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2 maltatoday | SUNDAY • 20 JULY 2025 NEWS CONTINUED FROM PAGE 1 The CBM paper estimates that in 2023, real GDP was 1.3% higher than it would have been without the energy subsidies and head- line inflation about 1.2 percent- age points lower. Lower-income households, who spend a larger share of their income on energy, benefitted the most. Without the subsidies, they would have expe- rienced almost twice the level of inflation compared to wealthier households. However, these short-term benefits came at a cost. By 2024, subsidies are estimated to have added four percentage points to the public debt-to-GDP ratio. They also discouraged invest- ment in renewable energy and energy efficiency, slowed Malta's progress toward its climate goals, and stimulated demand for im- ported fossil fuels, worsening the trade balance. According to the study, Malta's energy pricing strategy now fac- es a critical turning point. The fixed-price policy has kept retail prices artificially low, weakening market signals that would other- wise encourage conservation and clean energy investment. The study warns that continuing the subsidies risks entrenching fiscal imbalances and delaying Malta's green transition. The paper warns that indefinite continuation of subsidies could crowd out other areas of govern- ment spending and expose public finances to energy price shocks. While Malta's current account remains in surplus, the reliance on imported fossil fuels and the lack of adjustment in consump- tion patterns could lead to a de- terioration in external balances over time. The environmental impact of subsidies The study shows that had Malta not adopted fixed energy prices through subsidies, the country would likely have seen better en- vironmental results. Without these subsidies, fossil fuel (brown energy) prices would have risen, pushing more people and businesses to switch to re- newable sources (green energy). This would have made green in- vestments, such as solar panels and wind turbines, more attrac- tive and profitable. As a result, investment in clean energy infra- structure could have jumped by nearly 30% by 2022 and remained 10% higher in the years after. The shift would also have in- creased the share of renewable energy in Malta's overall energy mix, with green electricity mak- ing up almost 1.5 percentage points more than under the cur- rent fixed-price system. At the same time, higher energy costs would have encouraged people to use less energy overall. To- gether, these changes would have significantly cut greenhouse gas emissions, by about 5% as early as 2022. In short, while energy subsidies helped protect consumers from rising costs, they also discour- aged cleaner energy use and de- layed Malta's progress in reduc- ing pollution and moving toward sustainability. Which exit strategy? The paper simulates several exit strategies. An abrupt and unan- nounced removal of subsidies in 2025 would cause a sharp eco- nomic contraction and spike in inflation, with disproportionate hardship for poorer households. In contrast, a more gradual phase-out between 2025 and 2027 would ease adjustment pressures but may still expose the economy to volatility, especially if fossil fuel prices rise again. The study finds that combining a gradual tapering of subsidies with fiscal recycling strategies yields the most balanced out- come. In particular, reallocating fiscal savings toward green cap- ital subsidies would boost re- newable energy investment and support Malta's competitiveness. Targeted transfers to vulnerable households could help protect purchasing power and limit so- cial inequality, although such transfers alone do little to stimu- late clean energy investment. The study recommends a clear- ly communicated, phased exit strategy combined with targeted social support and green sub- sidies. This approach supports macroeconomic stability, pro- tects vulnerable households, and aligns Malta's energy policy with its EU climate commitments. Moreover, energy support poli- cies must evolve to support Mal- ta's decarbonisation targets. This includes ensuring that long-term strategies are explicitly tied to climate objectives and energy ef- ficiency goals. The study ends with a warning. When used over an indefinite period, "the fixed energy price system undermines the efficien- cy of price signals, delays neces- sary structural adjustments, and may place increasing pressure on government finances and exter- nal balances". The only alterna- tive to this is "a well-sequenced, transparent, and credible exit strategy" which would enable Malta "to transition from cri- sis response to long-term resil- ience." A Central Bank of Malta study warns of economic risks if Malta abruptly ends its fixed-price energy policy but recommends a phased withdrawal combined with green investment and targeted support to cushion the vulnerable Central bank urges end to fuel subsidies Fuel prices have remained static since 2020, following a 7c per litre reduction in excise taxes The study on energy subsidies was presented in a discussion paper authored by the Central Bank of Malta