From the Editor: Europe’s poor choice of crisis solutions [Gas in Transition]

Six months after Moscow began its invasion of Ukraine, Europe’s spiralling energy crisis now makes the prospect of a painful winter recession very likely. A number of governments are proposing measures to subsidise energy costs, but not all of these plans seem well-conceived.

In the UK, the contenders to replace prime minister Boris Johnson, Liz Truss and Rishi Sunak, have been pressed for their position on the energy price cap. The cap is set to be raised substantially next year, and opposition parties have warned that this will throw many poorer families into destitution. Protection for the most vulnerable energy consumers is prudent, but the government would do well to let the cap rise, as this would incentivise consumers to use less energy, which is exactly what Europe needs to happen right now. So far the favourite for leadership in the polls, Liz Truss, has for the time being said she does not back a freeze in the energy price cap. But if she secures the position, she may well U-turn under public pressure this winter.

Many other European countries have likewise frozen price caps or are considering doing so. This is simply because this is what voters are calling for, even if it runs counter to the  EU’s call for member states to make voluntary 15% cuts to gas consumption between now and the end of winter, and may increase the financial burden on households in the longer term. Germany notably allowed energy giant Uniper to pass on energy costs to consumers as part of the agreement for the company’s bailout, and this is likely to encourage Germans to cut usage better than any government campaigns on television. Many other companies across Europe are also being pushed to the brink of bankruptcy by energy costs. Instead of spending their time in overly complicated and messy negotiations with energy utilities to save them, governments would do better to let them pass on the cost and recapture profit.

Meanwhile, the European Commission announced on August 19 it had cleared under EU state rules plans proposed by the governments of Denmark, Finland and Germany to shield energy-intensive industries from the added cost to electricity caused by carbon taxation. The cost of permits under the EU’s emission trading system have never been higher, and governments want to do what they can to keep industries running and deter them from relocating their production to other parts of the world “with less ambitious climate goals.”

The plan may produce the desired effect, but the alternative solution that has been proposed by some experts has been to temporarily halt the emissions trading system entirely. This would immediately bring down energy costs, and allow industry to use whatever energy sources they can access to maximum benefit. This may well encourage more coal-fired power plants to be turned back on – something that is happening already – but it provides a more efficient means of protecting consumers than introducing selective subsidies to cover the cost of a tax.

By taking this step, Brussels would be compromising on its climate ambitions. But with the crisis risking social unrest and even uprisings this winter, it may be a step worth taking to ensure that there is still public support for those ambitions into next year.

Longer term, the EU must also reconsider its position vis-a-vis natural gas, in order to bring the current problems to an end sooner rather than later. European lawmakers agreed this summer to allow the European Commission to classify natural gas along with nuclear energy as sustainable in its taxonomy. But this was largely a symbolic victory. The rules for counting a gas investment as green are so strict that it will be incredibly hard for any projects to successfully pass the test.

There is little hope that these rules will be overturned any time. After all, the EU only just finalised them. But they will have some impact on financing for up-and-coming projects to reduce Europe’s dependence on Russian gas, such as the proposed expansion of the Southern Gas Corridor and the fields in Azerbaijan that will supply the gas, or the EastMed pipeline that will bring east Mediterranean supplies to southeast Europe, or indeed the many LNG projects under development across the continent.

Another long-term solution that Brussels could adopt would be to allow the inclusion of more natural gas investments in its list of projects of common interest (PCI). The number that are included has been steadily falling year by year, replaced by investments in electricity, hydrogen, renewables and various other lower-carbon pursuits. But again, such policies will take time to reverse, as such steps ought to have been taken years ago.