Green Deal Ambitions May Hinder Its Implementation

The Green Deal is an initiative that has – and will have – a significant economic and redistributive impact unlike anything the European Union (EU) has seen before. Its implementation will require fundamental changes in the foundations of the European economy and trillions of euros of investment. But even that may not be enough. The Green Deal envisages the introduction of technological innovations that we have not yet discovered.

Green Deal Ambitions May Hinder Its Implementation

The current energy crisis is a huge lesson for the Green Deal. Ambitious goals, boldly planned in a period of cheap and available energy, are much more difficult and expensive to achieve in a period of scarcity and uncertainty. The energy markets have taught European policymakers that central planning for economic transformation is not at all easy, if not downright impossible.

Economists know that any model of the economy is always a simplification of it, and the weight given to risks is given by the author of the model, which is also fallible. Two years ago, few in the Brussels offices could admit that in 2022 we would be desperate to save every cubic meter of natural gas. Positive enthusiasm and the belief that the EU must be a world leader in achieving carbon neutrality made it impossible to acknowledge the significance of the risk of over-reliance on a single supplier.

The low price of gas on the market and its seemingly unlimited quantities have made gas the magic wand of the green transformation. Its lower emissions were to replace coal in the long term, bridging today with tomorrow, when windmills and solar collectors will propel the European economy towards a bright future.

Today, in Europe, we are opening up canned coal-fired power stations to replace or save precious gas. At the petrol stations, the price of diesel far exceeds that of petrol, because demand for light fuel oils, which reduce the production potential for diesel, has also risen sharply. Then, as if on cue, there have been massive nuclear power plant outages in France. The figures show that industrial production has not yet fallen significantly, with manufacturing firms using alternative fuels to make up for the huge fall in gas consumption. In any case, Europe is expecting a rise in greenhouse gas emissions this winter.

Does this mean the end of the Green Deal? The current increase in emissions from increased coal or oil consumption will certainly not bring an end to it. There are two processes running in parallel: savings in consumption, and not just by insulating buildings. A high price (unless it is absurdly capped by governments) will eliminate any waste.

Then, there is the miracle of international trade and Europe’s hitherto fat wallet, which attracts vast quantities of liquefied gas. So significant is the gas crisis that even the sluggish Germans will complete their missing LNG terminals in record time so that a third more of the precious commodity can land in Europe next year. The increase in emissions from coal will be, and oil is very likely to be, temporary.

On the other hand, the determination of European politicians, but also the cultural and value settings of an influential section of the public, are leading to the current energy crisis being interpreted as an opportunity to introduce the Green Deal more quickly.

What did the EU do when everyone already knew about the gas shortages and expensive electricity? It did not suspend the trading of allowances in order to reduce the price of energy, it did not force Member States to extend the operation of nuclear power stations, it did not use European resources to encourage the extraction of natural gas in the Netherlands or wherever it could. The Member States have agreed to tighten the target for the share of renewables from 32% to 40% in 2030, and both the European Parliament and the Commission are currently lobbying for 45%.

These steps are surprising to many. The European economy is facing high inflation and is very likely to fall into recession. High energy prices are closing businesses, and Europe will be forced to import more emissions from abroad, for example in fertilizers or aluminum. Basic raw materials that are also essential for building renewables, such as steel, cement, aluminum, copper, but also silicon for solar panels and lithium for batteries, have also become significantly more expensive.

However, the problem of tightening targets is also an energy one. We still cannot make batteries cheaply and large enough, nor has hydrogen production become cheap enough to lose the ‘experimental’ label. Increasing the share of unstable renewables while reducing the share of stable ones is understandably leading to demonstrably increasing problems in maintaining grid stability.

The building of new transmission networks across Europe is moving very slowly, with Germany again a textbook example of how wide the gap is between paper targets and investment reality. Periods of ‘Dunkelflauten’, as the Germans call the time when the sun is not shining and the wind is not blowing, are still an unsolved problem.

Meanwhile, high energy prices will not disappear in a year or two. On the contrary, the low prices before 2019 were an anomaly. Governments are reacting to the situation with state aid that is reaching astronomical heights – again, think of the Germans, who want to subsidize the economy with a whopping 5% of GDP. The coronary crisis has driven the indebtedness of the EU countries to new heights, but this is going to break through the ceiling as a result of the energy crisis.

Ten years ago, at least we could have thought that we had not yet tried the ‘ECB will bail us out’ ploy. Today, we know that the ECB is one of the causes of the current problems; there is simply no easy solution. Europe will have to pay for it by a fall in living standards, by a fall in economic growth, which is already fragile. And that is grist for the mill of populists in all countries. We will not find the Green Deal on their political agenda.

How Do We Get Out of This?

We have a choice of two perspectives. The EU, with its 8% of global emissions, should pour itself a glass of clear wine. 18 GW of new wind power a year in the EU will produce 2 times less electricity than new coal-fired power stations in China. Without Asia’s involvement, the welfare reduction of Europeans will have minimal effect on the resulting warming figure.

The second view is less radical, more techno-optimistic. It would be enough to cut back on gas and not to tighten up the targets, which are so reminiscent of the five-year plan we are so familiar with. Stabilizing economic growth is the key, because it is a precondition for sustainable investment, including in renewables.

These have already become so significantly cheaper that they will find their way into the energy mix anyway, with the help of carbon taxation. And whether it will be in 2030 or 2040 is less important from the point of view of the 8%.

4Liberty, October 13, 2022

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