14.07.2022

How effective are the instruments to fight the energy price crisis?

The energy price crisis in Europe is worsening. Governments are launching new packages, but this remains unilateral measures.

The energy price crisis has been keeping Europe in suspense since autumn 2021. This is because energy prices only know one direction – steeply upwards. Governments have a duty to use state funds to cushion the price increase for the population and the economy. We would like to examine the current instruments for their social and climate policy compatibility. To this end, we consider both the impact on the economy and on households potentially affected by energy poverty. Many of the measures discussed are not designed specifically enough or they involve high bureaucratic costs. To effectively contain the crisis, governments need to pay even more attention to ensuring that countermeasures are targeted, low in bureaucracy, economically sustainable and climate sustainable. One government alone can guarantee this only to a limited extent; it is a European task.

The changed situation on the European energy market

The Russian war of aggression against Ukraine, distortions on the world market and profit-maximizing oil companies have exacerbated the energy price crisis considerably. In March 2022, energy prices in Germany were already 80% higher than in the same month last year. In the summer of 2022, it seems certain that these prices will rise again by between 80 and 130%.

A low supply of electricity (due to below-average electricity production from nuclear energy and renewable energies) combined with high demand led to an increased demand for gas in the electricity sector from autumn 2021 and ultimately to a gas shortage. This was likely exacerbated by a Gazprom subsidiary’s having filled storage facilities with only the minimum amount of gas specified in the contract. In 2022, a variety of factors were added that caused prices to rise further. First and foremost, there were the consequences of the war in Ukraine. In response to the Western sanctions, Russia curtailed or completely ended the export of gas to many European countries. The markets reacted, the price of gas rose and due to the coupling of the price of electricity to the price of gas, the price of electricity in Europe also rose massively. Furthermore, there is an increasing shortage of materials for many resources needed by the European economy. China, as a central global hub, is repeatedly closing itself  off regionally at certain points along the "zero covid strategy", which leads to material shortages and higher purchase prices for companies, which have to be compensated or passed on to consumers.

Many experts also suspect that refineries increased their own profit margins in the tense global situation and did not sufficiently pass on potential price reductions to the population. Later in the briefing, this is put in context of governments' instruments to reduce energy prices. Commodity traders also achieved record earnings. In the oil sector, the five industry giants Exxon Mobil, Chevron, Shell, BP and Total Energies posted their highest profits in seven years. At the same time, prices for consumers and industry are rising. These developments are changing the overall situation for European governments. Mitigation measures now need to be more differentiated and transnational. Let us first look at the existing instruments:

Antitrust measures and price caps

In many member states, antitrust measures are being examined because of the high profit margins. The need to cap profit margins and trade prices does not only exist in motorised private transport. The Greek MP Kyriakos Mitsotakis had already introduced a proposal for a Europe-wide cap on profit margins and a ban on market manipulation in the gas sector into the debate in the spring. However, since a European agreement would take too much time from the Greek government's point of view, a cap on the electricity price was decided at the national level. If consumers had to pay more than this cap between December and May, 60% of the monthly difference will be reimbursed by the state. This refund is limited to 600 euros per household and applies to all consumers with an annual income of up to 45,000 euros for the electricity consumed in their main residence. Also, additional income ("windfall profits") of energy companies resulting from war-related market shifts is to be taxed at a rate of 90%.

In order to secure locations and employment, various countries are also striving to keep the industrial electricity price at an internationally competitive level. France is considering a national price cap on gas, which would have a corresponding dampening effect on the industrial electricity price, which is linked to the gas price. In the case of a cap, the difference must be made up by the respective government.

In Italy, a cap was placed on the profits of energy companies. A tax of 10% was retroactively levied on additional profits made by energy companies (insofar as the profits are at least 10% higher than in the same period of the previous year). This is also the case in Spain: the government there wants to impose a tax on the profits of energy companies, which is to come into force in 2023. The Spanish government hopes that through this forced waiver by the companies, inflation in the country will be contained and that this will mean a contribution to Spanish GDP in the amount of more than one percentage point.

In Hungary and Slovenia, prices at the petrol pumps were capped. These unilateral regulations caused fuel tourism from neighbouring countries. Hungary reacted: the price reduction is to be guaranteed only to persons with a Hungarian licence plate. The EU Commission is now investigating a violation of EU law.

Short Evaluation

It will be a central issue for governments to examine the aforementioned connection between record profits for industry giants and record prices for consumers, and to break this connection if it is abused. However, due to the global interconnectedness of the markets, such an approach can hardly be tackled nationally; it must be coordinated at the European level. Moreover, such measures must not only benefit individual consumers. Discrimination on the basis of nationality or residence is not compatible with EU law.

Tax Cuts

Belgium and the Netherlands have lowered the value-added tax on natural gas, electricity and heating energy, and excise duty on petrol and diesel. The Belgian government hopes that this will save 10 euros per tank of gas worth 60 euros. In the Netherlands, tax cuts are expected to reduce household energy bills by 140 euros per half year. Sweden, which previously had the highest fuel taxes in Europe, also announced a cut of 1.30 kronor (twelve cents) per liter between June 1 and October 31.

Poland is suspending the value-added tax on gas, which previously stood at 23%. In Austria, where the energy tax was previously at 28%, taxes on natural gas and electricity will be cut proportionately by 90% by the end of June 2023, at a cost to the state of around EUR 900 million. In Spain, the value-added tax on electricity for private households will be reduced from 10% to 5%.

Short Evaluation

Tax cuts need to be designed sensitively in order to achieve the intended incentive effect. According to the ifo Institute, for example, a blanket reduction in the value-added tax cannot easily guarantee that this reduction will actually be passed on one-to-one from producers to consumers. Where the decision is made to cut this tax, further instruments must be put in place to ensure that the relief reaches consumers. This is because cuts in the value-added tax have an area-wide effect and tend to relieve the upper and middle classes more than low-income households. Nor does this approach provide any incentives for energy efficiency and climate-sensitive behaviour.

Price reductions and financial support

In Greece, fuel vouchers totalling EUR 200 are to be issued to all companies, financed by the state. A government subsidy will also keep gas and electricity bills at last summer’s levels. France is relying on a price reduction in the form of a fuel discount of 15 cents per liter from April 1. The measure is initially limited to four months. In Spain, there is also a discount of 20 cents per liter of fuel as well as a 50% reduction on public transport tickets. The German government also decided on a fuel discount. However, the effect of this instrument is debated controversial.

At the end of June, the price of petrol in Germany was cheaper or similar to that in most of the EU's direct neighbours. However, the fuel discount did not have the desired effect of lowering the price. Mineral oil companies justified this with price developments on the global oil market. It will take extensive analyses to work out whether the costs for the state and the savings for consumers were in good proportion.

In addition, Germany adopted a one-time payment of 300 euros for employees and the self-employed, a one-time family allowance of 100 euros per child and an increase in the one-time payment to recipients of transfer benefits to 200 euros per person. In addition, a mobility premium was adopted. Citizens can use local public transport for three months for only 9 euros per month.

In Belgium, a social tariff for electricity and gas has proved its worth to relieve low-income households. This has now been extended to September. Austria is relying on a mixture of mobility and energy money. The commuter allowance will be increased to 400 million euros. 150 million euros will be made available to enable price reductions and service extensions in local public transport. In addition, a graduated mobility premium is to be introduced from October. People who live in the countryside and have inadequate local transport connections will receive a higher climate bonus than people in Vienna, for example. In addition, investments in public transport amounting to 150 million have been announced in order to increase services and reduce prices.

The Spanish government decided in June that employees, the self-employed and the unemployed with a gross annual income of less than 14,000 euros should receive a one-off allowance of 200 euros to help pay for the rising cost of living. France also announced measures for July that are supposed to relieve families, the unemployed, the disabled and pensioners. The exact form this will take has not yet been decided, but the cost factor is around 8 billion euros. In Sweden, housing benefit has been increased for the period from July to December. People who receive housing benefit and have children will also receive 25% higher child benefit.

Short Evaluation

Fuel discounts are low in bureaucracy, but cost the state considerable sums and, similar to tax cuts, tend to relieve high-income earners more than middle and low-income groups. Price discounts can generally make a short-term contribution to making energy cheaper. With regard to energy efficiency and climate-sensitive behaviour, they are rather counterproductive.

Measures graded according to income, such as energy subsidies and mobility premiums, can be useful instruments, but they must also be implemented visibly and promptly, so that extensive bureaucracy along the measures is to be classified as problematic. Depositing the needs test with employers would pose significant challenges for many small and medium-sized businesses. If one decides in favour of an official examination, either an appropriately set up administration is required or the funds have to be integrated into existing payment systems with just as much bureaucratic effort.

From a climate perspective, these instruments can make sense if mobility is promoted more broadly than solely in motorized private transport. In the best case, the moment of crisis is used to advance the mobility turnaround with public funds.

Not losing sight of the energy transition

The present proposals do not yet solve one central problem. Fossil investments and energy use will continue to be subsidized. The energy transition and thus the move away from fossil fuels must be driven forward more strongly, not only for climate reasons, but also to prevent future energy price crises. The IEA (International Energy Agency) has accordingly proposed rapid implementation programs for photovoltaics, which could make it possible to break the fossil price spiral.

Agora Energiewende has also presented a recommendation paper with 15 priority measures on how the energy transition can now be accelerated. Citizen participation will play an important role in the implementation. If these fields are thought together, the energy transition could generate broad societal support and participation, thus ensuring equitable participation and preventing future price crises.

European package of measures needed

In order to sustainably relieve low-income households and industry, proposals coordinated at European level appear to be central, as measures such as decoupling the price of electricity from the price of gas, with the corresponding options for capping prices, can only be implemented at European level. Equally important are measures at the EU level when strategies are sought that go beyond short-term crisis management.

A proposal for such a strategy was put forward by the so-called "Club Med axis" (Italy, Spain, Portugal, Greece) and discussed in the European Council. The southern European heads of state and government sought several measures at once: decoupling the price of electricity from the price of gas and limiting the price, for example, by means of a European cap. However, their demands also included a diversification of energy sources and a strengthening of the European energy infrastructure. Germany and the Netherlands were cautious about these proposals because of concerns about security of supply.

The heads of state and government finally agreed on a compromise. Individual member states such as Spain and Portugal are temporarily given the opportunity to set national price caps. The Commission is ready to allow other countries to decide on a price cap on gas, especially in the event of a complete gas supply stop. Actually, such a procedure is not planned in the European internal market. The distorting developments that this can result in have already been explained above in this briefing using the example of “fuel tourism”, so it is now necessary to examine how this can be prevented.

A Europe-wide cap on gas prices is being examined by the Commission and discussed in many constellations, for example most recently at the G-7 summit. This has not yet been decided. The same applies to a decoupling of electricity and gas prices. Ursula von der Leyen brought up the idea of a complete realignment of the European electricity market design. Together with the member states, fundamental considerations would then have to be made as to how unjustified excess profits, so-called "windfall profits", can be avoided in the future. As shown above by individual examples, this debate is already underway in some member states.

The goal should be to link a potential European energy package with simplifications in project implementation in the field of renewable energies. In the medium term, this will effectively prevent the next fossil fuel price crisis and contribute to climate protection.

Agreement was reached in the European Council that interested member states will be able to jointly order pipeline gas or LNG in the future. However, this cannot hide the fact that individual national measures have dominated to date.

Timo Karl is Policy Advisor at FES Just Climate. He works towards modern climate and economic policy and their social opportunities. Previously, he was an advisor for community energy at the World Wind Energy Association and a research assistant at the University of Bonn. At the beginning of 2022, he submitted his dissertation on modern negotiation management in the international climate negotiations to the University of Bonn.

Lars Tum is an intern at the FES Competence Centre for Climate and Social Justice. He is in his last year of his Geomatics master studies at the Ruhr University Bochum with a specialization in Climate Change research and disaster management. Prior to joining the FES Team, Lars worked at the German Aerospace Center (DLR) in Munich and he completed a semester abroad in Estonia at the University of Tartu. Additionally, he is part of the Working Group of Interdisciplinary Geoinformation Sciences at the Ruhr University Bochum.

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