Austria has set an ambitious objective of net zero emissions by 2040. Achieving this will be challenging. While domestic energy production is largely decarbonised, the country relies on carbon-intensive gas and oil imports in particular for transport and heating use. Emissions have not decreased significantly in transportation and industrial processes; and energy consumption in buildings is comparatively high. Higher and more harmonised carbon prices across sectors will be needed. In transport, policies need to include smart urban planning, better targeted and efficient fiscal support for green travel modes, and investment in the charging infrastructure. Expanding green energy production would benefit from simpler planning procedures for renewables infrastructure investment and expanded electricity grid and storage capacity. Reducing emissions from residential heating will require support to speed up renovations and heating-system replacements, but also better regulation and standards. Austria will also need to adapt to a changing climate, in particular because a large part of the population is exposed to increasing flood risks and insurance coverage is relatively low.
OECD Economic Surveys: Austria 2024
Abstract
Austria has an ambitious schedule for the reduction of greenhouse gas emissions (GHG). In particular, the government has announced a net zero objective for 2040, a decade ahead of the EU’s target. Before that, as part of the Paris Agreement, the European Commission has committed to reduce emissions in 2030 by 55% relative to 1990 levels in its Nationally Determined Contribution. The EU “Fit for 55” package has also recently tightened the emissions objectives for EU countries, by demanding a reduction of 62% in emissions in the sectors covered by the EU Emissions Trading Scheme (ETS) and stricter targets for sectors covered by the Effort Sharing Regulation (ESR) including a 48% reduction in emissions in 2030 compared to 2005 levels for Austria (OECD, 2023[1]). Those objectives would imply a reduction of net emissions per capita from around 8.1 tonnes of CO2 equivalent (tCO2e) in 2022 to approximately 4.5 in 2030 and 0 in 2040 (Figure 5.1)
GHG emissions and ESR sectors emissions, per capita
Note: The 2030 targets for total GHG emissions including and excluding LULUCF are based on IMF estimates which are presented for illustrative purposes, as the Nationally Determined Contribution in the framework of the Paris Agreement is submitted for the EU as a whole.
Source: OECD calculations based on IMF (2024), IMF Climate Change Dashboard; OECD (2024), Demography and Population Statistics (database); Austrian greenhouse gas emissions from 1990 to 2022, by CRF sector (UNFCCC); and EEA. (2022), Greenhouse gas emissions under the Effort Sharing Decision (ESD).
Austria’s emissions have decoupled from growth: for example, in 2022, GHG emissions declined by almost 6% while GDP growth reached 4.8%. In particular, Austria’s carbon intensity of production has fallen over the last 20 years, but less than in other OECD members. Between 2000 and 2021, while GDP grew by 30% in real terms, emissions fell by around 4%. This mostly came from a decarbonisation of energy use, while the reduction in the energy intensity of production was limited (Figure 5.2, Panel A). The main challenges for Austria have been the rising emissions from energy use in transport and the difficulties in decarbonising industrial processes for the production of steel and cement (Figure 5.2, Panel B).
Note: In panel A, the black triangle is the growth in total GHG emissions excluding LULUCF between 2000 and 2021. Coloured bars represent the sum of annual contributions to the change by source, approximated by the log-difference. The Kaya equation is a simple decomposition of the level of GHG emissions into emissions per unit of total primary energy supply (“carbon intensity”), energy use per unit of real GDP (“energy intensity”), real GDP per capita, and population. In panel B, the category “residential and other sectors” includes emissions from fuel combustion in households, commercial and institutional buildings, and in agriculture, forestry, fishing and fishing industries such as fish farms.
Source: OECD (2023), OECD Environment Statistics (database); Demography and Population Statistics (database); National Accounts Database; Austrian greenhouse gas emissions from 1990 to 2022, by CRF sector (UNFCCC) and IEA (2023), IEA World Balances (Energy).
Domestic production of energy is largely decarbonised, but Austria imports three fifths of its energy needs for total final consumption, which is typically derived from oil (for transport) and natural gas (for heating and industry). Emissions from the use of energy in the transport sector – mostly from road transport – represented 28% of emissions in 2022. Industrial processes – mostly emissions linked to the production processes for iron, steel and cement – represented more than 20% of emissions (Figure 5.3). Those shares are higher than in peer countries. The remaining emissions notably include those related to the use of energy in energy industries, manufacturing, construction and buildings, as well as agriculture, while over 2018 and 2022 land-use, land-use change and forestry (LULUCF) have sunk 4% of emissions. Based on current and announced policies, there is a large risk that Austria will not achieve its medium- and long-term targets. Projections suggest that, even with measures included in its currently discussed National Energy and Climate Plan (NECP), emissions may decrease by only 38% by 2030 relative to 2005 and by 71% by 2050 (Table 5.1).
Level and distribution of GHG emissions by sector, 2021 (tCO2e per capita)
Note: GHG emissions include emissions from LULUCF (Land Use, Land Use Change and Forestry). The data include greenhouse gas emissions and removals taking place within national territory and offshore areas over which the country has jurisdiction.
Source: OECD calculations based on OECD (2024), OECD Environment Statistics (database) and Demography and Population Statistics (database).
Greenhouse Gas Emissions by sector, in million tonnes of CO2 equivalent
Note: “GHG inventory” reports actual historical GHG emissions. The “With existing measures” scenario considers all policy measures implemented by 1st January 2022. The “With additional measures” scenario is based on the targets set in the country’s National Economic and Climate Plan. The “Transition scenario” proposes a pathway to achieve net zero emissions in 2040.
Source: (Umweltbundesamt, 2023[2])
Notwithstanding mitigation efforts, countries, including Austria, will need to adapt to climate change. Like for the rest of Europe, Austria’s average annual temperature has been rising more quickly than the world average, gaining 2°C since 1880. In the Intergovernmental Panel on Climate Change (IPCC)’s scenarios limiting global warming to 2°C, temperatures are expected to increase further by 1.0 to 1.6°C in 2100 relative to the 1995-2014 average (World Bank[3]). As a landlocked country with a continental and temperate climate, Austria will be relatively protected from the worst effects of climate change. Still, severe precipitation events have already become more frequent (OECD (2023[4])) and the intensity of heavy rains in summers and winters and subsequent floods is likely to increase, in particular in central and eastern regions.
The remainder of this chapter first considers economy-wide emission-reduction policies, including carbon pricing and green investment, along with support measures to address the socio-economic impacts of the green transformation. The chapter then examines emission mitigation strategies in key sectors: transport, buildings, energy supply, and iron and steel production. Finally, it discusses challenges in adapting to climate change.
Austria needs to increase the price of carbon further and reduce fossil fuel subsidies
Effective carbon prices in Austria are higher than European and OECD averages, but low relative to peer countries. In addition, pricing is heterogeneous across sectors, with a significant share of emissions under-priced in some sectors with significant emissions. The net effective carbon price in Austria aligns with European averages for sectors under the European ETS, such as industry and power generation. However, carbon taxation is relatively low for transportation (reflecting lighter gasoline and diesel taxes) and buildings (reflecting lower taxation on heating oil and natural gas) (Figure 5.4). While 83% of GHG emissions were positively priced in 2021 (against 68% in the OECD on average), only 37% were effectively priced above EUR 60 per tCO2e (a widely used benchmark of a low-end estimate of the social cost of carbon in 2030). This results from the low price outside of EU-ETS sectors. In particular, 0.3% of emissions in residential energy use were priced above this level against more than a quarter on average in the EU.
Austria is making progress in carbon pricing on sectors outside the EU-ETS via its recent eco-social tax reform (see Chapter 2). The eco-social tax reform introduced a carbon pricing mechanism on sectors, such as transport and buildings, which are not covered by the EU trading system. The mechanism started operating in October 2022 and sets a gradually increasing fixed price on those emissions until 2025. This will then be incorporated in the new EU ETS (“ETS 2”) which is set to come into force in 2027. The new carbon price is aligned with a similar system implemented by Germany in 2021 and should thus prevent significant carbon leakage in particular in the transport sector.
Steeper price increases under the eco-social tax reform should be considered. The scheduled prices are relatively low: they started from EUR 30 per ton in 2022 and will rise to EUR 55 per ton in 2025. By comparison, prices in the current EU-ETS fluctuated between EUR 80 and EUR 100 per ton in 2023. Evidence suggests that the eco-social tax increases will not bring substantial emissions reductions. Based on OECD estimates of the semi-elasticities of emissions responses to effective carbon rates (ECRs), an increase of EUR 30 in carbon prices results in a long-term reduction in emissions of 13% in the transport sector and 8% in the buildings sector (D’Arcangelo et al., 2022[5]). In contrast, the objectives set in the updated EU Effort Sharing Regulation demand a reduction of emissions of 48% by 2030 in non-ETS sectors such as transport and buildings compared to 2005 levels. In 2019 in Austria, emissions in transport, buildings, waste & agriculture, the main non-ETS sectors, were only 13% below their 2005 level (-22% in 2022).
Net effective carbon rates, by sector and fuel, 2021
Note: Effective carbon rates for total excluding biofuels CO2, average in EUR (real 2021 base) per tonne of CO2 equivalent. The shown rates refer to 2021, so they do not reflect the consequences of the implementation of the eco-social tax reform, which imposes a tax on carbon in non-ETS sectors from EUR 30 per ton in 2022 to EUR 55 per ton in 2025.
Source: OECD (2023), "Environmental policy: Effective carbon rates", OECD Environment Statistics (database).
Reducing fossil fuel subsidies would also raise the effective carbon price. Austria implicitly supports fossil fuels, mostly through tax expenditures. These include a partial refund of energy taxes paid by energy-intensive businesses, and lower tax rates on gasoline and diesel for specific uses (OECD, 2023[6]). Recent estimates, excluding most of the relief measures implemented against inflation since 2022, suggest that the fiscal cost of this support amounts to between EUR 0.8 billion and EUR 6 billion (OECD, 2023[6]; Plank et al., 2023[7]; Schnabl et al., 2021[8]; Kletzan-Slamanig et al., 2023[9]). It is below the majority of OECD and EU countries (relative to the size of its economy) but significantly higher than the Scandinavian countries, Switzerland, and Portugal. The government could improve the systematic monitoring and evaluation of those tax expenditures and other subsidies which are counterproductive for climate change mitigation, including their potential role in increasing emissions (Kletzan-Slamanig et al., 2022[10]). In 2023, the Ministry of Finance introduced for the first time an overview of “climate counterproductive measures” in ESR sectors in the annual climate and environmental report, a supplementary budget document (BMF, 2023[11]). Indeed, significant progress has been made regarding budget tagging and green budgeting in general after a late start (OECD, 2022[12]). This is a welcome step towards such a consistent analysis of tax expenditures and fossil fuel subsidies, their quantification, and their eventual phaseout. A particular challenge, which has also been identified in the second module of the green spending review cycle started in 2022, will be the extension of those green budgeting measures at the subnational levels where the transparency and the uniformity of data reporting (both on funding and climate impact) are lacking.
Investment and innovation need to rise to support the green transformation
Investment needs for the green transformation are substantial. A recent analysis by the Austrian Environment Agency forecasts additional investment valued at 4.2% of GDP per year to achieve the 2040 net-zero objective. The government will fund a large share of the investment: Austria’s 2019 NECP estimated that the public sector will cover 60% of investment costs against 45% on average in Europe. Such substantial expenditures will require a supportive and efficient framework for the administration of investment and other environmental expenditures.
Improvements to public procurement processes would facilitate green investment. The efficient implementation of new infrastructure investment plans will require improvements in the competitiveness of the procurement process, bidder selection, and project appraisal and selection, where Austria lags behind the average OECD country (OECD, 2023[13]). In particular, the country could provide additional mechanisms to facilitate access to procurement opportunities by suppliers of all sizes such as simplifying administrative processes, and ensure the publication of the guidelines for the procurement of infrastructure projects (OECD, 2020[14]; Global Infrastructure Hub, 2020[15]). The duration for awarding contracts can be relatively high while the quality of contract management for public-private partnerships (PPPs) also lags the average developed country resulting in a low value of closed PPP deals (Global Infrastructure Hub, 2020[15]). As part of the Recovery and Resilience Plan, the Ministry of Finance plans a spending review on the sustainability of public procurement in 2025.
Stronger co-ordination in green investment across levels of governments is needed. Austria's federal system allocates a significant portion of responsibilities for green investments to the subnational governments. However, currently the long-term federal infrastructure plan is not aligned with regional development plans (OECD, 2020[14]). It is thus welcome that the Ministry of Finance published a spending review in 2023 analysing synergies in the funding of climate policies between the central government and the federal state. In particular, the report recommended more harmonisation in data reporting and target indicators, a study to prepare a distribution of Austria’s GHG emissions targets between federal states, and the development of incentives within the system of transfers between the central and subnational governments. Indeed, the federal government could incentivise more coordination across government levels by tying more sub-national government funding to the green transformation (Kletzan-Slamanig et al., 2023[16]).
Leveraging fiscal federalism institutions could be relevant in a country where local authorities have few own tax revenues. In practice, the recently passed Municipal Investment Act provides an interesting initiative with the allocation of EUR 1 billion for 2023 and 2024 from the federal government to municipalities, with half earmarked for energy efficiency measures, the switch to renewables, or the expansion and decarbonisation of district air conditioning systems. Further measures could be considered. For example, grants or the distribution of shared tax revenues could be earmarked to specific green transformation objectives (in the spirit of Ecological Fiscal Transfers (Busch et al., 2021[17]; OECD, 2021[18])) as in the “Climate Lens” programme in Canada (Government of Canada, 2023[19]). In that context, progress has been made in the financial equalisation agreement negotiated at the end of 2023 where, as part of the established “Future Fund”, around EUR 600 million are allocated annually to the fields of housing and renovation, and environment and climate, with specified targets to be reached including an increase in the renovation rate to 3% for public buildings and an increase in the share of renewables in final energy consumption by 1 percentage point each year. However, those amounts still represent a minor share of local resources, some indicators (in particular in the field of housing and renovation) are not harmonised between federal states, there is no clear link between allocated resources and performance, and there is no impact on the financial resources that are made available to the subnational governments if the targets are not met (Austrian Parliament, 2023[20]; KDZ, 2023[21]; Bittschi et al., 2024[22]).
Austria has further scope to lead green innovation. The public R&D budget in green technologies is high but lacks focus. In 2021, Austria’s public R&D budget for low-carbon energy purposes amounted to 0.05% of GDP, above most OECD countries. Additional effort is scheduled, as research funding from the Ministry of Finance is scheduled to increase by 5% in 2024. Nevertheless, the current support for green technologies represents a low share of the government R&D budget as most of the budget is allocated to the “general advancement of knowledge”. This lack of focus had been already identified in the 2018 Review of Innovation Policy (OECD (2018[23]) and Chapter 3), although progress has been made recently. For example, as a result of the Research Financing Act passed in 2020, the government has developed two plans for Research, Technology and Innovation (RTI) for 2021-2023 and 2024-2026 which define targets and fields of activities for R&D and which have identified the digital and green transition as key priorities. More focus could benefit Austria and its partners: the country has a relatively high share of patents in environment-related technologies and could thus contribute substantially to the development of the technologies necessary to achieve the green transformation globally. In particular, it has a big comparative advantage in environmental technologies related to the mitigation of emissions in buildings and energy generation (OECD, 2023[24]).
In its updated climate plan, Austria is planning a significant effort on innovation including in international collaborative projects. Significant funds are earmarked for innovation over the next three years (2024-2026). According to the draft plan, EUR 330 million will finance four missions focused on the green transformation, targeting the energy transition, the mobility transition, the circular economy and production technologies, and climate-neutral and smart cities. An additional EUR 520 million will support R&D and demonstration for energy, mobility, and climate neutrality research including EUR 320 million for the greening of industry as part of a “climate and transformation offensive”, funded via the Austrian Climate and Energy Fund (KLIEN), between 2023 and 2027. Austria will also take part in several Important Projects of Common European Interest (IPCEI) at the European level, which are projects carried out by the private sector and supported by at least four EU countries. In particular, one of the four main parts of Austria’s Resilience and Recovery Plan is devoted to the “knowledge-based recovery” and will finance an IPCEI on hydrogen technologies. Austria is also taking part in the IPCEI on batteries. This continues Austria’s active participation in multilateral efforts such as Mission Innovation, a global initiative of 23 countries with the purpose of sharing information on innovation initiatives and promoting public-private collaborations for green innovation.
Addressing the socio-economic consequences of the green transformation
Climate change mitigation policies will have distributional effects and will require accompanying measures to support households and businesses vulnerable to the transition. For example, a recent analysis by the Ministry of for Social Affairs found that the impact of increasing climate risks and of climate policies tend to affect vulnerable groups disproportionately, and has identified key vulnerability factors such as low income, old age, migration background, and low level of education (BMSGPK, 2021[25]). A follow-up study by the Ministry also analysed the different dimensions of the population’s vulnerability to climate change and climate-related policies in key areas of social policy such as health and care, family policy, housing, mobility, and employment, and provides starting points for their green transition, including financing issues (Wirtschaftsforschungsinstitut, 2024[26]).
First, the structure of economic activity will be altered, and this will change the allocation and the remuneration of labour and capital. New types of jobs will emerge, some existing jobs will decline, and required skills will change within jobs (OECD, 2023[27]). Austria’s sectoral specialisation and the preponderance of industry suggests that a larger share of workers work in occupations that could be deemed polluting compared to other OECD countries, which could also be concentrated in some local communities (Borgonovi et al., 2023[28]). However, the size of the overall job turnover in the green transformation is likely to be relatively small compared to overall labour market movements (Chateau, Bibas and Lanzi, 2018[29]). Ensuring that labour markets are sufficiently flexible and improving the dynamism of the economy more generally (see Chapter 3) will thus be essential to smooth the transition. This includes ramping up and adapting active labour market programmes to facilitate the reallocation of workers, and boosting training and skill development to address skills mismatches. Public employment services in Austria already provide information to job seekers regarding green jobs and skills (OECD, 2023[27]) and help them identify “environmentally-oriented production and services” occupations (European Commission, 2021[30]). To anticipate labour needs, public employment services could benefit from moving from their occupation-based approach to a skills-based approach in assessing the needs generated by the green transformation. The government has run “skills assessments and anticipation” for the green transition but those were mostly focused on industries rather than skills, and could also be more differentiated by regions (OECD, 2023[31]).
Regions heavily reliant on fossil fuels or with a high degree of specialisation in sectors affected by the green transition will need support. A recent regional analysis by the OECD has shown that Upper Austria and Styria are among the European regions most exposed to the transition, with high emissions levels and a large share of employment in polluting sectors such as the manufacturing of basic metals and the production of paper products (OECD, 2023[32]). Carinthia and Tyrol have a high share of employment in non-metallic mineral products. To cushion the local impact of the green transition, policymakers may need to reconsider place-based policies and remove obstacles to geographical mobility. The last OECD Austria Economic Survey showed that inter-regional migration in Austria is lower than in peer countries and suggested that reducing barriers to innovative entrepreneurship would have the biggest positive impact on labour mobility. Addressing inefficient restrictions on housing including land-use and rental market regulations (without a detrimental impact via land take, see below, reflected in relatively low national and regional elasticities of housing supply to prices, would also support labour mobility (Cavalleri, Cournède and Özsöğüt, 2019[33]).
Second, the temporary increase in the cost of energy will affect households differentially depending on income levels, residential location, or tenancy level for example, as the past year’s increase in energy prices has illustrated (Blake and Bulman, 2022[34]). Targeted transfers can help offset the regressive impacts of mitigation policies. The eco-social tax reform recycles some carbon pricing revenue into tax rate reductions in lower income tax brackets and the distribution of a cash transfer whose amount is differentiated based on the availability of infrastructure and public transport in the location of residence. Recent simulations suggest that allocating the climate bonus based on income – combined with the reductions in income tax – could be more efficient in jointly supporting economic growth while reducing inequalities (Kettner et al., 2023[35]). Notwithstanding recent improvements, fiscal support for the transition in specific sectors, such as switching vehicles in the transport sector, or heating systems in the residential sector, would also benefit from more targeted approaches (see below).
The green transition will require significant changes in the economy, and policies to address climate change can only be effective if they are well understood in their structure and objectives, perceived as fair, and democratically accepted. This presents at least two important challenges for Austria. First, improving transparency and openness will be essential (see Chapter 3). Austria experimented with inclusive democracy for green policies by creating a Climate Council which gathered 100 randomly selected people to formulate recommendations for the green transition after getting information and support from scientists. The Council came up with 93 recommendations but few have been implemented yet. Second, recent surveys from the European Investment Bank suggest that Austrians are more pessimistic about the impact of climate change on the future of jobs, their purchasing power, and overall quality of life compared to citizens in other European countries, and are less likely to support subsidies for vulnerable firms and workers or higher taxes to finance climate policies (EIB, 2023[36]). They are also less likely to acknowledge the effects of climate change on their lives, and to believe in its human origins. Reducing information and knowledge gaps will be key to building trust and making behaviour more climate-friendly. Disseminating knowledge about climate change and nurturing constructive narratives about climate policies can be achieved through public communication and education campaigns, targeted combating of misinformation, and promoting transparent and accessible political discourse on the design and rationale of climate policies (D’Arcangelo et al., 2022[37]).
Reducing transport emissions requires electrification and changes to urban planning
Transport, Austria's primary source of emissions, is dominated by private car use and road transport, alongside a slow transition to low-emission vehicles. It is also by far the sector with the highest green investment needs. Greening the transport sector requires combining a reduction in transport activity, a shift of travels towards greener options, and the greening of transport technologies (ITF, 2021[38]).
Incentivising densification and smart urban policies
Reform to planning regulation and property taxation can encourage urban densification, reducing transport emissions. Housing supply is less responsive to prices in Austria than in most European countries at both the national and local level (Cavalleri, Cournède and Özsöğüt, 2019[33]; Bétin and Ziemann, 2019[39]). One way forward is therefore to make land-use regulations more flexible in accordance with urban strategies, and more generally allowing densification in areas where demand expands. In particular, building height restrictions could be relaxed in high-environmental-quality areas as current building heights suggest large potential to build higher, and more generally maximum density restrictions could be loosened (Jedwab, Barr and Brueckner, 2022[40]). Enhancing tax autonomy on local property taxation could boost the responsiveness of housing supply by strengthening local authorities’ incentives to reduce inefficient constraints on new developments (Dougherty and Kim, 2023[41]). This could be done by increasing the importance of recurrent property taxation and reducing transaction taxes, while updating property values, as mentioned in Chapter 2. Opting for a split-rate design or a land value tax in the long run would further encourage the development of vacant or underused land in suburban areas. More direct instruments can also incentivise densification: road pricing mechanisms (e.g. cordon tolls or flat kilometre taxes), for example, may provide long-run incentives for urban densification (OECD, 2018[42]).
Densification requires good coordination across levels of governments. Local authorities influence densification through responsibility for transport system planning, and regulation of land use and zoning. The coordination of land-use planning in Austria is facilitated by the Conference on Spatial Planning, which co-ordinates spatial planning policies between the three levels of government. In theory, responsibilities and decision-making in urban planning are preferably delegated to the metropolitan rather than the local level to avoid not-in-my-backyard dynamics and foster inter-municipal co-operation, including in the provision of public services and transport (OECD, 2023[43]). Metropolitan areas in Austria exist functionally but do not have a formal or legal status. Intermunicipal cooperation is purely voluntary (although it has been incentivised by Länder e.g. via adjustments on equalisation transfers) despite only 70 municipalities out of more than 2 000 having more than 10 000 inhabitants. Good coordination may thus require new models for intermunicipal cooperation. Today, such cooperation is possible via the formation of local authority associations to manage certain specific areas, and municipalities also have the possibility to merge into a formal higher-level authority called a “territorial municipality” (Gebietsgemeinde). However, multi-purpose associations are rare and no territorial municipality has ever been formed (KDZ, 2021[44]). The government could establish metropolitan transit authorities, which can help promote transit solutions in line with national and local needs. Experience from other OECD countries shows that better coordination of transit management in metropolitan areas can also contribute significantly to higher growth and well-being (OECD, 2015[45]).
Shifting towards active mobility and public transport
Encouraging active mobility and public transport use can significantly reduce emissions. The number of cars is high in Austria relative to the population and car purchases remain significant (Figure 5.5). There is thus a need to promote a shift from motorised to active modes (walking, cycling) for travel within urban areas for example, or shifting from road to rail for regional/intercity travel or freight transport. According to an OECD study, a shift from private cars to urban rail can reduce final energy use per passenger-kilometre by more than 90% and shifting from trucks to freight rail delivers a 72% reduction (ITF, 2021[38]). Given this, Austria’s plans for significant investment in public transport infrastructure are welcome; investments in sustainable mobility account for the single largest item in the National Resilience and Recovery Program.
Source: ITF transport database and Eurostat.
There is room to encourage investments in more walking and cycling. There is strong potential for modal shift for short urban trips: for example, around 20% of car journeys are shorter than 2.5 kilometres and 60% are shorter than 10 kilometres (BMK, 2022[46]). Austria has developed a “Walking Master Plan for 2030” and a “Cycling Masterplan”. The Walking Masterplan targets a 20% share of trips taken by foot in 2030 up from 17% in 2020. Proposed measures include subsidies for pedestrian infrastructure and the mandatory development of local masterplans for large cities. The Cycling Masterplan targets an increase in the share of cycling in the modal split to 13% by 2030 from 8% in 2020. Proposed measures include investment in the expansion of bicycle highways connections for longer-distance traffic, infrastructure for walking and cycling networks, the construction of bicycle parking facilities, awareness raising, and the further development of bike rental systems (Planoptimo and Verracon, 2022[47]). As the planning competence for pedestrian and cycling infrastructure lies with the municipality or federal state level, the national subsidies aim to encourage the responsible planning levels to set-up long-term development goals and design targets for walking and cycling networks. To promote cycling, the government is also proposing a flat rate subsidy of EUR 300 for e-bikes (up to 50% of eligible costs) for enterprises in 2024. Such programs are effective to substitute driving for biking but can be costly, at least when focusing on the impact on emissions given the current social cost of carbon (Anderson and Hong, 2022[48]). To improve the cost-efficiency of the program, the subsidies could be more targeted: for instance, France provides three subsidy levels depending on household income. To promote walking and cycling further, the authorities could also set a lower speed limit in built-up areas (the official limit is 50 km/h); and streamline planning procedures for cycling infrastructure (such as cycling lanes and parking). First steps have been taken or are in discussion in Parliament to improve the quality of cycling and walking via amendments to the road traffic regulations such as regulations for bicycle overtaking distances, and to ease processes for municipalities to implement reductions in speed limits.
Austria has a well-developed urban public transport system, but could improve accessibility in rural areas. Austrians use public transport more often than most EU countries for both urban and longer trips: in particular, Austrians are by far the heaviest users of trams and metros in Europe (European Commission, 2022[49]). However, this masks an important rural-urban divide. In Austria, 40% of the population lives in rural areas, twice the EU share. More than half report problems in public transport access compared to 8% for urbanites, and distances to public transport stops are significantly higher for them (Kastrop et al., 2019[50]; BMVT, 2016[51]). As a consequence, more than a third of households in small cities have more than one car, against 9% in Vienna (Heinrich-Böll-Stiftung, 2021[52]). Facing similar challenges, some countries have implemented “demand responsive transport” programs, with bookable public transport operating on real-time demand rather than a fixed schedule and which can service underserved areas, and which can be door-to-door or using predefined locations on demand (ITF, 2021[53]). Such programs implemented in the Netherlands, in Finland and in Norway for example, suggest that those services are popular, can substitute for car use, and contribute significantly to emissions reduction, although they can be costly if they do not replace existing fixed routes (Coutinho et al., 2020[54]; Dotterud Leiren and Skollerud, 2015[55]; Diana, Quadrifoglio and Pronello, 2007[56]).
Additional investment in public transport along with Austria’s high-quality rail infrastructure network would ensure that increased capacity follows the increase in demand. For longer-distance travel and freight, Austria benefits from a well-developed railway infrastructure. The railway system is relatively dense and Austria invests relatively more than other OECD countries (Figure 5.6, Panel A). This effort will be pursued in the proximate future, with additional investment of EUR 2 billion scheduled between 2024 and 2029. To incentivise public transport use, the government has introduced in 2021 a “climate ticket” at the national level, offering nearly unlimited public transport use across the country with a single ticket for a full year, followed by eight “regional climate tickets” for regional public transport use (Box 5.1). It has contributed to substituting some car journeys with public transport. By the end of 2023, 266 000 nationwide climate tickets and more than 1.2 million regional climate tickets were in use - amounting to 16% of the Austrian population. The eventual goal of the government is to increase public transport use along with active mobility to reduce the use of motorised vehicles to 40% of trips compared to 60% today. The main risk in the short term is that the public transport infrastructure reaches saturation (IEA, 2020[57]). A climate ticket satisfaction survey held by the Ministry of Climate suggested high satisfaction with public transport but mentioned deterioration in punctuality and capacity, in addition to a recurrent lack of access in rural areas. For this purpose, a major investment package co-financed with funds from the Resilience and Recovery Facility (RRF) was approved in 2022 for the construction of new railway lines, the electrification of regional railway lines, and financial support for zero-emission buses, utility vehicles and infrastructure. Shifting more transport to rail can contribute substantially to emissions reduction because the railway infrastructure is already well electrified (Figure 5.6, Panel B).
Source: OECD (2023), "Performance Indicators", OECD Transport Statistics (database); and ITF transport database.
Scaling back fiscal support for car use
Fiscal support for commuters and business trips discourages public transport. Austria, as several other OECD countries, provides tax deductions for commuting expenses. The deductions comprise four elements: a progressive refundable tax credit, a “commuter allowance” (the Pendlerpauschale), a tax deduction proportional to distance travelled (the “commuter euro”, or Pendlereuro), and a tax exemption for an employer’s subsidy to a public transport ticket (Table 5.2, Panel A). Austria also provides significant incentives for car use for business purposes (Table 5.2, Panel B). The flat rate taxation of the personal use of company cars, considered as a remuneration in-kind to employees, undertaxes actual benefits: it has been estimated that the government only captures 60% of the benchmark benefit (Harding, 2014[58]). This can incentivise additional car purchases: in the first nine months of 2019, over 62% of newly registered cars were company-owned (IEA, 2020[57]). Business trips by cars are also incentivised by the kilometre allowance, a flat-rate payment for all costs incurred through the use of a private vehicle for journeys as part of a business trip. In parallel, far more Austrians report traveling for “personal business” than in other European countries (Eurostat, 2021[59]). In combination, all these fiscal measures discourage the use of public transport and encourage car-use, including via decisions on where to live. The key issues are:
Bias towards car-use and long travels. The commuter allowance is higher if public transport is not accessible, which rewards commuters living in areas with bad public transport connections. Likewise, the commuter euro tax deduction increases with distance travelled. Evidence suggests that the commuter tax breaks indeed lengthen travel distances (OECD, 2013[60]; Paetzold, 2019[61]; Kletzan-Slamanig et al., 2022[10]). Similarly, the flat rates on the use of company cars and for the kilometre allowance, independent of the intensity of use, favour trips of longer distances and reduce incentives to use other means of transport.
Counterproductive environmental impact. The biases described above imply higher emissions, while those fiscal measures rarely feature additional green incentives, although since 2016, the amount of the taxable total benefit in kind for the private use of a company car is lower when the CO2 emissions of the car in the year of purchase are below a certain threshold. In addition, no taxable benefit in kind applies for zero-emission vehicles.
Regressivity and inefficiencies. The commuter tax allowance is regressive as high-income earners commute longer distances and face higher marginal tax rates. Two-thirds of the tax expenditure from the commuter allowance and the commuter euro accrue to the top half of income earners. Similarly, the tax benefits for the private use of company cars are also quite concentrated towards high-income workers – evidence from Germany suggests little use of company cars for the bottom 50% of the income distribution. Company cars are also typically larger and more powerful (Fisher et al., 2021[62]).
Excessive complexity. The multiplicity of instruments induces administrative and compliance costs. In addition, most federal states also provide additional commuting tax breaks above and beyond the federal allowance.
High fiscal costs. For example, estimates suggest that the commuter allowance and the commuter euro cost around EUR 510 million annually between 2016 and 2020; while the implicit benefit for the private use of company cars cost approximately EUR 500 million in 2019.
Panel A: Support for commuters in Austria
Panel B: Support for the use of cars as part of business activities
Note: Panel A: The commuter allowances and commuter euro were temporarily increased between May 2022 and June 2023 as a response to the energy price crisis.
Source: Austrian Automobile, Motorcycle, and Touring Club, Austrian Government, Chamber of Labour, (Kletzan-Slamanig et al., 2022[10])
Several initiatives could help address these concerns. The commuter allowance could be replaced with targeted support for employees who have high travel costs as a share of their income or those with unavoidable long-distance work travel; while the commuter euro tax deduction could be reduced. The taxable total benefit in kind for the private use of a company car could be greened further by widening the relative gain in buying a low-emitting vehicle. Similarly, the level of the kilometre allowance is set too high (as it fails to take into account differences between cars) and could be reduced. The allowance levels could also be more aligned with climate objectives and be expanded to greener alternatives, e.g. public transport (Kletzan-Slamanig et al., 2022[10]).
In October 2021, Austria introduced a nationwide climate ticket – the “KlimaTicket”, which was included in its Resilience and Recovery Plan. It offers almost unlimited public transport use across the country (including state and privately-run rail services and inner-city transport services), with a single ticket for a full year. In total, the ticket costs EUR 1 095 per year for adults and EUR 821 for youth and seniors. A family ticket is also available. The BMK allocates EUR 180 million annually for this purpose. In the 2024 Budget Plan, the government proposed to make the KlimaTicket free for 18-year-olds with an additional expenditure of EUR 120 million per year. In addition, all Länder introduced regional tickets as of January 2022.
The KlimaTicket has been complemented with other policies to incentivise the use of public transport. The federal government has invested in infrastructure development and the digitalisation of services, for instance. The number of trains covering west to east routes has been increased; the train fleet has been modernised, and night trains expanded.
In contrast to similar initiatives in other OECD countries, customers in Austria purchase a ticket for a full year.
Austria’s national KlimaTicket gained more than 130 000 subscribers in the first two months of its existence. The take-up has slowed down and as of October 2023, 262 700 tickets had been purchased, or only around 3% of the Austrian population. Regional climate tickets are more popular, and overall one in seven Austrians use the national or a regional ticket.
The national ticket appears to have helped induce behavioural change. While the large majority of subscribers have a driving licence, about two-thirds of surveyed customers indicated that they were using public transport more frequently. Indeed, 85% had already replaced car journeys with public transport by then. A survey held in May and June 2023 by Verkehrsclub Österreich (VCÖ) also suggests that a majority of national and regional KlimaTicket users have substituted at least some of their car travel by public transport.
Source: OECD Climate Action Dashboard, (BMK, 2023[63]), Verkehrsclub Österreich
Austria’s fuel taxes are relatively low in international comparison and lower for diesel than for gasoline, incentivising more polluting cars. The effective carbon rate on road emissions was lower than the OECD average in 2021 although the rate is set to increase under the eco-social tax reform (Figure 5.4). In addition, diesel is still favourably taxed relative to gasoline despite emitting more CO2 and producing more particulates, although the gap has narrowed in recent years and is now close to the median OECD country (OECD, 2022[64]). The low relative price of diesel has contributed to a high share of diesel vehicles in Austria relative to other countries (ICCT, 2021[65]). A peculiar issue for Austria is that a significant share of its emissions is driven by “fuel tourism”, i.e. fuel sold to non-resident drivers in Austria which is then used abroad. This fuel tourism, mostly driven by heavy good vehicles, has been estimated to account for a quarter of total diesel and petrol sold in Austria in 2016, and a quarter of Austria’s emissions in the transport sector in recent years (Breitenfellner, Lahnsteiner and Reininger, 2021[66]; Umweltbundesamt, 2023[67]; IEA, 2020[57]). Part of it can be explained by the low taxation of fuel compared to neighbouring countries (OECD, 2021[68]). In that context, it is welcome that based on the EU “Eurovignette” Directive, Austria has introduced an external cost charge for CO2-emissions as part of the toll for vehicles above 3.5 tons by 1 January 2024 and a 75 % reduction for zero-emission vehicles above 3.5 tons. The taxation of diesel should be aligned with the taxation of gasoline, and should increase in line with neighbouring countries to reduce fuel tourism further. As diesel vehicles are used especially by companies – which react more to changes in prices – phasing out the lower taxation of diesel could have a substantial effect on behaviour and emissions. For example, an estimate based on historical price elasticities of petrol and diesel demand suggests that the alignment of diesel taxation with gasoline could reduce CO2 and fine particulates emissions by 6% in the long run, and the reduction would be 10% with an additional EUR 50 per ton carbon tax (Zimmer and Koch, 2016[69]). Aligning the price of diesel and gasoline could also provide significant tax revenues: the tax revenues forgone have been estimated to cost between EUR 540 million to EUR 1 billion in revenues forgone (Kletzan-Slamanig et al., 2022[10]).
Accelerating the electrification of passenger vehicles
In line with other European countries, Austria is supporting the purchase of electric vehicles (EVs) but the relative gap in the price impact of emissions-related fiscal policies between EVs and internal combustion engine (ICE) vehicles is still low. Although the share of battery electric cars and plug-in hybrids in new car sales has increased fast since 2019, they still only represented 4.1% of the total car stock in 2023 and the average emissions of new cars is still relatively high (Figure 5.7, Panel A). In addition, the increase in new registrations of electric cars has slowed down in 2022 despite the ambitious goals set in 2021 of integrally decarbonising cars, light-commercial, two-wheelers, and some heavy-duty vehicles by 2030 and large heavy-duty vehicles by 2035 as part of the Mobility Masterplan (Figure 5.7, Panel B). However, subsidies in Austria have significantly increased in recent years, and drivers can receive up to EUR 5 000 for the purchase of electric vehicles in 2023 in addition to some tax benefits like the exemption from NoVA, the one-off consumption tax on registration (Table 5.3). Still, the difference in the relative tax burden between a small ICE vehicle and a small EV is relatively low compared to other European countries (Figure 5.8).
Note: Electric cars refer to battery electric vehicles as well as plug-in hybrid electric vehicles. In Panel A, emissions are based on information recorded in cars’ certificates of conformity.
Source: IEA (2023), Global EV Data Explorer; and European Environment Agency.
Net tax burden by type of small cars and net differences
Note: Preliminary data. Calculations based on the tax burden data over ten years of private ownership. The total tax burden includes taxation on car acquisition (net of purchase grants) and ownership, a standard VAT rate, and excise duties on energy use.
Source: Transport & Environment (2024).
Austria should further increase support for EV purchases, but measures should be temporary and carefully targeted. Incentives to purchase EVs over ICEs could be increased by linking the cost of acquisition more strongly to emissions efficiency, as has been done in some other European countries (Wappelhorst et al., 2020[70]; Transport & Environment, 2022[71]). The public sector also has a role to play to stimulate EV demand directly. For that purpose, the Austrian government has set in 2021 a minimum target for the procurement of clean and energy-efficient vehicles as an application of the European Clean Vehicles directive (EY Law, 2022[72]). Purchase incentives and public procurement support measures can help to kick-start the market for EVs but can be a costly way to promote wider adoption – in particular relative to the benefits in terms of emissions reduction (Clinton and Steinberg, 2019[73]). They should thus be targeted, and temporary. Untargeted subsidies are costly, regressive, and have tended to support the purchase of heavier vehicles in other countries. In the United States, for example, 90% of tax credits for electric vehicles went to the 20% highest income households (Borenstein and Davis, 2016[74]). Subsidising stations with zero-emission cars available for renting could provide better access for low-income households, who are less likely to own a car (Nicholas and Bernard, 2021[75]). Subsidising loans rather than grants for purchasing zero emission vehicles, as done in Scotland, addresses financial constraints by overcoming high upfront costs of electric cars while mobilising more private funding (Wappelhorst, 2020[76]). Likewise, subsidies can be limited to light cars: starting in 2023, France restricts its ecological bonus and conversion premium to private cars under 2.4 tons (the conversion premium is also only accessible to low-income households). Public support should also be temporary as the price of electric cars falls over time. As EVs become better established, the speed of the subsidy phase-out should consider the decline in battery costs, the expected rise in carbon prices, and developments in the oil market, to prevent a strong drop in incentives to buy electric cars. For example, Norway has started scaling back insurance and registration tax incentives now that EVs are widespread in the country (OECD, 2022[77]).
By nature, the electrification of vehicles cannot have a quick impact on emissions. Short-term measures could help reduce greenhouse-gas emissions, and more generally air pollution on the road. One avenue could be to lower speed limits. Austria belongs to the set of countries with the highest speed limit on motorways at 130 km/h (European Commission, 2022[49]). Reducing the speed limit would have various benefits in terms of emissions of GHG but also fine particulates. Per kilometre driven, a car emits on average 50% less nitrogen oxides, 34% less fine dust particulates, and 23% less CO2 at 100 km/h compared to 130 km/h. A limit at 120 km/h would reduce CO2 emissions by 10% (Umweltbundesamt[78]).
Panel A: Public and private grants for purchasing battery electric and hybrid vehicles, in euros
Panel B: Tax benefits and purchase incentives for electric vehicles and charging infrastructure
Note: Panel A: * Up to 50% of the purchasing cost. Applicants are eligible to the government grant only if the vehicle dealer has granted the e-mobility bonus. PHEV: Plug-in Hybrid Electric Vehicle. ICE: Internal combustion engine. The subsidies shown in the table do not take into account potential programs at the subnational level.
Source: Panel A: KLIEN. Panel B: ACEA, European Alternative Fuels Observatory, Kommunalkredit Public Consulting, KLIEN, Austrian Research Promotion Agency.
Austria has set ambitious goals for charging-station infrastructure. Facilitating domestic charging and ensuring a sufficiently dense network of charging stations would help with the so-called “range anxiety”, one of the two main barriers to EV adoption along with high prices. The Austrian government plans to ensure a nationwide network of charging stations with access to a fast-charging station at a maximum distance of 15 kilometres and one station at least every 25 kilometres on motorways by 2030 (BMK, 2022[79]). For this purpose, supported with RRF funds, Austria provides significant incentives for private charging along with the grants for the purchase of electric vehicles (Table 5.3, Panel B), and also provides similar support for the installation of company and public chargers. Austria is also one of the four European countries which has implemented (starting in 2023) a credit mechanism whereby the electricity used to charge EVs at public or private charging stations can be sold to intermediaries as carbon credits. As a result of these policies, the density of charging stations is currently relatively high compared to other European countries (ACEA, 2022[80]). Rural access to charging stations is a concern given the importance of cars in those regions, and the government started a funding program (LADIN) for the deployment of charging stations in underserved areas with an initial amount of EUR 7 million for the first tender.
Austria can support a more efficient use of the charging infrastructure and alleviate range anxiety further. Despite the high density of charging stations in international comparison, the share of fast chargers is relatively low and could be increased to facilitate long journeys (IEA, 2023[81]). The government should also make sure that coordination with stakeholders (including the private sector and local administrations) addresses the key market failures in the stations network. Notably, policy should work further on alleviating planning constraints, promoting standardisation in the charging infrastructure, and encouraging time-of-use tariffs, while providing real-time information on stations’ availability. A welcome example of simplification is the amendment to the Condominium Ownership Act in 2022 which provided a “right to plug” for parking space owners in multi-ownership buildings whereby the installation of private charging stations will not need the approval of all landlords.
Simplifying procedures to accelerate the deployment of renewable energy
Austria’s domestic energy production is essentially decarbonised, but insufficient to satisfy energy demand; net imports of fossil fuels are substantial. Domestic energy production has averaged around 37% of total domestic energy supply over the last decade (Figure 5.9). The final consumption of energy related to transport contributes to the use of oil products and the import of oil. Biofuels and waste, natural gas, and electricity are the main sources of energy consumption in the industry sector and in buildings. Governments can decarbonise energy supply through policy intervention in two main areas:
Electricity production, storage and grid capacity: Governments can help realise opportunities to expand cost-effective, low-emission domestic generation, including renewables. Governments are also a key player in planning grid development and energy storage given their inherent network structure. Electrification is essential to Austria’s decarbonisation of final consumption sectors such as transport, industry, or buildings (see other sections).
Fuel imports: Most of the final consumption of natural gas and oil, which represents more than half of final energy consumption, is imported and originates from a small set of countries. Austria has recently made significant effort to increase storage capacity, which will reduce reliance on imports in the future and improve Austria’s energy security (Box 5.2).
Natural gas storage capacities have been expanded recently
Gas storage capacity in Austria is significant. Total storage capacity has more than doubled since 2010. It is now the only country in Europe, with Latvia, where the storage capacity (94.6 TWh) is above average annual gas consumption (91 TWh) (GIE, 2023[82]). However, some storage facilities are predominantly connected to other countries. For example, the storage facilities of Haidach and 7Fields deliver gas primarily to the German network and the two countries have recently signed an agreement to jointly fill the two fields to target. In 2022, the government has implemented a strategic gas reserve of 20 TWh, whose gas volumes are stored in gas storage facilities and can only be released by the Energy Ministry. This strategic reserve will expire in April 2026. Other recent initiatives will contribute to support the security of supply. For example, a bilateral agreement with Germany in December 2021 details the use of gas sharing under the solidarity mechanism of the EU – which ensures the continuous access to gas for a set of “protected customers” like vulnerable households are hospitals.
The reliance on Russian gas has fallen but is still significant
At the end of 2023, gas storage facilities were almost full. The main concern for Austria is high dependence on Russian gas passing through Ukraine. In April 2024, 81% of imported gas originated from Russia, a larger share than in February 2022 – although in volume, imports of Russian gas in April 2024 were 11% below their level in February 2022 (but 27% above April 2023 levels) (BMK, 2023[83]). The contract between Gazprom, Naftogaz, and the gas transmission system operator of Ukraine GSTOU, provides for the transit of Russian gas through Ukraine until the end of 2024. Austria has committed to phase out imports of Russian gas by 2027 in line with the EU’s objective through the REPowerEU plan, but has not outlined a clear plan to phase out completely this dependence on Russian gas, while Germany and the Czech Republic have now eliminated those gas imports (European Commission, 2023[84]). Some measures have already been taken to incentivise reduced reliance on Russia. As part of the Gas Diversification Act of 2022, the government has incentivised the injection of non-Russian gas by a direct subsidy (EUR 100 million) and by the reduction in the storage obligation duration for gas when it does not come from Russia.
In 2022, the Austrian Energy Agency suggested that dependence on Russian gas could be reduced through the exploitation of unused routes from northern Europe and the development of strategic partnerships with coastal countries for the import of liquefied natural gas (Austrian Energy Agency, 2022[85]).
A substantial further increase in domestic renewable electricity generation is planned. Austria has expanded electric power capacity by 27% since 2008 and the mix has shifted further towards renewables. The country has one of the highest shares of renewables in electricity generation in the OECD: around 60% of the electricity supply is fuelled with hydropower, and less than 20% comes from fossil fuels. The government plans to cover 100% of total electricity consumption with domestic renewable energy sources (on a national balance) by 2030. Combined with the increased electrification in the various sectors, the updated climate plan envisages increasing renewable energy generation from 56 TWh in 2020 to 91 TWh in 2030. The Renewable Energy Expansion Act passed in 2021 aimed at providing the necessary funding and regulatory environment to increase renewable energy generation significantly. To improve the efficiency of the incentives for investment in power plants, the Act replaces a feed-in tariff by a market-based premium, which subsidises electricity generation from renewables based on the difference between the average cost of production - determined by an auction - and the market price. The Act promotes investment grants for PV systems, wind turbines, and electricity storage. The replacement of the feed-in tariff is welcome, as evidence suggests that the introduction of auction systems in the EU has significantly lowered support cost while enhancing renewables deployment and promoting technological innovation (Zabala and Diallo, 2022[86]).
Demand and supply of energy, by fuel sources
Note: In Panel A, total energy supply corresponds to the sum of production, net imports, and the variation of stocks, minus international marine and aviation bunkers. In Panel B, final consumption is the sum of consumption in end-use sectors and for non energy-use. Data in 2022 are missing.
Source: IEA World Energy Balances.
Reducing administrative barriers to the deployment of renewable energy infrastructure
Planning and permitting procedures for installing renewable energy facilities are burdensome. In Austria wind power projects typically take five to six years to permit – longer than most countries in Western and Central Europe (European Commission, 2023[87]). Federalism can generate additional complexity. Since subnational governments are responsible for building regulations and zoning laws, planning and permitting procedures for renewable infrastructure projects differ across the country, sometimes with local concerns about negative impacts of green investment having high priority (European Commission, 2022[88]; IEA, 2020[57]). For instance, onshore wind power has only been developed in a small number of Länder to date and the states have implemented heterogeneous restrictions e.g. on minimum setback distances (OECD, 2023[89]), which in turn have a significant negative impact on the number of permits that are delivered (Stede, Blauert and May, 2021[90]). Zoning applications for large solar installations are rarely granted in particular where they clash with interests of the agricultural sector (Banasiak, Najdawi and Maarja Tiik, 2022[91]; European Commission, 2023[87]). The Renewables Expansion Act only weakens zoning constraints for a minority of installations. PV installations are also hampered by a lack of clarity on technical requirements from Distribution System Operators – which can also differ across federal states (European Commission, 2023[87]). Small-scale hydropower projects face administrative complexity including via redundant checks and contradictory conditions, and the lack of digital applications (Mayer and Tallat-Kelpšaitė, 2020[92]).
Efforts to simplify procedures are underway. For example, a major amendment of the Environmental Impact Assessment Act adopted in early 2023 focused on further accelerating permitting procedures. The possibility to institute “renewable energy communities” - associations that manage green energy autonomously - thanks to the Renewables Expansion Act provides an interesting example of the potential for decentralised energy generation and self-sufficiency, although the governance principles remain vague (REScoop.eu, 2022[93]). Several states also already implement simplified procedures for small scale renewables projects and their experience could be shared. For example, Upper Austria exempts small hydropower plants from the electricity generation licence and the building code in Carinthia exempts rooftop PVs from any required notification. Additional steps should be considered, including:
Combining the designation of renewable energy projects as being of “overriding public interest” with the requirement for subnational governments to designate specific areas where permitting procedures would be simplified (e.g. France’s and Spain’s “acceleration areas”, or Germany’s designated areas for onshore wind) would help speed up the necessary investments. Currently, only three provinces in Austria have provided go-to areas for PV systems (SolarPower Europe, 2023[94]). The revision to the EU Renewables Energy Directive which entered into force in November 2023 adequately requires the designation of such zones over the entire EU by February 2026.
Using “silence procedures”, where a lack of a formal response on a permitting procedure within a certain timeframe is interpreted as an implicit approval, such as those used by Spain and Portugal, would ease administrative bottlenecks (European Commission, 2023[87]).
Facilitating grid development and investing in long-term storage capacity
The expansion of the domestic electricity grid is hampered by inefficiencies and administrative constraints. Austria’s electricity grid will require greater capacity and flexibility. Shortfalls in grid capacity have already been an important barrier to investment in wind turbines and ground-mounted PVs, in particular in eastern Austria (Mayer and Tallat-Kelpšaitė, 2020[92]). Further electrification implies greater capacity needs overall. Furthermore, the grid will have to be re-worked to handle the planned expansion of renewable energy sources, which are often small scale and geographically dispersed. Austria faces stronger cost and administrative barriers to grid expansion than other European countries (Figure 5.10). Specific issues include:
High costs of grid access. For example, grid connection costs for ground-mounted solar PV systems often account for more than 20% of total investment costs, against 10% in France on average (Banasiak, Najdawi and Maarja Tiik, 2022[91]). The cost of grid connections needs to be lowered in line with other European countries. This could be done by reducing the network access fee for generation plants as they are currently specified in the Renewable Energy Expansion Act; and increase the upper cap on grid access costs above which the full cost has to be borne by the developer (which has been set at EUR 175 per kW).
Unfavourable tax treatment. For instance, contrary to neighbouring countries, pumped storage hydro plants which allow for both energy generation and energy storage are doubly taxed, not only when they draw power from the grid but also when they deliver electricity to the grid (IEA, 2020[57]; International Forum on Pumped Storage Hydropower, 2021[95]).
Complex grid development procedures. As a shared competence of the federal and the provincial governments, permitting procedures (e.g. different limits on electromagnetic emissions) for transmission grid projects are also complex and lengthy (Banasiak, Najdawi and Maarja Tiik, 2022[91]). More generally, the duration of grid expansion threatens the feasibility of the renewable expansion strategy for 2030. This can be partially explained by market actors hoarding grid connection permits for when grid capacities decline (European Commission, 2023[87]). Better harmonisation of procedures between regions and a centralised coordination would alleviate some of the barriers to deployment. The creation of an integrated Austrian network infrastructure plan (NIP) as part of the Renewables Expansion Act is thus highly relevant. A draft NIP has been sent for public consultation during the summer of 2023 and derives the energy infrastructure which is necessary for the transformation of the energy sector based on estimated needs. The government should make sure that the NIP involves all the relevant stakeholders and can be implemented quickly.
Barrier index on grid regulation and infrastructure for wind and solar PV deployment
Note: The Barrier Index (BI) assesses the barriers to wind and solar PV deployment in four key areas: political and economic frameworks, markets, administrative processes, and grid regulation and infrastructure. The index on grid regulation and infrastructure considers, among others, the cost and duration of grid access for Renewables Energy Sources (RES), the foreseeability and transparency of grid development, and the complexity of the connection procedures. The index is computed on the maximum of assessed severity and spread values for all affected technologies. The EU aggregate refers to the average of EU member countries plus the United Kingdom. For more details, see https://resmonitor.eu/en/.
Source: RES Policy Monitoring Database.
Austria needs to ensure that interconnections within its territory and with neighbouring countries are sufficient to leverage the benefit of the continental variation of climate for renewable energy use (Li et al., 2021[96]). Within Austria, the additional investment in renewables will affect the geography of electricity production: in particular, large investment in PV and wind capacity in eastern Austria will require the reinforcement of the transmission grid between Eastern and Western Austria (BMK, 2023[97]). The additional domestic storage capacity is also likely not to be enough for Austria to cover all its energy needs instantaneously. The country will thus need to reinforce its interconnections with the European grid. As a hub, Austria also plays a significant role in the optimisation of the European grid and its investment in interconnection and storage is important for the integration of the European electricity market. For example, the European Network of Transmission System Operators for Electricity (ENTSO-E) suggests major interconnection needs between Austria and its neighbours as part of the most cost-effective grid in Europe for 2030 and 2040 (Table 5.4). The triangle between Hungary, Slovenia and Austria has, more generally, often been identified as key for a European grid (Cremona, 2023[98]). The development of interconnections will also, in turn, incentivise additional investment in renewables power (Gonzales, Ito and Reguant, forthcoming[99]). Currently, Austria has not set additional interconnection targets for 2030, arguing that the 15% interconnection target – i.e. the share of electricity produced in Austria which is allowed to be transported across its borders by the current infrastructure - set by the EU has already been achieved. However, it has still experienced bottlenecks, in particular in north-south energy flows, which has led to the development of a network reserve scheme remunerating, via an auction process, resources providing the necessary reserves capacities to mitigate congestion (ACER, 2023[100]). The current level of interconnection needs to be monitored as future electric capacities will significantly increase in Austria and other European countries, and as interconnectivity will become all the more important with a larger share of intermittent renewables in neighbouring countries.
Note: ENTSO-E determined the combination of increases in cross-border network capacity that minimise the total system costs at the European level, composed of total network investment (including costs of related necessary internal reinforcements) and generation costs. A panel of possible network increases was proposed to an optimiser which identified the most cost-efficient combination. To consider the mutual influence of capacity increases, the analysis was performed simultaneously for all borders in a single optimisation process at the pan-European scale.
Source: European Network of Transmission System Operators for Electricity ENTSO-E (2023[101])
Storage investments need to focus on long term capacity storage and funding research in new technologies such as hydrogen storage. The expansion of renewable energy output raises the challenge of how to maintain the balance of supply and demand as renewable generation is variable, and highly dependent on weather and time of day. The security of supply calls for investments in different types of storage installations: not only batteries typically for local, short-term storage, but also chemical storage via electrolysers producing hydrogen or ammonia for long term storage, all supported by pumped hydro storage (Koolen, De Felice and Busch, 2022[102]). Short term capacity storage is already quite dense in Austria. In 2021, the country was the third residential storage market in Europe, in absolute numbers, reflecting a sizeable subsidy programme for PV which provided additional funding support for the installation of PV systems with battery storage (SolarPower Europe, 2022[103]). However, the country could invest more in long-term capacities. Monthly renewable production currently covers over 90% of electricity consumption in the summer but only 40% in the winter (BMK, 2023[97]). Austria will be able to leverage its expertise and current infrastructure in pumped hydropower. The potential for storage through hydrogen could be important but the technology is not fully developed (BMK, 2022[104]; Clemens and Clemens, 2022[105]). The recent Draft National Infrastructure Plan provides a welcome proposal for the development of new pumped hydro and electrolysis projects to achieve the desired network capacity in 2030 and 2040.
Encouraging the development of renewable hydrogen
Renewable gas (biogas and hydrogen produced from decarbonised sources) can potentially replace a substantial share of natural gas as part of Austria’s green transformation. Austria’s long-run energy strategy envisages partly replacing natural gas needs with biogenic gas (Austrian Energy Agency, 2021[106]). The strategy also plans on further developing renewable hydrogen and its synthetic methanisation. A hydrogen strategy, providing guiding principles for the future use of hydrogen as part of the 2030 and 2040 emissions objectives, has been published in June 2022, which is welcome. Supporting the use of renewable gas in industrial sectors where no substitute currently exists will be important to maintain industrial production before new technologies become available. In this regard, a new Act creating a green hydrogen production support scheme with funds of EUR 400 million has been under public consultation since February 2024. Leveraging renewable gas for the security of supply at the Austrian but also the European level has significant potential, as the gas storage capacity is 30 times more than the combined capacity of all pumped storage hydropower plants (IEA, 2020[57]). In the near term, increasing the blending limit of (renewable) hydrogen in the natural gas network from the current threshold of 4% to 10% or 20% and harmonising the regulatory limit with border countries could help (Kanellopoulos et al., 2022[107]; Clarke et al., 2022[108]; IEA, 2019[109]). However, this should be seen only as last resort solution to decarbonisation as the benefits in terms of CO2 emissions are small, and because blending reduces the efficiency of hydrogen use while increasing end-user costs and creating cross-country coordination constraints (Bard et al., 2022[110]; BMK, 2022[104]) (IRENA, 2023[111]).
Decarbonising district heating by deploying large capacity heat pumps
District heating can be an efficient way to decarbonise the buildings sector in particular in dense areas (see below), but its own energy sources will need to be decarbonised. A large share of district heating generation in Austria is currently produced in co-generation heat and power plants, including natural gas plants. As a consequence, in 2021 while 60% of district heating was powered by biofuels and waste, fossil fuels still contributed for one-third of heat generation (Figure 5.11). The Austrian Energy Agency has proposed a scenario of (almost) full decarbonisation for district heating by 2040 in line with the net zero objective, where the increased energy production of 8 TWh to 31.5 TWh between 2020 and 2040 is achieved by the total phasing out of natural gas (from around 8 TWh today) and the expanded use of biomass (from 10 to 14.5 TWh), geothermal energy and industrial heat pumps (from 0 to 6TWh), and renewable gas (from 0 to 5.5 TWh). The transition would require an investment of EUR 5 billion for additional power systems and EUR 5.5 billion for the network infrastructure (in real 2020 terms).
Austria could focus more on large capacity electric heat pumps for the decarbonisation of district heating. Renewable gas is likely to be more efficiently used in other sectors like industry, while the final energy needed will depend on complementary policies e.g. efficiency investment in buildings (see below) (Büchele et al., 2021[112]). Deploying more large capacity electric heat pumps could reduce the heavy reliance on biomass, with positive effects on decarbonisation. In addition to negative externalities in terms of air pollution, the lifecycle net carbon emissions of biomass can still be significant depending on its origin, and on indirect emissions. Some estimates suggest that biomass emissions are an order of magnitude higher than other renewables – which would generate the electricity used in large heat pumps (OECD, 2021[113]). The scarce, sustainable biomass could be of most valuable use in other applications than district heating where the substitution of carbon-based fuels is difficult, such as aviation. In addition, most of the biomass used for district heating in Austria is wood-based, which can be in limited supply and have high environmental costs. The incentives to use biomass should be better aligned with its environmental effects from net carbon emissions and air pollution. In particular, the effective taxation of the energy produced from biofuels is significantly lower today than other clean energy sources because of the differential impact of electricity excise taxes. Several countries already provide specific additional support for industrial heat pumps. For example, Germany has recently introduced a subsidy of 40% of the investments in generation plants and infrastructure for heating systems powered by renewables (including biomass and large heat pumps) with an additional operating support for electricity-based heat pumps. Sweden and Denmark provide examples of how the deployment of large capacity heat pumps can be encouraged for district heating providers, through a reduction in electricity prices and direct government support (Box 5.3).
The deployment of large-capacity heat pumps in Sweden in the 1980s
District heating in Sweden already relies on large capacity heat pumps to a substantial degree. The installation of those heat pumps in the country has been facilitated by the surplus of electricity generated by the commission of twelve nuclear power plants between 1972 and 1985. Because of this surplus, the government incentivised the replacement of domestic oil boilers by electric boilers and small-scale heat pumps, and the installation of large electric boilers and large-scale heat pumps in district heating systems. In 1990, more than one-third of the heat supply was sourced from electric boilers and heat pumps. The electrification of district heating was incentivised by a tax credit and a state investment grant.
The deployment of large-capacity heat pumps in Denmark in recent years
Denmark saw a large increase in the installation of large-scale heat pumps for district heating when district heating companies were allowed to include the heat generated by the installation of a heat pump in their government-mandated energy savings target, starting in 2017. In 2021, the Danish government introduced a subsidy scheme which rebated 15% of the investment made to buy and install large capacity heat pumps for district heating companies. The subsidy targets companies sourcing heating from fossil fuels. The subsidy covers the cost of the purchase of the heat pump, potential environmental studies, and construction and installation services up to DKK 5 million (around EUR 670 000).
Source : (Averfalk et al., 2017[114]), European Commission
District heating by fuel sources, 1995-2022
Source: IEA World Energy Balances.
Supporting the green transformation of steel production
Along with transport-related emissions, rising emissions from industrial processes have contributed to the slowdown in Austria’s decarbonisation efforts in the last decade. Today, they represent more than a fifth of emissions, a significantly larger share than in most countries. Those emissions are mostly coming from the production of iron and steel, along with the production of cement (Figure 5.12). One company, Voestalpine, is responsible for 90% of Austria’s steel production and the large majority of emissions in iron and steel processes (Umweltbundesamt, 2023[115]). The company’s largest two plants in Linz and Donawitz accounted for more than 15% of the country’s total emissions (excluding LULUCF) in recent years (Voestalpine, 2023[116]).
Distribution of emissions in industrial processes and product use, 2021
Source: Environmental European Agency.
Steel making in Austria uses particularly emission-intensive technologies but the technical solutions to reduce emissions are relatively well known. The production of steel in Austria is mostly done through the blast furnace – basic oxygen furnace route (BF-BOF). The alternative to produce steel is to use electric arc furnaces (henceforth “electric furnaces”), which typically use scrap steel as input. In 2022, more than 90% of steel was produced in blast furnaces in Austria, against 56% in the EU. Today, it is possible to use the same input as in BF-BOFs, iron ore, and process it with natural gas to feed electric furnaces via a process called “direct reduction of iron” (DRI) and produce new steel. A transition from BF-BOFs to electric furnaces, first capturing and storing (or using) the carbon which is emitted from the DRI, and eventually replacing natural gas with hydrogen, could reduce carbon emissions by 90% (Fan and Friedmann (2021[117])). The conversion of BF-BOFs to electric furnaces would be even more beneficial for Austria compared to other countries given the low carbon intensity of its electricity. Voestalpine has already started to replace one blast furnace and basic oxygen furnace by one electric furnace in each of its two sites starting in 2027 and suggests that emissions would then be reduced by 30%.
The government’s targets and Voestalpine’s could be more clearly aligned. Despite the importance of the company in the country’s emissions, it is not clear that the country’s 2030 and 2040 GHG emissions reductions objectives are aligned with Voestalpine’s. In particular, the new EU ETS sets a target of a 62% reduction in emissions for covered sectors in 2030 relative to 2005 while Voestalpine suggests that emissions at Linz and Donawitz would be reduced by 30% relative to current levels (which are close to 2005 levels, see Figure 5.2, Panel B) by that date (Held, 2023[118]). Likewise, the country has set a net zero objective (for the entire economy) in 2040 but the company has set its net zero objective in 2050.
The EU-ETS provides broad incentives for the steel sector to reduce emissions but will not be enough to decarbonise steel production. The EU Fit-for-55 package has recently tightened the emissions reduction target in the sectors currently covered by the ETS, from 43% to 62% by 2030 compared to 2005 levels. In addition, free emission allowances will be phased out over a nine-year period (from 2026 to 2034) and replaced by a carbon border adjustment mechanism (CBAM) which will impose a charge on the emissions embodied in specific carbon-intensive EU imports – including iron and steel. This is welcome, as the free allowances have prevented carbon leakage risks but have hampered the development of greener technologies. In the case of iron and steel, the allowances’ allocation rules based on technology-specific benchmarks have also encouraged more marginal innovation rather than breakthrough technologies (changing technologies may risk reducing the level of free allowances granted) (Somers, 2022[119]). Still, until the full phasing out of those free allowances, the producers’ allocation means that producers will continue facing a lower price than the actual current ETS level which has fluctuated between EUR 80 and 100 per tCO2 in 2023 (and which was below EUR 60 until end 2021), which thus reduces incentives for innovation (OECD, 2023[1]). Overall, the EU-ETS with CBAM will likely not be sufficient to support the transition towards greener processes using carbon capture, use, and storage (CCUS) or hydrogen, which are the most likely ways that the emissions intensity of steel production will be reduced in addition to electrification (IEA, 2023[120]). First, the main constraint on the potential use of CCUS is not the price, as estimates suggest that CCUS technologies have an abatement cost below or close to current ETS prices (excluding the impact of free allowances) (IEA, 2021[121]; IEA, 2023[122]). In Austria, the use of CCUS would be more constrained by regulations. Second, the current level of carbon pricing in the EU-ETS is largely below those which would make hydrogen-fuelled production and other substitute technologies competitive (Hoffmann, Hoey and Zeumer, 2020[123]). Fluctuations in the EU-ETS price also generate uncertainties which further reduces incentives for investment in green technologies.
Reducing legal constraints on carbon capture and storage
Austria needs to review its ban on the development of permanent geological storage of carbon. The carbon capture of emissions generated by steel and cement production is typically a significant part of the decarbonisation of those sectors in net zero transition scenarios, because it is relatively cheap (since carbon emissions are concentrated) and at an advanced technologically-readiness level (in particular for the DRI process), although it has not been deployed at a large scale yet (IEA, 2023[120]). However, Austria has banned projects to develop permanent geological storage of carbon dioxide since 2011 and the “Federal Act on the Prohibition of the Geological Storage of Carbon Dioxide”. By contrast, its long-term strategy developed in 2019 – aiming to net zero emissions in 2050 – includes a significant role for carbon sequestration. Only one project with a capacity of capturing 50 kilotons is taking place in Austria today (IOGP, 2022[124]) and focuses on the capture of emissions from exhaust gases at the Simmering biomass power plant, not directly on the industrial processes involved in steel production. The draft climate plan continues to emphasise CCUS technologies as a “last resort”, but it is welcome that the Climate Ministry has commissioned a feasibility study for carbon capture and transportation. In addition, the legally-scheduled evaluation of the ban every five years, which was due by the end of 2023, should provide the chance to revive discussion on the potential for storage in Austria and discuss international and European experiences. In parallel, the Ministries of Finance and Climate have initiated in September 2023 the process for a “Carbon Management Strategy” for the years 2024-2030 to be finalised in June 2024 which focuses on technologies and processes for carbon capture, transport, use, and storage.
Austria will likely need to collaborate with other European countries in developing CO2 transport infrastructure. Recent assessments suggest that while Europe has largely enough capacity to store the necessary emissions for the green transition, Austria has low potential for carbon storage based on its geology (Element Energy and Clean Air Task Force, 2023[125]; IEA, 2020[126]). The long-term strategy published in 2019 suggested that the currently secured storage capacity amounted to between 400 and 500 MtCo2, or only 6.5 times the country’s annual emissions. Therefore, in addition to providing a more precise assessment of its actual geological capacity, it is important that Austria contributes to European investments in carbon transport infrastructure to allow for storage in other European countries. In particular, oil and gas pipelines could be gradually repurposed for the transport of carbon dioxide (IEA, 2020[126]). Discussions at the European level would be supported by the passage of the recent Net Zero Industry Act proposed by the European Commission this year, which promotes the acceleration of carbon capture with a Europe-wide objective of an annual 50Mt injection capacity in strategic CO2 storage sites in the EU by 2030, and demands the sharing of information on storage capacity across countries.
Incentivising the development of new steel-production technologies
The production of steel will depend on the development and the deployment of affordable new technologies. For example, the full replacement of natural gas with renewable hydrogen is prohibitively costly today and would only become gradually more competitive as renewable electricity (and electrolysers’) prices fall and carbon prices increase (Fan and Friedmann, 2021[117]; Hoffmann, Hoey and Zeumer, 2020[123]). The reduction in the cost of hydrogen, and more generally the development of innovative technologies, will require public intervention to de-risk investments. Technologies such as hydrogen and carbon capture initiatives are beyond the typical scope of R&D funding yet are not mature enough to be financed purely via the markets, even with high carbon prices (Richstein, 2017[127]; OECD, 2023[89]; Somers, 2022[119]; Sartor and Bataille, 2019[128]). Those technologies would benefit from additional certainty on future returns – in particular as regards the future price of carbon. The government can also incentivise specific investments by the private sector by reducing the carbon price risk it has to bear.
Several instruments could be considered or expanded in order to support innovation and address these problems. Well-designed subsidies can spur innovation. They can support technologies that are at prototype or demonstration stage and be withdrawn when these technologies have matured to prevent the distortion of competition and ensure the efficient use of public finances. For example, as part of the climate and transformation offensive, the government has allocated EUR 2.9 billion to provide grants through tenders to fund projects which provide significant emissions reductions in industry, and where the allocation is mostly based on the amount of emissions reduction per unit of required funding. The initiative also includes support of EUR 600 million from the Ministry of the Economy, specifically allocated for research and business location. In particular, a “basic programme” funds 50% of the costs of prototype research projects via tender, based in particular on the innovative content of the project. The deployment of greener technologies with high current abatement cost, but which would benefit later from economies of scale, could also gain from original de-risking instruments. For example, general fluctuations in the carbon price set in the EU-ETS can be smoothed, e.g., by implementing a top-up on the ETS price like the Netherlands’s carbon levy. Such a price floor also prevents the risk of leakage between sectors which is inherent in the trading scheme. Additional certainty on the returns to investment in green innovation for industrial processes can be provided through public procurement rules, for example by implementing carbon content criteria for steel. Other instruments could provide more certainty specifically on the returns to investment in decarbonisation innovation, similar to the market premium that Austria has implemented for renewables investment (see above), and which would particularly well-suited for the type of technologies envisaged to green steel (and cement) production. For example, Austria could consider the implementation of carbon contracts for difference (CCfD) such as the ones instituted this year by Germany for emission-intensive industries (Box 5.4). Based on a strike price for emissions reductions resulting from an auction – aiming to reflect the lowest abatement costs - the CCfD guarantees investors a fixed revenue per tonne of non-emitted CO2 by paying out the difference between the current carbon price (e.g. the ETS price) and the strike price (Agora Energiewende and Wuppertal Institute, 2021[129]). The use of CCfD can also now benefit from the coverage of the EU Innovation Fund as part of the EU Fit-for-55 package (European Commission, 2022[130]). Compared to standard contracts for differences, the CCfD would provide a price guarantee strictly focused on the carbon price, which would reduce the scope for potential mistakes on prices inherent in feed-in tariffs and standard contracts for differences. However, the design of a CCfD can be complex, in particular because of the asymmetry of information regarding the true cost of decarbonising technologies. Those could be addressed for instance by opening the tender to projects which have already displayed successful pilot results, and by requiring third-party independent verification of cost estimates (Sartor and Bataille, 2019[131]). It could also leverage information gleaned from the German auctions.
In 2023, the German government instituted a carbon “contract for difference” (CCfD) program which awards companies in energy-intensive industries, and subject to the EU-ETS, 15-year compensation arrangements in return for reducing emissions in their production. All companies belonging to energy-intensive industries setting up facilities with 90% less emissions than a traditional plant, and which would emit more than 10 ktCO2 per year under traditional technologies, will be eligible to benefit from this program.
The CCfD starts from a strike price determined in an auction where companies submit bids related to the carbon price that would make the use of a green technology more profitable than the current process. This is compared to the current market price for carbon. The company is compensated if the price difference is positive and pays the government if it is negative, i.e. if the new technology actually becomes cheaper than conventional production. The contract thus aims at protecting the companies against fluctuations in prices of carbon and other technologies, e.g. the price of hydrogen.
Source: IEA, BMWK, (OECD, 2023[89])
Facilitating renovations would provide efficiency gains in the buildings sector
Emissions from the combustion of fuels in commercial and residential buildings are relatively high, representing around 10% of total Austrian emissions. More than 80% of emissions in the buildings sector come from residential buildings. Use of fossil-fuel heating systems is widespread. Austria’s building energy consumption and related emissions have been decreasing in recent years, but are still relatively high today compared to countries with a similar climate. Energy consumption is similar to what it was 20 years ago while other countries have reduced energy consumption (per capita) significantly (Figure 5.13 and OECD (2021[132])). Indeed, the energy intensity of space heating and cooling in private households has increased over the last 20 years and only stabilised since 2015, even after controlling for changes in the climate and the expansion of habitable areas (BMK, 2021[133]). As a consequence, the greenhouse gas emissions by households for heating and cooling are higher per capita in Austria relative to the EU average (Eurostat, 2022[134]). The new climate plan aims at reducing emissions by 66% in 2030 relative to 2005 (53% relative to 2021), which is in line with the tighter emissions target from the EU fit-for-55 package. The government then aims at fully decarbonising the heat supply by 2040 to achieve the sectoral net zero target.
Note: Heating degree days are defined as the number of degrees that a day's average temperature is below the country’s base temperature, that is, the temperature below which residents typically turn on the heating system. Data are based on IEA Energy Efficiency Indicators, IEA, 2020 edition.
Source: OECD (2021), Brick by Brick: Building Better Housing Policies, OECD Publishing, Paris.
Switching heating systems to less polluting sources
Greening building emissions faces significant implementation constraints. The reduction in emissions in the buildings sector will come mostly from the electrification of space and water heating and a switch to renewables for energy consumption, higher energy efficiency, and behavioural changes to reduce final demand (Hoeller et al., 2023[135]; IEA, 2022[136]). Implementing the right measures to reduce emissions in the sector faces particular challenges: potential investments can have a high up-front cost and only long-term benefits – which subject them to potential behavioural biases; and there is a multiplicity of agents involved (e.g. owners v. renters or multiple-ownership infrastructures) which may cause misalignment of incentives and coordination problems (Hoeller et al., 2023[135]). As a consequence, emissions in the buildings sector are less responsive to carbon pricing than emissions in other sectors (D’Arcangelo et al., 2022[5]).
A faster deployment of small-scale heat pumps is required. Heat pumps present the double benefit of being powered by electricity, and of being highly efficient. It is estimated that for typical Austrian family homes, replacing gas boilers by heat pumps would reduce energy consumption by two-thirds and emissions by four-fifths (Nijs, Tarvydas and Toleikyte, 2021[137]). Despite providing significant subsidies for the installation of heat pumps (Table 5.5), Austria is currently lagging in the pace of installation relative to the best performing countries in Europe. In 2022, it installed around 60 thousand heat pumps, or 6 700 per million people (Figure 5.14). As a consequence, the country still lags behind best performers in terms of heat pumps installed per population overall, with around 50 per one thousand people against more than 100 in Denmark and more than 200 in Sweden, Finland, and Norway. The deployment of heat pumps could be facilitated by additional price measures. The extension of carbon pricing to building emissions with the eco-social tax reform will improve the incentive for green heating. Austria could go further and reduce the taxation for electricity for heating. The adoption of heat pumps has been shown to be highly sensitive to electricity prices (Davis, 2023[138]). In Denmark the electricity excise tax has been reduced for consumption over 4 000 kWh for electrically heated households. However, price measures, including higher subsidies, will not be sufficient. The faster deployment of heat pumps will require overcoming significant non-price barriers in the residential sector, as explained below.
Heat pumps sold per million persons, 2022
Source: European Heat Pump Association (EHPA, www.ehpa.org); and UN (2023), "Total population (both sexes)" in Probabilistic Population Projections based on the World Population Prospects 2022.
Renewable energy sources and district heating powered by renewable sources (see above) should contribute to greening building emissions. Residential heat pumps cannot replace all heating systems or may not be the most efficient replacement in all cases. The most appropriate and effective way to replace existing systems will depend on several dimensions, including temperature (today’s heat pumps are less efficient in colder climate where extracting heat is harder) or existing infrastructure (e.g. the existence of a central heating system infrastructure) and space constraints. In particular, centralised district heating could provide economies of scale and more efficiency relative to decentralised systems in densely-populated areas (Hoeller et al., 2023[135]), while solar thermal is the best technology to green water heating (IEA, 2021[139]). Austria adequately provides simple information in matrix form for the most adequate substitute for fossil-fuel heating systems depending on house types and their energy efficiency (Klimaactiv, 2020[140]). District heating could play a significant role in the country since more than one-quarter of apartments are heated with local or district heating. Combined with the greening of its sources, Austria is planning on expanding the district heating network by around 40% by 2040 (Austrian Energy Agency, 2022[141]).
Energy-efficiency regulations that phase out fossil-fuel heating systems should be re-introduced. The Renewable Heat Act, proposed in 2022, provided an ambitious pathway for the replacement of heating systems. In 2022, around 1.25 million gas heating systems (half being central heating systems), 630 000 oil heating systems, and 11 000 coal-fired heating systems were operational in Austria (Austrian Parliament, 2022[142]). The 2022 draft Act laid out timelines for transition to green alternatives, including a complete phasing out by 2040 for natural gas heating systems and 2035 for other fossil-fuel systems. Such a plan was in line with the proposed new EU directive on the Performance of Buildings (EPBD) which would require a roadmap to phase out fossil fuels in heating and cooling by 2040. However, the Renewable Heat Act was altered in October 2023, focusing on banning the installation of fossil-fuel heating only in new buildings – both for centralised and decentralised systems (as of 2019 there has been a ban on new centralised oil-fuelled heating systems) – and accompanied by a ramping up of subsidies for the switching of heating systems (see below). Most other countries also focus on constraining the installation of new systems (Braungardt et al., 2023[143]). Still, there are more ambitious exceptions. In Norway, for example, the use of fossil oil for heating has been banned since 2020. An effective ban for boilers based on fossil fuels in existing (and new) buildings could be implemented by setting gradually tighter requirements for heat generators based on greenhouse gas emissions or the type of fuel used, as recently proposed by the European Commission (European Commission, 2022[144]). Such requirements could impose a significant burden on vulnerable households if it implies the purchase of new heating systems with high upfront costs. Fiscal support will need to be provided, in particular through a better targeting of the current subsidy system (see below).
Speeding up the renovation of poorly insulated buildings
Many buildings in Austria are old and poorly insulated. Investing in buildings retrofit will be important as three quarters of the buildings were built before 1990 (IEA, 2020[57]) and a very large majority were built before 1945. New buildings have an insulation level (measured by thermal transmittance, i.e. how fast heat can transfer through building material) five times higher than buildings built before 1945 and more than two times higher than buildings built before 1990 (OECD, 2022[145]). As a consequence, Austria’s residential buildings feature the highest final energy consumption (in kWh/m²/year) in Europe and will likely remain so after the upgrade of the worst-performing 15% of the building stock as required by the new EPBD (BPIE, 2023[146]). Improving buildings’ efficiency is complementary to the deployment of heat pumps, as the pumps become more useful when heating cannot dissipate. Improving the efficiency of existing buildings can have a significant impact as improving a home’s efficiency rating by two grades (e.g. from D to B) can halve heating energy demand. Better-insulated buildings will also support Austria’s adaptation strategy as it will reduce exposure to extreme temperatures.
Austria needs to speed up the pace of energy-efficiency building retrofits, including through more detailed renovation planning. Currently, the pace of renovation is still slow. In particular, the rate of deep renovation (renovations with at least three thermally or energetically-relevant individual measures) of main residences fell by more than half between 2009 and 2021 (Amann, 2022[147]; European Commission, 2023[148]). The government aims to raise the renovation rate to 3% of the total (not as yet thermally renovated) housing stock up from 0.7%-1.5% in 2018 (OIB, 2020[149]). Estimates suggest that such an increase would reduce emissions in the buildings sector by more than 10%, not counting emissions reduction form switches to green heating systems (BMNT and BMVIT, 2018[150]). Austria was among the first countries to submit, in 2020, a long-term renovation strategy for residential buildings to the European Commission. However, the strategy has been judged to be only weakly compliant with the requirements of the current 2018 EPBD. In particular, despite the articulation of a roadmap with regular indicative milestones, the Austrian plan lacked a presentation of cost-effective options to decarbonise buildings relevant to specific building types and climate zones, with identified trigger points in the lifecycle of the buildings (BPIE, 2020[151]; Castellazzi et al., 2022[152]). The new EPBD will require more operational long-term renovation plans (“National building renovation plans”) to be integrated with countries’ NECPs and which will be subject to the Commission’s assessment and recommendations. A precise renovation plan could be accompanied by the implementation of building renovation passports, as suggested voluntarily by the new EPBD, which would provide a long-term renovation schedule for a given building following an energy audit. Existing schemes such as the individual renovation roadmap in Germany or the energy efficiency passport in France have shown a positive effect on the depth, the rate, and the quality of renovations when they are combined with financial advice and support, legal requirements, and communication campaigns (Volt, Fabbri and Zuhaib, 2020[153]).
Overcoming market failures and helping vulnerable groups
Austria should continue subsidising the replacement of heating systems and the renovation of buildings, but in a more targeted way. Significant investments such as large building renovations or the installation of heat pumps have high upfront costs which will only make households or companies whole over the long run via efficiency gains. Subsidising private upfront costs is desirable, but should be targeted. Schemes with sizeable grant components can be fiscally costly and involve considerable deadweight loss, i.e. the subsidies finance investment that would have taken place without them. Previous untargeted programs in Switzerland and France have, for instance, been found to have large deadweight losses (Studer and Rieder, 2019[154]; Egner, Klöckner and Pellegrini-Masini, 2021[155]; Risch, 2020[156]). Targeting grants can focus on the most vulnerable groups. For other households and SMEs, providing subsidised loans that are repaid via utility bills (“on-bill financing”) through energy savings, such that customers do not pay more than they would have paid without the renovation, can address barriers to high upfront costs while leveraging more private capital (Economidou, Todeschi and Bertoldi, 2019[157]; Bertoldi et al., 2020[158]). For instance, the United Kingdom implemented the Green Deal Scheme between 2013 and 2015 which featured on-bill financing where loans for energy-saving improvements were paid back through a charge on the utility bill and where annual repayments could not exceed estimated energy savings.
Austria has recently complemented its universal subsidy schemes with targeted support for vulnerable households. The flat-rate subsidies, differentiated by technologies, are available to all households for the switching of heating systems and the renovation of old (20-year old for companies and public buildings, 15-year old for residential buildings) buildings via respectively the “out of oil and gas” (“Raus aus Öl und gas”) and the “Renovation offensive” (“Sanierungsoffensive”), representing a budget of EUR 1.25 billion (Table 5.5, Table 5.6) co-financed by RRF funds. Since 2022, the subsidies are complemented by the “Clean Heating for All program” through which the government covers the full cost of substituting fossil-fuel heating systems by green alternatives for the lowest income tercile, up to a technology-specific cap. However, this targeted measure is not available for renovation measures and is limited to homeowners, which reduces the extent of the targeting given the large share of tenants in Austria, the overrepresentation of low-income households among tenants, and the misalignment of incentives between owners and tenants (see below). As an example, France provides a grant (prime “Coup de pouce chauffage”) for switching heating systems which is accessible to tenants of detached houses and which is higher for low-income households; while the partial and deep renovation subsidies “MaPrimeRenov’” are also differentiated by income. The Austrian government also provides energy saving advice and the replacement of one inefficient large household appliance free of charge to low-income households via the Climate and Energy Fund.
Note: “Green” local and district heating networks have minimum threshold on the energy provided by renewables. New heating systems like heat pumps and wood-powered systems have strict minimum efficiency thresholds.
Source: Austrian government, Kommunal Kredit Public Consulting.
Note: “Individual measures” include (i) insulation of: external walls, top floor ceiling or roof, lowest ceiling or basement floor; (ii) refurbishment or replacement of windows and external doors. Buildings must be older than 20 years old. Eligible renovations typically feature limits on U-value (an indicator of heat lost), on thickness of insulation material, on heating requirement of the renovated construction and/or on the energy efficiency factor.
Source: Austrian government, Kommunal Kredit Public Consulting.
Investment in renovation and heating-system replacement in rental accommodation can be encouraged through smart financial support. Constraints on renovations or heating-system replacement can arise in rental properties due to differing incentives between owners and renters. Evidence suggests that energy efficient measures are less likely to be carried out in rental housing compared to owner-occupied housing even after controlling for income and household characteristics (Gerarden, Newell and Stavins, 2017[159]). Owners may have less incentives to invest if the returns of lower energy bills do not accrue to them, and tenants may have limited options to react to higher energy costs. This question is particularly relevant for Austria where a larger share of people are renters relative to other OECD countries (OECD, 2023[160]). Investment support can be designed to strengthen incentives in rental accommodation. For example, Germany has recently introduced an innovative measure where its new carbon tax on building emissions will be split between tenants and landlords differently according to the emission performance of the building. Tenants in low-emission housing will bear most of the price, while landlords will be liable for the majority of the additional price for carbon-intensive rental dwellings. This measure is intended to alleviate the carbon price burden on tenants and to encourage landlords to undertake investments to improve the emissions performance of their home, while still incentivising tenants to reduce their carbon footprint (OECD, 2022[161]). Similar incentive issues occur in multi-ownership structures. Policy moves have been made regarding the latter. In a welcome step, the voting requirement for renovation among owners in multi-ownership structures has been made less stringent, from an qualified majority of two-thirds to a simple majority (or two-thirds of votes with at least one-third voting) (Hoeller et al., 2023[135]).
Stronger energy-efficiency standards can also encourage investment and overcome misaligned incentives and the lack of information. Expanding the coverage of building efficiency standards, through a well-defined schedule increasing stringency requirements, while making disclosure of information on the energy performance of properties (throughout their lifecycle) compulsory, would improve information and certainty for green investments. Such moves would help overcome the misaligned incentives in rental property described above, as well as incentivise investment more generally (De Mello, 2023[162]). New buildings in Austria are already subject to minimum energy performance requirements via the implementation of the 2018 EPBD. However, energy certificates are only required at contractual moments, when property is rented, or when leasing or selling property, while the new EPBD aims to extend certification requirement to buildings undergoing major renovations and renewed rentals. Certificate requirements could be expanded beyond those simple trigger points. Efficiency standards are already imposed in the subsidy programs for renovations and the switching of heating systems. To speed up renovations and overcome informational frictions among others, Austria could expand the set of trigger points (e.g. building age) for retrofits including minimum efficiency performance, provided adequate lead time and funding assistance (Climate Action Tracker, 2022[163]; Sunderland and Jahn, 2021[164]). Several European countries and American regions have recently provided medium- or long-term objectives for the efficiency ratings of existing buildings (Nadel and Hinge, 2020[165]; European Commission, 2021[166]; OECD, 2023[167]).
The coordination of housing policies with the federal states will be essential as they bear the responsibility for the execution of federal laws relative to housing, and urban and regional development. In particular, they are in charge of the deployment of updated energy efficiency standards, and housing subsidies for renovations. Since 2008, the Länder agree on binding, harmonised standards with the Austrian Institute of Construction Engineering, but the speed of adoption of new standards in local legislation can vary. The implementation of the recent spending review recommendation regarding the harmonisation of relevant data and the distribution of emissions targets between states will be essential in the buildings sector, given the lack of consistent data e.g. on renovation rates, and the disparity of initial conditions across states (Bittschi et al., 2024[22]). The federal government can support a coordinated transition through incentives in the financial equalisation system. In that context, it is welcome that the new equalisation agreement aimed at incentivising a speedier transformation in the buildings sector by earmarking EUR 300 million per year between 2024 and 2028 for housing and renovation as part of the Future Fund (see above). The agreement emphasises that those funds must be used to achieve a renovation rate of 3% for public buildings, and either to reach expenditures on renovation amounting to 30% of the revenues derived from the housing subsidy contribution (a social contribution of 1% whose revenues are allocated to the Länder) or to renovate and develop more residential units in already-developed areas than units built in currently-unsealed areas. However, the outcome of these new measures is uncertain as there is still no clear link between the allocation of resources and the performance of the local governments and there is no impact on financial resources if the specified goals are not achieved.
Providing easy access to information on energy consumption, and comparative tools, would encourage efficiency improvements. In addition to more stringent energy standards, the deployment of digital tools and smart controls can enable efficiency gains by providing information to consumers. Energy benchmarking and disclosure/transparency can contribute to significant reductions at low cost (OECD, 2021[132]; Frick et al., 2017[168]). In order to improve efficiency, Austria should speed up the rollout of smart meters. The country had originally aimed for an 80% rollout of smart meters in 2020 but delayed the objective to 2024, and less than 50% of households had smart electricity meters by 2021 – while 12 European countries had rates above 80% (ACER/CEER, 2022[169]).
The biggest challenge for climate change adaptation in Austria will most likely be increased flood risk. The country’s geographical location and the distribution of the population and buildings over the territory makes Austria less exposed to extreme temperature, droughts, wildfires, or wind threats (in addition to being isolated from coastal floodings) (Maes et al., 2022[170]). However, flood hazard is likely to increase. The Austrian population is more exposed to flood risks than most OECD countries (Figure 5.15). The penetration of flood insurance, in turn, is relatively low. Reducing the future economic burden linked to more frequent and severe floods requires a two-pronged strategy: reducing exposure through better land use and protective investments, and reducing vulnerabilities through wider insurance coverage.
Share of population exposure to river flooding with a 10-year return period, 2020
Note: A return period is the average or estimated time that a flood event is likely to recur.
Source: IEA/OECD (2023), "Climate-related hazards: River flooding", Environment Statistics (database), https://oe.cd/dx/58w.
Reducing exposure to flood risk by better planning and incentivising investment
More effective multi-level governance on planning, mobility, and housing development would help reduce the development of flood-prone populated land. Austria has sealed or artificialised a considerable amount of land (“land take”); a European Commission report found that Austria’s land take was higher than the EU average (relative to its size) between 2012 and 2018, and significantly faster than population growth (European Commission, 2022[171]). In October 2021, the Austrian Conference on Spatial Planning was mandated to develop the first Soil Strategy for Austria, which aimed to reduce land take from 11.5 hectares per day to 2.5 in 2030 (Schamann, 2022[172]), and which was also included in the country’s Resilience and Recovery Plan (RRP). The strategy was to be presented at the end of 2022 but has been delayed regularly.
A particular constraint for reducing land take (and for reforms in land planning in general) is that spatial planning and building regulations are the responsibility of local authorities which may not internalise the full risks of developing flood-prone land. Flood protection itself is shared across federal, state, district and municipalities. In general, in Austria the federal government is responsible for the development and management of water-regulating infrastructures, while the federal states and local governments are in charge of spatial planning and water resources management at their respective scales. Nationwide regulations on land take should be considered. These have proved useful elsewhere. In Portugal, national law forbids development in areas adjacent to rivers without pre-authorisation and within 50 metres of the coast, while in France a 2021 law imposes mandatory objectives to local governments in order to achieve net zero artificialisation in 2050. If federal regulation is unlikely in Austria, incentives could be provided through the financial equalisation system. Similarly, the degree of insurance provided by the Catastrophes Fund (a public fund financed by federal taxes which pays for preventive and compensation measures against natural catastrophes, see Box 5.5) to local governments could be adjusted based on land-use objectives. For example, the United Kingdom limits reinsurance coverage for developments constructed after 2009, while in the United States coverage by the National Flood Insurance Program is only provided to communities which have set flood management conditions such as building and floodplain management standards. A voluntary Community Rating System in the United States also allows communities to earn points which are translated into premium discounts for households in those communities (OECD, 2016[173]).
In Austria’s constitution, the responsibility to repair damages from natural hazards to private and public assets is assigned to the federal states. However, federal policy plays an important role through the Catastrophes Fund was created in the wake of large natural catastrophes, to fund preventive measures and support the compensation of private and local public assets.
Funding
The fund is financed mostly by a fraction (1.07%) of household and corporate income taxes. In 2021, receipts from those taxes amounted to EUR 509 million. It also receives some funds (EUR 10 million as of 2021) from corporate taxes which are earmarked for repairing state roads.
Functions
Three-quarters of the fund’s expenditure is allocated to preventive measures, mostly to prevent future flood and avalanche damage, and the payment of insurance premia paid to cover losses to agricultural crops. Most of the remainder is available for compensating damages to private property and local authorities’ assets. Compensation of up to 60% of damages is provided for private property and 50% for local assets.
Compensation process
Private individuals whose assets have been damaged by natural disasters can apply for support from the fund via their municipality. The federal states are responsible for assessing damages and for the payment of compensation. After damage has been recorded by a local expert commission set up at the community level, compensations are paid out directly to the claimants. However, there is neither any enforceable legal right nor guaranteed level for financial assistance.
Source: (Unterberger et al., 2019[174]), BMF 2022 Disaster Fund Act, (Holub and Fuchs, 2009[175])
Increasing the effectiveness of natural flood protection mechanisms, particularly forests, should be considered. Evidence from Austria suggests that forests can reduce run-offs including after heavy rainfall (Markart et al., 2022[176]), but the ecological condition of forests is relatively poor. Forests cover 45% of the territory but almost 90% are estimated to be in bad to poor conservation status (European Commission, 2022[171]). Only 13% of Austria’s forests are part of Natura 2000 sites, a network of protected natural areas in Europe aimed at conserving biodiversity and ensuring the long-term survival of species and habitats, against 25% on average in the EU (European Commission, 2021[177]). Other nature-based solutions to building flood resilience can complement infrastructure investment in urban areas, and have been implemented with success in Austria. For example, the municipality of Ober-Grafendorf developed the “eco-street” project which provides roadside green spaces to stop diverting rainwater from the streets to the canal system. Nature-based solutions are often less costly than infrastructure and can provide additional climate mitigation benefits (OECD, 2021[178]). Urban green space expansions, including parks and green roofs, increase water absorption capacities and thereby reduce the risk of urban flooding while contributing to reducing GHG emissions. For instance, about a quarter of Germany’s larger cities provide financial subsidies for green roofs (OECD, 2023[4]).
Structural flood mitigation investments, such as dams, levees, and reservoirs, can be used to reduce flood risk, and can be particularly cost effective in urban built-up areas. Improvements in drainage systems and the installation of permeable pavement can also improve absorption capacity. One particular example is the Danube side channel built by Vienna between 1972 and 1988 in order to provide flood relief. More generally, the “Room for the River” programme in the Netherlands between 2006 and 2015 included creating and increasing the depth of flood channels and removing obstacles, and the establishment of floodplains across major river systems. However, those investments can take a long time to pay off, which can hinder their implementation. In order to take into account the long-term effectiveness of structural mitigation measures and the uncertainty on future impacts of a changing climate, some countries allow the use of climate change allowances (predictions of anticipated change to flood risk due specifically to climate change) in flood risks assessments. For example, in Australia, the Queensland Inland Flooding Study recommends a 5% increase in rainfall intensity for each 1°C increase in global warming. In Germany, the regions of Baden-Württemberg and Bavaria introduced a climate change factor as a surcharge value to be considered in flood calculations (Pelaez Jara, 2020[179]; OECD, 2016[173]).
Support for adaption investment by sub-national government could be made more effective. The Austrian government provides information and technical support to local authorities planning adaptation investments but could leverage financial incentives to support additional infrastructure. The Climate Change Adaptation Model Regions for Austria programme (KLAR!) helps regions enhance their climate resilience by providing funding for specific adaptation plans, in addition to information and advice from government environment experts via a common platform. Stronger incentives could be built in funding programmes. For example, investments by local authorities which reduce future risks could benefit from adjustments in financial equalisation transfers or in the contribution to, and the coverage provided by, the Catastrophes Fund. In parallel, the lower premiums demanded by insurers could be partially topped up by specific charges or taxes earmarked for adaptation investment (OECD, 2016[173]).
Pecuniary and informational support for private investments in risk reduction can also help adaptation. Private household investment in flood protection could significantly reduce flood damages (Kreibich et al., 2005[180]). The main issues, similar to the constraints on investment for energy efficiency in residential buildings (see above), are the lack of information on risks and the benefits of protection, and the high upfront costs. The potential solutions are also similar. For instance, households can be provided with subsidised loans. The government or private lenders could recoup the cost of subsidised loans through charges on the implicit benefits derived from those investments: that is, the full benefits of lower premiums would be shared between the household and the lender. In France, the “fonds de prévention des risques naturels majeurs” finances 80% of adaptation measures for SMEs and private households when they are situated in flood zones in cities with a flood prevention plan. The fund is financed by the “Catnat” premium, a mandatory contribution from all property insurance policies (Covéa, 2023[181]). Public policy can also improve information on flood risk by certifications akin to the buildings certificates for energy efficiency (Oakley and Ahern, 2020[182]). For example, Germany has implemented a “flood passport” (Hochwasserpass) that includes a risk assessment and recommendations for additional precautionary measures. Those passports could be combined with the detailed and easily accessible flood-mapping tools already developed by Austria, as discussed below.
Reducing the vulnerability to flood risk by rethinking insurance
Private insurance coverage against flooding is low in Austria. Basic flood risk insurance is exclusively provided by private insurance companies and is bundled within standard household coverage, with very low indemnity limits (Hanger et al., 2017[183]). A recent estimation suggests that only three quarters of households have basic coverage, with a limit of EUR 10 000. Extended coverage is available on an optional basis (OECD, 2020[184]). It is estimated that the insurance market penetration (measured by sum insured) against river flooding was 5% in Austria in 2022 against 40% in Germany or 100% in France and Switzerland, where coverage is compulsory (Insurance Europe, 2022[185]). In turn, more than 80% of economic losses from natural catastrophes (including floods) in the last 30 years were uninsured (European Environment Agency, 2023[186]). Because the country is highly exposed to future flood risk, an estimation by the European Commission suggests that Austria has the largest protection gap in the EU (Radu, 2022[187]). The low take up of flood insurance likely reflects, in part, a belief that government will step in to compensate losses in the event of flood damage through the Catastrophes Fund (Box 5.5).
Enhancing public awareness of flood risk would help insurance take up. Policies to improve flood risk information are underway. As part of the EU floods directive, the government developed a preliminary risk assessment which identified 416 risk areas with detailed information including probabilities of occurrence and estimated impacts. In addition, the government has developed an online mapping tool, HORA, with the Austrian Insurance Association, which enables the user to make an initial assessment of their personal risk situation. Other informational materials include CLIMA-MAP, which uses maps to illustrate climate change impacts in Austria’s municipalities and regions. The government could build further public awareness by adding more information on flood risk at the time of a rental or purchase transaction, similar to the requirement for energy certificates in real estate transactions. This could be combined with the adoption of flood passports (see above). For example, France and Australia already require sellers and landlords to disclose information on compensation paid in the past for a property as a result of a natural disaster (OECD, 2016[173]).
More fundamental change to flood insurance could also be considered. Reform options include:
Funding the Catastrophes Fund by mandatory premiums, rather than general taxation. Iceland, for instance, effectively requires flood insurance with its publicly-run Natural Catastrophe Insurance. Austria’s Catastrophes Fund could be reformed in this direction with a switch from tax to premium-based funding. The collection of premiums and the ability to adjust premiums as a function of risk (and risk prevention measures which are undertaken) would allow the government to incentivise mitigation measures.
Introduce mandatory and comprehensive private flood insurance, for instance by the mandatory extension of homeowners’ insurance to include coverage of flood risk. In France, for example, private insurers must include insurance against flood risk in property insurance policies. Coverage is funded from a fixed share of all premiums. Insurers in turn benefit from government-backed reinsurance through the “Catnat” system. A state guarantee ensures that damages from extreme events can be covered. A particular advantage of the French system is that it provides complete coverage and affordable premiums while keeping a large role for private insurers, with subsequent benefits in terms of cost effectiveness (Kuik et al., 2017[188]). Well-designed subsidies could be implemented to ensure that premiums remain affordable: in particular, they should be means-tested and could be enacted with requirements regarding investments in risk reduction (OECD, 2016[173]). A recent analysis of a hypothetical switch from the current Austrian private insurance system with public ex-post compensation, towards a more mixed public-private insurance mechanism where the government acts as a global reinsurer, accompanied with incentives for risk reduction measures, suggests that it would significantly reduce the fiscal burden and the volatility of payments in addition to providing significantly broader coverage (Unterberger et al., 2019[174]).
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