The current energy price rises are due to a combination of factors, but mostly to high demand for natural gas on the world markets in connection with a quite strong economic recovery. The European and Asian markets (primarily China, Japan, Thailand, South Korea) are linked, as gas suppliers are the same. China has become the largest importer of Liquefied Natural Gas (LNG) with an increase of 20% in 2021. This is a global development, affecting many countries, regardless of their location or market arrangements.
There are good reasons to consider this shock as probably transitory, but it nevertheless raises important issues for the EU, internally and externally. Europe needs to act: the current situation risks creating real energy poverty, destabilising governments, derailing the economic recovery and undermining the political and social support to the green transition in member states. It also risks increasing our vulnerability in our relations with third countries.
Source: European Commission
To address the rising energy prices, the European Commission presented yesterday a Joint Communication. The EU has tools that the member states can use to address rising prices in the short term: for instance by reducing Value Added Tax rate and/or other taxes on energy, by adopting targeted measures to support poor and vulnerable consumers, or through other temporary measures to support households and small businesses. As stated by the Joint Communication, all these steps can be taken in line with the EU rules. These measures mitigate the impact of the rising prices by distributing the cost to all taxpayers but do not address the root causes. We may also need to revise the rules governing our electricity and gas markets; however, this can only be a medium-term task. With current EU regulations, the price of gas determines indeed the price of electricity and we have to analyze if the current model is the best possible to achieve the goals of the Green Deal and those of the EU’s geopolitical agenda.
Higher energy prices raise major issues for EU foreign and security policy. Our external dependency on fossil fuels is greater than for the vast majority of other regions in the world because we have been the first to industrialise and have hence depleted most fossil fuel resources on our territory. In 2019, according to Eurostat, the EU27’s external dependency ratio was 70% for hard coal, 90% for natural gas and 97% for crude oil. This external dependency is increasing year by year. In the same year, according to Eurostat, we imported €363 billion worth of fossil fuels, 2.6% of our GDP or the equivalent of the cost of more than 9 million European jobs.
In addition to mitigating climate change, this strong external dependency on fossil fuels is an important reason why we need to decarbonise our economy as quickly as possible. The direction is clear, but we need to accelerate. This is the purpose of the European Green Deal and the ambitious goal that we have set last April by committing ourselves legally to become carbon neutral by 2050 and to reduce our greenhouse gas emissions by 55 % in 2030. Last July, the European Commission also presented the Fit for 55 legislative package, to further adapt our rules and toolbox to fulfil our commitments.
The energy transition will for sure be accompanied by a rise in the price of fossil fuels. However, this increase must be gradual and controlled to give all stakeholders time to adapt in an orderly manner. Short-term price shocks risk endangering this process by damaging the economy and weakening the social consensus and support for measures to fight climate change and for the green transition towards a more sustainable future. To limit the various risks linked to energy price shocks, we need to better ensure the EU’s energy security. This implies that we act proactively to diversify our own sources, suppliers and routes, assist other countries to accelerate their own energy transition and help stabilise our international environment, particularly in our wider neighborhood.
Energy security is an important reason why Europeans should intensify efforts to contribute to the stability in the Eastern Mediterranean, which has great energy potential, including renewables, and in the Gulf region, for example through the Iran nuclear deal/JCPoA or by helping Iraq to stabilise and develop again. Gulf countries remain heavily dependent on oil and gas exports. However, they have understood that they too need to transition to renewable energy. We can help them in this transition as well as cooperate on mitigation and adaptation measures to tackle water security issues. They also need to stay reliable suppliers today if they want to be considered as potential reliable suppliers in the future, for example of green hydrogen.
Energy security is also relevant when we help stabilise the Sahel region and countries like Libya or Mozambique and prevent terrorism from spillover on the African continent. This is also a reason why we need to be a global maritime security provider, as we already are with EUNAVFOR Atalanta to help fight the Somali-based piracy at sea off the Horn of Africa or with our new Coordinated Maritime Presences (CMP) concept off the coast of West Africa.
Last but not least, our energy dependency is one of the key issues in our relations with Russia. Russia is meeting its contractual obligations on gas deliveries, but is not putting additional gas into the European system as it could do, hence contributing to drive prices upward. As I said before on this blog, “we share a continent with Russia and it remains a vital actor on numerous fronts. We therefore have no alternative but to develop a principled, balanced and strategic approach.” The EU is dependent on Russia for fossil fuel imports, but the Russian economy and state also need the revenues of our energy imports. Energy issues are one important reason why the EU needs to become more cohesive in its relation with Russia and preserve the unity of purpose among its member states. This has not always been the case in the past and to face this crisis we need to make progress in this direction.
In sum, the current rise of energy prices is another example why Europe has to act more united on the global stage and in relations with our neighbors: in isolation, none of us can really address this issue. We need to act collectively as a Team Europe as we have successfully done with our external partners in the COVID-19 crisis or by purchasing together vaccines. An important tool could be to prioritise energy dialogues with key suppliers. I am ready to go down this road.
This crisis calls for better coordinated, more inclusive and coherent global energy governance to ensure both fully functioning global markets and affordable energy throughout the green transition for everyone in the world. We should put this issue on the table in international fora like the International Energy Agency and the G20. In 2008, when the oil prices were very high, we called for an international conference of suppliers and buyers. We could make a similar proposal concerning gas: the global gas market has no obvious home like OPEC for oil. Enhanced international coordination will not reduce the gas prices automatically, but the world acting visibly together could help calm down speculative markets. We will develop our medium-term proposals in the new International Energy Strategy that the European Commission will present in the spring 2022.
Stabilising our energy supplies is not the only issue we have to face. We also need to avoid that the current tensions on the energy market worsens the environmental degradation caused by the exploitation of fossil fuels. It is particularly important in the Arctic region (we have released today also our new EU Arctic Strategy) but also in the Mediterranean which is already one of the most polluted and threatened seas in the world.
Decarbonising our economies is a key task for the EU and humanity. It will be the defining challenge of the 21st century, a make or break for the future of humankind. Globally, the main issue will be to provide adequate energy to all the population that today consumes very limited or no energy at all while fighting climate change. In 2019, 759 million people still lived without electricity. This delicate process must be fine-tuned to avoid also short-terms shocks with brutal price hikes that could derail the entire energy transition in the EU. We can achieve this by using various tools, such as those put forward by the European Commission yesterday. Our foreign and security policy can also contribute to both long and short terms goals.