required, as well as for the ‘single authorisation’, which often takes longer than the statutory 90-day limit (Box 2.3).
Figure 2.13. Renewable energy installations picked up in 2022-23 but are still below plans
Installation of renewable energy generation capacity, 2021-23 and yearly target implied in NECP plans
Note: 2023 numbers are extrapolations based on real data up to August 2023.
Source: OECD calculations based on Terna (2023b), Terna (2023c) and MASE (2023).
The identification of special areas for the development of offshore wind farms through maritime spatial plans would help planning and coordination between Terna and energy producers. It is important that these plans are approved swiftly. Having a clear procedure for the authorisation of offshore wind farms and having the central government responsible for it would also help (IEA, 2023a; Legambiente, 2023). Further, the ceiling below which the environmental impact assessment is waived in areas identified in the marine spatial plans can be increased, as its current level of 50 MW is very low for offshore wind farms, for which the median size of grid connection requests to Terna is about 3000 MW.
The backing of local communities is key to ensure that renewable energy projects are authorised. Communities should be engaged early on through information campaigns and can be given a financial stake in renewable energy installations, for instance through revenue participation or lower electricity prices for municipalities hosting the installations, to ensure their buy-in. Energy communities, enabling citizens to participate in the electricity market either by generating, consuming, sharing, and selling electricity, or by providing flexibility services through demand-response and storage, can build support for renewables installations. Their prioritisation in the NRRP through the granting of zero-interest rate loans in small communities is a welcome step, but energy communities in Italy are still significantly underdeveloped relative to countries such as Germany. To try filling this gap, Italy has recently submitted to the European Commission the draft decree establishing a premium tariff for energy communities and prosumers for approval.
Expanding renewable electricity requires investing in transmission and storage capacity. Renewable electricity will need to be transmitted from the South of the country, where generation potential is concentrated, to the North, where consumption is higher (Figure 2.14). Terna projects that transmission capacity needs to more than double over 2021-30 (Terna; Snam, 2022). In its latest development plan, it outlines investments worth more than 1% of Italy’s GDP in total over a 10-year period (Terna, 2023a). The plan includes the introduction of a new network technology (‘Hypergrid’) that will double the exchange capacity between market zones, thus reducing land consumption and environmental impact. Other key elements are the construction of five new electrical backbones, incorporating submarine connections and upgrading existing power lines to strengthen connections between regions. The NRRP additionally provides investments in smart grids and the climate resilience of networks worth about 0.2% of GDP.
Figure 2.14. Renewables potential is higher in the South, while consumption is higher in the North
Geographical distribution of grid connection requests to Terna and electricity consumption
Note: Data is in GW (Panel A) and TWh (Panel B). Connection requests for offshore wind farms are assigned to the municipality where the requestor is registered.
Source: OECD calculations based on Terna Econnextion and Terna Pubblicazioni Statistiche.
Grid development has been held back by long and complex permitting procedures, but recent reforms should ensure faster approvals for key projects. Terna’s investment plan needs to be approved by the Ministry of the Environment and Energy Security after undergoing a strategic environmental assessment involving several institutions (IEA, 2023a). After Terna’s plan gets approval, each grid development project still needs to undergo an environmental impact assessment and obtain administrative authorisation. Together, the strategic environmental assessment and the permitting procedure of each project last seven to eight years (IEA, 2023a). These lags create a problem because the lack of enough storage and transmission capacity might hold back investments in generation, and vice versa. Recent reforms have the potential to speed up the process. The draft 2023 competition law contains a provision requiring the Ministry of the Environment and Energy Security to approve the plan within 18 months. Projects deemed of strategic importance for decarbonisation can be authorised even pending the authorisation of the plan.
The intermittent nature of solar and wind energy also requires large investment in storage capacity, to allow electricity to be stored when it is produced and released when it is consumed. According to Terna, most of the investments in electrochemical storage capacity will be concentrated in southern regions (Figure 2.15). Long-term scenarios developed by independent institutions underscore that storage capacity will need to be higher the lower is the share in the electricity mix of wind, which is complementary to solar, and biomethane, which is dispatchable (REF, 2023). Italy should strengthen incentives for the installation of storage capacity and simplify its permitting procedures. Strengthening the capacity market and long-term contracts between energy producers and storage capacity owners will be important to spur investment in large-scale storage facilities, which has so far been weak. The recent waiving of the environmental impact assessment and authorisation for storage facilities under a certain capacity to be built in areas with existing renewable energy power generation plants is a welcome step to simplify permitting.
Figure 2.15. Investment in generation and storage capacity will be concentrated in the South
Expected generation and storage capacity investments by geographical area, 2022-30
Note: Data for onshore wind, offshore wind and solar is in GW; data for storage is in GWh.
Source: Terna, Snam (2022).
The NECP also foresees the production through electrolysis of hydrogen, which can be stored and transported to other areas, as another way to manage the overgeneration of renewable electricity. To develop the infrastructure to store and transport hydrogen, Italy may repurpose parts of its extended natural gas pipeline network, as it is currently envisaged by SNAM (Italy’s main gas transport and dispatch operator). Hydrogen and other e-fuels could be used to decarbonise sectors that are hard to electrify, including heavy industry, freight transport and aviation.
Dynamic pricing may help to manage periods of renewable electricity overgeneration. The recent completion of the liberalisation of the electricity market should lead to lower average electricity prices for consumers due to increased competition. As a next step, electricity distributors could offer variable prices based on the supply of electricity in the grid. By checking the electricity price in real time through mobile apps, consumers may adjust their consumption, thus reducing transmission requirements by adjusting demand (Davis, Hausman and Rose, 2023). Similar systems are already in place in other EU countries, such as, for instance, the Netherlands.
Potentially long periods of renewable electricity underproduction require strengthening connections to other countries and maintaining some degree of baseload generation capacity from other sources. Nuclear energy could in principle provide this baseload capacity, but Italy decided to phase out nuclear electricity through a referendum in 1987. The government is open to reconsider this decision, but reversing the outcome of the 1987 referendum may be politically challenging, even for small and technologically advanced reactors. Italy’s NECP projects natural gas to be the main source of baseload capacity and targets a significant increase of biomethane, which is also dispatchable. Net electricity imports from other countries are projected to increase up to 2030 and stay broadly constant thereafter (REF, 2022). The NECP sets the strengthening of grid connections to neighbouring countries, including in North Africa, where solar electricity potential is high also in the winter months, as priorities. But connecting Italy to North Africa should not be a reason to underexploit Italy’s renewable potential.
2.3.3. Decarbonising transport
Italy’s updated NECP targets a reduction of greenhouse gases by about 40% over 2005-30 for the transport sector, which is Italy’s largest emitting sector. Transport emissions decreased only by about 20% over 2005-21. Most of this reduction took place following the Global Financial Crisis, when energy use decreased by 15%, aided by a reduction in mobility on the backdrop of weak growth. The subsequent pick up in mobility was compensated by a marked decline in energy intensity so that overall energy use stayed broadly constant up to the Covid-19 pandemic. Cars and trucks account for most of domestic transport emissions (Figure 2.16, Panel A). The share of motorcycles is significant by international standards. Emissions from domestic air travel are low but have increased fast in recent years.
Figure 2.16. Diesel accounts for almost two thirds of energy consumption in the transport sector
Sources of emissions and energy use in domestic transport, shares, 2021
Note: Diesel includes biodiesels and motor gasoline includes bio gasolines.
Source: IEA Energy End-uses and Efficiency Indicators.
The NECP foresees a combination of lower energy consumption and increased renewables penetration to reduce transport emissions in the short term. Energy consumption is targeted to decrease by more than 10% over 2021-30, while the penetration of renewables is expected to increase from about 5% in 2021 to more than 15% in 2030 (from 8% to 31% using Eurostat accounting rules, which give higher weights to certain types of renewables). Only one quarter of renewables consumption in the transport sector in 2030 is expected to come from renewable electricity, with the remaining three quarters expected to come from biofuels, of which Italy is a global leader, and biomethane.
The EU decided to ban the sale of most cars powered by internal combustion engines as of 2035. The ban will apply to engines powered by biofuels and biomethane, with those powered by carbon-neutral fuels (‘e-fuels’) as the only exception. Still, biofuels and biomethane, along with hydrogen, can be important in areas where electrification is hard, such as aviation and shipping. The production of e-fuels, using renewable electricity to convert carbon dioxide and water into hydrocarbon-based fuels, is highly energy intensive, meaning that the generation of renewable electricity would need to be further scaled up, and costly, which can be a barrier to their widespread adoption. This suggests that direct electrification of vehicles may be a more efficient and cost-effective way to reduce emissions compared to e-fuels.
While per capita emissions from cars are low by international standards (Figure 2.17, Panel A), thanks to the low size and energy intensity of the average passenger car, freight trucks display high emissions and energy intensities (Panel B). As in other countries, diesel benefits from a much lower excise tax rate per unit of CO2 emissions than gasoline (Table 2.4). Given that diesel is by far the most used technology for freight trucks, this reduces incentives to buy more energy efficient trucks and has particularly adverse effects on human health as diesel exhausts are carcinogenic to humans (IARC, 2012). Moreover, the diesel excise tax paid by transport operators is partly rebated. Although the rebate only applies to trucks belonging to the European Emission Standard Category 5 or higher, it still covers all trucks registered after 2008.
Bearing in mind social implications and possible impacts on firm competitiveness, the government should increase excise taxes on diesel and gradually phase out the excise rebate for truck operators, as this favourable tax treatment blurs price signals and results in lower revenues for the government. The tax rebate alone costs taxpayers about 0.1% of GDP in lost revenues per year (IEA, 2023a). Recovering these revenues could help subsidising the installation of superfast charging stations or the purchase of low-carbon, electric and hydrogen, trucks, whose market is still in its infancy. Hydrogen may provide an important option to decarbonise road freight transport and the remaining diesel railways in the long term, but government plans in this respect are not yet definitive.
Italy has the second highest per capita car ownership rate in the EU and the NECP envisages a reduction of the total car fleet of almost 10% over 2021-30. This ambitious goal is in line with the approach of inducing behavioural changes to decarbonise transport (ITF, 2021; OECD, 2021c; MIT, 2022) and should be supported by introducing financial incentives for the scrapping of old and high-carbon intensive cars, independently of the purchase of a new car. Some municipalities have set up schemes in which households receive public transport vouchers for each old car that they scrap. The government should encourage such initiatives in other municipalities, and further set up a national scheme in which households are paid a lump-sum for each old car that they scrap. The lump-sum can be set at a level in line with the price of old cars in the secondary market, with fiscal costs limited by capping the overall funds allocated to the programme and targeting it to the most polluting vehicles. This would help reducing the stock of 4 million very polluting cars and is in line with recent proposals to ban such vehicles in urban centres. Coupled with targeted and more generous subsides for zero-emissions cars, this measure would provide strong incentives to reduce and renew the car fleet.
The taxation of car fringe benefits should be further tightened, as these benefits incentivise higher car use (OECD, 2014). In Italy company cars make up more than a third of new car registrations every year (Transport & Environment, 2022), although this proportion has decreased in 2021. The share of the benefit accrued from having a company car that is considered as taxable income, which accounts for the private use of the car, was recently increased and partly linked to the emission intensity of the car. This share can be increased further, as it appears to still be relatively low in Italy compared to other countries (Transport & Environment, 2022). The final goal should be to reduce the size of the car fleet by making employees indifferent between receiving compensation in cash or in-kind through a company car. In increasing the taxation of car fringe benefits, the government should consider introducing a wedge, which currently does not exist, in the share of the in-kind benefit considered as taxable income between zero- and low- (emitting up to 60g/km of CO2) emissions cars and increase the one between low- and mid- (emitting between 60g/km and 160g/km of CO2) emissions ones, which is currently limited to 5 percentage points. This would incentivise a higher take up of zero-emissions cars and contribute to the creation of a second-hand zero-emissions cars market.
The experience of Milan further suggests that introducing congestion charges can reduce car use and contribute to abate car-related CO2 emissions (see Box 2.4 and OECD, 2019). Revenues generated through congestion charge systems can be used to strengthen sustainable urban mobility, while exempting zero-emissions cars from such schemes through plate recognition systems can increase the attractiveness of these cars relative to traditional internal combustion engine ones.
Box 2.4. Charging car use in Milan has reduced CO2 emissions by a third
In 2012, the city of Milan introduced a congestion charge in a central area accounting for about 5% of the municipality’s territory, the ‘Area C’, to reduce congestion and air pollution. After an 18-month pilot period, the system was approved by referendum and became permanent (Comune di Milano, 2022). The scheme bans the most polluting and longest vehicles and puts a fee on other vehicles powered by gasoline and diesel (EUR 2-5 for residents and EUR 3-6 for non-residents) from 7.30 am to 7.30 pm on working days. Electric and hybrid vehicles, as well as motorcycles can access the zone freely. Revenues are used for road management encouraging active mobility, such as bicycle lanes, pedestrian zones, and special speed zones (Comune di Milano, 2022). In 2019, the city introduced a Low Emission Zone covering 75% of the city territory, the ‘Area B’, in which the most polluting vehicles and the biggest trucks are banned. In 2023, the ban covered most diesel and the most polluting gasoline vehicles. Its scope will be gradually broadened until 2030 (Comune di Milano, 2022).
The system appears effective in reducing car use and emissions, including CO2. Congestion in ‘Area C’ dropped by 28% and CO2 emissions fell by 35%, while evidence on emissions outside the area affected by the congestion charge system is not available. Other air pollutants such as particulate matters (PM10) (-18%), nitrogen oxides or ammonia were also significantly reduced. There is evidence that the scheme also boosted the uptake of bicycle-sharing (Cornago, Dimitropoulos and Oueslati, 2019).
Italy must significantly accelerate the adoption of electric and other zero-emissions vehicles to align with its decarbonisation objectives in the transportation sector and meet the 2030 EU target for the average emissions intensity of newly registered cars, which is less than half of Italy's present level. In 2022, the EV share in new car registrations stood at less than 10%, falling well below the EU average and trailing behind France and Germany by two to three times (Figure 2.18).
The NECP sets forth ambitious goals, anticipating that new EV registrations will surpass those of cars powered by liquefied petroleum gas and methane, for which Italy is the EU's largest market, by 2026. Moreover, the NECP envisions an EV fleet of 6.6 million vehicles by 2030 (MASE, 2023). Achieving this target implies that annual new EV registrations over the 2024-30 period must be seven times as large as the 2021 level. Augmenting the penetration of EVs can also play a pivotal role in enhancing the stability of the electric grid. EV batteries possess the capability to supply stored energy to the grid, thereby mitigating demand spikes through bidirectional charging systems. A fully charged EV can provide sufficient power to sustain an average household for several days (IEA, 2023b).
Figure 2.17. Freight trucks in Italy are highly energy intensive
Cars/light trucks and freight trucks energy intensities, 2019
Note: MJ/pkm is megajoules per passenger-kilometre (Panel A); MJ/tkm is megajoules per tonne-kilometre (Panel B).
Source: IEA Energy End-uses and Efficiency Indicators.
Italy relies on car purchase subsidies to increase the penetration of EVs but the system needs to be reformed to increase uptake. The amount of the subsidy might be too low to incentivise the purchase of entry-level models by lower-income households. In 2022 a large share of EV subsidies ended up unutilised and, as of mid-2023, subsidy uptake was less than 20% of the amounts allocated for the full 2023 calendar year (Table 2.5). This low uptake is not due to lack of interest in EVs. In 2022, about 50% of EV purchases did not benefit from subsidies, which are only available for cars below a certain price ceiling (Table 2.5), underscoring interest in EVs by high-income households that do not need subsidies. Subsidies for the purchase of internal combustion engine cars, which also have a price cap and therefore cannot be used to buy expensive models, were exhausted in a few weeks, suggesting that lower-income households opted for cheaper combustion engine cars. The difference in the price before subsidies between the least expensive EVs and combustion engine cars in Europe is about 10 000 EUR (IEA, n.d). While the subsidy to purchase an EV in Italy currently amounts to up to 5 000 EUR, that to purchase an internal combustion engine car is 2 000 EUR, meaning that the net difference is just 3 000 EUR. The subsidy to purchase an EV in Germany amounted to up to 9 000 EUR in 2022.
Figure 2.18. Electric vehicles made up less than 10% of newly registered cars in 2022
Electric vehicles share in new car registrations, 2022
Note: EU is EU simple average excluding non-OECD countries.
Source: European Environment Agency (EEA), European Commission - Directorate-General for Climate Action (DG CLIMA)
Italy should focus on narrowing the price gap between entry-level EVs and internal combustion engine cars. The initial step should involve discontinuing subsidies for combustion engine car purchases, which are only available in France and Romania alongside Italy within the EU (Transport & Environment, 2022). Additionally, subsidies for electric vehicle purchases should be increased. To target entry-level EVs, the subsidy system should be tiered, offering more substantial incentives for cheaper cars and gradually reducing subsidies for more expensive models. Eligibility for the subsidy should be contingent upon scrapping an old and highly polluting car, except for household which do not already own a car. This condition would ensure that the programme does not contribute to increase the overall vehicle fleet and that public funds are used efficiently. The program's yearly allocation, currently worth less than 0.05% of GDP, should be expanded in the short term to create a critical mass in the domestic EV market and scaled down in the medium term as the market matures, following the model adopted by the United Kingdom and Germany. With an average subsidy of 5 000 EUR, the existing allocation can support the purchase of approximately 100 000 EVs each year, against a target of nearly 900 000 EV registrations annually from 2024 to 2030.
Italy has a relatively low ratio of circulating EVs for each publicly available charging point, but, when measured in per capita terms, there are almost three times fewer public charging points in Italy than in the EU average and significantly fewer than in Germany and France (Figure 2.19). Although the penetration of private charging points is higher, these cannot be a substitute for public charging stations, which are particularly needed in city centres, highways and inter-city roads. The scarcity of public charging points available per capita might hold back households from purchasing EVs due to charging anxiety. The NRRP objective of subsidising the installation of an additional 20 000 public charging stations over 2023-25 appears small compared to the EU recommendation of having 1 public charging station for each 10 circulating EVs, as this would imply the installation of about 600 000 additional charging points by 2030, and the first call for tenders for the subsidised installation of charging points on freeways has attracted little interest by operators. Italy should further ramp up the roll out of publicly available EV charging stations and promote the installation of private ones. Information campaigns explaining the financial and environmental benefits of EVs can further help to increase uptake. The government recently decided the creation of a national platform for the localisation of all publicly available charging stations and related information, including charging prices and the share of renewable electricity used.
Table 2.5. The uptake of subsidies for the purchase of electric vehicles is low
Subsidies for the purchase of motor vehicles in Italy, 2023, thousands of EUR
Note: BEV (battery electric vehicle): 0-20 gCO2/km; PHEV (plug-in hybrid electric vehicle): 21-60 gCO2/km; ICE (internal combustion engine) cars: 61-135 gCO2/km; Electric trucks: 0-12 t. Low-income households: ISEE < 30 000 EUR. Price limit applies to the net price before VAT. Numbers are thousands of EUR.
Source: OECD calculations based on Ministero delle Imprese e del Made in Italy, Ecobous (https://ecobonus.mise.gov.it/).
Figure 2.19. Electric charging stations per capita are few in Italy
Publicly available electric charging stations per 1,000 persons, 2021
Note: EU and OECD averages are simple averages calculated based on countries for which data is displayed.
Source: IEA Global EV Outlook 2022, OECD National Accounts database and OECD calculations.
Reforming car sale, registration and ownership taxes can further increase the attractiveness of zero-emissions vehicles. In 2019-21, Italy levied a high sale tax (the so-called ‘ecotassa’) on the purchase of high-emissions cars (from a minimum of 1 100 EUR to a maximum 2 500 EUR). The government can reintroduce this tax and apply it to all vehicles based on their emissions, rather than only to the most polluting cars. Alternatively, it could increase the one-off provincial registration tax, which is currently low, and make it conditional on emissions intensity. Some provinces have exempted EVs from paying this registration tax. This exemption could be extended nation-wide. Italy levies a special yearly car ownership tax surcharge on cars with powerful engines (the so-called ‘superbollo’). The government should consider making this tax dependent on emissions rather than on engine power and remove exemptions for old cars. EVs are exempted from car ownership taxes for the first five years and benefit from a generous reduction thereafter (OECD, 2020). The same exemption applies to cars powered by liquefied petroleum gas and methane, which, although in smaller quantities than gasoline and diesel cars, do emit CO2 emissions (EEA, n.d.). The taxation of these cars should be gradually reformed so that these cars are treated like other emitting vehicles in the medium term.
Italy should continue strengthening alternatives to road transport. Only seven cities have a subway and only eleven a tram system, and the quality of public transport in big cities is poor (IEA, 2023a). NextGen EU funds, EU Structural Funds and funds mobilised in the 2022 budget law are expected to finance investments worth almost 1% of GDP over the next few years in sustainable mobility, such as new rapid mass transit infrastructures, zero-emissions buses, regional trains and cycling paths. These investments are complemented with measures to simplify the authorisation procedures for clean urban mobility. Their effects would be further magnified by initiatives to induce municipalities to strengthen preferential bus lanes, which is a low-cost option to make public transport more appealing than cars.
Investments worth about 2.5% of GDP are also planned for railways. These investments are mainly directed at improving the high-speed train infrastructure, boosting regional train networks, and electrifying railways in the south of Italy. Railway investments in the NRRP are expected to reduce yearly transport emissions by almost 2% (Alpino, Citino and Zeni, 2023). Italy’s NECP also targets behavioural changes to reduce the need for mobility altogether, for instance by promoting remote working.
Further efforts are needed to improve the interconnections of trains with airports, which would allow reducing the number of short connecting flights taken between smaller cities and major hubs. Railway connections with neighbouring countries, which in many cases do not run on high-speed lines, should also be strengthened. These investments, which would also help in moving passengers and freight away from roads, should prioritise cases in which cost-benefit ratios are lowest.
Domestic aviation falls under the EU Emissions Trading System, but it currently benefits from nearly zero excise taxes on fossil fuels. A proposed revision of the EU Energy Taxation Directive aims to introduce minimum excise tax rates on aviation fuels over a 10-year period. To limit the increasing share of aviation emissions, Italy could consider going beyond the minimum and bring excise taxes on aviation fuels closer to those applying to other fossil fuels. Additionally, Italy could rationalise its multiple non-fuel aviation taxes and introduce a single tax taking into account the availability of alternative train connections and the fare paid by each passenger. This tax could decrease in the time it takes for the train to cover the same route and increase in the price of the ticket paid by each passenger. This fare-based approach would promote equity in flight taxation and additionally address the fact that more expensive tickets contribute more to airlines' profitability and their decision to operate (van Ewijk, Chaudhary and Berrill, 2023).
2.3.4. Decarbonising buildings
Buildings are expected to contribute significantly to meeting Italy’s emissions reduction target in sectors covered by the EU Effort Sharing Regulation. At around 20%, their share in economy-wide emissions is significantly higher in Italy than on average in the EU (Figure 2.2). Italy’s updated NECP targets an emissions reduction amounting to more than 40% over 2005-30, but emissions have decreased by less than 15% over 2005-21. The reduction over 2005-21 was considerably less than in the rest of the EU and implies that the pace of decarbonisation needs to accelerate significantly.
Since the great majority of the existing buildings stock will still be standing in 2050, retrofitting it (e.g., by improving insulation, electrifying heating, and cooling, and incorporating on-site renewable energy) is a crucial priority to achieve the decarbonisation targets. While Italy’s historical and cultural heritage means that some of its buildings are protected and might not be retrofitted, the number of such buildings is around 75 000 (MIC, n.d), or less than 1% of the total buildings stock, meaning that the great majority can in principle retrofitted. The proposed reform of the EU Energy Performance of Buildings Directive sets a clear timeline: except for historical buildings, places of worship and defence buildings, Italy would need to renovate the 15% least energy efficient buildings by 2030 and another 15-20% by 2033 if the reform was approved. To achieve total decarbonisation by 2050, Italy needs to retrofit 2½ per cent of the buildings stock annually from 2020 to 2050 (MASE, 2021). Renovations approved with the ‘superbonus’ (a government-funded retrofitting scheme) enabled to retrofit less than 3% of the buildings stock over 2021-22. But with an overall fiscal cost of around 4% of yearly GDP, its cost effectiveness was very low (Alpino, Citino and Zeni, 2023), highlighting that more cost-effective policies are needed.
Box 2.5. The reform of the EU Energy Performance of Buildings Directive
Buildings emissions would need to decrease by 60% by 2030 compared to their 2015 level
If approved, the proposed reform of the EU Energy Performance of Buildings Directive would have far-reaching consequences. It targets (i) a reduction of emissions from the buildings sector of at least 60% by 2030 in comparison to 2015, (ii) the achievement of climate neutrality by 2050, and (iii) the increase in renewable energy penetration in buildings up to 50% by 2030.
A third of Italy’s buildings would need to be retrofitted by 2033
The EU energy performance certificates of buildings would be reformed so that the 15% least energy efficient buildings in each country would be assigned to the category G, zero-emissions buildings would be assigned to the category A and all others would be distributed proportionally to the categories B to F. Public and non-residential buildings would need to achieve at least class F energy performance by 2027, and at least class E by 2030. Similarly, residential buildings would need to reach at least class F by 2030 and at least class E by 2033. Member States would then need to establish specific timelines for achieving a zero-emissions buildings stock by 2050 through new National Building Renovation Plans. The Commission plans to mobilise up to €150 billion from the EU budget until 2030 to finance upfront investment costs, with priority for households living in the worst-performing buildings (European Commission, 2021).
All new buildings should be zero-emissions buildings starting from 2030 (2027 for public buildings). 3% of the total floor area of all public buildings should be renovated annually, while energy use in the public sector should be reduced by almost 2% every year. Renewable energy use in heating and cooling should increase by more than 1 percentage point per year. The phase-out of fossil fuels should be completed by 2040.
Italy’s buildings are relatively energy-intensive and electricity penetration is low. Although their energy use has started to decrease since the mid-2010s, buildings still account for about 30% of Italy’s energy consumption (Figure 2.3). Residential buildings in Italy tend to be energy inefficient as most of them were already built when the first energy efficiency standards were introduced (Figure 2.20) and are responsible for most of the sector’s emissions (Figure 2.21, Panel A). Their energy and carbon intensities are significantly higher than in Spain, which has a similar climate (Figure 2.21, Panel B).
Most of Italy’s residential buildings’ greenhouse gas emissions stem from space heating (Figure 2.21, Panel A). By contrast, Norway emits almost zero emissions from buildings notwithstanding harsh climatic conditions. More generally, the correlation between energy use and CO2 emissions across countries is low (Hoeller et al., 2023). This suggests that it is possible to reduce buildings emissions intensities through buildings electrification, which is currently low in Italy (Figure 2.22), the decarbonisation of the power sector and better buildings insulation. Decarbonising the power sector and better insulating buildings would also help to limit the potential increase in emissions stemming from the expected higher need for space cooling. Space cooling currently still accounts for a small share of emissions (Figure 2.21, Panel A), but its share may increase as summer temperatures rise.
Figure 2.20. Over half of Italy’s buildings was built before the first energy efficiency standards
Share of residential buildings built before 1971, by province
Note: Data is as of 2011.
Source: ISTAT Censimento Popolazione e Abitazioni 2011 and OECD calculations.
The buildings sector may not be as responsive to price signals to reduce greenhouse gas emissions as other sectors (Hoeller et al., 2023; D’Arcangelo et al., 2022). Italy’s effective carbon rate in the buildings sector is substantially higher than that of the EU average (Figure 2.15), and technologies to improve buildings emissions are increasingly available. Despite that, buildings emissions have decreased much less in Italy than in the rest of the EU (Figure 2.2). This suggests that the introduction of the EU Emissions Trading System in the buildings sector in 2027 might not, by itself, induce a drastic acceleration of carbon abatement.
The low responsiveness to price signals in the buildings sector can be related to a number of factors, including the long length of renovation cycles, the fact that many households rent rather than own property and therefore have limited options to react to higher energy prices (Fowlie, Greenstone and Wolfram, 2015), the prevalence of credit constraints, the limited understanding of the financial gains of living in an energy-efficient home (Hoeller et al., 2023) and the presence of a coordination issue in buildings with several apartments. However, although important, these issues do not appear to be sufficient to explain the slower progress in decarbonising buildings despite higher carbon prices in Italy than in the rest of the EU, suggesting that carbon abatement costs in buildings might be higher in Italy than elsewhere.
Figure 2.21. Italy has higher buildings emissions intensities than Spain, which has a similar climate
Emissions shares and emissions intensities by end use, 2021
Note: Emissions intensities in Panel B are in tonnes of CO2 per dwelling for residential space heating and total residential and in kg of CO2 per 50 units of value added in USD PPP 2015 for total Services.
Source: IEA Energy End-uses and Efficiency Indicators.
Figure 2.22. Italy has room to electrify residential buildings
Composition of residential energy consumption by source, 2020 or latest available year
Source: IEA Energy End-uses and Efficiency Indicators and OECD calculations.
Subsidies and tax rebates can speed up the deployment of new technologies by overcoming credit constraints but can have high fiscal costs and need to be designed carefully. Policy design needs to consider that some investments, for instance the triple glazing of windows, have limited effects (Gerarden, Newell and Stavins, 2017) and that, when untargeted, subsidies and tax rebates risk funding renovations that would have been undertaken anyway (Risch, 2020).
Italy mainly relies on tax rebates and direct subsidies to support the renovation of private and public buildings, but cost-effectiveness is low. Under the ‘Ecobonus’ scheme, individuals and businesses may deduct from their income tax a percentage of the expenditure incurred for certain types of energy upgrading works on existing buildings. From 2014 to 2020, the ‘Ecobonus’ mobilised investments worth about 1.5% of Italy’s GDP in total for interventions on about 20% of Italy’s buildings stock but estimated energy savings were less than 1% of residential buildings’ yearly energy consumption (ENEA, 2021).
The ‘Ecobonus’ appears to be regressive, as households with higher housing wealth and upfront capital can benefit from higher tax credits. More than half of the interventions financed benefitted households in the tenth decile of the income distribution (UPB, 2023). Recent interventions should make the ‘Ecobonus’ less regressive, as the government has introduced a parallel scheme in the context of the RePowerEU chapter of the NRRP targeted towards young families and those at risk of energy poverty.
The very generous ‘Superbonus’ scheme, introduced in 2020 and reformed several times, initially granted tax rebates worth 110% of renovation costs for projects leading to an important energy efficiency upgrade of at least two energy classes. To facilitate uptake, the government disposed that the tax credit could be transferred to a third party, thus allowing households without a sufficient tax bill and/or upfront capital to access the scheme. This resulted in a more moderate correlation between household income and take-up than the ‘Ecobonus’ scheme (UPB, 2023). As of February 2023, interventions on slightly more than 3% of Italy’s buildings stock were approved, for a total fiscal cost of about 4% of GDP (UPB, 2023), underlining the low cost-effectiveness of the scheme.
The government recently tightened the ‘Superbonus’ by decreasing the percentage of the costs that can be rebated, ending the transferability of the tax credit to third parties, and targeting the programme to low-income households, which is likely to significantly diminish uptake. The programme is due to be entirely phased out by 2026. Two other programmes (the Thermal Account and the Programme for the Renovation of Buildings of the Central Administration) aim at, mostly, buildings of the public administration. However, given their limited budgets and uptake, they might not be sufficient to lead to meaningful investments.
Italy should reform the tax rebate system to target it to the least efficient buildings and complement it with a system based on a mix of highly subsidised long-term loans and grants for low-income households who lack a sufficiently high tax bill to claim the tax credits. The incidence of grants should be made inversely proportional to households’ income, as in France (OECD, 2022a), but a minimum part of the cost should always be financed through loans in order to leave households with a financial stake in the project. The system should (i) prioritise the retrofitting of the least-energy-efficient housing units that are used as primary homes, (ii) be based on an ex-ante assessment of the emissions-reduction potential of each project and limited to high-potential interventions, and (iii) exclude technologies that are based on fossil fuels if renewables- or electricity-based alternatives are available. Although it might currently be low, the appetite to take up subsidised long-term loans for energy efficiency renovations should gradually increase with rising energy prices in buildings due to the phase in of the new EU Emission Trading System for buildings in 2027 and increasing awareness across the population.
Banning dirty technologies or setting standards for rentals are other options to help homeowners making greener choices. Italy, which still incentives the installation of boilers powered by fossil fuels, should stop this policy immediately, as recently done by the Czech Republic and Slovakia (see Box 2.6). It should also consider banning the installation of fossil fuel-powered boilers altogether in the medium term. To encourage owners to make energy efficiency renovations, Italy could further consider setting higher rental income taxes for owners that rent energy-inefficient homes. Landlords who decide to retrofit their houses because of this policy may pass on the cost of energy efficiency renovations to tenants, but tenants would save money from lower energy bills. Landlords who do not retrofit their properties and decide to increase the asked rent to compensate for the higher taxes would find it more difficult to find tenants. An even more stringent policy option would be to set minimum energy efficiency requirements for rental properties, as done in France and Scotland (Box 2.6).
Setting standards for new construction and renovation can ensure that greener technologies are chosen whenever they are available. Since the beginning of 2021, all new buildings and buildings undergoing major renovation in Italy need to align with nearly zero emissions buildings (nZEB) standards. Italy could consider strengthening this by requiring all new buildings to be zero-emissions buildings (ZEB). Improving renovation process efficiency, as attempted in Estonia, Latvia, and the Netherlands (Box 2.6), can accelerate renovations and raise the ability of construction companies to meet the expected surge in demand. Fast renovations also diminish discomfort associated with living in a house under renovation.
Energy performance certificates, which are currently mandatory for new constructions and major renovations or when renting or selling a property, can be strengthened as they help households realise how energy efficient their homes are. Favourable energy ratings are also reflected in higher property prices (Taruttis and Weber, 2022), thus reinforcing price incentives for energy efficiency renovations. Currently, energy certificates cover about 10% of the national buildings stock. Although current plans for the reform of the EU Energy Performance of Buildings Directive would make energy certificates mandatory, Italy can make them mandatory immediately, as is already the case in the Netherlands, for instance. Their criteria should be reviewed regularly, which would also address the problem that the quality of many older certificates is weak.
Box 2.6. Measures to promote and facilitate deep retrofitting in OECD countries
Policies from other OECD countries can be replicated in Italy to decarbonise its buildings stock. France has made the rental of extremely energy-inefficient housing outlawed starting in 2023 and plans to tighten this regulation even further in the future. In Scotland, a minimum level of energy performance is required for rented homes from 2022, when a tenancy contract changes, and for all properties from 2025.
The Czech Republic and Slovakia recently phased out public subsidies for the installation of boilers powered by natural gas (Hoeller et al., 2023), in line with the proposed reform of the EU Energy Performance of Buildings Directive. Latvia and Estonia are testing the use of prefabricated multifunctional renovation elements to expedite renovations and minimise disruption for occupants. The Netherlands has implemented a programme enhancing coordination among various renovation steps, reducing the total time for net-zero renovations of social housing to just 10 days (OECD, 2023a).
Latvia’s “Let’s live warmer!” (Dzīvo siltāk!) campaign contributed to the quadrupling of the number of applications for the improvement of heat insulation of multi-apartment residential buildings in just two years (OECD, 2023b).
Further enhancing public awareness about the benefits of energy efficiency upgrades would help accelerating the pace of deep retrofitting, as suggested by the example of Latvia (Box 2.6). Italy’s National Agency for Energy Efficiency is implementing an information and training programme aimed at promoting and facilitating the efficient use of energy. As one of the first initiatives, it has developed a dedicated website which allows consumers to calculate energy savings and evaluate energy efficiency.
Promoting behavioural changes can induce important reductions in energy use at no fiscal cost. Reducing the heating temperature from 20°C to 19°C would cut gas use for residential heating by nearly 10%. If, in addition, heating times were reduced by one hour per day and the heating season by 15 days, Italy could save about 15% of current consumption, with large savings in households energy bills (ENEA, 2022). Temporary measures mandating energy savings in public buildings and multi-apartment buildings during the 2022-23 energy crisis should become permanent.
2.4. Managing the transition and adapting to climate change
2.4.1. The economic and social consequences of the transition
Reducing emissions is key to mitigating climate change but will require profound changes in the Italian economy. Stylised simulations from the OECD ENV-Linkages model (Box 2.7) confirm that planned policies, such as those envisaged in the NECP and the tightening of EU climate legislation, may not be enough for Italy to meet its 2030 emissions reduction targets (Figure 2.23, Panels A and B). The planned increase in policy stringency will have some, limited, macroeconomic costs, with GDP per capita being about 0.7% lower in 2030 relative to a reference scenario before the adoption of the EU Climate Law (Panel C).
Figure 2.23. Planned climate change mitigation policies are expected to result in a limited GDP loss
Effect of tightening climate change mitigation policy on greenhouse gas emissions and GDP per capita
Notes: The 2023 planned policies scenario include policies envisaged in Italy’s NECP and account for the tightening of the EU climate legislation; ESR denotes Effort Sharing Regulation.
Source: OECD calculations based on Château, Dellink and Lanzi (2014), OECD (2022) and IMF (2022).
Box 2.7. The OECD ENV-Linkages model
The OECD ENV-Linkages model is a global, dynamic, and sectoral Computable General Equilibrium (CGE) model that allows to simulate the effects of climate mitigation policies on emissions, macroeconomic variables, sectoral outcomes, and trade (Château, Dellink and Lanzi, 2014). The model is based on a neo-classical economic framework with close to perfect capital and goods markets and vintage capital.
The model also has a detailed sectoral and trade representation, making it well suited to study the effects of climate policy on trade and commodity markets, and closely matches greenhouse gas emissions to economic activities. Given its short time horizon (until 2030), the study does not incorporate the feedback effects of climate change on economic variables. The economic benefits of a reduction of air pollutants on health expenditures and labour productivity are also discarded.
Data sources and calibration
Calibration is done referring to the macroeconomic scenario of the OECD Long-Term model, with projections from the 2022 November OECD Economic Outlook (OECD, 2022b), and complemented using the October 2022 IMF World Economic Projections (IMF, 2022) for countries not covered by the OECD Long-Term model. Two scenarios are considered: a 2020 reference scenario, and an increased ambition scenario, using information on the policies adopted as part of the EU climate policy reform and national policies of EU member states, as described in national energy and climate plans. EU-wide emissions reduction goals by 2030 relative to 1990 in the reference and increased ambitions scenario are respectively 42.5% and 55%.
The transition will reinforce the structural shift away from manufacturing and towards services sectors (Table 2.6). Manufacturing will suffer employment losses, reflecting the impact of higher carbon prices on the production costs of emissions-intensive industrial goods, which will decrease Italy’s competitiveness in energy-intensive sectors (the OECD ENV-Linkages model assumes no policy change in non-EU countries). Given that the incidence of brown jobs is higher in the regions of southern Italy (Box 2.8), there is a risk that local unemployment may rise significantly in some areas. In contrast, less emissions-intensive service sectors will see higher employment growth.
Table 2.6. The transition will lead to significant reallocation of employment and output
Differences between 2020 reference scenario and 2023 updated policies scenario on 2030 outcomes
Note: 1 Employment changes are in thousands of employed persons, normalised by the sector wage.
Source: OECD calculations based on Château, Dellink and Lanzi (2011), OECD (2022a) and IMF (2022).
Employment in the construction and power sectors will expand because of the need to retrofit a large part of Italy’s buildings stock, ramping up green infrastructures and boosting renewable electricity generation, potentially leading to labour shortages in these sectors. Addressing shortages requires raising productivity, including by reducing entry barriers for businesses from other EU countries; raising labour supply, including reducing occupational entry regulations and facilitating skilled immigration (OECD, 2023a); and increasing funding for training and upskilling schemes and career guidance initiatives. Additionally, given that the increase in green electricity generation is expected to be clustered in some areas of southern Italy, policies to promote workers’ geographical mobility would help enabling the reallocation of the workers needed for the operation and maintenance of green power plants, allowing them to contribute to the local economy (Cai et al., 2017).
Box 2.8. Brown and green occupations in Italy
In 2019, almost 5% of workers in Italy worked in a polluting occupation, slightly above the EU average (Causa and Soldani, forthcoming). High-polluting jobs, identified following a methodology similar to Vona et al. (2018), are mostly concentrated in Italy’s South and less prevalent in the Centre and the North (Figure 2.24). The share of workers in green occupations, identified by Causa and Soldani (forthcoming) through an adaptation to European data of the O*NET classification of green work content involved (Dierdorff et al., 2009; Dierdoff et al., 2011), is more homogenous across regions.
Figure 2.24. A higher share of workers works in brown occupations in southern Italy
Share of workers in brown and green occupations, by region, 2019
Source: OECD calculations based on EU-LFS 2019 data and Causa and Soldani (forthcoming) methodology.
Workers in high-polluting occupations tend to be male and foreign-born, have a lower educational attainment and live in non-urban areas (Table 2.7). Workers in green occupations are also more likely to be men but tend to be born in Italy, have a higher educational attainment (see also Basso et al., 2023) and live in urban areas.
Table 2.7. Workers in brown occupations tend to be less educated
Characteristics of workers in brown and green occupations
Note: Averages based on 2018-19 data; * indicates statistical significance at the 99% confidence interval using region-clustered s.e.
Source: EU-LFS data and OECD calculations.
The transition will expand some existing markets and create new ones, including, for instance, that of electric vehicles (EVs) and green energy components, while shrinking others. This may create opportunities but also new challenges for Italy’s large manufacturing sector. Many of the government policies needed to achieve the transition may stimulate innovation by Italian firms, thereby helping them to take some shares in the new green markets. For instance, the government is planning a simplification of the legislation regulating the extraction and processing of critical raw materials. This and other initiatives should be complemented by higher public and private green R&D spending and growth-friendly labour market policies.
Rising carbon prices may have important distributional effects and cause job displacement. The problem of energy poverty is particularly acute in Italy, where the share of income spent on energy by the bottom quintile of households is about 50% higher than the EU average (due in particular to high expenditures on housing-related energy use), whereas that spent by the highest quintile is about the same as the EU average (Menyhert, 2022). Poorer households are more likely to live in a rented property and may find it harder to renovate the spaces where they live to lower energy use, even if financial aid was provided, due to the split incentive problem between landlords and tenants. They are also more likely to own older and less energy-efficient cars and might lack the financing to replace them. Brown jobs are more likely to be performed by workers with lower educational attainment and in more rural areas (Box 2.8), so that their potential disappearance might exacerbate social tensions.
The design of climate mitigation policies should consider distributional aspects (OECD, 2021b). Investment in sustainable mobility alternatives and targeted EVs purchase subsidies can help low-income households deal with the impact of rising car fuel prices by facilitating the purchase of low-carbon cars and reducing the need to own a car. Direct public investment to build and renovate energy-efficient social housing according to high environmental standards, as envisaged in Italy’s NRRP and its REPowerEU chapter, would reduce the risk of energy poverty and directly contribute to housing decarbonisation. Targeted cash transfers may need to be reinforced to deal with the redistributive effects of the transition. To finance these policies, Italy will be able to use funds worth around 0.3%-0.4% of its GDP over 2026-2032 coming from the new EU Social Climate Fund, to be financed with the proceeds of the new EU Emission Trading System for buildings and transport.
Achieving the transition will have a negative impact on Italian public finances. Investment needs to achieve the transition are estimated to be worth over 5% of GDP annually over 2023-30 (MASE, 2023) and some will need to be shouldered by the public sector. Given its limited fiscal space, the government needs to select public investment projects carefully, prioritising those with low cost-benefit ratios, and must prioritise taxes over subsidies to incentivise investments by the private sector. However, higher carbon taxes cannot be expected to be a boon for public finances as they tend to be regressive and most of their proceeds might need to be redistributed to lower-income households as direct transfers.
Although climate change mitigation will be fiscally costly, counterfactual analyses done for other countries suggest that the public-debt-to-GDP ratio may be far higher under inaction over the longer term, as governments will need to bear most of the costs of uncontrolled extreme weather events (Office for budget responsibility, 2021; The Network of EU IFIs, 2022). The Italian government should carry out a comprehensive assessment of the combined impact of the climate transition and climate change on fiscal sustainability. This would help designing fiscally responsible mitigation policies. It can also strengthen the use of green bonds to mobilise public funds to finance green investments, as this facilitates green accounting.
Excise taxes on fossil fuels currently generate almost 1.5% of GDP in revenues every year. The government will need to devise other taxes to make up for the expected shortfall in fossil fuel excise tax revenues as fossil fuels use will gradually decrease. Italy also taxes the consumption of electricity. This decreases price incentives to electrify end uses but may provide a backstop for public finances. One strategy to avoid conflicts between environmental and fiscal objectives can be to temporarily reduce existing electricity taxes and increase carbon taxes in a revenue-neutral way. Eventually, as the energy system approaches full decarbonisation, electricity taxes can be increased (OECD, 2019b). Alternatively, in transport, another option to make up for the loss of fossil fuel taxes might be to gradually shift from taxes on fuel to taxes on distances driven (OECD/ITF, 2019).
2.4.2. Adapting to climate change
Climate change is increasing the frequency of climate-related hazards, such as extreme precipitations, droughts, and heatwaves, to which Italy is heavily exposed (Figure 2.25). Given Italy’s geographical structure and high artificial soil coverage (the highest in the EU), extreme precipitations have a high probability of causing flooding and landslides, as confirmed by recent events. Climate-related hazards can damage critical infrastructure, disrupt supply chains, and harm directly exposed sectors such as agriculture and tourism (Mariani and Scalise, 2022; Accetturo and Alpino, 2023), as well as manufacturing and service activities (Cascarano, Natoli and Petrella, 2022). Extreme weather events are projected to cause cumulated infrastructural damages of about 10% of GDP over 2021-30 (MIT, 2022). Further, long periods of very high temperatures, which have increased significantly over the past decades, can increase heat stress and reduce labour productivity (Heal and Park, 2015; Zander et al., 2015). Rising temperatures alone might decrease Italy’s long-run GDP growth potential by about a tenth (Brunetti et al., 2022). Italy’s short-time work scheme (‘Cassa integrazione’) was recently amended to cover instances of suspension of work due to temperatures above 35 degrees Celsius.
Figure 2.25. Italy is highly exposed to extreme heat
Share of population exposed to extreme heat
Note: Hot summer days are those with maximum temperature above 35 degrees Celsius.
Source: OECD IPAC Climate Action Dashboard (Maes et al., 2022).
To adapt to climate change, the Italian government has developed, but not yet approved, its first National Climate Change Adaptation Plan (NAP, Box 2.9). One of the key goals of the NAP is to set up a national governance mechanism for climate adaptation through the development of a National Observatory on climate. The observatory will lead the approval and prioritisation of interventions, allocate resources, and monitor and evaluate adaptation progress and effectiveness. The NAP also foresees other practical measures to facilitate coordination and knowledge exchange across levels of government, including the establishment of a permanent forum and of a dedicated research programme. A key element of Italy’s NAP is that it includes a climate risk review, which provides an overview of observed and projected climate hazards in the country under three climate scenarios. The approval of the NAP is set to be followed by the planning and implementation of adaptation actions in specific areas and sectors, which will converge in sectoral and inter-sectoral plans outlining the specific interventions to be implemented.
While the NAP contributes to map existing EU, national and regional funding sources that can potentially finance adaptation actions, it does neither assess existing levels or sources of funding nor total funding needs for its envisaged actions. Italy’s NRRP initially allocated funds worth about 0.5% of GDP in total for adaptation investments, but a part of these funds was cut with the recent NRRP reform. A complementary funding strategy would increase the likelihood of successful implementation of the NAP and contribute to effective adaptation.
Box 2.9. Italy’s National Adaptation Plan
Building resilience to the impacts of climate change
Recognising the growing impacts from climate change and the need to enhance adaptive capacity, Italy has recently developed its first National Climate Change Adaptation Plan (NAP), to be released in the course of 2023. Spearheaded by the Ministry of the Environment and Energy Security, the NAP aims to strengthen the enabling environment for climate change adaptation and provides a framework to assess climate risks, with a view to supporting the planning and implementation of climate adaptation actions at national, local, and sectoral level.
The NAP is to be followed by a set of sectoral and inter-sectoral plans that will outline the specific interventions to be implemented. For these plans to effectively contribute to build climate resilience, it will be critical to develop a comprehensive climate risk assessment, including downscaled risk projections under different warming scenarios. The NAP’s review of existing climate hazards provides a starting point that needs to be further integrated with spatially bound information on projected exposure and vulnerabilities of people, assets, and sectoral activities. All these elements are critical to effectively identify adaptation objectives and targets and to prioritise actions at local and sectoral level. For example, the Slovak Republic has assessed the vulnerability of its population at the municipal level with a view to better targeting adaptation interventions.
Implementation relies on the engagement of all stakeholders and on specific measures and targets
While the Ministry of the Environment and Energy Security plays a key coordinating role, the implementation of adaptation actions relies on the engagement of all sectoral and subnational stakeholders. Therefore, a clear allocation of roles and responsibilities is needed. Italy’s NAP does not provide this element, though it foresees the definition of roles and responsibilities as part of the steps following its publication.
Clear and specific measures, targets and timelines for climate adaptation are pivotal to orientate policy and project implementation across geographies and sectors. The NAP provides a set of more than 350 suggested actions that could be taken to strengthen climate resilience, ranging from soft (i.e., measures focusing on information and governance, about 75%) to green (i.e., ecosystem-based, about 15%) and grey (i.e., infrastructure and technology, about 10%) measures. While this list of measures can provide a good base to inform and inspire regional and sectoral stakeholders, their inclusion in sectoral plans needs to go hand in hand with a clear definition of priorities, costs, and funding streams. For example, in the United Kingdom, the Climate Change Risk Assessment identifies adaptation objectives, linked to identified risks and completed with timelines and progress indicators, to be achieved under the subsequent five years.
One of the key goals of the NAP is the establishment of a national governance mechanism for climate adaptation starting with the development of a dedicated National Observatory. The observatory has the potential to accompany sectors and subnational governments in the definition of roles and responsibilities, adaptation priorities and targets as well as to facilitate cross-agency coordination and capacity building at all levels of government.
Concrete adaptation actions in Italy should encompass a range of measures. Investments in river embankments would decrease the risk of flooding in high-risk areas. Planting trees, devising green roofs, and replicating natural drainage systems in cities would contribute to limit stormwater runoff, thus reducing the risk of flooding, and decrease urban heat. Increasing the penetration of cooling systems and improving buildings isolation would increase resilience to heatwaves. Reducing the leakage rate in water pipes, which is currently among the highest in the EU, would increase water storage levels. Engaging in rainwater harvesting (the collection and storage of rain) and other natural water retention measures would reduce stress on freshwater resources, which is among the OECD highest (Figure 2.26), increase resilience to droughts, reduce the risk of flooding and lead to water bills savings. Regulations preventing the construction of new buildings and the extension of existing ones in areas at high risk of hydrogeological disasters should be implemented strictly.
Figure 2.26. The risk of water stress is high in Italy
Ratio of total water demand to available renewable surface and groundwater supplies (water stress risk)
Note: Water demand include domestic, industrial, irrigation, and livestock uses. Available renewable water supplies include the impact of upstream consumptive water users and large dams on downstream water availability.
Source: Kuzma et al. (2023).
The use of private insurance mechanisms among households and firms should be promoted. This would ensure the financial coverage of climate-related disasters. It may also incentivise individual risk prevention behaviour if policyholders engaging in adaptation measures were offered reduced premiums. The Italian government might also consider making climate-related private insurances mandatory in the long term so as to limit the increase in public debt expected due to climate change.
2.5. Recommendations
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