Europe Addressing its Energy Price Crunch Problem

The European Commission risks contradicting itself on two fronts as it prepares a “toolbox” of measures to combat the continuous rise in energy prices: its climate policy and its decade-long campaign to liberalize energy markets.

Let’s start with the environment. Although the EU’s climate policies cannot be blamed for the current high energy prices, they have certainly fueled the fire.

Frans Timmermans, the EU’s climate leader, admitted it two weeks ago, telling the European Parliament that rising CO2 pricing on the EU’s carbon market account for “about a fifth” of the increase in energy prices.

A number of factors influence carbon pricing, including the current high price of gas. However, the anticipation that CO2 allowances will become scarcer in the coming years is fueled by the EU’s legal responsibility to cut emissions in half by 2030 and achieve net-zero emissions by 2050.

In other words, the market is finally paying attention to the EU’s climate measures. So the Commission’s option of stumbling at the first hurdle and weakening the EU’s carbon market – for example, by establishing a CO2 price cap, as Poland and Spain have urged – does not appear to be appealing.

And, because the European Parliament and the EU Council would have to get involved, it would likely take too long to pass — not an appealing solution in the face of a short-term crisis.

An easy fix for the EU would be to allow member states to temporarily suspend power taxes as Spain did. Alternatively, they may follow France’s lead and give cash straight to the poorest households so that they can afford to heat their homes through winter. All of this is possible under EU regulations, as long as market participants are treated equally.

Since the 2006-2007 gas conflict between Moscow and Kyiv, the EU has implemented supplier diversification and energy liberalization requirements. This included requiring gas corporations to divide their supply and transportation operations and terminating long-term supply contracts, which Brussels saw as perpetuating the dominance of big players like Russia’s Gazprom.

As a result, the market is more liquid, and prices are generally cheaper. However, it exposed Europe to worldwide competition, as gas is transferred to the highest bidder when supplies are scarce. And today’s highest bidders come from Asia rather than Europe.

The long-term solution to the current dilemma is well-known: increased renewable energy and increased energy efficiency. However, that is a long-term project that will take years, if not decades, to complete, and the energy crisis is currently underway.

So, in the short term, what can Europe do? Aside from temporary tax relief and social measures, revisiting the EU’s position on long-term gas supply contracts could be a good place to start. Volatility in oil and gas markets is likely to increase, not decrease, as Europe pushes forward with its climate targets.

And, because gas – and oil – will be required in the transition to renewables, restoring long-term contracts, while remaining within the EU’s climate goals, looks to be a reasonable approach that might restore market stability.