Can Europe Afford Its Energy Transition?

Authored by Irina Slav via OilPrice.com,

• A new report estimates the EU’s green transition could cost €1.3 trillion annually until 2030 and €1.54 trillion annually until 2050.

• The high cost of the transition may require higher taxes, subsidies, and potentially national green investment strategies.

• Concerns exist about public support for the transition due to rising living costs and potential harm to businesses’ competitiveness.

Climate finance is a white-hot topic right now. The COP2 delegates failed to agree on a generous enough deal for the transition in developing countries; in the U.S., project Veritas revealed that the EPA was funneling billions into climate activist organizations ahead of Trump’s presidency to ensure continued pressure on the government; and in the EU, a think tank put a price tag on the transition. The EU cannot afford it.

Bruegel, the Brussels-based energy outlet, published a policy brief this week focusing on what the EU needs to get to its stated goals of net zero and how much it would cost. It appears that, for these goals to be hit, the bloc would need to spend 1.3 trillion euros, or about $1.4 trillion, every year until 2030. After that, the price for the transition jumps to 1.54 trillion annually and stays this much until 2050.

The impressive amount of money that needs to be spent on the transition is divided into three categories by Bruegel: energy supply, energy demand, and transport. It may also be an underestimation by the EU itself—because it does not include all the costs associated with the transition, omitting, for instance, financing costs that could be quite significant in their own right. As Bruegel points out, “the cost of financing investment will be significant for cash-constrained agents, and public finances will need to step in with de-risking instruments to facilitate private investment.”

What this means is that the European Union will need to step up subsidies in all of its transition directions in order to motivate private investors to join it in funding the transition. That could be a tough job given the current context in transition technologies, which is one with subdued demand despite the strong government support in the form of subsidies.

Yet the European Union—as represented by its executive arm, the Commission—also omits other costs from its financial plans for the transition. It does not include the manufacturing costs associated with that transition into the budget, and these could be steep as well. As Bruegel notes, the buildout of local manufacturing capacity in line with a policy that requires 40% of European transition tech to be made in the bloc would require additional investments of 100 billion euros annually between this year and 2030.

It sounds like the tab just keeps getting items added to it, but who is going to pick it up and how they are going to afford it is becoming increasingly unclear. Of course, on the face of it, the payers are perfectly clear: governments and private investors. It is below this face that things get interesting—and challenging.

The government receives money from the taxpayers. So, the government part of the transition tab will be, in effect, picked up by people who pay taxes—and who vote. But with the transition about to get even more expensive than it already is, European governments would need to find more money than previously expected in order to do their bit for the common green good, and that would have to mean higher taxes—while trying to incentivize taxpayers to adopt greener and more expensive lifestyles.

Per Bruegel, “There will be a great need from 2025-2030 to deal with the complex distributional implications of buildings and transport decarbonisation, from which emissions reductions have so far been relatively small. Avoiding political backlash may involve offering financial incentives to households in return for adopting costlier green technologies.”

This is quite a conundrum because it effectively comes down to European governments taking money from people with the one hand and giving them some back with the other, all for the purpose of reducing the emissions of carbon dioxide by 55% from 1990s levels by 2030 and then achieving net-zero status by 2050. Judging by the latest political events in Europe, notably Germany, Romania, and now France, it is not going well.

It might get even worse in the near future because Bruegel has suggestions about how to ensure the money for the transition is there: by effectively binding all national policies with the European Green Deal. The EU is currently seeking to achieve its transition goals via a scheme featuring national energy and climate plans, or NECPs. Per Bruegel, in order to be effective, NECPs “must be turned into real national green-investment strategies, providing a point of reference for investors, stakeholders and citizens in making investment decisions.”

“Governments should be obliged to set out in their NECPs a detailed, bottom-up analysis of their green investment needs, and an implementation roadmap with clear milestones or key performance indicators (KPIs),” the think tank also wrote, basically suggesting that transition policies should be turned into the focus and basis of all national policies.

While that might be possible, if difficult, to do with all pro-transition governments across the EU, the implementation remains dependent on over a trillion euros in investments every single year between now and 2030—and Europeans are already angry enough with their rising cost of living. Bruegel calls the criticism of EU climate policies populism and accuses critics of making false statements about the damage that the transition would do to the EU’s competitiveness. Yet evidence points in the opposite direction: the transition is making life in the EU a lot more expensive, destroying European businesses’ competitiveness and even threatening their survival. The impossibility of finding enough money to fund the transition could be a blessing in disguise.