The long times of the energy transition

3-11-2022 | News

The Russian aggression against Ukraine and the sharp cuts in oil and gas exports have aggravated an already difficult situation due to the consequences of the pandemic crisis. This will make the task of achieving the necessary ecological transition even more complex, also due to European policies that are not always consistent with the objectives.

by Carlo Stagnaro

Despite the slowdown in the economy, CO2 grew by around 2% in the first half of 2022. A small variation may appear, but it is significant in light of the immense efforts and resources that, for years, Member States have invested in decarbonization. Behind this rise is the effect of the energy crisis that broke out in 2021 and strongly deteriorated after the Russian invasion of Ukraine. In fact, compared to the first half of 2021, the EU has seen a significant reduction in gas consumption (-11%) and partially offset this decline with more carbon-intensive energy sources, such as petroleum products (+ 8%), coal (+ 7%) and lignite (+ 12%). The situation is set to become even more tense in the next two months and, in all likelihood, also in 2023. And it would be even worse if the demand for energy in general were not tempered by the slowdown in growth, which at least in some countries (such as Germany) risks trespassing into recession. 

The hesitations of European policies

It is from these data that we must start to ask ourselves about the future of ecological transition. Formally, no one doubts the European medium and long-term objectives, namely the cutting of 55% emissions below 1990 levels by 2030 and carbon neutrality (ie net emissions equal to zero) by 2050. European institutions tend to revive: both the plan Fit for 55 - launched in reaction to the pandemic crisis - both the RePowerEu one, theoretically the framework for a common response to the current energy inflation, make the targets even more ambitious formalities on decarbonisation and renewables. 

There are, however, indications that reality is moving in a completely different direction. 

That the immediate response to gas scarcity is to resume the use of coal may appear (and is) an obligatory choice, at least to contain electricity prices and reduce the risk of blackouts. But it would cause less concern if it were an isolated breakthrough. Instead it is not. Because the same willingness to reignite coal by watering down the previous commitments to decommission it - for example, in Italy, we should have closed the plants by 2025 - has not been seen in the face of an emission-free source such as nuclear power. 

In this case, the Germany closed three of the six active plants at the end of last year, and is preparing to stop a fourth: the other two, which should have ceased operations, will remain in operation, but this decision came late and only in the face of a extreme situation. The Belgium instead confirmed the stop to one of its seven reactors in September 2022 and does not seem to want to change the program phase out of the rest, currently set in 2025. So, having to choose between which commitment to violate - the one to reduce emissions or the one to abandon the atom - Berlin and Brussels seem to consider one less binding than the other. 

It should also be remembered that all Member States of the European Union have prepared huge financial resources to reduce energy prices. Italy has so far spent about 60 billion euros, 3.3 % of GDP, for this purpose. Most other European nations have allocated between 2 and 3% of gross domestic product and more money will be used in the future. Germany has launched a maxi-program worth 200 billion (5% of GDP) for 2023-24. The United Kingdom, the most generous so far, has even put almost 7% of its GDP on the plate. This money is not only used to provide targeted aid - for example to low-income families or businesses in particularly difficult conditions - but is largely destined to benefit society as a whole. 

There can be many good reasons for doing so, but there are also two huge reasons for avoiding it or, at the very least, moderating. The first has to do with the current crisis: any measure aimed at suppressing the price signal is equivalent to an incentive to consume (energy in general and gas in particular). So it risks aggravating the situation rather than helping to keep it under control. But there is another relevant aspect: a year ago, at the Cop26 of Glasgow (31 October - 12 November 2021), i leader global companies signed a joint declaration in which they pledged to reduce environmentally harmful subsidies, that is, those fiscal policies that directly or indirectly incentivize the use of fossil fuels. A few months later (February 2022) the Ministry of Ecological Transition released the new edition of the "Catalog of subsidies harmful and favorable to the environment", which one by one denounces all the measures that have this effect and also contains precise policy indications, including that of increasing the excise duties on diesel (!). 

Beyond the methodological discussions of how these lists are compiled, and how individual measures are evaluated, it is quite impressive to note that 2022 was probably the year in which the volume of these subsidies exploded unprecedentedly. . It will be interesting to see how the various tax expenses and the exceptions "temporary"To the energy taxation adopted during this year and next, when the next edition of the volume will be released. 

We can, of course, consider all these interventions to be completely temporary and linked to contingency, and think that - as soon as the emergency is overcome - we will return to fight with equal conviction for the abatement of emissions. But are we sure? It is by no means taken for granted. And not only because some of the choices made have already generated effects, leading to an increase in emissions in 2022-23 that will have to be compensated in some way in the future. The fact is that many of them will be politically difficult to question. For example, a few weeks after the Mite Catalog called for an increase in excise duties on diesel, the Italian government actually "temporarily" lowered the levy on motor fuels. In theory this is a temporary choice. But it will not be easy for the new executive to present himself in front of the Italians and announce the return to "normality", that is, a sharp increase in excise duties of 25 cents per liter. 

A difficult two-year period

To the picture described, a further and less obvious element is added. The last year and a half has been - and probably will be the next two years as well - extremely difficult not only for society and the economy in general, but especially for energy market operators. Some have certainly made stellar profits (producers of oil & gas and producers of electricity from renewable sources, at least for the volumes not contracted at prices established ex ante). But most of the market participants - especially traders and sellers - are going through a phase that jeopardizes their very survival. The sudden and frightening increase not only in the price level, but also in volatility, exposes them to almost unsustainable financial charges and margins, and above all puts them in the position of not being able to take the risk of contracting every customer, leaving many companies without supplier. 

It is no coincidence that several countries have had to adopt extraordinary injection tools liquid assets or recapitalization of those in difficulty: above all, Germany, which had to save the largest operator, Uniper, which has a market share of around 40% in the sale of gas to end customers. The situation is made even more complex by a series of interventions adopted by governments, which have put these subjects even more in a tight spot: just think, in Italy, of the obligation to pay in installments for end customers or the prohibition of unilateral adjustment of contracts. 

In this context, resuming the path of transition will inevitably have to deal with two enormous obstacles to overcome. The first will be the reabsorption from the measures exceptional launched in recent months, which at least in part contradict the objectives of decarbonization, while others, obviously, are consistent with them: this is the case of simplifications for renewable sources. The second is the demographics of energy companies, which are fundamental tools and actors of the transition, but which could be decimated at the end of this period. Not to mention that an effect - perhaps unwanted, but certainly substantial - of the approach adopted by many Member States (including Italy) and in part by the EU itself will be that of a progressive centralization and nationalization of decisions. This can be seen from the debate, with a vague Marxian flavor, on the "decoupling" of electricity prices from gas prices, as if it were not the norm in any commodity that the price of the good depends on the marginal cost of production. The alternative, of course, is - on the theoretical level and even more on the practical one, as can be seen from the confusing measures adopted for this purpose - that of intervening with a straight leg with more or less articulated and more or less invasive forms of price control. . This contradicts the twenty-year process of privatization and liberalization that had shaped the European energy landscape up to now. But it poses yet another obstacle to the return to normalcy. 

Contradictory thrusts

It is therefore a question of understanding like adjust not so much the long-term goals of transition policies as the tools and methods of implementation. So far Europe has navigated - not without contradictions - between an energy policy which tends to be inspired by the principles of free competition and a much more interventionist environmental policy. Thus, on the one hand, the path of vertical separation of the former monopolists, of competition in the market and of the push towards mechanisms of pricing such as to reflect the real conditions of supply and demand (the centrality of the hated Ttf is born right here and its scrapping would be a serious mistake from this point of view). On the other hand, however, increasingly detailed obligations were introduced not only on the reduction of emissions, but also and above all on the instruments to be adopted to achieve it: which and how many renewables, which and how many technologies for energy efficiency, what type of fuels for transport, and so on. The result of this contradictory push has been a regulation of the market generally oriented towards the promotion of competition, but also an energy taxation of the opposite sign. 

With Philip Booth we analyzed the environmental effect of taxes and energy subsidies in the 27 Member States of the European Union and in the United Kingdom, finding the total lack of coherence between the declared objectives (decarbonisation) and the consequences of the entanglement. between taxes and subsidies. For example, based on pre-crisis data, the emission of one tonne of CO2 through the combustion of petroleum products in a car was subject to an implicit tax of about 90 euros, while the same ton of CO2 issued by a coal plant pays a duty of only 10 euros. Conversely, the abatement of a ton of CO2 through sources such as biomass or hydroelectricity is rewarded with an average incentive between 10 and 50 euros, while the same result - if pursued through the installation of photovoltaic panels or wind turbines - guarantees a subsidy, respectively, higher than 200 o of 100-150 euros. 

Therefore, the pre-existing contradictions add up to the consequences of the “transitory” interventions. It is good that Europe has so far never really questioned environmental objectives. But one is also essential reflection criticism on the way in which they have been pursued so far, endorsing and indeed amplifying inconsistent policies such as the use of energy taxation. And also recognizing that the current crisis is, in part, the daughter of a perversion in environmental policies which, for example, have often confused the (desirable) goal of reducing request of fossil fuels with that of abandoning the production. This has led us to a growing dependence not so much on foreign countries as on a small number of countries including, obviously, Russia. 

To conclude: it is essential put decarbonisation back at the heart of our energy policy, but it will not be easy to do so after, overwhelmed by the emergency and perhaps even by panic, we have questioned the entire energetic order that we had given ourselves. 

Carlo Stagnaro he is Research and Studies Director of the Bruno Leoni Institute. 

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