There should be a commitment to lower consumption, even if GDP is lost, and help only the most vulnerable households
European leaders have the right intentions to deal with rising energy bills, but not the right remedies. After gas prices quadrupled since last year, European Union governments had committed 0.6% of the bloc’s GDP by the end of April to help their economies cushion the blow. That makes sense. However, the way they do so enriches Russia and calls into question the EU’s commitment to reduce greenhouse gas emissions by 55% from their 1990 level by 2030.
The smart way to intervene is to leave prices intact and use taxpayer resources to help the poorest citizens, who are least able to cope with the problem. That is not what is happening. According to a document prepared by economists from the European Commission, most of the measures announced so far aim to reduce the price paid by households and companies, cutting aspects such as taxes on fuel. For his part, the UK Chancellor of the Exchequer, Rishi Sunak, is going to give all British citizens a £400 cut on their electricity bills.
You don’t have to be a fan of the free market to see the problem. Europe wants households and businesses to use less Russian gas, in particular, and cut consumption in general to fight climate change. Rising prices offer an ideal opportunity to achieve those goals. Instead, keeping prices artificially low helps maintain the flow of revenue that Europe continues to send to Moscow, worth $20 billion (€19 billion) a month.
There are two better alternatives. Rather than a price-focused strategy that would increase household fossil fuel consumption by 11% in the long term, the Commission’s economists calculate that targeted income support for lower-income households would limit the increase by both of emissions and imports.
But the real opportunity, as the International Energy Agency pointed out yesterday, is to focus on energy efficiency. According to the Energy Transition Commission, lowering thermostats a further 2 degrees Celsius, along with a 10% cut in industrial gas use, would reduce Europe’s Russian gas needs by 30 billion cubic metres, or 20%. . True, this could also cost 2.2% of GDP. But targeted income support for the poorest would limit the blow.
This would be economically and logically superior to the continued fattening of Russian President Vladimir Putin’s portfolio. Furthermore, the fight to limit global warming to 1.5 degrees Celsius depends critically on reducing energy demand. Perhaps European governments should start preparing the mother of all public information campaigns now.
