Malta Urged to Phase Out Energy Subsidies Gradually

Malta’s long-standing policy of subsidising energy costs through fixed pricing mechanisms has provided short-term relief to households and businesses in the wake of global energy shocks. However, a recent study by the Central Bank of Malta (CBM) presents a sobering analysis: these subsidies, while protective in the immediate term, pose mounting long-term fiscal, environmental, and structural risks.

The discussion paper, written by Dr Noel Rapa, who leads the Economic Research and Modelling Department at the Central Bank of Malta, advocates for a gradual and structured reduction of the country’s energy subsidies. The study underscores that indefinite continuation of fixed-price energy support may undermine Malta’s macroeconomic stability, distort investment incentives, delay decarbonisation targets, and strain public finances.

Historical context: Subsidies introduced in crisis response

In 2022, the government of Malta implemented broad energy subsidies as a policy response to the sharp rise in global energy prices that followed Russia's military actions in Ukraine. These subsidies froze retail electricity prices and capped pump prices for petrol and diesel. It is worth noting that electricity tariffs in Malta have been frozen since 2014, and the cost of petrol and diesel has remained constant since 2020.

These policy measures insulated Maltese households and businesses from the worst of the international energy crisis, offering immediate economic and political benefits. However, the subsidies were applied indiscriminately, benefiting both lower- and higher-income groups without targeting or means testing.

Short-term benefits masked deeper economic risks

According to the CBM study, the subsidies delivered measurable short-term benefits. In 2023, Malta’s real GDP was estimated to be 1.3% higher than it would have been without the subsidies. Similarly, headline inflation was approximately 1.2 percentage points lower, offering significant protection against global price volatility.

Households with lower incomes, who allocate a larger share of their earnings to energy expenses, experienced a comparatively greater benefit. In the absence of subsidies, these households would have faced inflation rates nearly double those experienced by higher-income groups.

Yet these advantages came at a significant cost. By 2024, the subsidies had added four percentage points to Malta’s public debt-to-GDP ratio. Moreover, the artificially low energy prices dulled market signals that would typically encourage energy conservation and investment in cleaner alternatives.

Suppressing the green transition

One of the study’s most critical findings relates to the environmental consequences of fixed energy prices. The CBM argues that the subsidies have effectively stalled Malta’s transition toward renewable energy and energy efficiency.

If market forces had been allowed to operate freely—i.e., if energy prices had increased in line with global trends—both households and businesses would have had stronger incentives to shift to clean energy solutions.

Simulations within the report suggest that in the absence of subsidies, Malta could have achieved:

• A 30% increase in renewable energy infrastructure investment by 2022
• A 10% sustained increase in green energy investments in subsequent years
• An energy mix with 1.5 percentage points more renewables
• A 5% reduction in greenhouse gas emissions as early as 2022

In short, the report concludes that the fixed-price policy, though effective at cushioning consumers, delayed Malta’s progress toward its EU-mandated climate goals.

Structural vulnerabilities and fiscal risks

The report also highlights several structural imbalances that have been exacerbated by the energy subsidies. Firstly, the reliance on imported fossil fuels has increased Malta’s vulnerability to external shocks and contributed to a worsening trade balance.

Secondly, the long-term fiscal implications are potentially unsustainable. Subsidies reduce the government’s fiscal space and risk crowding out essential public investments in health, education, infrastructure, and climate adaptation.

Moreover, the CBM warns that retaining a fixed-price regime limits Malta’s capacity to respond to future energy price volatility. If global energy prices rise again, maintaining the current subsidy structure would expose public finances to renewed pressures.

Transition strategies: Abrupt vs gradual exit

The study explores several hypothetical exit strategies for phasing out the subsidies:

Immediate withdrawal in 2025: An abrupt and unannounced end to subsidies would likely trigger economic contraction, sudden inflationary pressures, and social discontent. Lower-income households would bear the brunt of the impact, with serious implications for inequality and political stability.

Gradual phase-out from 2025 to 2027: A three-year transition period would reduce adjustment shocks but could still expose the economy to volatility, particularly if fossil fuel prices remain high.

The preferred approach, according to the CBM, is a gradual phase-out coupled with fiscal recycling strategies. This means redirecting the fiscal space freed by subsidy removal into targeted green investments and social protection measures.

Policy recommendations: Balancing equity, stability, and sustainability

The CBM study outlines a comprehensive policy approach aimed at ensuring a socially just and economically sustainable energy transition:

Phased removal of subsidies

A clear, well-communicated timeline for phasing out subsidies would allow households and businesses to adjust incrementally. The transition should avoid abrupt shocks that could destabilise the economy.

Green capital subsidies

Redirecting public funds toward renewable energy incentives—such as subsidies for solar panels, energy-efficient appliances, or building retrofits—would support long-term energy independence and emission reductions.

Targeted support for vulnerable groups

Means-tested financial transfers or energy vouchers could protect lower-income households from energy poverty, mitigating the social impact of higher energy prices. However, the study notes that such transfers alone do little to promote clean energy adoption.

Integration with climate objectives

Energy policy reform should be explicitly aligned with Malta’s national climate strategies, including EU Fit-for-55 targets and decarbonisation commitments.

Institutional transparency and credibility

The success of any exit strategy depends heavily on public trust. Policymakers must ensure that reforms are transparent, evidence-based, and clearly communicated to the population.

A caution against policy inertia

The CBM study concludes with a stark warning: the indefinite continuation of Malta’s fixed-price energy policy risks undermining both fiscal sustainability and environmental responsibility.

By suppressing market signals and delaying structural adjustments, the subsidy regime may lead to mounting public debt, economic distortions, and failure to meet EU climate requirements. The only credible alternative is a transparent, phased, and targeted withdrawal strategy that shifts the country from crisis response to long-term resilience.

The broader European context

Malta is not alone in grappling with the dilemma of balancing short-term energy affordability against long-term sustainability. Across the European Union, several member states introduced temporary energy subsidies in the aftermath of the 2022 energy shock.

However, many have since begun to taper these supports in line with falling global energy prices and increasing pressure to meet climate obligations. In this regard, Malta’s continued reliance on fixed-price subsidies is becoming an outlier.

The European Commission has encouraged member states to replace broad-based subsidies with more targeted, efficient, and environmentally sound energy support schemes. Malta’s strategy, therefore, faces not only internal fiscal and environmental constraints but also growing external pressure to align with broader EU norms.

Conclusion

Malta’s energy subsidy policy, born out of crisis, has arguably served its immediate purpose of stabilising prices and protecting vulnerable consumers. However, as the energy shock recedes and climate goals become increasingly urgent, the cost of maintaining these subsidies continues to rise—economically, environmentally, and structurally.

The Central Bank of Malta has laid out a reasoned, evidence-based argument for reform. A phased, targeted exit strategy that redirects public funds toward renewable energy and supports the most vulnerable is not only economically sound but also morally and environmentally necessary.

The choice now lies with policymakers: whether to heed the warning signs and chart a path toward long-term sustainability or to maintain the status quo and risk deeper systemic imbalances.

FAQs

What are Malta’s energy subsidies?
Malta’s energy subsidies are government-funded measures that fix electricity and fuel prices below market levels to shield consumers from global energy price increases.

Why were the subsidies introduced?
The subsidies were introduced in 2022 following a surge in global energy prices, largely driven by geopolitical tensions, particularly Russia’s invasion of Ukraine.

How have subsidies affected Malta’s economy?
In the short term, they boosted GDP and reduced inflation. However, they also increased public debt and delayed investments in renewable energy.

What does the Central Bank recommend?
The Central Bank recommends a gradual, transparent phase-out of subsidies combined with social support and green investment incentives.

Will removing subsidies increase inflation?
Yes, a sudden removal could spike inflation. However, a phased approach with fiscal recycling could help mitigate inflationary pressures.

How will low-income households be affected?
Lower-income groups, who spend more on energy, would be most affected without targeted support. The CBM recommends targeted transfers to protect them.

What are the environmental concerns linked to subsidies?
Subsidies keep fossil fuel prices low, discouraging the shift to clean energy and slowing Malta’s progress in reducing emissions.

What is fiscal recycling in this context?
Fiscal recycling refers to reallocating funds saved from subsidy removal into areas like green energy investment and social support schemes.

Is Malta falling behind EU climate targets?
Yes, the continued use of fixed-price subsidies hampers Malta’s ability to meet EU-mandated decarbonisation and energy efficiency goals.

What is the risk of continuing subsidies indefinitely?
Indefinite subsidies may lead to unsustainable debt, reduced economic resilience, and failure to transition to a low-carbon economy.