The global situation remains dramatic, unpredictable and unstable. The surge in energy prices triggered by the US and Israeli war with Iran continues to affect European Union climate and energy policy and, of course, us here in Latvia as well. Just as four years ago, when Russia invaded Ukraine, the war in the Persian Gulf region has forced policymakers in the European Union and its member states to seek a balance between short-term crisis responses and the long-term goal of cutting carbon emissions. Green policy has become mired in contradictions. Although the message from European Commission Energy Commissioner Dan Jørgensen is that “the crisis demonstrates the need to rapidly reduce dependence on imported fossil energy”, the reactions of member states have undeniably been geared towards curbing the rise in the prices of these fuels and towards keeping their economies “above water”.
The prospect of energy market reforms
EU member states are likely to revisit proposals for deeper market reforms, possibly including more coordinated oil and gas purchasing or fresh discussions of price controls, should volatility persist. Although the Council of the European Union rejected the idea of suspending the EU Emissions Trading System (EU ETS), the pressure for urgent reform is unlikely to ease. On 15 July the European Commission will come forward with its own proposal, which could include the allocation of additional emission allowances to industry worth billions of euros. The decision on whether to do so has caused considerable disagreement among European Union countries.
The carbon market and the roll-out of CBAM
More detailed information on the implementation of the EU Carbon Border Adjustment Mechanism (CBAM) is expected in the coming weeks. Its aim is to protect domestic industry by phasing out free carbon emission allowances. Although the measure faces serious resistance, it is an important instrument for aligning international trade with climate goals while shielding European industry from unfair competition. Many questions nevertheless remain unanswered: more detail is needed on carbon pricing instruments, including the pricing of certificates and compliance rules, as the European Union approaches full implementation. Last month the EC already published the quarterly price for CBAM certificates.
Will it be a “bureaucratic monster”?
The European Commission's Industrial Accelerator Act, intended to boost the growth of European industry alongside the Clean Industrial Deal, has provoked fierce resistance among both Members of the European Parliament and national governments. The head of the Federation of German Industries (BDI), Peter Leibinger, has called it a “bureaucratic monster”. The proposal to give preference to Made in EU products and the plans to restrict Chinese investment have found particularly little support. The debate will continue over the coming months, most sharply, it seems, over the proposal's impact on energy.
The Net Zero Framework has been postponed, but it remains in force…
Progress towards the Net Zero Framework (NZF) in international shipping will continue, since the Americans' attempt to halt the agreement at the International Maritime Organization (IMO) meeting on 1 May failed and the discussions have been postponed until the autumn. “Although the US and its allies successfully secured a postponement of the discussions until the autumn, the European Union and several other countries refused to abandon the Net Zero Framework,” concluded sustainable shipping expert Felix Klann, who took part in the talks as a representative of the environmental and transport organisation T&E. “Europe must keep calm and turn down a deal produced by American pressure.”
The European Commission publishes its review of the simplification of the Deforestation Regulation (EUDR)
On 4 May the European Commission published its long-awaited “simplification review” of the European Union Deforestation Regulation (the law intended to guarantee that European Union products do not contribute to deforestation worldwide). The regulation was due to be implemented last year, but its entry into force was postponed. The review was welcomed, unsurprisingly, by environmental campaign groups, and it confirmed the soundness of the regulation as well as finding it fit for purpose, despite the criticism levelled at the EUDR by the US government. The review slightly reduced the regulation's requirements, proposing to exclude leather goods but to include instant coffee.
Western states reject the Italian prime minister's demand
The Italian, German and Polish initiative was to criticise European climate policy, in the conditions of the current energy crisis, as an additional burden on citizens and businesses. Italian Prime Minister Giorgia Meloni came to the European Council summit in March demanding the suspension of the European Union Emissions Trading System in order to help so-called emissions-intensive industry. She had broad support from the leaders of Eastern European countries, but the idea was rejected by the leaders of Western European states.
Measures to help weather the crisis
At the end of April the European Commission unveiled a temporary framework to address the consequences of the energy crisis. It allows member states to subsidise up to 70 percent of the additional fuel and electricity costs of agriculture, fisheries, transport, the steel industry and the chemical industry. The step complements a broader package of “energy security cushion” measures that includes tax relief on electricity and coordinated gas storage arrangements. National governments can select from these measures the ones most important to carry out. As in the previous energy crisis, critics argue that the new subsidies risk prolonging dependence on fossil resources, particularly since they include no structural measures such as windfall taxes or price caps. The EC is also considering allowing companies to breach methane emission rules in order to help weather the current crisis. A report published by the Financial Times in early May found that these rules are designed to prevent methane leaks that cause twice as much gas loss each year as is currently being lost because of the Strait of Hormuz crisis.
Aspects of the energy transition
At the same time, the European Commission is seeking to press ahead with the long-term energy transition. New funding worth 600 million euros for cross-border energy infrastructure projects, focused on electricity grids and system integration, indicates that renewables and their integration into the market remain a priority. The contradiction is plain to see, however: the EC is trying to stabilise the economy amid unstable fossil resource markets while simultaneously accelerating the move away from those very fuels. There is a risk that repeated short-term interventions may weaken the ability to forecast prices, which is crucial to encouraging investment in reducing carbon dioxide emissions.
Sweden objects firmly
A sharp dispute broke out among Europe's energy ministers over the European Commission's proposal for an electricity grids act. The aim of the law is to strengthen cross-border electricity infrastructure, speed up permitting procedures and improve the resilience of Europe's energy system. Sweden's Energy Minister Ebba Busch objected firmly to the proposal's provisions on congestion revenue and grid planning, defending member states' discretion in how that revenue is used. The Swedish minister threatened to freeze the creation of new electricity interconnections with neighbouring countries if the rules were not changed. Other member states agreed that first movers — in this case the Swedes — must not be penalised for their success.
Support for energy-intensive sectors as an economic security instrument
The European Commission unveiled the AccelerateEU package of proposals, which aims to reduce dependence on imports of fossil resources while cushioning the price shocks caused by the war in Iran. It is a package of consumer protection measures, including subsidies, tax cuts and so-called energy vouchers. The proposals also include support for industry, such as targeted support for energy-intensive sectors and the promotion of electrification through investment in the electricity grid. Although it contains many climate measures, the package of proposals is framed as an instrument of economic security policy. The temporary subsidies envisaged in the plan include up to 50,000 euros per business for farmers, fishers and hauliers, as well as coverage of up to 70 percent of the increase in energy costs in certain other sectors.
Green policy gives way to security and the cost of living
In 2018 the European Union positioned itself as a potential champion of the climate, committing to achieve climate neutrality by 2050. Since then it has written that goal into law, set an interim target of cutting net emissions by 55 percent by 2030, and agreed a wide range of new and revised legislation to shift towards a more sustainable economy. Yet mounting anxiety about security, competitiveness and the cost of living has drawn some of the attention away from this transition, and so-called green policy has had to contend with active resistance from citizens, businesses, member states and politicians. It is becoming clear that “green policy”, unless it is fundamentally changed, will weaken Europe irreversibly, strip it of its competitiveness, sharply lower prosperity and lead it into a deep political, social and economic depression.