Cost Of Living Crisis Threatens EU Energy Transition

• Rising living expenses in the EU are causing conflicts over climate change mitigation efforts, with members like Poland and Germany expressing concerns.
• The European Parliament remains committed to increasing low-carbon energy targets despite growing opposition and economic challenges.
• The EU's push for local production of low-carbon tech faces competition from China, raising concerns about the feasibility and cost of achieving climate goals.

Consistently higher living expenses have deepened a rift among—and within—EU members about tackling climate change and moving away from oil, gas, and coal.

The development has been anything but surprising, as higher energy costs had millions of Europeans struggling to make ends meet. Yet Brussels remains adamant that the transition must happen as planned. Or almost.

This spring, the ruling coalition in Germany proposed a bill aiming to phase out gas heating systems and replace them with electrical ones that draw energy from sources such as wind and solar.

The proposal caused protests in parts of Germany as people refused to shoulder the cost of retrofitting houses and residential buildings with heat pump systems.

Eventually, the German parliament last week passed a watered-down version of the proposal in a bid to calm public nerves.

Meanwhile, earlier this year, Poland filed a lawsuit against the EU about some of Brussels' climate policies, arguing that these would impose an unbearable burden on its citizens.

One of these policies was the planned ban on new internal combustion engine car sales from 2035, which the European Commission believes would be a major step towards moving to a low-carbon future.

"The contested regulation imposes excessive burdens connected with the transition towards zero-emission mobility on European citizens, especially those who are less well off, as well as on the European automotive companies sector," Poland said.

The Central European country also railed against national emission reduction targets, saying these would undermine its energy security. Poland is overwhelmingly dependent on coal for its power generation.

Germany, for all its efforts to reduce its dependence on hydrocarbons, also recently increased its dependence on coal: utility RWE recently began dismantling a wind farm in order to expand a lignite coal mine after the government shut down Germany's last three nuclear reactors.

France is also against some new climate policies pushed by Brussels, specifically rules concerning levels of exhaust pipe emissions, along with another seven member states. These include Poland again, Bulgaria, Hungary, Italy, Romania, the Czech Republic, and Slovakia.

"These new rules would divert the industry's investments from achieving the net-zero transition pathway," the eight said.

The main problem these member states have is that the cost of the transition to net zero is already beginning to be felt by their citizens. Since no rational government would risk its re-election chances by angering the majority of voters, they are now looking for ways to slow these climate policies down or do away with them altogether.

As Bloomberg put it in a recent report, "Polls show most European voters want action on climate change as heat waves, wild fires and floods make the impact of emissions ever clearer — but they're reluctant to bear the cost of switching to less-polluting technology."

Despite rising popular opposition, the European parliament this week voted to increase low-carbon energy targets, now aiming to generate over 42% of its electricity from wind, solar, and other low-carbon sources of energy.

To facilitate the buildup, the European parliament also approved faster permitting processes for new wind and solar installations.

The vote came amid warnings from wind and solar developers in the bloc that higher raw material and lending costs are jeopardizing their projects. Danish Orsted sounded the alarm earlier this year, although it focused on the UK, calling for more state subsidies.

Several solar developers in the EU, for their part, warned cheap Chinese panels were undermining their own profitability thanks to generous subsidies from Beijing and cheaper labor. The European Union has ambitions to manufacture 30 GW of solar power technology at home by 2030.

Today, in her State of the Union address, European Commission President Ursula von der Leyen doubled down on transition ambitions, slamming China for its "unfair trade practices," which "affected our solar industry."

She also highlighted the EU's plans to go local in terms of transition supply chains, stating that "From wind to steel, from batteries to electric vehicles, our ambition is crystal clear: The future of our clean tech industry has to be made in Europe."

The problem with that idea, as demonstrated by solar developers' Chinese problem, is that the cost of developing low-carbon tech in Europe is much higher than in China. What this means, in turn, is that the price tag for the transition will also be higher if the EU continues down the path of local production.

While the idea of local production certainly makes a lot of sense, there is hardly any doubt that the European Union is desperately late for the party, with China effectively in control of low-carbon supply chains on a global level.

This does not bode well for Brussels' climate ambitions. Going local in production and eliminating Chinese raw materials and components will delay the transition beyond any targets currently in favor. Giving up and going Chinese, on the other hand, is totally unpalatable for most EU members and the European Commission.

This puts the EU in a delicate position, having to juggle the interests of too many stakeholders—and pour more subsidies into the transition even though the energy crunch is eating into tax revenues as businesses shrink operations.

By Irina Slav for Oilprice.com

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