Oliver Röhn
OECD
OECD Economic Surveys: Czechia 2025
Abstract
Czechia has significantly reduced greenhouse gas (GHG) emissions over the past three decades, but the emissions- and energy-intensity of the economy remain high. Accelerated policy action is needed to put the economy on a path to net-zero emissions. This requires a cost-effective policy package that includes more consistent pricing of carbon, facilitating the deployment of renewable energy and strengthening incentives to increase the share of low- or zero-emission vehicles and to shift transport off the road. Implementing stricter regulation and targeted financial assistance would help incentivise housing renovation to reduce the high emission and energy intensity of the building stock. Measures to alleviate the impact of the net-zero transition on vulnerable communities and to adapt to climate change are also required.
Czechia has significantly reduced greenhouse gas (GHG) emissions over the past three decades, but the emissions- and energy-intensity of the economy remain high (Figure 3.1). In 2022, GHG emissions excluding land use, land-use change and forestry (LULUCF) were around 42% below the level in 1990. These significant reductions reflect changes in the production structure of the economy in the 1990s and a declining share of coal in energy supply in the following two decades (Figure 3.2). Nevertheless, emissions and energy intensity remain above EU and OECD averages (Panel B and C). This reflects a large industrial sector, a still high share of coal in electricity and heat generation, and an energy-inefficient stock of residential buildings. Furthermore, as noted in the previous Economic Survey (OECD, 2023[1]), active protection against the further spread of bark beetles since 2015 has required increasing timber harvesting, temporarily moving the forestry sector from a carbon sink to a net carbon emitter.
Note: LULUCF refers to land use, land-use change and forestry.
Source: OECD Environment Statistics database; IEA database.
In February 2024, a draft updated strategy Climate Protection Policy in the Czech Republic, which aligns Czechia’s climate goals with the EU’s “Fit for 55” targets was prepared. According to the draft, greenhouse gas emissions should be reduced by at least 55% by 2030 compared to 1990.The draft also includes the goal of achieving climate neutrality by 2050. According to simulations in the draft updated National Energy and Climate Plan (NECP) from Spring 2024, emissions outside of the EU ETS sector are set to fall by 35.4% compared to 2005 with existing measures, which is higher than the target under EU legislation of 26% (Figure 3.3). A shift in the energy mix is among the main goals to reach these targets. In particular, the strategy aims to reduce the share of unabated fossil fuels in primary energy consumption to 50 % by 2030 and to zero by 2050, with coal being completely phased out of power and heat generation by 2033. Moreover, the strategy targets to increase the share of renewable energy in gross final energy consumption to 30% in 2030 (from 13% in 2020), which is somewhat lower than implied by EU legislation (33%). Finally, a return of the LULUCF sector to a carbon sink is expected by 2024.
Note: GHG emissions exclude land use, land-use change and forestry (LULUCF).
Source: OECD Environment Statistics.
Accelerated policy action and large investments are needed to reach climate targets. The updated OECD Environmental Policy Stringency (EPS) indicator (Kruse et al., 2022[2]; Botta and Koźluk, 2014[3]) suggests significant scope to step-up environmental policies compared to other OECD countries, in particular in the areas of market-based policies (e.g. carbon taxes) and technology support (e.g. for R&D). Moreover, the draft updated NECP estimates investment needs of around CZK 3.4 trillion (EUR 140 billion, around 45% of 2023 GDP) to reach the 2030 targets and for climate adaptation measures. Around one third of the climate mitigation investments in key sectors are expected to be financed from public, mainly EU, sources. For example, the Recovery and Resilience Plan of Czechia allocates around 42% of total funds or about EUR 3.9 billion to the green transition, including for housing renovations, modernisation of the electricity grid and electrification of railways. Climate policies need to be stepped up to stimulate the large private investments needed to reach the targets.
Simulated greenhouse gas emissions including LULUCF, million tonnes of CO2-equivalent
Note: LULUCF refers to land use, land-use change and forestry. WEM stands for scenario with existing measures. WAM stands for scenario with additional measures.
Source: Ministry of Environment of the Czech Republic, draft updated National Energy and Climate Plan (NECP) for 2021 - 2030.
Strengthening carbon pricing
The EU ETS has effectively helped to reduce emissions in Czechia. Around half of GHG emissions in Czechia are covered by the EU ETS. The reduction in free allowances (and complete phase-out for power generators) has strengthened the price signal over time. Verified emissions in EU ETS sectors have fallen by 43% in Czechia over the period 2005 to 2023 (EEA). Progress in sectors outside the EU ETS has been much more modest, with emissions in transport and waste increasing (Figure 3.2).
Carbon prices outside the EU ETS are too low to reach climate targets. Effective carbon prices are the sum of explicit (e.g. carbon tax; ETS price) and implicit (e.g. fuel excise tax) carbon prices. In 2021, the average effective carbon price, at about EUR 52 per tonne of CO2e, was relatively low compared to other OECD countries and especially EU countries (Figure 3.4, Panel A). Data for 2023 suggests that the average effective carbon price increased to about EUR 64 per tonne of CO2e due to the increase in the EU ETS price. However, effective carbon prices remained lower than in most EU countries, due to the lower effective taxation of carbon outside of the EU ETS sectors (Figure 3.4, Panel B). Moreover, around 25% of GHG emissions were not priced at all (OECD, 2023[4]). The large differences in tax rates across sectors and activities mean that marginal abatement costs are not equalised, potentially increasing the cost of emission reductions. Furthermore, the absence of a unified carbon price produces uneven conditions for similar activities within and outside the ETS. This is particularly apparent in the Czech heating sector, where larger district heating systems fall under the ETS whereas smaller heating systems for residential buildings as well as individual systems are not covered (see below). The smaller installations therefore enjoy a competitive edge over the larger district heating systems, even if they are less environmentally friendly.
The government should increase effective carbon prices in sectors not covered by the EU ETS. This would send more consistent price signals and make abatement more cost-efficient. OECD simulations suggest that broad-based carbon pricing is effective in reducing emissions in most sectors and can accelerate coal phase-out, with a EUR 10 increase in carbon pricing estimated to decrease CO2 emissions from fossil fuels by 3.7% (D’Arcangelo et al., 2022[5]). Carbon pricing could take the form of a carbon tax element in the fuel excise levies. The rate should be gradually raised according to a pre-determined schedule until it reaches a level that is consistent with emission reduction targets. An EU reform of the Energy Taxation Directive, which aims to take the environmental characteristics of fuels into account more broadly, has not yet been finalised. While a new EU-wide emission trading system (EU ETS 2) will extend carbon pricing to transport and heating fuels from 2027, Czechia could consider introducing a national carbon tax before 2027 and align pricing with the EU ETS 2 system once operational. Fifteen EU countries (e.g. Austria and Germany) have already unilaterally implemented a national carbon pricing scheme, in the form of carbon tax or emission trading.
Fossil fuel subsidies weaken and distort price signals and should be phased out. In 2022, government support to fossil fuels amounted to around CZK 22.57 billion (0.33% of GDP) (OECD, 2023[6]). Temporary support for households and firms to cushion the effects of the energy crisis accounted for about half of these subsidies, and was largely phased out by end-2023. The remaining fossil fuel subsidies are mainly related to excise tax refunds for diesel in agriculture, and excise tax exemptions for certain uses of natural gas, oil and coal, including heating for households. Moreover, CNG/LNG and LPG vehicles are also subsidised. While subsidies for household consumption of fossil fuels may improve affordability, the support is not well targeted. Instead, fossil fuel subsidies should be phased out and impact on vulnerable households mitigated via targeted transfers (see below).
Higher carbon prices raise concerns about the competitiveness of export-oriented manufacturing sectors. However, not all sectors will lose competitiveness, even within energy-intensive industries. Results depend for instance on market power in export markets, which allows to pass on part of the costs to consumers in other countries. Less carbon- and energy-intensive sectors tend to benefit from reduced factor demand in shrinking sectors and lower factor prices. OECD simulations for Germany based on a computation general equilibrium model show for example for the baseline Fit-for-55 scenario, that output reductions are strongest for oil refineries, metal industries as well as some non-EU ETS sectors such as consumer goods and transport services. At the same time chemical, automobile and machinery and equipment would increase output and exports (OECD, 2023[7]). Well-designed abatement subsidies to incentivise emission reductions, for instance via competitive tenders, can help to address competitiveness concerns. However, subsides should be limited to companies exposed to international competition and include sunset clauses, announced upfront, to strengthen abatement incentives and reduce future fiscal costs. Facilitating the expansion of renewable energy supply and better integrating the European electricity grid would mitigate electricity price rises and volatility and support energy-intensive industries. Moreover, competitiveness is influenced by many factors besides energy prices. Competitiveness can be improved for example by boosting the innovation capacity and business dynamism as discussed in detail in Chapter 2.
Phasing out coal from the energy mix and accelerating renewable energy deployment while ensuring energy security
Decarbonising the energy mix will be key for reducing GHG emissions. Fuel combustion in energy industries accounted for around 36% of total emissions in 2022, the largest source of emissions (Figure 3.2). This largely reflects the still dominant share of coal in electricity and heat generation (Figure 3.5). In addition to decarbonising the energy mix, Czechia needs to expand electricity generation to allow for the electrification of sectors such as transport and industry. Electricity accounted for only 18.5% of final energy consumption in 2021 compared to an OECD average of 23%.
Phasing out coal from the energy mix by 2033 is imperative to get on track to net zero but needs to be well planned to ensure energy security. The draft update of the State Energy Policy from February 2024 confirms the goal to phase out coal completely from electricity and heat generation by 2033. Instead, the authorities aim to significantly expand nuclear and renewables (Table 3.1), including through public subsides. Nuclear power can contribute to improving energy security, and nuclear electricity production is more stable over time compared to intermittent renewables while also being low-carbon, although concerns involve high-impact negative risks in case of severe nuclear accidents. It is important for nuclear projects, as well as any other energy project, to be underpinned by transparent and comprehensive life-cycle cost-benefit analyses that inter alia account for the cost of constructing power plants, storing nuclear waste and decommissioning disused power plants. Such analysis must also consider the (direct and indirect) subsidies granted through the entire production cycle. New nuclear capacity in Czechia will only come online in the mid-2030s, leaving an expansion of renewables and to a lesser extent natural gas as the main instrument to offset declining coal capacity and to satisfy increasing electricity demand. The draft updated Climate Protection Policy targets an additional 8 GW of solar capacity and 1.2 GW of wind capacity by 2030. By 2050, 26.1 GW of solar and 5.5 GW of wind capacity is planned to be installed.
Note: Excluding biofuels CO2. Unweighted average for EU (22 EU countries) and OECD. Cross country comparison of effective carbon prices for 2023 is affected by temporary energy price support measures in many OECD countries in response to the energy crisis.
Source: OECD (2024), Pricing Greenhouse Gas Emissions 2024: Gearing Up to Bring Emissions Down, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris, https://doi.org/10.1787/b44c74e6-en
Despite recent improvements, permitting procedures for renewable energy can be further streamlined. As noted in the previous Economic Survey (OECD, 2023[1]), cumbersome regulations and lengthy construction processes are severe barriers to renewable investment. In 2023, Czechia amended the Energy Act and related laws. One amendment (‘Lex RES 1’) raised the limit for installing small photovoltaic plants without a licence from 10kW to 50kW. Further progress can be made by introducing a one-stop shop for administrative procedures to connect renewables to the grid. In April 2024, the government approved a resolution to establish renewable acceleration zones, as part of Czechia’s REPowerEU chapter of the Recovery and Resilience Plan. In line with the third EU Renewable Energy Directive, these zones benefit from simplified permitting processes, including for environmental impact assessments, while preserving the landscape and biodiversity. The authorities should identify and assign suitable land for these acceleration zones as soon as possible.
Source: IEA (2024), IEA World Energy Statistics and Balances (database).
Expanding renewable energy capacity requires further investments in the electricity grid capacity and system flexibility. Czechia’s transmission grid is well connected with neighbouring countries, with a significant capacity to transport electricity across borders, helping to ensure security of supply in the coal phase-out period (IEA, 2021[8]). However, the transmission grid needs to be upgraded to allow for a higher share of variable renewable energy sources. Challenges linked to the overbooking of available capacities need to be addressed (EC, 2023[9]). Czechia should also accelerate the rollout of smart meters to improve demand response. Smart meters enable the introduction of dynamic price contracts, which encourage customers to adapt their electricity consumption to market conditions, for example by reducing consumption at peak times when prices are high. By the end of 2022, thirteen EU countries met the EU target of covering 80% of households with the smart meters, and another four are expected to reach this target by 2024 (ACER/CEER, 2023[10]). In Czechia rollout is still in its early stages.
Support for renewables could be better targeted. In 2022, support for renewables was shifted from feed-in tariffs to competitive auctions for large scale installations, and green bonuses (feed-in premia) for smaller scale installations. While auctions improve cost-effectiveness of support to renewables, Czechia should over time focus support for utility-scale projects from cost-competitive technologies such as solar, wind and hydroelectric power, towards those where cost-competitiveness remains a challenge such as electricity storage and hydrogen. In addition, price volatility in electricity markets pose challenges for renewables producers reliant on stable long-term revenues for recovering high fixed costs. To address price volatility, several European countries, including France, Greece, Hungary, Ireland, Italy, Poland, Spain and the United Kingdom, have introduced contract for difference schemes. Contracts for difference schemes reduce price (and therefore revenue) uncertainty for renewable generators by providing a guaranteed (strike) price for the electricity produced. The government provides subsidies if the wholesale market price falls below the strike price and requires payment if the price exceeds the strike price.
Decarbonising the building sector
The residential building sector remains highly energy inefficient and polluting. In 2021, the sector accounted for about 11% of total GHG emissions and 83.7% of fine particulate matter (PM2.5). Exposure to PM2.5 air pollution was linked to 8500 premature deaths in 2021 (EEA, 2023[11]). Many households still use individual coal boilers to heat their homes, and coal is the dominant fuel in district heating systems (IEA, 2021[8]). This together with the high share of coal in electricity generation explains the high carbon intensity of the residential sector (Figure 3.6, Panel A). Furthermore, the energy use in Czech dwellings, per square meter, is among the highest in the European Union, reflecting a large share of older and energy-inefficient dwellings (Figure 3.6, Panel B). By 2019, 25% of single-family houses and 40% of multi-apartment buildings had undergone partial renovations at least once (EC, 2022[12]). This has positively contributed to the reduction in energy intensity in the residential sector. However, a large part of already renovated dwellings will need to undergo further and more substantial renovations to meet energy efficiency targets.
The authorities have set ambitious targets to reduce the energy intensity of buildings. The draft updated NECP includes a very ambitious scenario from Czechia’s Long-Term Renovation Strategy, according to which final energy consumption in the building sector shall be reduced by 17% by 2030 and 44% by 2050 compared to the baseline year 2013. This scenario requires the deep renovation of 85% of the building stock by 2025/30 and a doubling of the current rate of renovations. Investment needs are large, estimated at CZK 1.1 trillion (EUR 45 billion, about 14.5% of 2023 GDP) until 2030. Around CZK 393 billion of public funds, largely from EU sources, are foreseen for energy efficiency measures until 2030, such as building renovations and boiler replacements. This leaves a large private investment gap.
Increasing carbon prices would provide strong incentives for housing renovations and for shifting to lower-emission heating systems. Carbon prices are low in the residential sector (Figure 3.4, above). Higher prices would also level the playing field between district heating (already under ETS) and individual heating (outside ETS). While pricing carbon is the most effective way to internalise climate externalities, the buildings sector is not as responsive to price signals as other sectors. This is partly because housing renovations are typically carried out infrequently, and several market imperfections lead to underinvestment in energy retrofitting. These include credit constraints for households, limited homeowner awareness regarding the quality of insulation in their homes, and coordination issues for buildings with several apartments.
The role of certifications could be strengthened to complement pricing instruments. Energy performance certificates (EPCs) represent a reliable and standardised source of information on the energy performance of buildings, which also include practical guidance on how to move from one performance class to another. This enables easy comparison of energy performance of properties and tracking of the worst-performing properties. In line with current European regulations, Czechia requires new buildings, properties for rental or sale, and properties that have undergone a renovation to have an EPC. Currently around 10% of the building stock are estimated to have EPCs. The authorities should consider extending coverage of EPCs before 2030 to help achieve energy efficiency targets and better target financial support for renovations to the worst-performing dwellings. For instance, authorities could follow the example of other countries, such as the Netherlands or France, where certifications have become mandatory for all properties in multi-family buildings from January 2023. To alleviate the burden on vulnerable households for the acquisition of EPCs, financial support could be provided.
Financial support for building renovations could be better targeted to the most vulnerable households and energy-inefficient buildings. Czechia has been operating subsidy programmes for residential renovations for many years, partly funded by EU ETS proceeds. The main instrument is the New Green Savings Programme that supports the renovation of residential buildings with up to 50% of total eligible expenses. Low-income and vulnerable households can receive special up-front grants and a new programme for comprehensive renovations also provides favourable loan conditions in addition to the subsidy. Given large investment needs and limited fiscal resources, renovation grants could be better targeted at the most vulnerable households living in the most energy-inefficient dwellings. Untargeted grants face the risk of disproportionately benefitting middle and high-income households, and funding renovation works that would have been undertaken even in the absence of support. In contrast, lower-income households are less likely to undertake renovation projects without assistance. For example, since 2022 in France grants from the programme “Ma Prime Renov” have been subject to means testing and have been contingent on the energy savings generated by the renovation works. Extending the coverage of EPCs can help better target the worst-performing dwellings.
The use of favourable loan programmes should be expanded for all households and realised energy savings better monitored. A good example of a loan programme is Slovakia’s State Housing Development Fund (SHDF). The SHDF operates as a revolving fund and is almost totally financed by its own resources, reducing the burden on the state budget. Projects funded by loans from the SHDF target multi-apartment buildings or family houses, which have been in use for at least 10-years, and are subject to achieving at least 35% in energy savings. Such projects are conditioned on technical ex ante and ex post evaluations, which increase the potential effectiveness of the renovations in terms of energy savings. In Czechia, there is a need to better monitor realised efficiency gains. Ex-post evaluations of renovation programmes in the past showed that in many cases the ex post energy savings were much lower than anticipated ex ante (Valentová, Karásek and Knápek, 2018[13]). Such evaluations also provide essential inputs for further optimising energy efficiency support programmes. The New Green Savings Programme uses EPCs to measure energy efficiency gains, which is welcome.
Split-incentives between landlords and tenants and diverse preferences in multi-apartment buildings can slow down renovations. Tenants usually have limited options to react to higher energy costs, while property owners may have weak incentives to invest in energy efficiency because they typically do not pay the energy bills (Hoeller et al., 2023[14]). However, this split-incentives problem in rented dwellings is less of an issue in Czechia because of the limited rental market. Nevertheless, the authorities could consider following Germany’s approach, which in 2023 introduced a law that the carbon tax liability in residential buildings is split between landlords and tenants depending on the building’s emission performance, with landlords being liable for most of the tax (up to 95%) in emission-intensive rental dwellings. Renovations of worst-performing dwellings can be incentivised by excluding the possibility of renting them, as done in France from 2023 onwards. However, given the small size of the rental market, this should be done in conjunction with efforts to promote the expansion of the rental market. In addition, renovating multi-apartment blocks presents the additional complexity of balancing diverse preferences and financial contributions of multiple homeowners. In 2014, Czechia changed the voting rules from a two-thirds majority of owners needed to agree to renovations in a multi-apartment building to a simple majority. This is welcome as it expedites decision making (Hoeller et al., 2023[14]). In addition, agreement on renovation works could be coupled with easier access to financial assistance for low-income owners. For instance, in Lithuania heating aid to low-income households is conditional on a household’s agreement to multi-apartment building renovation.
Note: Unweighted average for OECD. Indirect emissions are calculated as follows: (Energy use)*(pe+pdh)*EF; where pe=proportion of energy generated by electricity, pdh=proportion of energy generated by district heating, and EF is the emission factor for electricity and district heating (Hoeller et al., 2023, https://doi.org/10.1787/cbda8bad-en)
Source: IEA (2024), IEA Energy end-uses and efficiency indicators database; IEA (2021), Emission Factors Database and OECD calculations.
More needs to be done to decarbonise residential heating. The most inefficient solid fuel boilers have been banned in Czechia since September 2024. The replacement of inefficient boilers with heat pumps and biomass boilers is subsidised, especially for low-income households, while subsidies for gas boilers were abolished in 2022. Since September 2024, support for the replacement of more efficient coal boilers continues albeit with lower subsidies. Besides individual heating, district heating systems have great potential to decarbonise the building sector, by facilitating the integration of renewables into the heating energy mix (Hoeller et al., 2023[14]). However, there is a need to modernise and increase the efficiency of the district heating system in Czechia. District heating systems already cover 40% of Czech households, one of the largest shares in the EU. However, it is still dominated by coal and other fossil fuels. The draft updated NECP aims to increase renewable and nuclear energy in district heating, although concrete quantitative goals are missing. In 2023, the European Commission approved a EUR 401 million scheme to expand district heating capacity based on renewable energy and waste heat. This is welcome but a more comprehensive plan to decarbonise district heating is needed.
Reducing transport emissions
Emissions in the transport sector continue to increase rapidly. Emissions have increased by close to 72% between 1990 and 2022, and the sector contributed around 17% to total emissions in 2022. Vehicle ownership increased strongly in the past decade and is now above the EU average. Moreover, the car fleet is older and more polluting than on average in the EU. The average age of the passenger car fleet is about three and a half years above the EU average (15.9 compared to 12.3 years) (ACEA, 2024[15]). The share of electric vehicles in new car sales is among the lowest in the EU, while the carbon emissions of new passenger cars are among the highest (Figure 3.7). Decarbonising the transport sector will hence require increasing the share of low- or zero-emission vehicles and shifting transport off the road.
Note: In panel B, performance is assessed on the basis of CO2 emissions under the Worldwide Harmonised Light Vehicle Test Procedure (WLTP).
Source: IEA, Global EV Data Explorer, https://www.iea.org/data-and-statistics/data-tools/global-ev-data-explorer; European Environment Agency, CO2 emissions performance of new passenger cars in Europe.
Incentives to shift to less polluting cars should be strengthened. Decisions to purchase electric vehicles typically depend on the retail price, operating costs as well as concerns about practicability, such as the range and the availability of charging stations. The charging infrastructure is expanding but is lagging behind other EU countries (ACEA, 2024[16]), although the number of electric vehicles per charging station is below the EU average. In 2024, the government introduced a new loan guarantee and subsidy programme for the purchase of electric vehicles and charging stations for private use. Subsidies need to be carefully designed to avoid being regressive, as electric car buyers are on average richer than the average household, and to avoid incentivizing the purchase of larger, less energy efficient cars. A less fiscally costly way to incentivize the shift to low emission vehicles is to further refine the registration tax to directly reflect the CO2-emissions of the vehicle. Currently, the one-time registration tax only includes a surcharge for vehicles of very poor emission standards (euro norm 1 and 2) and electric vehicles are tax exempt (OECD, 2022[17]). The annual ownership tax (road tax) has been largely replaced by a road toll (for vehicles above 3.5 tonnes) and highway fees (electronic vignettes, for vehicles below 3.5 tonnes). The road toll varies inter alia with the distance driven and the CO2 emission class. Czechia should also close the gap between petrol and diesel excise taxes. Diesel fuel is taxed at a lower rate than petrol, despite diesel’s higher emissions of air pollutants per litre (e.g. nitrogen oxides and fine particulates). To enable consumers to conduct more accurate cost comparisons in their vehicle purchase decision, the government can require car dealers to prominently display the total typical cost of vehicle ownership for consumers over a period of time.
Promoting the shift from individual road transport towards lower-emission modes like rail and public transport requires further investment. The draft updated NECP estimates investment needs in rail and road transport to meet the 2030 climate targets of around CZK 229 billion (EUR 9 billion). While the rail network is one of the densest in the EU, investment is needed for instance into electrification, modernisation and track speed. Improving the quality of the rail network and public transport availability would particularly benefit rural areas that are more reliant on car use. Better public transport also tends to increase support for climate policies. The Recovery and Resilience Plan allocates EUR 1.2 billion for sustainable mobility, notably to improve the railway infrastructure, and to promote electric charging stations and cycling pathways. The Supreme Audit Office found that transport projects often suffer from inadequate project preparation and implementation, which lead to changes in the design, delays and costs overruns (SAO, 2023[18]). Hence, implementing large transport projects to accelerate the green transition will also require improving public investment governance and management.
Climate policies have distributional impacts. Carbon pricing and the removal of fossil fuel subsidies would lead to higher energy prices. Poorer households tend to spend large shares of their incomes on energy, giving rise to equity and affordability concerns (OECD, 2024[19]). Energy accounts for around 10% of private consumption expenditures in Czechia, and expenditure shares on electricity, gas and heating are particularly high among poorer households (OECD, 2023[1]). Simulations show that implementing policies to achieve the emission reduction goals in EU’s Fit-for-55 could reduce real income, with lower income households likely to see the largest reductions. However, the distributional consequences hinge on how environmental tax revenues are used to support households (OECD, 2023[1]) (OECD, 2024[19]). At the same time, positive health effects from climate mitigation policies (e.g. phasing out of coal) may disproportionally benefit more disadvantaged households.
The impact of climate policies on vulnerable households needs to be addressed. Many OECD countries recycle revenues from environmental taxes to address distributional concerns (D’Arcangelo et al., 2022[20]) (Marten and van Dender, 2019[21]). Public acceptability of carbon prices tends to increase if it is combined with progressive use of revenues (such as cash transfers to the poorest or most impacted households) (Dechezleprêtre et al., 2022[22]). Czechia is expected to receive around CZK 50 billion (EUR 2 billion) from the new EU Social Climate Fund to mitigate distributional impacts, including to support vulnerable households and to enhance energy efficiency and sustainable transport. To support households, lump-sum transfers (as in Switzerland) are efficient and simple to administer but not well targeted and hence expensive. Targeted transfers to low-income households would be more cost-effective. For example, Ireland raised its carbon tax rate and used some of the extra revenue to enhance some social welfare schemes (OECD, 2021[23]). Several countries have also used revenues to lower other taxes such as personal income taxes (e.g. Austria, British Columbia). In Czechia, environmental revenues could be used to lower social security contributions or to fund transfer programmes towards those more affected by higher energy prices. To this end, an operational definition of energy poverty is needed. Such a definition is currently under preparation. Moreover, data requirements to identify and target eligible households need to be addressed, for example by connecting income data with data from land registry and environmental performance certificates (EPC) databases.
A relatively large share of workers is directly affected by the green transition. Recent OECD research estimates that the employment share of high-polluting jobs in Czechia is the highest among EU countries with available data (Figure 3.8). The share is particularly high among middle and low-educated, male and older (55-64) workers (Causa, Nguyen and Soldani, 2024[24]). While the green transition is likely to have limited aggregate employment effects (OECD, 2021[25]), it will imply shifts from more polluting to less polluting sectors or firms within sectors. Some of the labour reallocation has already started in Czechia, with employment in mining and quarrying (mostly coal) having decreased by more than 50% since 2005 (OECD, 2023[1]). Moreover, greener production processes or products (e.g. electric vehicles) will require new or modified skills of the workforce (see Chapter 4).
Share of employment in high-polluting jobs across countries, %, 2019
Note: High-polluting jobs are identified at the occupation level, based on industry emissions and the distribution of occupations by industry. OECD Europe is an unweighted average of countries shown. The figure shows all countries with available data.
Source: Orsetta Causa, Maxime Nguyen, Emilia Soldani, A new measurement approach for identifying high-polluting jobs across European countries, Economics Department Working Papers n. 1796. https://www.oecd-ilibrary.org/economics/a-new-measurement-approach-for-identifying-high-polluting-jobs-across-european-countries_f5127e4c-en
Adjusting labour market settings can facilitate labour mobility and strengthen opportunities to re- and upskill the workforce. Policy measures are needed to cushion the social and employment impact of the net-zero transition (OECD, 2024[19]), including skill-need assessments, social and transitional plans to support workers at risk of being displaced, as well as place-based policies for the most affected regions, as discussed in more detail in the previous Survey. One important area is to facilitate labour reallocation. OECD research suggests that labour mobility in Czechia is among the lowest in the EU, especially in terms of job-to-job mobility (Causa et al., 2022[26]). This at least partially reflects labour market settings that are not conducive to foster labour reallocation. Reforms are needed especially in the following areas (Figure 3.9):
Boosting spending on active labour market policies, especially on training. This can help displaced workers find new jobs more quickly to effectively match jobseekers with emerging job opportunities (Botta, 2019[27]) (Causa et al., 2022[26]). This should be accompanied by strengthening the counselling and guidance capacity of the public employment service and effective profiling of jobseekers to identify their needs and the most relevant training paths. New OECD evidence suggests that spending on training, public employment services and employment incentives can be effective at supporting transitions to green jobs (Causa et al., 2024[28]).
Adjusting employment protection legislation. The employment protection legislation is among the strictest in the OECD (Figure 3.9, Panel C). This may reduce workers’ incentives to change jobs and firms’ incentives to hire displaced workers from the pool of unemployed. Indeed, stringent job protection on regular contracts and large differences in job protection between regular and temporary contracts are associated with lower job-to-job and unemployment-to-job transitions, especially for low-educated workers and young people (Causa et al., 2022[26]).
Reducing the average tax wedge especially for low-income earners (see Chapter 1). Higher levels of labour tax wedges, especially in the lower-half of the wage distribution, tend to depress job-to-job mobility, particularly for low-skilled and young people; as well as jobless-to job mobility, including inactivity-to-job mobility for women (Causa et al., 2022[26]).
Note : ALMP refers to active labour market programmes. OECD average is an unweighted average of available OECD countries.
Source : OECD Labour market policy (LMP) database; OECD Economic Outlook database; OECD Employment Protection Legislation database; OECD Taxing Wages database.
As discussed in detail in the previous Economic Survey (OECD, 2023[1]), climate policies will also have impacts that vary across regions, with the coal and heavy industry regions in Czechia (especially the Northeast, Northwest and central Moravia) particularly affected. Czech governments have since the 1990s implemented policies to mitigate the impact on the most affected regions, supported by EU funds (mainly the Just Transition Fund). For example, the Czech RE:START strategy was initiated in 2015 to support economic restructuring and fair transformation in the coal regions. Ensuring sufficient absorption capacity in the regions, engaging local stakeholders from higher education institutions, innovative businesses, regional and local governments, and building consensus around future specialisations are key to the success of regional development policies.
Extreme weather and climate events have significant health and economic costs. Over the period 1980-2023, these events caused over 700 fatalities and economic losses worth around EUR 18.5 billion (6% of 2023 GDP) in Czechia (EEA, 2024[29]). Economic losses were higher than in most EU countries when adjusted for population or size of the country. Floods are the most significant natural disaster risk in Czechia in terms of direct threat to life and damage to property. The population and the built-up area exposed to the risk of river flooding is higher than in most OECD countries (Figure 3.10; (Maes et al., 2022[30])). Severe floods in September 2024 have caused substantial damage. Moreover, climate models predict a worsening in terms of frequency and intensity of droughts (MoEnv, 2021[31]). Droughts weaken forests and may make forest infestation, such as the outbreak of bark beetles in 2015, more likely (OECD, 2023[1]). Adaptation to climate change is crucial to managing these challenges and limiting economic and fiscal costs (OECD, forthcoming). Overall, the Ministry of Environment estimates total investment needs for climate change adaptation of CZK 275 billion (4% of 2023 GDP) until 2030.
The authorities have made a comprehensive assessment of climate vulnerabilities and reflected these in the adaptation strategy but implementation of adaptation measures at the local level needs to be strengthened. The National Assessment of Impacts, Vulnerabilities and Risks of climate change, last updated in 2019, provides a detailed analysis of climate impacts and risks. Moreover, the PERUN project was established to research the consequences of climate change in Czechia. Based on the risk assessment, the government updated the National Adaptation Strategy and the National Action Plan for Adaptation for the period 2021-2025 in 2021. The Action Plan contains 108 adaptation measures to preserve agricultural, forests and the water-related ecosystems; enhance the resilience of human settlements and strengthen early warning systems. The expected total investment needs for the measures amount to CZK 139 billion (1.9% of 2023 GDP) until 2025. In 2025, the implementation of the action plan will be evaluated and the plan updated. The updated plan should make better use of the detailed data on municipal climate risks and impacts to prioritise adaptation measures. Moreover, many municipalities still lack adaptation plans and lag behind in the implementation of measures (Křištofová et al., 2022[32]). This points to the need to establish systemic coordination at the national level and strengthen the professional capacity of local authorities (see Chapter 1).
Private insurance coverage is relatively broad, but pockets of vulnerability exist and will be increasing. Estimates of insured losses of past climate-related disasters vary widely across sources, but generally suggest a coverage of around 30% and 40% (e.g. EIOPA, 2023), which is relatively high in international comparison. Flood risk insurance is generally voluntary in Czechia but mandatory for new mortgages as part of the real estate property insurance. Demand for property insurance has increased in recent years and insurance covers most risks caused by natural disasters. In 2023, about 56% of properties were insured. However, many properties are underinsured, which is partly due to fact that property values (see Chapter 1) and insurance policies are not regularly updated. Moreover, insurance companies generally do not provide flood insurance for properties in high-risk flood zones, leaving homeowners in these areas particularly vulnerable. In the agricultural sector, the Czech government provides subsidies for (natural disasters, adverse climatic events, plant pests, and animal diseases) insurance premia for small and medium-sized enterprises. While this helps broaden insurance coverage, it may reduce incentives to adopt resilience-enhancing practices, such as crop switching or planting drought resistant crops.
The government should evaluate the overall availability and affordability of insurance coverage for all potential climate-related risks, with a view to broadening insurance coverage. Greater private insurance coverage for climate-related disasters could reduce burdens on the public budget for disaster relief and financial support for rebuilding. Identifying segments that are uninsured due to market failures, for example in flood zones, can help inform adaptation priorities. Raising public awareness of catastrophe risks could help increase insurance take up, for instance by developing online mapping tools based on existing flood maps. The government could build public awareness further by demanding information on disaster risk at the time of a rental or purchase transaction, similar to the requirement for energy certificates in real estate transactions. 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. Furthermore, the authorities could consider mandatory insurance against disaster risks (especially flooding) as in France and Switzerland. 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 “Cat Nat” system. A state guarantee ensures that damages from extreme events can be covered. An advantage of the French system is that it provides complete coverage and affordable premiums while keeping a large role for private insurers, with benefits in terms of cost effectiveness.
Share of population exposed to river flooding, %, 2020
Note: A return period is the average or estimated time that a flood event is likely to recur.
Source: OECD International Programme for Action on Climate (IPAC) dashboard, https://www.oecd.org/climate-action/ipac
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