The EU must change course on energy

This week, European industry finally raised the alarm, directly challenging EU climate policy. In a letter to the President of the European Council, which gathers all of the EU’s 27 government leaders, four of Europe’s largest steel and chemical manufacturers demanded “immediate action” to do something about the self-inflicted high cost of energy in the European Union. In particular, ArcelorMittal, ThyssenKrupp and Voestalpine and chemicals giant BASF singled out the EU’s Emissions Trading System (ETS), a de facto climate tax. 

They want the EU to “halt the escalation of ETS-related costs and avoid further damage to Europe’s manufacturing base”, lamenting that EU climate policy has become too expensive and “no longer reflects current global realities.”

The strange thing is that it took the companies so long to raise the pressure. Natural gas prices in the EU are about four to five times higher than in the United States. Suspending ETS — as requested by Italy and Slovakia — would bring that down to two or three times the level. Already in 2023, a report prepared by former Italian PM Mario Draghi pointed out that carbon costs accounted for around 10 per cent of EU industrial retail electricity prices. Electrification is not an option for heavy manufacturing and 10 percent is already considerable. Heavy industry requires natural gas or coal. 

The European Commission of Ursula von der Leyen hasn’t done much about it all, despite EU leaders demanding in March that something be done. In response, the European Commission only came up with a few limited measures to bring the ETS price down slightly. Immediately after the announcement of those measures in early April, the market price of ETS rose, indicating that traders had expected more far-reaching measures. Then the Commission also proposed a new “decarbonisation fund” of up to 30 billion euros, partly financed by ETS revenues. The central planning mindset of the institution is simply grotesque. 

What is worse is that the the EU has decided to expand ETS to consumers. This expansion, dubbed “ETS2” will cause natural gas prices to “increase by 16 percent, heating oil by 21 percent, and gasoline and diesel by approximately 10 percent. This is estimated to cost families that continue to heat their houses with gas or drive a fossil-fuel powered car an additional 250 to 400 euros per year. Low-income households, single-person households, and single-parent families would feel the impact the hardest. It led EU member states to postpone implementation to 2028, from January 2027, but this punitive policy has still not been scrapped. 

Perhaps industrial pressure may now finally bring some sanity back into the debate. The four leading companies criticize the EU in their letter also for “acting alone in imposing rapidly rising carbon costs on its industry already facing structural cost disadvantages like higher energy prices and regulatory costs … Europe is effectively acting alone in imposing rapidly rising carbon costs on its industry already facing structural cost disadvantages like higher energy prices and regulatory costs.”

In fact, the EU had come up with some kind of solution for this. Because the rest of the world was less than keen to copy its suicidal climate policies, it formed the so-called “carbon border adjustment mechanism” or “CBAM”. They do love acronyms in Brussels.

The scheme imposes tariffs on trading partners, which unsurprisingly led to tensions. The U.S. managed to secure concessions, unlike poorer economies like South Africa and India. Despite opposition within the EU, by France and Italy, which demanded fertiliser to be exempted, the CBAM scheme is still in place, even if it was watered down somewhat.

As Professor Samuel Furfari, a long time senior EU official in the Commission’s energy department wrote on BrusselsReport.eu: “the Carbon Border Adjustment Mechanism (CBAM), often invoked as a remedy, addresses only the imported component of finished goods, leaves complex value chains exposed, and provokes trade retaliation from major partners. It is a fiscal patch on a structural wound, and it cannot recreate industrial capacity once that capacity has been written off.”

It is good to see that European industry is no longer shy to directly attack the EU instead of focusing on protectionist climate tariffs like CBAM.

Furfari warns that this year is “a critical moment for the decision to abolish” ETS, due to the imminent implementation of the ETS2, the EU Commission’s constant attempts to integrate ETS revenues into its budget as an “own resource” and due to the “Social Climate Fund” — yet another EU fund financed with ETS revenues — creating beneficiaries that will lend political support to ETS. 

Meanwhile, despite the outside world complaining about the enormous cost of EU climate policies, the European Commission simply continues on its fated path. Earlier this month, the institution proposed legislation to force households to use less energy at peak times by using AI-powered smart meters. This in order to take pressure off the grid, in preparation for an explosion of electricity demand from artificial intelligence data centers and electrification of the economy. 

Let’s hope that EU leaders will finally pay attention to the writing on the wall

Danish economist Bjorn Lomborg, a long time critic of EU energy policy, reacted to this by stating: “Because of climate policies, the EU can’t produce enough reliable power. Its solution? Tell households to cut electricity use when they want it most. To make room for AI data centers and industry.” 

Let’s hope that EU leaders will finally pay attention to the writing on the wall. That may in turn also trigger a change in UK energy policies, which have remained largely aligned with the EU’s. A European man can dream.