Skyrocketing power prices have sent European governments and the European Central bank into crisis mode. Rather unsurprisingly, the EU objectives that were to drive the green transition were the first to go out of the window.
Our policy makers are probably thinking: first things first. This is strange, because for this energy crisis in specific the answer lies completely within the existing EU's sustainable objectives provide. A rapid sustainable power transition would cause the high energy inflation to fade into insignificance.
Support measures are counter effective
Our policy makers know full well that we need to cut ourselves loose from fossil fuels quickly (global warming and our dependence on Russia, anyone?). It would therefore make perfect sense to tackle the high level of European inflation - which is partly due to our fossil energy shortage - entirely by making our energy use more efficient and expanding green power production capacity.
But instead, European governments are relying exclusively on national energy price ceilings to contain the price rises. This involves huge costs, because every citizen is receiving compensation, not just the ones in need. That is a lot of money going straight into the pockets of foreign fossil-energy companies.
Targeted support for only the lowest income groups could have saved a lot of money and would, moreover, have encouraged more efficient energy use. The rest of this huge amount could then have been spent on the sustainable energy transition, in the form of large-scale home insulation programmes and the construction of green infrastructure. In the winters ahead we would then have needed less gas to heat our homes and our sensitivity to the fickleness of the fossil fuel market would have been greatly reduced.
Short-term thinking by national governments and the ECB
It is staggering that national governments are being so short-sighted in their actions, especially because the measures that they have decided to implement so obviously clash with the EU objectives for a green transition. The EU aims to reduce CO2 emissions by 55% by 2030 to be climate neutral in 2050. Since the start of the war in Ukraine, however, governments have only been focusing on the winter ahead and consider the long term as a bridge that will be crossed when we get to it.
The European Central Bank has been equally short-sighted in its fight against inflation. It has started raising interest rates and will continue to do so in the foreseeable future. Because its thinking is that when interest rates go up, households and businesses will start to save more and consume and invest less, because borrowing is becoming more expensive.
In the short term, this could indeed rebalance supply and demand at a lower level. But when the demand for energy subsequently increases again, the supply of sustainable power has not magically increased. To achieve that, we will really need to up our investments in expanding the production capacity for sustainable power. And the ECB, too, can contribute here through its interest rate policy.
ECB, take your responsibility!
Because higher interest rates are a particular disadvantage for projects with high start-up costs. And it just so happens that for green power projects these costs are higher than for fossil fuel alternatives. So, by indiscriminately raising interest rate levels, the ECB is in fact slowing down the energy transition. And this, too, is not exactly aligned with the ECB’s goal of promoting price stability in a manner that supports general EU policy.
The EU objectives for reducing CO2 emissions are clear and the ECB's goal of keeping inflation stable in the medium term should therefore actually be realised by explicitly aiming for more sustainable energy capacity, instead of temporarily reducing demand by inducing a recession. There are plenty of ways in which the ECB could tweak its policy so that it does stimulate green investment. But this does not get a single mention in any of the communications concerning interest rate hikes.
The EU objectives for a green transition should take centre stage in the policy that it pursues - and especially if they form part of the solution for a crisis. Apparently, policy makers need to be constantly reminded of this. Does anyone happen to have a tin of soup or a tube of strong glue to spare?
This is an translation of Joeri de Wilde's column on Financial Investigator, published 1 November 2022.