3 minute read
Energy Policies
DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle
EU’s ‘Price Cap’ Mistake
Only 15 years ago, the European Union produced more natural gas than Russia exported, according to the Energy Information Administration. Repeating past mistakes and maintaining a failed energetic interventionist policy would only worsen what is already a structural disaster.
The prohibitive cost of electricity and gas in Europe isn’t a result of market flaws but of a completely unsustainable cost structure where consumers are forced to pay escalating taxes, a hidden CO2 tax, subsidies, and other rising regulatory costs. More than 60 percent of an average eurozone country’s household bill is made up of taxes and regulated costs, according to Eurostat.
Brussels can’t turn water into wine, and, similarly, the European Union can’t “cap” the price of natural gas and oil. It’s almost ironic, but European leaders are spending days debating whether to impose a cap on Russian oil that would be set above the current Urals price and significantly above the five-year average levels.
The only thing that these so-called caps would achieve in a global energy market is to provide a massive subsidy that would then have to be repaid with higher tariffs or taxes afterward.
Additionally, in a globalized and international market, the cap would create enormous arbitrage incentives that would only benefit China, which would continue purchasing cheap Russian commodities and exporting to Europe its more competitive goods.
A European gas and oil cap causes no harm to Russia at all. We should have learned by now that through exports to China, India, and other Asian countries, Russia continues to set trade surplus records.
Additionally, by subsidizing the price in the short term, the gas cap would create an artificial demand and a perverse incentive. A cap on natural gas prices leads to higher consumption of fossil fuels, higher taxes, and higher bills while it penalizes renewable investment and a competitive energy transition.
The European Union needs a competitive energy policy that makes use of all available technologies. Eliminating, delaying, and placing bureaucratic barriers on investments in supply-chain security is a luxury no nation can afford.
The European Union should:
• Use the European Union’s extraordinary tax receipts from the sale of CO2 emission rights, which are estimated at more than 20 billion euros for 2022, to lower tariffs for the neediest families. • Reduce the taxes on gasoline and gasoil that are more than 50 percent of the final price for the least fortunate and small businesses. The same for natural gas, for which taxes add up to more than 30 percent of the tariff. • Reduce the regulated costs burden included in consumer tariffs. Most
of those regulated costs and subsidies have nothing to do with energy consumption and ought to be included in each country’s budget. • Extend the life of nuclear plants and invest in new reactors. • Support renewable energy by eliminating the regulatory risk that negatively impacts capital attraction.
Supporting renewable energy means securing the necessary amounts of lithium, copper, and cobalt. • Facilitate investments in natural gas development and lift the ban on the exploration and exploitation of unconventional gas. • Reach long-term contracts with the major producers of liquefied natural gas, as China did when it closed its 27-year contract with Qatar. • Eliminate taxes imposed on energy companies. They are the key to investment in the security of supply. • Strengthen the security of supply and stability provided by hydroelectric energy through contract extensions and investments in mini-hydro. • Provide tax benefits for investing in cogeneration. • Support long-term investments in the grid and networks and energy sources such as green hydrogen with tax benefits.
The energy crisis, which was already a high-cost issue for European citizens in 2019, will become a price and supply issue soon if the European Union disregards these measures and continues to impose interventionist policies, raising taxes and imposing idealistic and industrially unviable models.
If the necessity of securing the supply and mining of copper, cobalt, lithium, and rare earth metals isn’t understood, together with the need to strengthen nuclear, natural gas, and hydro, the European Union will switch from being dependent on Russia to being dependent on Russia and China.
