It is getting time for the EU to abandon its green dogma

By
Pieter Cleppe
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As Winter is approaching, Europe is trying to come to grips with a massive energy crisis, with energy prices breaching record heights, worsened by what looks like a permanent Russian cut-off of the Nord Stream I gas pipeline between Russia and Germany.

Even if there are problems in the rest of the world as well, there are two main reasons why the situation in Europe is much more severe.

The first one is of course Russia’s invasion of Ukraine, which has resulted in sanctions and Western weapon deliveries to Ukraine, followed by a Russian countermeasure to restrict gas deliveries to Western Europe, as Putin is apparently hoping that this may result in Western politicians forcing Ukraine to conclude a bad settlement with Russia.

The second reason why energy prices in Europe have gone more through the roof than elsewhere is of course Europe’s policy experiments with energy provision, in the name of fighting climate change and reducing CO2 emissions. Already since last year, long before Putin’s invasion, energy prices had been on the increase, partially also a result of the fall-out of the Covid lockdowns, which appear more and more to have been an epic policy mistake.

The key change to our energy system European governments have been seeking, on instigation by the European Union, has been to increase the share of unreliable energy sources – most prominently solar and wind power – in a bid to reduce the share of coal and gas, while also phasing out perfectly functional nuclear power plants, despite the fact that they operate with hardly any CO2 emissions.

Irrational and hypocritical policies

Rationality wasn’t exactly the guiding principle throughout all of this. For a start, from the perspective of energy security, it is of course not the best idea to promote unreliable energy sources. The European Commission for its part, thereby ignored its own energy security strategy, developed in 2000.

Secondly, as much as European governments made great efforts to shut down domestic coal and gas production, they simply increased foreign imports of such fossil fuels, with Germany’s worsening addiction to Russian gas as the most evident example. However, also the Netherlands decided to shut down its gas field in Groningen, which is Europe’s largest gas field and one of the largest in the world. This was also triggered by damage to private homes caused by the gas exploration, but getting compensation has been an arduous process, while most of the income was for the national government’s budget, something which damaged support for it in Groningen.

Green politicians justified replacing European fossil fuels with imported fossil fuels from authoritarian neighbours, by claiming this would only be temporary, despite the fact that no serious expert would agree with the idea that an energy mix of 100 percent renewables is anyhow realistic.

Subsidies as poison for a stable investment framework

Obviously, there is nothing wrong with wind and solar power, as long as it is not subsidized. These forms of energy have however been badly subsidized.

The Spanish government, for example, threw fortunes at it back in 2007, only to change the subsidy regime in 2013, something which damaged investors badly, making clear how also the solar and wind power sectors themselves are the victim of the top-down approach in European energy policy.

Spain has been ordered to pay compensation by arbitration courts, but now it refuses to pay this to these investors. In the process, the European Commission is even encouraging Spain not to do so, using dodgy state aid arguments as a pretext, as the Commission redefines compensation awarded by arbitration courts as “state aid”.

Thereby, the Commission is not only politicising its own ever less solid state aid policies, abandoning support for arbitration, despite European and Spanish companies like BBVA profiting from this system, which has become indispensable for international trade and investment, it thereby is also damaging the renewable energy investment it supposedly wants to promote. In sum, subsidies are truly toxic, as they go hand in hand with politicization of an economic sector.

The EU is wary to correct its course

Yes, the Russian invasion has provided Europe with a reality check. The UK has restarted its coal plants, Belgium has partially reconsidered shutting down its nuclear plants and Germany may also do so, but the experiments with our energy provision are continuing, as the EU and some member states now want to build more renewables as the way forward, despite the fact that precisely this caused the over-dependence on Russian gas.

After the failure of wind and solar power, as well as other renewables, to provide energy security, the European Commission and the German government are now putting all of their hopes on “hydrogen”. Professor Samuele Furfari, a senior official at the European Commission’s energy department for more than thirty years, details in his book, «The hydrogen illusion”, why this amounts to a lot of wishful thinking. He may of course be too pessimistic, but in itself it is questionable that policy makers are betting the bank on technological solutions that have not yet matured, so in order to avoid fossil fuels or nuclear power.

In a desperate attempt to do something, the EU is now proposing more central planning to fix the problems created by central planning. Proposed measures, coming both from member states and the European Commission, range from gas-price caps to a suspension of power derivatives trading. A side debate is meanwhile happening over the price formation in energy markets, where prices are determined by the most expensive energy source. Even if this has apparently been enshrined in EU regulation, and should in that case therefore be liberalised, many other markets work according to this logic, so it looks like opponents of energy liberalization are seizing this as an excuse to reduce the rather incomplete liberalization of European energy markets.

When it comes to a gas price cap – of which it is less than clear how this could be achieved – not all EU member states are convinced. The example of Spain, which manipulated gas prices at a high cost for taxpayers, should be instructive. The country consumed more gas in the first half of 2022 as compared with the first half of 2021. This should make clear that tampering with market prices is like tampering with the thermometer. It only makes things worse and does nothing to tackle the root causes of the crisis.

Meanwhile, as both SMEs and big manufacturers in Europe are forced to suspend operations, European governments are resorting to financial bailouts, further pushing up debt levels.

What the EU should be doing instead

A very first measure is for the EU to suspend the EU’s Emission Trading System (ETS), akin to an EU climate tax on producers and therefore on consumers, in order to counter price increases, as requested by Poland and Flanders. European Commission President von der Leyen is however firmly against. New EU regulations are even about to expand the scope of EU ETS, burdening more economic sectors.

A second pretty obvious measure is not to shut down perfectly functional nuclear power plants, which Belgium and Germany are unbelievably still planning to do. In that respect, it should also be mentioned that the European Commission is in theory obliged to promote nuclear power, following the Euratom Treaty. However, the influence of green NGOs in Brussels is preventing this. Only due to French pressure did the European Commission in the end include it as environmentally sustainable, under certain conditions, in the EU “taxonomy regulation”.

Boosting domestic fossil fuels exploitation and exploring the opportunity of shale gas should be a third step. Even opponents of fossil fuels should prefer European gas exploitation in Groningen over imports from Qatar, or domestic European shale gas exploitation over expensive American LNG imports of shale. New British PM Liz Truss may well signify a historic break with the old orthodoxy, as she has opened up towards shale gas. Also Bavaria’s PM has stated it is time to reconsider the ban on this. As British MP David Davis pointed out: “The Royal Academy of Engineering and the chairman of the Environment Agency have declared fracking safe. Shale gas is much cleaner than coal or conventional gas.” We don’t know yet how profitable shale could be for Europe, but at least it deserves to be properly investigated.

Do not implement CBAM or more protectionist import restrictions

It is hard to believe, but at the moment, the EU is preparing more barriers to entry for energy and commodities to enter the EU, as if constraining domestic production wasn’t enough.

It is not only doing that through its planned CBAM “external climate levy”, which may violate WTO rules, but also through newly planned restrictions on for example palm oil imports. The EU’s plan to phase out biofuels by 2030 has still not been suspended, despite the fact that palm oil-based biofuels derive mostly from geo-strategically reliable places, like Malaysia or Indonesia. One would think that this may not be the time to reduce energy security even more, but well.

On top of that, there is the so-called “EU Deforestation Due Diligence Proposal”. Some EU governments, like the Bulgarian one, warned in June that this may impose an “excessive administrative and financial burden for both operators and trading in the EU and the competent authorities of the member states.” The European Parliament is dealing with the topic this month, so perhaps MEPs should ponder whether it is appropriate at this very time to come up with this piece of legislation which is about the hurt the income of over 7 million smallholder famers globally.

That is what Dr. Inke Van der Sluijs, the director of market transformation at the Roundtable on Sustainable Palm Oil (RSPO), points out in Politico, as she notes: “In Malaysia, palm oil has been a key contributor to reducing poverty from 50 per cent in the 1960s to just 5 per cent today, with smallholder production accounting for 40 per cent of total palm oil plantation areas.”

She adds: “The current proposal poses significant risks to these communities. If the legislation pushes European companies to consider smallholder farmers too risky to have in their supply chain because they are not likely to meet the requirement of the legislation in the time, it could mean they cut the smallholder fares out, meaning they lose access to the EU market. (…)

The problem comes from the proposal’s short implementation deadline, in combination with the requirements for geolocation and traceability. The RSPO recognises the key role traceability plays in enhancing sustainability. But to meet the requirements of the current proposal, millions of smallholder farmers in the countryside of Papua New Guinea, Sarawak and other rural areas of Malaysia, Indonesia, Africa and Latin America need to be reached, informed, equipped and trained. Most of these smallholders supply mills through middlemen, meaning that most European companies currently do not have direct contact with them. To support smallholders in this transition, work must be done in collaboration with local authorities, NGOs and local supply chains, which will take more time than what is currently being proposed in the legislation.”

She thereby further highlights how there are already certification schemes in place for sustainable palm oil like the RSPO system, which has been found to reduce deforestation rates by 33 per cent. In sum, this new bureaucracy isn’t adding value either for the environment, the poor in emerging economies, or Europe’s commodity and energy craving economies.  It is noteworthy that no regulatory impact assessment was made for the proposal, which unfortunately is often the case.

The forgotten lesson of Adam Smith

A key insight of the father of modern economics, Adam Smith, is that imposing lower prices in markets experiencing surging demand and stagnant supply will not help consumers much. This is the case because price controls are not able to address scarcity. Still, European governments and the EU seem to have forgotten this. They may be reminded about this old insight next Winter.

It looks like the weather will determine whether Germany will have enough gas then. Perhaps this is why the German government is clearly wary to go too far with manipulation of prices. Clearly, a price signal of some kind is important, to avoid that consumers start consuming more energy as a result of the subsidies, which is what happened in Spain. Unsurprisingly, France is on the other side of the argument. The French government has already frozen gas prices, while limiting the increase of the regulated price of electricity to an annual 4 per cent. This comes of course at an astronomical cost to French energy company EDF, which France now wants to fully nationalise. In other words, French taxpayers will need to pay for the gains currently enjoyed by French consumers.

Thanks to the euro, the French state is able to shift part of that cost to savers in other European countries, given how the ECB’s monetary financing has now become a key mechanism to fund cash-strapped and spend-drunk Eurozone governments, as the expense of those saving in euro. Potentially, EU governments may agree to yet another jointly financed fund, but in the past, these kinds of fiscal responses have proven a lot more difficult than monetary policy responses, which have now become more complicated by the high levels of inflation.

In this way, Europe’s energy crisis is not far off from spilling over into yet another financial crisis, potentially ultimately endangering the shaky common currency.

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