In the latest edition of IPF Notes, Leonarda Srdelić examines the design and implications of government interventions in Croatia’s energy market during the 2022–2025 period. The analysis underscores the need for a gradual withdrawal of broad-based energy subsidies, with a targeted redirection of support to vulnerable households. The findings highlight the importance of developing a sustainable energy policy framework that appropriately balances social protection, market efficiency, and climate objectives.

Following the energy price shock triggered by the war in Ukraine, the Croatian government implemented a comprehensive set of crisis measures beginning in early 2022 to mitigate the impact of elevated energy prices on households and firms. Over the 2022–2025 period, seven emergency support packages were introduced, with a cumulative value of approximately EUR 6.4 billion. These measures included temporary reductions in VAT rates on energy products, administrative price caps and freezes on retail electricity and gas, as well as direct subsidies to energy providers to compensate for the discrepancy between regulated and market prices.

Although the seventh package signalled a shift away from untargeted support, key measures were extended in March 2025, including the reduced VAT rate and regulated prices for household consumers. These extensions further delay the transition toward market-based pricing mechanisms.

In the short term, the interventions contributed to price stability by containing increases in retail electricity and gas prices, thereby mitigating inflationary pressures and preserving the households purchasing power. The liquidity position of firms was also supported. From a broader perspective, the measures contributed to social stability by lowering the risk of public discontent, social unrest, or political instability.

Nonetheless, the long-term fiscal and structural implications merit careful consideration. Continued application of reduced VAT rates and energy subsidies may increase pressure on the fiscal deficit and public debt or require the reallocation of budgetary resources at the expense of other policy priorities. Moreover, prolonged price interventions distort market signals. Artificially low energy prices weaken incentives for energy efficiency improvements, conservation, and investment in new production capacity. Such distortions can lead to inefficient consumption patterns, reduced system resilience, and delayed adjustment to long-term market and climate-related challenges.

In light of these trade-offs, a clear and credible exit strategy from untargeted energy support measures appears necessary. This should involve a shift toward more targeted social protection instruments, complemented by reforms that enhance energy efficiency, support low-carbon investment, and strengthen the alignment of energy pricing with environmental objectives.