Many European governments now face a perfect storm of threatened energy security, rising inflation, war-propelled refugee crisis, and climate objectives. New Zealand be warned.
As Europe and the UK prepares to go into another winter, with many low-income and elderly now reducing their heating costs to shivering in one room, we are getting to a point where there is actually a limit to what governments can do simultaneously.
The risk is that governments abandon serious climate policy and opt for further short-term compensation schemes that limit the worst of the effects of energy prices spikes. We’ve seen it in New Zealand, we’ve seen it in Germany, across many countries we’re seeing massive subsidies go into defending the poor from cold and the family from fuel-driven inflation.
But unless there is deep and long state support for heating, cooling, and food as a way for governments to protect households, governments will fall and so too will the shift to a greener economy that has a shot at staying under 1.5C degrees of warming.
OIL AND GAS
Oil prices for Europe have been steadily rising since April 2020 as a consequence of OPEC production cuts. Natural gas prices have followed suit. Last Friday Russia’s GazProm stopped the resumption of gas flows to Europe through its NordStrom 1 line. In July this year the EU called for voluntary cuts of 15% in gas use across the EU.
Europe will be banning imports of all Russian oil that arrives by sea, by the end of this year.
This will likely further hit oil prices and spread to all economic sectors. The petroleum crunch is hitting harder and harder.
The spike in consumer electricity bills has also be caused by French nuclear outages and a heatwave across Europe this summer boosting demand.
In part because the Russia-Ukraine war is likely according to NATO to continue for several years, many gas analysts expect gas prices to be elevated for the next two years or more.
Germany – the dominant economic engine of Europe – has moved to the second stage of a three-tier emergency gas plan, curtailing supply to industry. It will also introduce a gas levy to distribute the high costs of replacing Russian gas from October this year.
In fact Germany has now set in place a set of society-altering rules around energy consumption, starting this month and getting progressively tougher: gone are such things as illuminated advertising, indoor public building heating, enforced cuts to hot water, no heated pools, and further rules kicking in longer term.
STATE ASSISTANCE WITH ENERGY TRANSITION
Olaf Schulz is putting EU65 billion in price supports for consumers to help them through this.
Britain has put a price cap on energy tariffs in 2019, but this has blown out and the UK media are awash with stories of poor old people shivering and reduced to one room.
The idea that gas could be a transition fuel to get Europe through to the era beyond 2035 well, no longer possible.
Then there’s oil.
The European Union has set some of the boldest targets in the world for rapidly decreasing their reliance on petroleum particularly in new cars.
The market share of new vehicle purchases in Europe is nearly 20% and rising. For a few Nordic countries this is great, but the great majority of citizens still drive petroleum cars.
Now, the only thing standing between the 2022-23 winter and thousands of people shivering in poverty and into freezing to death is deeper and deeper massive government subsidy.
The alternative is that more European governments cannot withstand political pressure rising from cold citizens, the resistance to Russian aggression dissolves, and with it goes the best shot at the fast energy transition that the EU needed to keep its 1.5 degree climate target.
As in New Zealand, some European countries like Germany, Ireland and France have cut public transport prices to make less-petroleum-reliant travel more attractive.
VERY, VERY HARD POLICY CHOICES
The future is onrushing towards the EU faster even than its bold longer term policy plans and shorter term transitions.
It is an exceedingly tough balance between governments enabling high petroleum prices to accelerate energy transition across the EU for strong strategic reasons in the years to come, but yet generate policies to mitigate the suffering of people to not die of cold, not be able to travel to work or learn, and not decline as either families or as countries. It is New Zealand writ large, and they are several years ahead of what we will go through.
There is a brutal point in this: decarbonising economies requires high and stable fossil fuel prices.
According to the scenarios from the latest IPCC report, limiting warming to around 1.5C requires global greenhouse gas emissions to peak no later than 2025 and to be reduced by 43% by 2030. That is a fast closing window.
It would be vile and cruel to consider any upside to the Russian invasion of Ukraine. It is forcing harder and harder policy choices on governments, just at the same time as it is uprooting millions and millions of people and killing thousands.
But do we see emerging a positive feedback loop of change between high energy prices, industry and consumers, and state and EU support that will eventually transform European society? Signs are good but the chaos is terrifying and there is much more chaos to come.
To illustrate how much more sensitive we are to similar fuel price rises, the ANZ ‘truckometer’ index showed that it was only in Level 4 lockdown that we stopped driving much, we try and cut down where we can, but we are other than on the margins fuel inelastic.
It is a brutal policy point to state, but fossil fuel prices need to be kept high in the transition age. Even then, the petroleum addiction is very, very hard to shift. It will drive inflation and poverty upwards together. Even worse than it already is.
It would be foolish to claim that a political appetite exists for sustained freezing in a bedroom to support the Ukrainian war or that such a political equation will last for long. Nor may one claim that there is a capable government who has done this kind of transition before that has kept economies strong, democracy alive and human rights sustained.
But what Europe and the UK is going through is right at the limits of what long term policy goal and execution can manage.
If New Zealand ever wanted to see how hard real energy transition is, observe the EU now and into 2023-4. Winter is coming.
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