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Øystein Noreng: EU Energy Dis-Union?

Professor Emeritus Øystein Noreng, Norwegian Business School

The May 2019 European elections marked the decline of the traditional centre-right and centre-left parties. The beneficiaries were the green parties, with their objective of ever-more forceful climate policies, and right-wing populists, concerned more about employment and income.

This change was also underpinned by a generational shift: young voters are moving from the traditional left-wing parties to the emerging green groups, and older voters are moving from both the centre-left and the centre-right to the populist right. Somewhat simplistically, the green wave was driven by economic surpluses, as in Germany, and the populist wave was driven by economic deficits, as in France. In this overall picture, climate and energy policies are pertinent.

In Germany, enjoying full employment and large budget surpluses, high energy prices are not seen as a threat, except for low-income groups. In Germany, the young, well-educated and well-off middle-class supported the Green Party, leaving the social democrats far behind. The greens do not worry about jobs or income; they are concerned about the environment and global climate. In Germany, the Green Party is positioned to replace the social democrats as the coalition partner for the ruling conservative CDU/CSU.

So long as Germany’s economic outlook remains good, the outcome is likely to be more ambitious climate and environmental policies, and a possible acceleration of the end of the coal industry. The established practice of electricity price levies to finance renewable energy combined with price reductions for large firms is likely to continue, although it represents a major transfer of income from households to industry. German electricity pricing also represents a regressive income redistribution. However, if the economy should suffer, political acceptance of this approach might disappear.

In France, high energy costs are a problem for a large part of the population. Many of the very young have switched from the far left to the Greens; the middle-aged, including many workers, voted largely for the right-wing Rassemblement National; the elderly have supported President Macron’s LREM. The very young seem to worry about climate and the environment; those of working age seem to worry about jobs and income; the elderly seem to worry about savings and pensions. Age, income and education are the factors favouring Macron over Le Pen, but she appears as the spokesperson for the younger, less educated, with modest living standards.

In the run-up to the elections, President Macron presented himself as the only alternative to the far right, but in doing so he also presented the far right as the only alternative to his own policies. In France, suffering from endemic unemployment and persistent deficits, many voters are worried about jobs and income. The traditional French left is in ruins, with the Green party gaining, but without a coherent economic agenda.

In late 2018, a fuel tax increase in a context of broadening economic and social disparity triggered widespread unrest in France, perhaps indicating social limits to aggressive energy policy measures. The official reason for the fuel tax rise was climate protection, but it was possibly motivated by the need to offset an earlier cut in the wealth tax. The regulatory authority warned that electricity price increases proposed would hit low-income households. In France too, energy policy has an element of regressive income redistribution.

The EU’s Energy Union project, as presented in the 2018 Clean Energy for All document promises ‘to give EU consumers – households and businesses – secure, sustainable, competitive and affordable energy’. The desired competitive and affordable energy supplies are, however, nowhere to be seen; EU electricity prices are two to three times those paid by US consumers.

The explicit target of EU energy policy is to reduce carbon dioxide emissions by promoting and subsidising renewables, enhancing energy efficiency, and limiting energy demand growth. Implicitly, this may restrict economic growth. Indeed, since the financial crisis of 2008–2009, Europe has experienced lower growth than any other continent, except Antarctica.

High electricity prices have not helped the European Union make more progress than the United States on energy intensity, measured as energy consumption in relation to economic growth. That is also the case with carbon emissions. In spite of much higher electricity prices, Germany has performed worse than the United States on both energy consumption and carbon emissions. Among the major EU countries, the UK had the best record.

From 2009 to 2017, the EU economy grew by 13 per cent, measured in constant prices, while primary energy consumption fell by 1 per cent. During this period, Germany enjoyed economic growth of 19 per cent, while energy consumption increased by 6 per cent and carbon emissions rose by 2 per cent. By comparison, the United States had real economic growth of 19 per cent and an increase in primary energy consumption of 3 per cent, with much lower energy prices. Japan performed even better, with a real economic growth also of 13 per cent and a decline in primary energy consumption of 3 per cent. In relation to economic performance. The strongest reduction in carbon emissions took place in the United Kingdom, followed by the United States and France. In case of Brexit, the remaining EU-27 will face challenges to meet collective targets.

Despite ambitious aims, high energy prices and high expenditure on renewable energy, Germany has underperformed on energy and carbon efficiency compared to the United States. Apparently, in Germany, high energy prices have not been a sufficient condition for energy efficiency; in the United States, they have not been a necessary condition. Prices may not always be the most efficient tool in energy policy.

The EU’s emphasis is increasingly on climate and governance, monitoring member states’ progress on their mandated integrated national energy and climate plans. The overriding objective is to reduce greenhouse gas emissions by 85–90 per cent by 2050 from 1990 levels. The EU is on track to meet the so-called “20-20-20” targets set in 2007 for 2020: a 20 per centreduction ingreenhouse gas emissions from 1990 levels, 20 per cent of EU energy from renewables, and a 20 per cent improvement in energy efficiency. Economic stagnation is helping the EU meet these targets, but it is notable that the EU has no targets for employment or income.

The social cost of these policies receives little attention. From 2009 to 2017, the world economy grew at an average annual rate of 3.4 per cent, with an cumulative growth of 35 per cent; the figure for the European Union was 1.6 per cent, with cumulative growth of 14 per cent. Some member countries, such as Greece, France and Italy, by 2017 had high unemployment – around ten per cent of the labour force – whereas for others, such as Germany and the United Kingdom, the figure was around four per cent, similar to the United States. High energy costs add to the strains that the euro has inflicted on southern Europe.

The EU plans to mandate integrated 10-year national energy and climate plans (NECPs) starting from the period from 2021 to 2030. The purpose is to ensure that member states have policies consistent with the Paris Agreement, as well as energy union objectives.  Monitoring implies a centralised control of energy policies, transferring energy policy and energy taxation competence from the national capitals to Brussels.This would require a revision of the treaties currently in force. Any transfer of competence to Brussels on such matters is likely to damage important national interests.

Energy poverty is a major challenge across the EU. Energy costs do not hit household consumers in an equitable way. With rising income, energy consumption tends to increase, but the proportion of a household budget spent on energy tends to decline. For high-income households, with comfortable budgets and a high savings rate, consumption of electricity and motor fuel is little affected by prices. Their economic situation permits them to weather price increases by reducing savings or by buying more efficient equipment that cuts energy costs.

By contrast, the purchasing power of low-income households with tight budgets and little or no savings are more severely affected by energy prices. For these groups, energy consumption has the highest price elasticity, as energy prices take a comparatively high share of household budgets. The distribution of energy expenditure is more even than that of incomes. With rising income, energy costs take a diminishing share of household budgets. Consequently, policies for expensive energy have anti-social effects, regardless of any benign environmental justification.

High unemployment has restrained EU energy demand, but depressing economic activity and leaving people out of work is an expensive way of curtailing energy consumption. Millions of unemployed EU citizens represent a potential increase of energy demand. Millions of young people in the EU, especially in southern Europe, cannot afford their own homes. With their own living quarters, they would have used more energy for lighting, heating and cooking. The failure of the EU to meet these challenges is likely to produce more populist opposition.

In our political vocabulary, policies that enhance economic and social inequalities qualify as right-wing, and policies that reduce inequalities are seen as left-wing. From that perspective, EU climate and energy policies appear to be right-wing in nature, and opposition to them as left-wing. Against this backdrop, Marine Le Pen’s popularity among French workers should not be a surprise. Her voters are more sensitive to energy price rises than are those of President Macron. Like low-income voters everywhere, Le Pen’s supporters see climate-driven costs as assaults on their purchasing power and living standards. In this light, climate can be seen as a new polarising factor, reshaping the old conflict between capital and labour.

This is a trailer of an article, “EU Energy Union – A critical view”, to be published in the autumn of 2019 by The Journal of Energy and Development.