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21. An investment strategy to keep the European Green Deal on track

Author:
Jean Pisani-Ferry and Simone Tagliapietra
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Fostering investment in clean energy and transport systems is essential if the European Union is to achieve the 2030 climate goal of a 55 percent emissions reduction relative to 1990. However, getting to the required levels of investment during 2025-2030 is likely to be exceptionally difficult. Clean electricity generation and electricity transmission systems need to be expanded rapidly, while industrial decarbonisation must be boosted and the green transformation of buildings and transport accelerated sharply. But policymakers face growing constraints on the public sector’s ability to support the necessary investments. At EU level, potential obstacles include the end of the NextGenerationEU post-pandemic recovery instrument, the lack of a green carve-out in the reformed EU fiscal framework, the increasingly difficult trade-offs between decarbonisation, competitiveness and security, and the spreading false narratives on climate policy promoted by populist nationalist parties. The latter two challenges are set to be further exacerbated by the return of President Trump in the United States. The upshot is that Europe is not on track to reach its climate targets. It is at a juncture where political resistance to decarbonisation is mounting and where budgetary means to buy off consent are becoming scarce, at both EU level (because the main source of financing is drying up) and national level (because the fiscal rules leave little room for green investment). In this Policy Brief, we assess the investment needed to achieve the 2030 climate goal and climate neutrality by 2050, and discuss why current estimates might be either over- or underestimated. Second, we discuss the roles of the private and public sectors in making these investments happen. Third, we analyse the obstacles to reaching the desired investment levels during 2025-2030, especially for the public sector. Finally we propose measures to overcome or circumvent these obstacles. The business strand consists of innovations destined to ensuring credibility and the full mobilisation of savings. The public strand aims to maximise the firepower of limited fiscal resources.
Topic:
Climate Change, European Union, Investment, Green Deal, and Energy
Political Geography:
Europe

22. Decarbonising for competitiveness: four ways to reduce European energy prices

Author:
Conall Heussaff
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Energy prices are higher in the European Union than in most other industrialised economies, presenting a fundamental competitiveness challenge. The price disparity stems from the EU’s reliance on imported fossil fuels, contrasting with the United States, which is a net exporter of energy. In 2024, EU gas wholesale prices were on average nearly five times those in the US. Average EU industrial electricity prices were roughly two and a half times higher than in the US. The transition to clean, domestically generated energy is therefore essential to reduce European energy costs. Despite rapid decarbonisation of the power sector, fossil fuels remain vital for electricity generation and continue to significantly influence final consumer costs. Additional factors influencing final prices include the fixed costs of supporting renewables and maintaining and expanding the energy networks, and consumption taxes and levies. However, the ongoing energy transition is reshaping cost dynamics. Renewables, with fixed capital costs and no fuel requirements, are increasingly transforming the electricity sector. The electrification of heating, transport and other energy services further reduces fossil-fuel demand, shifting overall energy costs from variable fuel expenses to fixed capital investments. As the energy transition progresses, EU energy costs can be expected to fall, but how far they fall and how they are shared will depend on policy choices in four main areas. In the short term, policymakers must allocate system costs fairly across energy consumers. Medium-term policies should encourage demand flexibility in electricity to improve system efficiency. In the long-term, coordinated investment at EU level and deeper cross-border interconnection will drive down final costs for all consumers.
Topic:
Climate Change, European Union, Economy, Industrialization, Decarbonization, Energy, and Competition
Political Geography:
Europe

23. Finance for nature: how to improve funding for the protection of biodiversity

Author:
Heather Grabbe and Luca Léry Moffat
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The economics of biodiversity are still little understood and the loss of nature, which provides pollination, clean water and other ecosystem services, is often considered to have primarily local economic impact. But nature has an intrinsic value and also has extrinsic value to many parts of the economy. Destruction of nature has global costs because nature loss accelerates climate change by releasing greenhouse gases into the atmosphere, causes water stress and crop failures that reduce food exports, and can force people to move. Some of the consequences are systemic. Others are long term, because potential solutions to human problems contained in intact ecosystems, such as medicines and bio-technologies, are lost to future generations. The benefits from nature – and particularly biodiversity – do not result in revenue flows that would protect natural capital assets from degradation. The costs of ecosystem destruction are still largely unaccounted for. Finance for biodiversity is very small relative to what is required for its maintenance. Most of the sources are state or public funds, or from private philanthropy. Because biodiversity is complex and has largely been ignored as an economic issue, market mechanisms are still at an early stage of development. Nature still does not appear on many balance sheets, and nor is it integrated into risk assessments across the public and private sectors. This policy brief summarises the options and outlines the main considerations in finding better ways to value nature. We explain why financial tools are important for biodiversity, give an overview of the range of tools developed to finance ecosystems and assess which would be most suitable to pursue at European Union level. The focus in developing existing and new tools should be on whether they can deliver reliable revenue streams over a long period to maintain the value of natural assets. In the EU, the most impactful immediate means of using financing to protect and restore nature is to defund the damage caused to biodiversity by eliminating nature-harming subsidies, starting with reform of the common agricultural policy.
Topic:
Climate Change, Climate Finance, Biodiversity, and Energy
Political Geography:
Europe

24. UK trade 2024

Author:
Jonathan Portes, Sarah Hall, and Stephen Hunsaker
Publication Date:
06-2024
Content Type:
Special Report
Institution:
UK in a Changing Europe, King's College London
Abstract:
UK trade has, since the 2016 referendum, become a hotly debated subject. Which is not to say that it is simply a Brexit story; the uncertainties currently shaping UK trade are far from unique to the UK. Supply chain disruption associated with international conflicts, and a geo-political environment that is generally less conducive to trade, are impacting trade globally. In the immediate years following Brexit, trade data was complicated by the Covid-19 pandemic and a significant rise in global energy prices following Russia’s invasion of Ukraine. 2023 data released by the Office for National Statistics provides one of the first opportunities to assess the UK’s post-Brexit trade performance in detail. This report uses these data to set out the key recent trends in UK trade, outline where uncertainties lie and what the policy implications are.
Topic:
Brexit, Trade, COVID-19, Energy, and Russia-Ukraine War
Political Geography:
United Kingdom and Europe

25. The EU can manage without Russian liquified natural gas

Author:
Ben McWilliams, Giovanni Sgaravatti, Simone Tagliapietra, and Georg Zachmann
Publication Date:
06-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union has committed to eliminate all Russian fossil-fuel imports by 2027. Progress has been made, with sanctions on oil and coal already introduced. The glaring exception is natural gas, on which the EU has so far refrained from imposing limitations, owing to greater dependence on Russia. Nevertheless, pipeline gas imports have fallen by four-fifths following Russia’s weaponisation of gas supplies. However, Russia’s exports of liquified natural gas (LNG) to the EU have increased since the invasion of Ukraine. The EU needs a coherent strategy for these LNG imports. Our analysis shows that the EU can manage without Russian LNG. Anticipated impacts are not comparable to those felt in 2022 as Russian pipeline gas dried up. The regional impact would be most significant for the Iberian Peninsula, which has the highest share of Russian LNG in total gas supply. Meanwhile, the global LNG market is tight, and we anticipate that Russia would find new buyers for cargos that no longer enter Europe. We discuss the options available to the EU. Wait-and-see implies delaying any action until 2027, while soft sanctions would discourage additional purchases but not break long-term contracts. We argue instead for an EU embargo on Russian LNG, to reduce exposure to an unreliable and adversarial entity, and to limit the extent to which EU consumers fund the Russian state. The embargo may be designed to allow purchases only if they are coordinated via the EU’s Energy Platform, with limited volumes and below market prices. This could be accompanied by the implementation of a price cap on Russian LNG cargos that use EU or G7 trans-shipment, insurance or shipping services.
Topic:
European Union, Gas, Energy, and Green Economy
Political Geography:
Russia and Europe

26. Adjusting to the energy shock: the right policies for European industry

Author:
Giovanni Sgaravatti, Simone Tagliapietra, and Georg Zachmann
Publication Date:
05-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
In 2022, overall European Union industrial employment and output increased above 2021 levels, despite rocketing energy prices. However, output declined from energy-intensive industries including basic metals, chemicals, non-metallic minerals and paper, for which energy costs represent a much bigger share of production costs than for less energy-intensive manufacturing. Energy prices are likely to remain above historic levels for the foreseeable future. In its industrial strategy response to this context, the EU must ask first whether the energy-intensive parts of the value chain should be outsourced permanently. Conditional on the answer being no, the second question is how to reduce energy prices to ensure the competitiveness of the energy-intensive productions stages that remain in the EU. First, the EU could bridge the high energy price period with unconditional subsidies, which seems to be the preferred strategy currently. This will avoid irreversible large-scale relocation abroad but is expensive, does not help to drive down energy prices and poses risks of fragmentation within the EU. It will only succeed if internationally competitive energy supplies are made available quickly. Second, the EU could support decarbonised production processes built on large-scale deployment of domestic renewables, grid interconnectors and storage. This would accelerate the green transition and reduce clean-tech prices worldwide. However, EU taxpayers would bear the cost of new technologies, without any guarantee of solving the current cost-competitiveness issue. Third, the EU could facilitate imports of energy-intensive products, while helping EU industry move to higher value-added parts of the value chain. Subsidies could be given directly to industrial sectors that have not become structurally uncompetitive, while bringing down energy demand and thus energy prices. However, this strategy would result in temporarily higher unemployment and factory closures in energy-intensive industries, would need to accommodate concerns over excessive reliance on imports and would need to be engineered to address carbon leakage. Policymakers should implement a mix of these policies. The EU should subsidise existing energy-intensive industries only in clearly justified cases, while deciding which energy-intensive products can be left to international market forces. By choosing which decarbonisation investments should be supported in Europe, the EU can combine industrial competitiveness and environmental sustainability.
Topic:
Industrial Policy, European Union, Value Chains, Energy, and Green Economy
Political Geography:
Europe

27. Preparing for the next winter: Europe’s gas outlook for 2023

Author:
Ben McWilliams, Simone Tagliapietra, Georg Zachmann, and Thierry Deschuyteneer
Publication Date:
02-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union has so far weathered the energy crisis brought on by Russia’s invasion of Ukraine in February 2022 and will manage winter 2022/23 even if Russia abruptly halts all pipeline gas flows. However, preparations must be made for winter 2023-24. In particular, gas storage facilities should be 90 percent full by 1 October 2023. We assess the demand reduction needed if the 90 percent storage target is to be achieved. Our assessment takes into account EU imports, exports to refill gas storage facilities in Ukraine and Moldova, the weather and the situation in power markets, where gas demand is highly dependent on non-gas energy sources. Assuming limited Russian exports continue, and weather conditions are typical, demand up to 1 October 2023 must remain 13 percent lower than the previous five-year average. The EU should therefore extend its demand-reduction target, which is currently set to expire on 31 March 2023. Two variables will determine how easily the target can be met: 1) liquified natural gas (LNG) supply, and 2) the nature of demand reductions. Plans for rapid deployment of regasification units will alleviate concerns over LNG import infrastructure capacity. However, the EU will continue to compete internationally for LNG cargoes, and will remain vulnerable to global dynamics. Strong economic growth in China, for example, could further tighten markets. The way demand is reduced will determine the economic consequences. So far, large reductions in industrial gas demand have not been accompanied by dramatic drops in industrial output, suggesting good substitution options. However, hardly any gas was saved in the power sector last year, because of weak nuclear and hydro output. The return of French nuclear output will therefore be a huge positive. Finally, households have reduced gas demand, partly driven by warmer than usual weather. Record numbers of heat pumps were deployed in 2022, suggesting the start of a structural shift away from gas demand for heating. Policy should support a continued structural shift away from gas. This involves enabling rapid deployment of renewables and the accompanying grid infrastructure, energy-efficiency measures, help for households that want to switch to cleaner heating, and collaboration with industry to accelerate adoption of new low-carbon production methods.
Topic:
Security, Gas, Energy, Russia-Ukraine War, and Green Economy
Political Geography:
Europe

28. Gas for Survival: Tackling reasons behind the Italian PM's efforts to promote relations with Libya

Author:
FARAS
Publication Date:
02-2023
Content Type:
Policy Brief
Institution:
Future for Advanced Research and Studies (FARAS)
Abstract:
Italian PM Giorgia Meloni visited Libya on January 28, where she met with Abdul Hamid al-Dbeibeh, PM of the outgoing government of national unity. The two leaders signed a new gas deal which has proved controversial.
Topic:
Migration, Gas, Energy, and Government of National Unity (GNU)
Political Geography:
Europe, Middle East, Libya, and Italy

29. European energy solidarity: strengthening the EU’s crisibility

Author:
Aline Bartenstein
Publication Date:
02-2023
Content Type:
Policy Brief
Institution:
Robert Schuman Foundation (RSF)
Abstract:
By default, when the EU is hit by a crisis, member states tend to have a national sovereignty reflex. When Italy was hit hard by the Covid-19 pandemic, the first reaction was to close its borders and restrict the export of urgently needed medical equipment. National interest superseded the call for European solidarity. Although member states have repeatedly managed to unite and – in the face of the polycrisis – developed a certain crisibility, no one would have been surprised if member states had preferred to seek their own advantage when Russia started the war in Ukraine on 24 February 2022. Nearly one year later, member states are (still) united – some declaring this as never before – and a gas or electricity crisis has so far been averted. This unity, which certainly threatened to crumble in the face of Hungarian opposition, German hesitancy, and the different approaches to dealing with the war, leads us to the question of what is different this time? Certainly, the EU's identity has been profoundly challenged by the war since its peacekeeping credentials – the EU is even a recipient of the Nobel Peace Prize – were perceived to be at risk. Was is this identity-threatening experience that united the member states? Or was it the recognition of Russia as a common foe that strengthened the bond between them?
Topic:
Sovereignty, European Union, Solidarity, Energy, and Regional Politics
Political Geography:
Russia, Europe, and Italy

30. The Strategic Repositioning of LNG: Implications for Key Trade Routes and Choke Points

Author:
Leslie Palti-Guzman and Marc-Antoine Eyl-Mazzega
Publication Date:
04-2023
Content Type:
Special Report
Institution:
Institut français des relations internationales (IFRI)
Abstract:
2022 saw the climax so far of the weaponization of energy. Following its geopolitical demise, Russia has undertaken its own gas amputation, moving from a super energy power status to a diminished role with uncertain prospects and only hard options left. Russia has cut off almost entirely pipeline gas supplies to the European Union (EU), first inflicting huge financial pain and collecting record high revenues, but then simply losing out its largest and best market with no realistic alternative, and no prospect of any significant return. However, the Kremlin could still further reduce some of the remaining pipeline gas or liquefied natural gas (LNG) supplies and thus cause some tensions in the markets. Russia also retains leverage on oil markets, where the Kremlin managed to cope with the embargo as well as the price cap and maintain the relationship with Saudi Arabia which drives OPEC+ decisions. Meanwhile, in 2022, the European energy system has managed to surprisingly adapt on the supply and demand side to the three shocks: the decoupling from Russian energy supplies, the hydropower generation crisis, and the French nuclear electricity crisis. Liquefied natural gas has made a comeback in Europe and has been a savior of industries, governments, and populations. The LNG corridor between the EU and the United States (U.S.) has become the most dominant LNG trade route in 2022. This came at a huge cost though – EU’s gas import bill soared ten times from 2020 and three times from 2021 levels. For 2023, the European gas balance is much more fragile, as the demand reduction potential has reached its limits, same for the ability to attract additional non-Russian exports to Europe, at a time when missing Russian volumes will probably reach 120 billion cubic meters (bcm), instead of about 77 bcm in 2022. More moderate price levels since November 2022 have clearly overshadowed this fundamental mismatch, especially as the weather has been mild and China was still struggling with the pandemic. With an additional 30-40 bcm of missing Russian gas to offset in 2023 compared to 2022, Europeans can be expected to benefit from an extra gas of around 20-25 bcm left in storages thanks to mild weather and available LNG. They have no choice but to continue saving energy in a hurry, that is both on gas and electricity. Gas demand in power generation had increased in the first nine months of 2022 before falling in Q4 2022, and well over 15 bcm can be saved here in 2023 as more nuclear is available altogether, alongside more renewables, and some coal. It will be critical to reduce peak loads though. The key improvement is in terms of logistics, with the massive new LNG import capacity deployed across Europe. Overall, EU’s import situation will be very tensed and fragile for the next winter. The key challenge is that EU’s gas supply security ultimately depends on the weather in Europe, China’s and Japan’s LNG demand, and weather or technical outages in the Gulf of Mexico or in other producers. Any slight disruptions in supplies can have major impacts. As a last resort, bringing back some Groningen supplies, no matter how politically sensitive this would be, must be considered and prepared. Large financial compensations and effective governmental action would notably be required to offset the hardships.
Topic:
European Union, Gas, Exports, Trade, Energy, and Russia-Ukraine War
Political Geography:
Russia, China, and Europe