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Energy crisis is moment of truth for Europe’s green ambition

Newsletter: Europe Express

The EU’s “green deal” is about more than saving the planet. It is a stab at hegemony. European leaders sense that the decarbonisation agenda will force fundamental reform on the world’s economies, and want Europe to be at the front of that technological and policy revolution.

The EU’s desire to be the global green champion reflects that, in many ways, it already is. Green parties are more prominent in Europe than elsewhere. They have gained power or won the battle of the ideas to the extent that other parties have adopted their agenda. Europe creates its prosperity with relatively low emissions. Its cities are pioneering urban economies that rely less and less on the car.

But Europe’s big ambitions also mean it is first to face the headwinds, such as the political fallout from the current spike in energy prices. The imminent prospect of citizens unable to keep the lights on is the stuff of any government’s nightmare. But for Europe it also threatens a long-term political programme around which much else — including the EU’s path-breaking common recovery fund — is built.

Europe’s decarbonisation agenda requires making fossil energy use more expensive. That was always going to be a tough sell. Now that higher prices are suddenly here, it is going to be harder still. Whether EU leaders can keep a cool head in the current crisis — this is, after all, the continent that spawned the yellow vests — will show whether their aspiration to global green hegemony has any staying power.

No politician can afford to neglect genuine energy penury among their constituents. But they should not fall for the temptation of postponing climate policies that could make energy dearer. They should, instead, harness the crisis to galvanise green politics — starting by admitting four ways in which today’s soaring bills reflect unfinished work.

First, these spikes come after a long period of subdued energy prices. Europeans have enjoyed half a decade in which pre-tax market prices for natural gas were lower than before the 2008-9 recession, adjusted for inflation. Electricity prices have behaved much the same. While energy taxes have gone up in that period, the total price increases have been manageable, especially for businesses.

That may be poor consolation for those now facing high bills. But the longer-term consequence has been to blunt the incentive to improve energy efficiency. If governments had committed to faster-rising energy taxes earlier, households and businesses would now be better placed to weather short-term spikes.

Second, a unified energy market remains more aspiration than reality. Households and businesses pay much more for gas in the most expensive EU country than the cheapest, even before differences in taxes are counted. The same is true for electricity. In a real single market, prices should only differ by transport or transmission costs (which policy interventions and public investment should aim to diminish). In such a market, local price swings would be much less violent.

Third, Europe is insufficiently diversified in energy imports. This may seem to legitimise Germany’s acceptance of the Russian Nord Stream 2 pipeline. But it really points to the need for more investment in alternative sources, such as gasification capacity to improve access to global liquefied natural gas markets, or renewable energy projects across the Mediterranean.

Fourth, the fundamental question of what the EU’s energy mix should be remains unsettled. In the medium term, the question is what role gas should play as a stepping stone away from dirtier coal and oil. In the long term, the question is what replaces it. These are not independent considerations: natural gas investments have a longer lifetime than the decade or so it can plausibly act as a transitional energy source.

Overall the EU’s long-term energy strategies point in the right direction but are not forceful enough. Tough carbon pricing will boost energy efficiency. Bigger investments in energy trade will smooth short-term bumps. The bloc’s intensifying focus on hydrogen could accommodate longer lifespans for new natural gas investments with policies to shift gas production from transitional energy to “blue” hydrogen source. It could even give credence to Berlin’s idea to compensate Ukraine for the geostrategic risk of Nord Stream 2 by turning the country into a hydrogen exporter to the EU.

These are fiendishly complex policy challenges. But the bigger task is that of statecraft: to persuade voters that doubling down on decarbonisation — with its implications for gas prices — is the best way to avoid similar crises in the future.

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