Effects of Energy Price Shocks on Germany’s Economy and Private Households

Abstract

The massive rise in energy prices in the wake of the Ukraine crisis and the Western sanctions against Russia is putting a great strain on the economy and consumers. Germany is particularly dependent on Russian energy imports. With the desire to reduce dependence on Russian imports, the pressure for climate neutrality is intensifying. The reports of the IPCC recently show again the high pressure to act. The EU is aiming for climate neutrality by 2050, and Germany would like to reach the target by 2045.This chapter aims to examine the macroeconomic effects of the drastic price increase for energy sources in Germany. For this purpose, a scenario in which energy prices on the world market experience a significant shock is compared with a reference scenario until 2030. The scenarios are implemented in the economy–energy–environment model PANTA RHEI. The scenario comparison shows the different effects of energy price increase on important macroeconomic variables such as price level for consumers, GDP, and employment. Distributional effects across income classes are considered with particular attention to low-income households, which spend higher shares of their income for energy and cannot afford to pay for energy efficiency improvement. A brief comparison with other modelling studies shows that climate mitigation has a positive effect on the economy as a whole and can be an important lever for containing the losses caused by the current high energy prices.