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Europe turning 'green' with envy for U.S. energy boom

  • Article by: Keith Johnson
  • Foreign Policy
  • January 22, 2014 - 11:41 AM

Europe’s governments have poured in tens of billions into alternatives to fossil fuels. But now, the famously green Europeans are fretting that the continent can be clean, or it can be competitive, but are finding it increasingly hard to be both.

This week, with the release of its new energy blueprint, Europe will again try to square the circle between ambitious environmental goals and the nagging realization that cheap and abundant energy underpin economic growth.

The release this week of the European Commission’s energy strategy for the next decade and a half comes amidst an ever-louder chorus of concern that European energy policy threatens its economy.

The latest and loudest voice belongs to Sigmar Gabriel, Germany’s “super minister” responsible for energy and the economy. He warned this week at an energy conference that Germany simply cannot continue to bear the $32 billion-a-year cost of subsidies for renewable energy, the linchpin of Germany’s ambitious planned transition towards cleaner energy sources. German electricity prices, both for individuals and for industry, are among the highest in Europe.

“We have to make sure that we connect the energy switch to economic success, or at least not endanger it,” Gabriel said.

And he is not alone. British policymakers, led by Prime Minister David Cameron, railed against European plans to regulate hydraulic fracturing across the Continent. Polish leaders have also slammed what they call restrictive climate policies that could hobble the few countries that have managed to muddle through the economic crisis.

Corporate titans, too, have weighed in, albeit with self-serving arguments. Lakshmi Mittal, the chief executive of Luxembourg-based ArcelorMittal, the world’s biggest steel maker, took to the pages of the Financial Times to warn that expensive energy and over-ambitious emissions-reductions schemes will de-industrialize the continent.

The new European energy blueprint is meant as a waypoint between the established energy and climate goals for 2020 and the long-term goals already in place for 2050, which include slashing greenhouse-gas emissions by about 90 percent compared to 1990 levels. But the eagerly-anticipated 2030 blueprint won’t merely draw a straight line between those years. Instead, as Europe reels with the aftermath of the great recession, lingering unemployment, eroding economic competitiveness, and the siren call of the American energy-driven rebirth, the strategy is expected to scale back Europe’s commitment to ever cleaner and greener policies, at least in the mid-term.

Indeed, ever since the eruption of the U.S. shale boom, which created a glut of natural gas in the United States, Europe has been struggling to keep its environmental and economic policies pointed in the same direction. Cheap U.S. coal, displaced at home by natural gas, for the last two years has pushed out pricey natural gas in Europe. That, in turn, has led to greenhouse-gas emissions increases in Europe, even as the United States got cleaner.

The challenge for European policymakers now is to figure out how to balance worries that its green focus will hamstring economic recovery, while still sending signals to the market that Europe backs clean energy and is committed to ambitious cuts in greenhouse-gas emissions.

Observers and blueprint drafts that have leaked into the press recently suggest that the 2030 blueprint will water down carbon-reduction goals, remove European-wide commitments on renewable energy, and take a pass on European-wide fracking rules for now.

European Union officials acknowledge that the current economic climate has greatly shaped the debate over the blueprint to 2030. “No one wants to kill the economy,” one told Foreign Policy.

But at the same time, they say, concerns that European energy policy is strangling the economy are overblown. Few industries are actually energy-intensive in the way that big steel makers and cement manufacturers are. Rather, it’s the contrast with America’s sudden bounty of cheap energy that has Europeans wringing their hands.

“Yes, the competitive disadvantage is clearly there. But it seems to me that most of the reasons for that disadvantage are outside Europe, that is, cheap energy in the United States and cheap labor in Asia,” Tim Boersma, an energy analyst at the Brookings Institution, told FP.

Rather than jettison its climate and clean-energy goals in the pursuit of a U.S.-style energy revolution that might be impossible to replicate anyway, he said, Europe should acknowledge that a big chunk of what determines economic competitiveness lies outside its control, and focus on finding a competitive edge for its industries where it can make a difference.

The contrast between the United States and Europe becomes crystal clear inside the electric meter, whether for regular consumers or for industries. Average nationwide retail electricity prices for residential users in the United States rose from 11.7 cents per kilowatt-hour in 2011 to 12.2 cents in 2013. The average residential rate in the 27 European Union countries, in contrast, rose from 24 U.S. cents a kilowatt-hour in 2011 to 27 cents last year.

The costs for businesses are equally stark. U.S. industries paid an average rate of 6.9 cents a kilowatt-hour last year, about the same as two years ago. European firms, on the other hand, pay 16 U.S. cents a kilowatt-hour, up almost 10 percent in the last two years.

Those averages mask some big variations from country to country, with further knock-on effects for economic recovery. Spaniards pay residential rates of about 30 U.S. cents per kilowatt-hour — and that’s still not enough to actually cover the costs. Spanish power generators receive the difference from the government. As a result, the debt-ridden Spanish government is essentially on the hook for billions of dollars more, intensifying the difficulties for Spain to climb out of its fiscal hole.

But Germany, as the EU’s largest economy and home to the world’s most ambitious energy transformation, is the epicenter of the European debate.

Germany’s “Energiewende” — the transformation of its energy system from a soon-to-be-retired nuclear fleet to an array of solar panels and wind farms — is a test case for whether “green” policies undergird, or undermine, economic growth. In Germany, the costs of the nascent transition already appear to be tipping the scales.

German residential power rates have risen from 34 U.S. cents a kWh to 39 cents in the last two years. Industrial rates rose from about 17 cents to over 19 cents a kWh in the same period. The tally for consumers and businesses from subsidizing renewable energy is $32 billion a year.

“I don’t know any other economy that can bear this burden,” Gabriel, the German energy minister, said. The German government plans to cap subsidies for green energy, even though that will do little or nothing to lower power bills in the meantime.

Big German industry groups have criticized the way the Energiewende has played out so far, calling for an end to open-ended subsidies for green power producers. But ironically, German industries have not had to pick up the tab for the costs of the transition to green power, most of which is borne by regular customers.

“I don’t believe that the link that is often made between competitiveness and renewable-energy policies is really there,” Brookings’ Boersma said. “I think it’s very convenient for everyone who is not in favor of renewable to make that claim, but the industries that are at a competitive disadvantage are generally exempt and have all sorts of favorable conditions that would rule out making that link.”

Indeed, a recent study by PriceWaterhouseCoopers found that European countries with aggressive climate policies, including Germany, can manage economic growth even while reducing energy use and greenhouse-gas emissions.

The danger, Boersma and others say, is that Europe may end up watering down its energy and climate policies to deal with economic fears that have little to do with subsidies for solar power or ambitious plans for wind farms. That, they say, could send muddled messages to investors, further clouding the investment climate in the energy sector precisely at a time when hundreds of billions of dollars are needed to make the clean-energy transition work.

Of course, if it’s any consolation to European policymakers, Japanese and Chinese businesses are also grappling with rising energy costs. The post-Fukushima nuclear shutdown in Japan has led to a spike in costly, imported energy, which Japanese government officials say could drive business offshore. And China, which for years rode cheap energy and cheap labor to become the world’s workshop, is steadily ramping up its own imports of pricey natural gas, even as rising labor costs on the coast push manufacturing into the Chinese interior and other countries in Southeast Asia.

But as Europe wrestles with just how to reconcile its environmental ambitions and its economic imperatives, the real irony is that the country that lacks any sort of energy policy at all — the United States — has managed to cut greenhouse-gas emissions, drive energy prices down, and jumpstart a manufacturing boom, all thanks to fracking.

© 2014 Star Tribune