How to prevent Europe’s energy crisis from becoming an economic one

How to prevent Europe’s energy crisis from becoming an economic one
How to prevent Europe’s energy crisis from becoming an economic one

Price capping sounds good, but it can be counterproductive. That’s because caps won’t curb demand for scarce energy. According to one study, the cap introduced in Spain has led to a 42% increase in gas production since June. A Europe-wide policy would only further increase gas demand, increasing the chances of introducing winter consumption limits. It’s true that the current setup allows some renewable energy companies that produce at almost zero marginal cost to make a profit. If gas prices remain high for years, such windfalls could be described as unwarranted. But the same price signal ensures that gas-fired plants generate power when the wind isn’t blowing and spurs more investment in renewables.

Tasks before governments

Instead of hanging around, governments should focus on two larger tasks. The first is to allow the market mechanism to limit demand while supporting the most vulnerable people. Big funds will be needed, but targeted aid can limit the cost: according to the IMF, policies that offer rebates and cash transfers to the poorest 40% of people would be cheaper than today’s policy mix, which largely includes cutting of fuel taxes or retail price caps.

The second priority is to increase supply, something that is not just the gift of Vladimir Putin. Other sources of natural gas may be secured: this is one of the reasons why French President Emmanuel Macron has just visited Algeria. Within Europe, countries can help alleviate obstacles such as inadequate cross-border gas connections. Today, underinvestment and differences in standards impede the flow of gas from Spain and France to Germany and Eastern Europe. The EU must ensure that if consumption limits are introduced there is continent-wide agreement on which consumers should cut off first.

All of this will cost money. So far, Greece, Italy and Spain, among the eurozone’s most indebted members, have spent 2-4% of their GDP on bailouts to cushion the energy shock. Fortunately, the EU has the firepower to help. Its €807 billion pandemic recovery fund is distributed in the form of loans and grants. Yet less than 15% of the amount has been paid out so far. Payments for energy projects could be accelerated and the commission could offer low-cost loans to help finance targeted fiscal support. The EU has come together to deal with the economic fallout of the pandemic lockdown. Make no mistake – the energy crisis requires an equally bold response.

The article is in bulgaria


Tags: prevent Europes energy crisis economic

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