EU governments have spent €674 billion to date shielding households and businesses from high oil, gas and other fossil fuel costs. This unprecedented intervention keeps citizens warm but also keeps them hooked on the very fossil fuels that caused the energy crisis.
Adding fuel to the fire
In a market economy, high prices (real or engineered, as OPEC recently demonstrated) are an expression of scarcity. The only way to structurally lower prices is to alter the demand-supply balance. In that context, spending €674 billion to support demand actually makes the problem bigger.
For example, Europe’s €35 billion fuel tax cut did very little to ease pain at the pump. Instead it helped oil producers such as Russia make more money. Some countries, such as Germany, have learned this lesson and ended fuel duty cuts[1].
It gets worse once you imagine what we could do with €35 billion. According to calculations by our friends at the Clean Cities campaign in May 2022, just €16 billion would pay for VAT on 200 million bikes; or 300 million free public transport passess; or thousands of shared electric vehicles.
The same principle applies across the economy. A big chunk of the €674 billion – twice the size of the US Inflation Reduction Act – should have been used to renovate millions of homes, equipping people with solar panels, heat pumps and insulation.
A capital problem
That’s exactly what rich Europeans are doing. However, the vast majority of Europeans don’t have the tens of thousands in spare cash needed to invest in a heat pump, electric car and new windows. The problem for corporations is different – they have money, but may prefer to delocalise production – but the solution is similar: massive investment in clean, affordable energy and cleantech manufacturing.
Both households and businesses need public support. And here’s the problem: government deficits have ballooned during COVID and remain high. Add to this higher interest rates and a looming recession and it becomes clear most governments, especially those with high debt-to-GDP ratios, will have no room for big investment programmes.
The EU to the rescue?
There is one actor that has the ability to borrow relatively cheaply and has the kind of long term vision and focus required to pull off a major energy transition investment programme: the European Union.
The EU’s €700 billion Covid Recovery Fund (NextGenerationEU) is the continent’s most important investment programme. Unfortunately, only part of the NextGen was for ‘greenery’ and many of the supposedly green NextGen projects miss their mark. For example, a €22 billion high speed train between Salerno and Reggio di Calabria is not a priority right now. We need our best engineers and workers to apply their brilliance to our biggest problems, not new roads, or white elephant rail projects. Yes, the Commission should review the NextGen spending plans, but reshuffling existing funds is not good enough given the scale of the challenge.
Huge amounts of additional funding are required to invest ourselves out of this crisis. NextGenerationEU broke the taboo on EU borrowing. The US Inflation Reduction Act is doing the same to industrial policy tabus. With the right investments now, we can make sure this is the continent’s last energy crisis.
Notes
[1] Countries that have ended cuts to fuel excise duty: Czechia, Germany, Greece, Luxembourg, Slovenia. Countries that have continued cuts to fuel excise duty: Belgium, Bulgaria, Croatia, Cyprus, France, Ireland, Italy, Malta, Netherlands, Poland, Portugal, Spain, Sweden. Countries that did not cut fuel excise duty: Austria, Denmark, Estonia, Finland, Latvia, Lithuania, Romania, Slovakia.
