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11. Overcome divisions and confront threats: Memo to the Presidents of the European Commission, Council and Parliament

Author:
Maria Demertzis, André Sapir, and Jeromin Zettelmeyer
Publication Date:
07-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
In the last five years, the European Union managed to find its way through a series of major shocks, including the pandemic and the 2022 surge in energy prices. The response was in many ways remarkable, including unprecedented EU borrowing to fund the NextGenerationEU economic recovery programme and a coordinated reduction in energy demand. However, these crises have left the EU in a bruised state. The pandemic recession and energy-support measures have squeezed fiscal space. Higher energy prices have persisted and EU industrial competitiveness has been eroded. The productivity and per-capita income gap with the United States has widened. Meanwhile, the world around the EU has become more threatening and fragmented. The military situation in Ukraine remains precarious. China has become both more authoritarian and more assertive. The US shift toward protectionism has become entrenched. There is less consensus for measures to combat climate change. In the face of all this, the challenges confronting you are substantial. In the next five years, you must continue to support Ukraine while implementing measures to reinvigorate EU growth, meet the 2030 climate targets and lay the ground for meeting the 2040 goals, and secure faster emissions reductions beyond the EU’s borders. Social cohesion needs to be restored to head off threats to the EU model. More needs to be done to improve EU external security. Promoting growth and enhancing cohesion will entail further deepening of the single market in areas with the highest growth impact, doing more to support innovation and defending competition, openness and multilateralism. Safeguarding the European Green Deal means boosting green industrialisation and fair burden-sharing, while scaling up international climate finance. Strengthening security requires continued support for Ukraine and the addressing of economic security risks. Underpinning all of this, a serious effort must be made to improve EU governance – and it must be done without creating further division.
Topic:
Security, European Union, European Parliament, European Commission, Energy, Regional Politics, Competition, European Council, and Threat Assessment
Political Geography:
Europe

12. How to finance the European Union’s building decarbonisation plan

Author:
Ugnė Keliauskaitė, Ben McWilliams, Giovanni Sgaravatti, and Simone Tagliapietra
Publication Date:
07-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
By 2030, the European Union must reduce emissions from the heating and cooling of buildings – responsible for 13 percent of EU emissions – by the equivalent of the annual emissions of Slovakia. This requires a near tripling of the current decarbonisation rate. But the time gap between high upfront costs and long-term payback from renovation works deter consumers from investing in energy renovation. To address these challenges, the EU has introduced a policy toolkit that includes strengthened price signals against fossil-fuel heating through emissions trading, and setting energy-consumption reduction targets in the Energy Performance Building Directive (EPBD). EU countries must take the EPBD targets seriously and implement policies to accelerate building retrofits and the adoption of clean heating. If they don’t, there is a risk that EU climate targets will not be met, and the costs for households of subjecting domestic heating to emissions trading could be almost twice the higher costs seen during the 2022 energy crisis. We estimate that achieving the EPBD’s energy savings targets requires filling an investment gap of about €150 billion per year up to 2030. This is a daunting but feasible goal. By leveraging energy savings from electrification and retrofitting to reduce renovation costs, the investment gap could be more than halved. Additionally, effective use of EU funds and emissions trading revenues will further shrink the gap. A mix of grants, preferential loans and obligations is needed, as no single policy will speed up energy renovations. Prioritising grants for the worst-performing buildings, often occupied by vulnerable consumers, will yield climate benefits and benefits in terms of improved air quality, health, productivity, energy security and lower future government outlays to alleviate energy poverty. Traditional public subsidies have not successfully engaged the banking sector, which now must help to foster private-public financing mechanisms. Countries also need to adjust relative energy prices for heating through taxation and subsidies, and expand one-stop-shops to streamline the renovation process for consumers.
Topic:
European Union, Carbon Emissions, Decarbonization, and Energy
Political Geography:
Europe

13. Energy as a weapon - decoding blackmail tactics in Europe

Author:
Veronika Slakaityte and Izabela Surwillo
Publication Date:
01-2024
Content Type:
Policy Brief
Institution:
Danish Institute for International Studies (DIIS)
Abstract:
‘Energy blackmail’ became a buzzword following the Russian invasion of Ukraine in 2022 and the subsequent energy crisis, but the phenomenon is not new. Energy blackmail has been employed by states to leverage their strategic energy resources for decades. In Europe, the weaponisation of energy predates Vladimir Putin’s time in Kremlin. Despite EU efforts to diversify its energy supply, the threat of energy blackmail persists, posing challenges not only to traditional energy dependencies but also to the increasingly digitalised energy sector.
Topic:
European Union, Energy, Russia-Ukraine War, and Natural Gas
Political Geography:
Russia and Europe

14. From Carrots to Sticks, to Carrots Again? The EU’s Changing Sustainable Trade Agenda

Author:
Victor De Decker
Publication Date:
02-2024
Content Type:
Policy Brief
Institution:
EGMONT - The Royal Institute for International Relations
Abstract:
Although sustainability criteria include references to human, social and labour rights as well as broader environmental concerns, this policy brief will focus on measures related to carbon emission reduction in relation to the Paris Agreement. This policy brief consists of three parts. First, there will be an overview of how Trade and Sustainable Development (TSD) chapters have gained prominence in European Free Trade Agreements. The second part will be dedicated to the autonomous, unilateral EU initiatives the Carbon Border Adjustment Mechanism (CBAM) and the Corporate Due Diligence Directive (CSDDD). To conclude, there will be a brief analysis of how the EU is working within a multilateral setting on the issue of climate change. In 2015, the United Nations adopted the 2030 Agenda for Sustainable Development, a landmark framework renowned for its far-reaching vision encompassing 17 Sustainable Development Goals (SDGs) and 169 targets. These goals collectively constitute the “universal policy agenda,” aiming to address global challenges and foster inclusive economic growth. Notable among these goals is the promotion of sustainable international trade, identified as a pivotal policy instrument contributing to overarching SDGs. The 2030 Agenda positions international trade as “an engine for inclusive economic growth and poverty reduction” while actively contributing to the broader pursuit of sustainable development.
Topic:
Climate Change, Economics, European Union, Trade, Sustainability, and Energy
Political Geography:
Europe

15. Infrastructures, energy and digitalisation: pillars for the sustainable development of transport in the Western Mediterranean

Author:
Mark Furness, Jordi Selfa, Sassi Hammami, Pier Paolo Raimondi, and Michel Noussan
Publication Date:
02-2024
Content Type:
Policy Brief
Institution:
IEMed/EuroMeSCo
Abstract:
With the Russian aggression on Ukraine and the war in Gaza being prolonged over time the Mediterranean region at large is in total turmoil. The Policy Study entitled “Infrastructures, energy and digitalisation, pillars for the sustainable development of transport in the Western Mediterranean” aims at contributing with shared reflections and formulation of policy proposals to the challenges and strategies that the region faces in the field of promoting sustainable development in the transport sector. To this end, the Policy Study delves into this topic from these three cross-cutting dimensions in the Western Mediterranean: infrastructures, energy and environment, and digitalisation. The European Institute of the Mediterranean (IEMed) and the Centre for Transportation Studies for the Western Mediterranean (CETMO) have taken on this stimulating task by continuing for a third year the preparation of a Policy Study that involves various authors who are experts in the field, while also unveiling some recommendations of public policy addressed to the Presidency of the Group of Transport Ministers for the Western Mediterranean (GTMO 5+5). Indeed, this publication released as a Policy Study comes within the framework of the Med Think 5+5 network of Western Mediterranean think tanks, a multidisciplinary platform of exchange associated with the 5+5 Dialogue, which brings together policymakers, practitioners and academics from the Western Mediterranean area. Considering transport and logistics as one of the most relevant sectors to foster socio-economic development and regional integration in the Western Mediterranean, the Med Think 5+5 network has been committed to promoting debate and knowledge-sharing on the issue, building upon support and expertise of the CETMO as Technical Secretariat of the Group of Transport Ministers for the Western Mediterranean (GTMO 5+5). As a matter of fact, the Med Think 5+5 convened seminars (2018, 2021) dedicated to the analysis of trends in the Western Mediterranean transport and logistics sectors, organised back-to-back with the GTMO 5+5. In this context, this Policy Study, which is part of the work programme of GTMO 5+5 under the Maltese presidency, aims at giving response to the challenges posed by climate change in the region and how the transport sector can counter it and adapt to it through digitalisation, the transformation and connection of transport with infrastructures and energy.
Topic:
Infrastructure, European Union, Transportation, Energy, and Sustainable Development
Political Geography:
China, Europe, North Africa, and Mediterranean

16. Energising eastern Europe: How the EU can enhance energy sovereignty through cooperation with Ukraine and Moldova

Author:
Szymon Kardas
Publication Date:
03-2024
Content Type:
Policy Brief
Institution:
European Council on Foreign Relations (ECFR)
Abstract:
Since Russia’s full-scale invasion of Ukraine, the EU has made strengthening energy sovereignty – its own and that of its eastern neighbours – a strategic priority. Along with Ukraine and Moldova, the EU has created an elaborate legal and institutional framework that provides a platform for energy cooperation. Through this framework and other measures, the EU and member states have helped significantly strengthen the energy sovereignty of Moldova and Ukraine, in particular helping them to diversify away from Russian fossil fuels and synchronising their electricity grids with that of the EU. But when it comes to the cleanness and efficiency of their energy, Moldova and Ukraine are still underperforming, despite their potential for green energy generation. Improving the cleanness of their energy would also help strengthen the EU’s energy sovereignty, increasing the mutual benefits of closer energy cooperation. Ukraine’s vast gas reserves and extensive gas infrastructure, along with its potential for green hydrogen production and the significant development of renewable energy sources in both countries offer opportunities for cooperation with the EU, which could enhance both its energy security and decarbonisation efforts.
Topic:
International Cooperation, Sovereignty, European Union, Energy, and Russia-Ukraine War
Political Geography:
Russia, Europe, Ukraine, and Moldova

17. Rebuild, Decarbonize, and Integrate: Ukraine, the EU, and the Road to a Net-Zero Energy Sector

Author:
Jacob Kirkegaard
Publication Date:
06-2024
Content Type:
Working Paper
Institution:
German Marshall Fund of the United States (GMFUS)
Abstract:
More than half of Ukraine’s power production capacity has been damaged by Russia since February 2022. Reconstruction is already underway, but to meet EU accession requirements, Ukraine will have to rapidly decarbonize as it rebuilds. As the frontline situation points to a longer war than was projected early on, uncertainties about Ukraine’s long-term economic path and prospects have inevitably increased. At the same time, noticeable political progress has been made given the EU’s agreement to start negotiations for full Ukrainian membership. This step provides the fighting Ukrainian people with a long-term perspective and a destination point as a prosperous, democratic, European market economy. Anchoring Ukraine’s economic future in the EU will have transformative implications for the country’s economy, not least its energy sector. That sector, which is still exposed to Russian military attacks, is now compelled to assimilate into the rapidly decarbonizing EU. More than half of Ukraine’s power production capacity has been damaged by Russia since February 2022 or is situated on territory now controlled by Russia. The Net Zero World Initiative (2023) estimated that 43% of nuclear, 68% of coal-fired, and 33% of combined heat and power generation was lost to the war as of mid-2023. Despite continuing attacks, more than two gigawatts (GW) of electricity production capacity were restored during 2023. Reconstruction of the Ukrainian energy sector is already underway despite the war. With it, the country’s energy transformation has begun. Yet, in March 2024, Russia returned to large- scale saturation missile attacks against Ukraine’s energy infrastructure, including its large hydropower plants and thermal power stations, inflicting further long-term damage. Putin seeks to exploit the apparent drop in Ukrainian air defense efficiency as Western supplies of air interceptor missiles have grown scarcer. Military risk consequently continues to cloud the outlook for Ukraine’s energy production. It also reduces the interest of foreign and domestic investors in committing resources to the sector. Uncertainty plagues the prospects for Western public support for Ukraine, too. Despite the recent passage of a funding package, future US funding will remain hostage to domestic politics. In Europe, various veto players—led by Hungary—as well as other internal divisions pose an ongoing political challenge to the EU’s financial support for Kyiv. The scarcity of public and private investment funding sources for Ukraine stands in stark contrast to the level of ambition for the energy- sector transition inherent in Ukraine’s EU accession process. One of the major energy- sector challenges facing Ukraine will be the expectation in Brussels that Ukraine will either enter fully into the EU Emissions Trading System (ETS) or implement an ETS-aligned national carbon-pricing system of similar ambition. It will not be possible for the Ukrainian economy to be granted a prolonged transition period here, and—for instance—enjoy free carbon-emission credits for affected industries, when these same industries will have been partially or fully phased out in the rest of the EU at the time of Ukraine’s EU accession. While the EU ETS price is currently adjusting to the new post-2022 energy shock demand level (for example, prices have declined so far in 2024 to around €60–65/ton), the ETS auction price forward curve slopes upward. This indicates that carbon market participants continue to believe that EU carbon prices will rise during Ukraine’s EU accession process. Adapting the economy to the EU’s carbon price level will require urgent action on the part of the Ukrainian government as it prepares the long-term National Energy and Climate Plan (NECP) that will lay out the country’s energy strategy for the rest of the 2020s. Certainly, Ukraine’s Environmental Protection Minister, Ruslan Strilets, displayed the necessary ambition when he spoke after the UN Climate Change Conference (COP28) in Dubai in late 2023. He reiterated earlier government statements from 2021 and committed Ukraine to launching a pilot emissions trading system in 2025 with a full launch in 2026. This would enable Ukraine’s entry into the ETS, and thus avoid negative effects of the EU’s Carbon Border Adjustment Mechanism (CBAM) for Ukrainian exports. This is a timetable that necessitates immediate and sizable climate investments in Ukraine. Ukraine has further committed itself in recent months to a significant scaling up of its already large nuclear power-generation capacity. The Ukrainian government has signed memoranda of understanding aiming at the construction of up to nine new power units using Westinghouse AP1000 technology. Just as the accelerated introduction of carbon pricing in Ukraine will be costly, construction of new nuclear power units, even if located at one of Ukraine’s existing nuclear plant facilities, will require large sums of capital investment upfront. The issue of upfront costs will similarly weigh on the broader issue of reconstruction of Ukraine, as more energy- efficient buildings will only gradually earn back the higher building and materials costs through lower long-term energy consumption. Ukraine must be applauded for aiming to seize the opportunity to rebuild its energy sector and integrate it with the EU as quickly as possible. This follows the recommendations of several expert groups, including GMF’s earlier (2023) report on this issue, which called for rapid Ukrainian adoption of carbon pricing and highlighted the need to phase in EU-level building codes expeditiously. This paper will focus on the implications for both Ukraine and the EU of the Ukrainian government’s recent energy-sector choices. What do these plans require institutionally and financially to succeed, and how will they alter not only the Ukrainian but the entire EU energy sector in the process?
Topic:
Climate Change, European Union, Decarbonization, Energy, Russia-Ukraine War, and Net Zero
Political Geography:
Europe and Ukraine

18. Italy’s National Energy and Climate Plan and Road Transport: An Appraisal

Author:
Pier Paolo Raimondi and Michel Noussan
Publication Date:
07-2024
Content Type:
Commentary and Analysis
Institution:
Istituto Affari Internazionali
Abstract:
The Italian government has recently submitted the final version of its National Energy and Climate Plan (NECP),[1] which outlines Italian measures to achieve its national climate targets by 2030 in line with the objectives set by the European Union. To do so, Italy has put forward targets, strategies and measures also for the decarbonisation of transport, which remains among the hardest to decarbonise. While Italy’s greenhouse gas emissions due to energy consumption have decreased by 21 per cent from 1990 to 2022, those related to transport have increased by 8 per cent in the same period. Moreover, the transport sector accounted for 27 per cent of national emissions in 2022, with road transport alone accounting for 92 per cent of those emissions.[2] Against this backdrop, it is important to assess the main targets and political implications of Italy’s NECP related to both private cars and heavy-duty road transport (buses and trucks) in order to identify potential gaps and opportunities to reach Italy’s climate targets.
Topic:
Climate Change, Transportation, and Energy
Political Geography:
Europe and Italy

19. Perspectives for Italy-Germany Energy Cooperation amid Energy Security and Transition

Author:
Alessio Sangiorgio and Pier Paolo Raimondi
Publication Date:
10-2024
Content Type:
Working Paper
Institution:
Istituto Affari Internazionali
Abstract:
Italy and Germany share important similarities in their energy sectors, facing multiple challenges, first and foremost the impact of the energy crisis and its effect on transition efforts. Similarly, changing political contexts at the national and European levels creates new obstacles for climate ambitions, raising the need for bilateral dialogue and common solutions. The two countries’ economies are also closely interconnected, increasing the need for joint action on industrial decarbonisation and cross-border interconnections. A coordinated response in tackling the challenges of energy security, competitiveness and sustainability is needed and may yield positive results for both countries and the European Union.
Topic:
Security, International Cooperation, Bilateral Relations, and Energy
Political Geography:
Europe, Germany, and Italy

20. Can Price Controls Be Optimal? The Economics of the Energy Shock in Germany

Author:
Tom Krebs and Isabella Weber
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
In the wake of the global energy crisis, many European countries used energy price controls to fight inflation and to stabilize the economy. Despite its wide adoption, many economists remained skeptical. In this paper, we argue that price controls should be part of the policy toolbox to respond to shocks to systemically important sectors because not using them can have large economic and political costs. We put forward our arguments in two steps. In a first step, we analyze the impact on the German economy and society of the global energy crisis that followed Russia’s attack on Ukraine in February 2022. Our analysis shows that energy shocks matter. Specifically, the one-year GDP loss of the energy crisis 2022 amounts to 4 percent and is of a comparable magnitude to the short-run output losses during the COVID-19 crisis 2020 and the global financial crisis 2008. In addition, during the energy crisis 2022 inflation rates rose dramatically and real wages dropped more than in any other year in post-war Germany. There are also clear signs that the crisis is causing severe long-term economic damage (hysteresis effects). At the beginning of 2024, GDP is 7 percent and real wages are 10 percent below their pre-COVID-19 trend. We argue that the German government handled the immediate response to the energy shock well, but subsequently waited too long to introduce an energy price brake in 2022. This failure to act decisively in response to heightened economic insecurity coincided with a strong rise of the approval rates of the far-right AfD in the summer of 2022. We also show that the German energy price brake was an effective price stabilization policy for households, but did not protect the industrial base appropriately making it more likely that the German economy will continue to stagnate. In a final step, we turn to the use of price controls as an optimal policy response to an energy shock within a general equilibrium framework. We develop a simple production model with an energy sector and shows that price controls are socially optimal whenever selffulfilling expectations generate endogenous price uncertainty in the wake of an energy shock. We also link our analysis to the so-called sunspot literature that was developed in the 1980s as a response to the rational-expectations revolution in macroeconomics. Finally, we use our theoretical analysis to shed some light on the economic policy debate and the resistance of German mainstream economists to the introduction of energy price controls in 2022.
Topic:
Economics, Inflation, Macroeconomics, Price Control, Energy, and Stabilization
Political Geography:
Europe and Germany