The Green Brief: Europe’s energy price crunch dilemna

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As the European Commission prepares a “toolbox” of measures to tackle the ongoing surge in energy prices, it runs the risk of contradicting itself on two fronts: its climate policy and its decade-old drive to liberalise energy markets.

Let’s take climate first. Although the current high energy prices cannot be blamed on the EU’s climate policies, they have certainly fanned the flames.

The EU’s climate chief Frans Timmermans admitted to it, telling the European Parliament two weeks ago that “about one fifth” of the energy price increase can be attributed to rising CO2 prices on the EU’s carbon market.

The carbon price is driven by a combination of things, including the current high price of gas. But it’s also driven by the expectation that CO2 allowances will become scarcer in the coming years due to the EU’s legal obligation to slash emissions in half by 2030 and reach net-zero by 2050.

In other words, the market is finally taking the EU’s climate policies seriously. So wavering at the first obstacle and weakening the EU’s carbon market – for example by introducing a cap on CO2 prices like Poland or Spain have suggested – doesn’t look like an attractive option for the Commission. And it would likely take too long to adopt anyway, as the European Parliament and EU Council would need to get involved – again, not an attractive solution when you’re facing a short term crisis.

From the EU’s perspective, a quick fix would be to let member states temporarily suspend taxes on electricity, like Spain did. Or they could do like France and distribute cash directly to the poorest households so they can afford heat this winter. All of that can be done within EU rules, provided that an equal playing field is maintained between market players.

But that raises another question: what is the role of liberalised EU energy market rules in the current crisis?

As the energy crunch grips Europe, blame has swiftly been placed on Russia for failing to deliver sufficient quantities of gas to Europe through Ukraine. But though this may be the case, it ignores the basic fact that Gazprom is entirely free to choose the highest bidders for its gas.

In fact, the EU has imposed supply diversification and energy liberalisation rules since the 2006-2007 gas dispute between Moscow and Kyiv. This included forcing gas companies to separate supply and transport activities and breaking long-term supply contracts, which were seen in Brussels as preserving the stronghold of dominant players like Russia’s Gazprom.

The result is a more liquid market and lower prices most of the time. But it also exposed Europe to global competition: when supply is scarce, gas is shipped to the highest bidder. And the highest bidders today are in Asia, not Europe.

You can’t blame Russia for playing by the liberalisation rules that Europe itself put in place. (And one also wonders where America’s much-touted ‘freedom gas’ is when we need it most.)

The long-term solutions to the current crisis are well-known: boosting renewables and energy efficiency. But that is a long-term endeavour that will take years, if not decades, to materialise, and the energy crisis is now.

So what can Europe do in the short term? Besides temporary tax relief and social policies, a good place to start could be reviewing the EU’s stance on long-term gas supply contracts. As Europe presses ahead with its climate goals, volatility on oil and gas markets is likely to intensify, not the opposite.

And as gas – and oil – will continue to be needed in the transition to renewables, reinstating long-term contracts, within the boundaries of the EU’s climate goals, appears like a sensible solution that could restore some calm to the markets. 

– Frédéric Simon

 

Top stories

 

This week’s stories

 

News from the capitals

VIENNA. ​​Austria receives first tranche from EU recovery fund. Austria on Tuesday received its first portion of EU recovery funds worth €450 million of a €3.5 billion total to finance projects aimed at industry digitalisation and climate protection. Read more.

ROME. ‘Blah, blah, blah’ – young climate activists call out governments for their climate inaction. “Build back better. Blah, blah, blah. Green economy. Blah blah blah. Net-zero by 2050. Blah, blah, blah. This is all we hear from our so-called leaders. Words that sound great but so far have not led to action. Our hopes and ambitions drown in their empty promises”, said Greta Thunberg during the opening sessions of the Youth4Climate event in Milan. The Italian government hosted the event, which welcomed 400 young climate activists ahead of the COP26 climate summit set to take place in late October in Glasgow. Read more.

BUDAPEST. Hungary lashes out at Ukraine over Russian gas. Foreign Minister Péter Szijjártó summoned the Ukrainian ambassador in Budapest on Tuesday over Kyiv’s decision to turn to the European Commission over the Hungarian-Russian gas deal, Telex reported. Read more.

BUDAPEST. Budapest signs deal with Gazprom, Kyiv ‘disappointed’. Hungary signed a fifteen-year gas purchase contract with Russia’s Gazprom bypassing Ukraine. This angered Kyiv who said it will turn to the EU Commission for a solution. Read more.

STOCKHOLM. Swedish electric carmaker Polestar to go public. Electric car maker Polestar, controlled by Sweden’s Volvo Cars and its Chinese owner Geely, said on Monday plans to go public in a stock market debut that could value it at around $20 billion (€17 billion). Read more.

SOFIA. Bulgarian businesses can not get aid for electricity bills quickly due to political crisis. The Bulgarian government has decided to give €25 per MWh to all companies in the country as compensation for rising electricity prices. Still, the political crisis has blocked the implementation of this decision. Read more.

BUCHAREST. European Commission greenlights Romania’s recovery. The European Commission finally endorsed Romania’s €29.2 billion recovery and resilience plan after months of negotiations. Read more.

WARSAW. Powerful NGOs attack Polish ECR MEP over gas lobby. Two powerful Brussels NGOs accused MEP Zdzisław Krasnodębski of the Law and Justice (PiS) party currently part of the ECR group in the Parliament of concealing the list of lobbyists and supporting EU financing of fossil fuels. Read more.

PRAGUE | WARSAW. Czech/ Polish relations hit rock bottom. Polish Prime Minister Mateusz Morawicki cancelled his planned trip to Budapest’s two-day Demography Summit on 23-24 September due to the current dispute between Czechia and Poland over the Turów coal mine, a Polish government spokesperson has confirmed. Read more.

SOFIA. Bulgarian police, special agents storm energy commission over electricity price hike. Bulgarian police officers and employees of the special services (SANS) made a surprise inspection in the Energy and Water Regulatory Commission (EWRC), trying to understand the reason for the high electricity prices on the energy exchange. Read more.

 

News in brief

Turning the air blue. The European Commission has focused on achieving a climate neutral agriculture by 2035 while ignoring CO2 emissions from other sectors in the revision of the LULUCF regulation, according to Renew MEP Nils Torvalds.

“In my reading, this an ideological decision. You decided for ideological reasons to force the land use sector to be climate neutral by 2035, but you don’t give a f- (trails off)sorry about all the CO2 coming from Poland,” Torvalds told a Commission official at a forestry event on Tuesday.

The Commission’s decision to include agriculture in the land use, land use change and forestry (LULUCF) calculations was controversial from the off. The proposal will roll agriculture into the LULUCF sector at the beginning of the next decade and expect the sector to be carbon neutral by 2035. But environmental organisations have criticised it for giving agriculture a sector renowned for its emissions an out. (Kira Taylor | EURACTIV.com)

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UK considers going it alone with carbon border tax. To use an age-old British phrase, carbon border adjustment mechanisms are like buses, you wait ages for one and then three come at once. The UK is the latest to throw its hat in the carbon-intensive-levy ring, with the environment committee of the UK parliament starting to consider adopting one. But it seems the aim is to go it alone rather than link to Europe’s already proposed measure. The inquiry will look at whether “the Government [should] pursue a unilateral CBAM”.

The committee will look at the role a levy would play in preventing carbon leakage and meeting the UK’s environmental goals. Members of Parliament will look at the practical challenges and what goods it could apply to, as well as ensuring it would not have an impact on developing countries.

“As the UK continues to bear down on carbon emissions, we should not inadvertently increase carbon leakage – the risk of companies moving operations abroad to avoid their environmental responsibilities. This could present a glaring loophole for Net Zero Britain, through which many highly skilled jobs might be lost, damaging local economies,” said Conservative MP Philip Dunne. (Kira Taylor | EURACTIV.com)

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Keep gas out of taxonomy, demand NGOs. Fossil gas should not be labelled as a green investment under Europe’s new sustainability criteria, according to over 150 civil society group. In an open letter to the EU institutions, signatories including WWF, Greenpeace and Transport & Environment, warned against including gas in the soon-to-be-released taxonomy delegated act, saying this would turn it into a greenwashing tool. The letter cites the International Energy Agency’s recent report on reaching net zero by mid-century, which stated no new investments into fossil fuels should occur beyond those committed to in 2021.

“A ‘sustainable taxonomy’ that welcomes methane gas would offer financial institutions the ideal alibi to keep on milking the fossil fuel cash cow in spite of the growing consensus against gas development,” said Paul Schreiber, campaigner at Reclaim Finance. Read the full letter here. (Kira Taylor | EURACTIV.com)

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Italian businesses warn of costly energy transition. The energy transition could cost Italy in excess of €650 billion over the next decade and the government must do more to help businesses bear the cost, the head of the employers’ federation said on Thursday (23 September).

“The national recovery plan provides only 6% of the investment needed for the transition. Almost 94% has to be covered by companies,” Confindustria President Carlo Bonomi told the group’s annual assembly. (EURACTIV.com with Reuters)

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Enel digital spinoff launched. Meanwhile, some Italian companies are embracing the opportunities of the green transition. Also on Thursday (23 September), Italy’s biggest utility, Enel, set up a new digital spinoff to assist power distributors around the world in upgrading their networks.

Gridspertise will manage all activities related to digital meters and intelligent grid services to help its clients deal with the increasing amounts of power generated from intermittent renewable energy sources. The spinoff will mainly target markets in Europe and Latin America, where Enel already has extensive business, but will also look to expand in North America and Asia-Pacific.

Europe’s biggest utility manages power distribution grids in eight countries in Latin America and Europe with around 74.8 million end users. More than 40% of its core earnings came from networks last year. (EURACTIV.com with Reuters)

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Kermit the Frog hops into the UN General Assembly. A world-renowned Muppet made a stunning appearance at the United Nations General Assembly in New York last week. Boris Johnson, the UK prime minister, urged humankind to “grow up” and “come of age” at the COP26 climate summit in November. He then tried cracking a joke, by quoting … Kermit the Frog. 

“When Kermit the Frog sang ‘It’s not easy being green’  you remember that one? I want you to know that he was wrong… [He pauses. Then repeats to make sure everyone heard]. He was wrong. It *is* easy. It’s easy and lucrative and it’s right to be green – even though he was unnecessarily rude to his Piggy, I thought.” 

It seems the joke did not resonate with the UN General Assembly, which remained silent as he made his speech. You can decide for yourself by watching the full speech here (Kermit’s appearance is at 18:57). (Frédéric Simon | EURACTIV.com)

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Southern European banks set for climate hit, ECB study shows. Banks in southern Europe are set to be among the hardest hit if climate change is not mitigated as their clients are most exposed to natural hazards such as wildfires, a European Central Bank (ECB) study showed on Wednesday (22 September).

The ECB has run simulations on more than 1,600 euro zone banks to find out how they would cope with the consequences of climate change, such as natural disasters and the introduction of policies aimed at reducing emissions. It found that the probability of default on bank loans would increase by 7% over the next 30 years in a “hot house scenario” in which nothing is done to limit climate change.

But that increase would be roughly twice as high for four countries. The ECB did not name them but a chart in the report showed Greece, Portugal, Spain and Malta had the highest proportion of companies exposed to physical risks stemming from climate change.

“While European countries are similarly exposed to transition risk when looking at tail firms … there are a few countries that show exceptional vulnerability to high physical risk,” the ECB said in the report. (EURACTIV.com with Reuters)

 

Opinions

 

Upcoming events

29 SEPTEMBER. Is green hydrogen really carbon neutral? As the EU moves away from its dependency on fossil fuel, hydrogen is expected to play a key role in our future energy systems. Join the debate to discuss how. Programme and registration here. (Supported by Environmental Defense Fund)

30 SEPTEMBER. COP 26 – can renewed political will result in concrete actions? With a month to go until the big climate summit, join Jytte Guteland from the European Parliament’s environment committee, María Mendiluce CEO of We Mean Business, Simone Tagliapietra, senior fellow Bruegel and more to discuss what solutions are needed to reach global decarbonisation. Programme and registration here. (Supported by Iberdrola)

1 OCTOBER. Responsible sourcing: the case of batteries. Join Stefano Soro, head of unit for green and circular economy at DG Grow, Antonius Manders, opinion rapporteur for the new batteries regulation and more to discuss sustainable governance, responsible sourcing and the importance of due diligence in the battery supply chain. Programme and registration here. (Supported by Nickel Institute)

7 OCTOBER. Energy system integration – can stakeholders agree on the best path forward? A fan of the TEN-E regulation? Join Catharina Sikow-Magny, director of green transition and energy integration at the European Commission’s energy department, Erik Bergkvist, substitute for the energy committee in the European Parliament and other speakers to delve into the planning of Europe’s cross-border energy infrastructure. Programme and registration here. (Supported by Entsog)

10 OCTOBER. COP26 – can it be a game-changer? With COP26 just around the corner, join environment committee MEP Michael Bloss, Anthony Froggatt, senior research fellow and deputy director for the energy, environment and resources programme at the Royal Institute of International Affairs and more to discuss the upcoming summit. Programme and registration here. (Supported by Zurich)

 

On our radar

6 OCTOBER: Environment Council. The meeting of EU environment ministers includes a deliberation on the ‘Fit for 55’ package, and a public debate on the EU’s position for COP26 as well as the bloc’s forest strategy (see meeting page for full agenda).

21-22 OCTOBER: EU summit. Agenda includes preparations for COP26 in Glasgow (climate) and COP15 in Kunming (biodiversity). (See meeting page).

31 OCTOBER – 12 NOVEMBER: COP26. Global leaders will meet in Glasgow, UK, with more ambitious climate pledges and with the aim to finish negotiations around Article 6 of the Paris Agreement.

2 DECEMBER: Energy Council. EU energy ministers will meet in early December in the second session since the Fit for 55 package was tabled. (meeting page). 

14 DECEMBER: Fit for 55 – part 2. Following the publication of its huge package of climate proposals in July, the European Commission is expected to table more energy-related files, including regulations on natural gas, and proposals on the circular economy.

22 DECEMBER. European Commission to propose nature protection laws. As an early Christmas present to all you nature protection fans, the EU executive is expected to table a proposal for legally binding nature restoration targets to tackle the poor state of biodiversity in Europe and a proposal to tackle EU-driven deforestation.

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