Fast Green Deal Could Help EU Tackle Energy Crunch: Bruegel
(Bloomberg) -- Governments in the European Union should quickly approve a package of reforms aimed at deepening emissions reductions in order to help the region avert future spikes in energy prices, according to a leading think-tank.
Gas, power and carbon prices are hitting fresh records in the 27-nations bloc as the economy is rebounding. The surge in the recovery-linked demand has coupled with lower gas imports from Russia and Norway, the region’s no. 2 supplier, drying up storages. At the same time, an EU proposal to toughen climate policies this decade boosted investors’ appetite for emissions permits.
But the soaring prices and high volatility are more than a one-off shock and have more fundamental reasons, according to Simone Tagliapietra and Georg Zachmann, researchers at Bruegel in Brussels. To avoid future disruptions, policy makers should promptly approve and implement a set of draft laws proposed in July to boost the EU carbon-cut goal to at least 55% by 2030 from 1990 levels.
“The energy supply-demand balance in the EU will be volatile depending on how quickly fossil fuels are phased out and green energy is phased in,” they said in a note on Monday. “Clearer commitments from governments to introduce low-carbon energy sources, for example by financing the necessary infrastructure and committing to substantial carbon prices in all sectors, could help move away from this precarious balance.”
Europe’s benchmark power price traded above 100 euros per megawatt-hour for the first time on Monday, with German electricity prices for next year almost doubling in 2021. The soaring costs are set to boost bills for millions of businesses and households, posing a big challenge for the EU to garner political support for its transition from brown to green.
On an annual basis, a doubling of wholesale electricity prices to 100 euros would imply that EU consumers pay up to 150 billion euro more more for their electricity, according to Bruegel. High gas and electricity prices are also reverberating through supply chains, causing inflationary pressure and becoming a growing headache for central banks.
To alleviate the impact on the most vulnerable in the short term, EU governments could return extra revenues from sales of carbon permits and value-added tax on energy to citizens in the form of per-capita lump sums, Tagliapietra and Zachmann said. “Member states should also take action to avoid a supply crisis in the coming winter.”
©2021 Bloomberg L.P.