The wrong way to solve Europe’s energy crisis

EUROPE HAS been battered by soaring energy prices since Russia’s bloody invasion of Ukraine. In response Ursula von der Leyen, the president of the European Commission, has proposed reforms to the EU’s electricity market and unveiled plans for a proposed windfall tax on energy companies. Energy ministers will meet on September 30th to discuss the details. Meanwhile Europe is investigating possible acts of sabotage to Russia’s Nord Stream gas pipelines, one of which was until recently one of the main conduits of Russian gas to Europe. It would be a stark reminder of the Kremlin’s oft-demonstrated willingness to wage energy warfare on Europe.

Better co-ordination across the EU is needed. So far, Europe’s governments have varied wildly in their response to high energy prices. Some have protected consumers by imposing retail price caps, granting fuel subsidies or cutting consumption taxes on energy bills. Others have allowed energy firms to pass on higher wholesale prices to customers, preferring to concentrate on helping the low-paid directly. Generous untargeted help may be socially or politically expedient. But it also risks undoing incentives to limit energy use (see chart).

As might be expected, figures compiled this month for Bruegel, a think-tank, point to a correlation in different European countries between the extent of household gas-price rises and the drop in demand for gas. Broadly speaking, the smaller the rise in prices in July 2022 compared with the first half of 2021, the less year-on-year household demand for gas dropped in the first half of 2022. In other words, higher prices appear to be linked to lower energy use.

France, for example, has frozen gas prices this year and capped electricity price rises at 4%, for households. In his budget unveiled on September 26th Bruno Le Maire, the finance minister, confirmed that this “price shield” would continue into 2023, although the price of both gas and electricity would then be allowed to rise by 15%. These measures come at a big cost, but they have sheltered French households from the hefty price increases in countries like Britain. That the French did not much reduce their use of gas in the first half of this year may in part be because the price freeze gave them little incentive to do so. In Denmark, on the other hand, where gas prices have risen steeply, the government has concentrated efforts on helping the poorest families. It has paid out a “heat cheque” to more than 400,000 households to help with bills. Overall household use of gas has dropped by more than three times as much as in France.

Governments, of course, have other considerations to take into account. Price incentives for greener behaviour are often neither popular nor politically easy to manage. In France, memories of the gilets jaunes (yellow jackets) uprising of 2018-19 are still fresh. This was a rebellion prompted in part by a rise in the tax on motor fuel at the pump. Some greener behaviour can be encouraged by public-information campaigns and clever leadership. Yet if societies are to prepare for a lower-carbon future while protecting poorer households, at some point they must let prices rise in order to discourage excessive use. ■