EU needs to share the costs of energy independence

By Philipp Jäger, Nils Redeker
Philipp Jäger is Policy Fellow, Nils Redeker is Deputy Director at the Jacques Delors Centre.

European economic policymaking is currently particularly complicated. The Russian war of aggression against Ukraine is a heavy drag on growth, while inflation is rising rapidly. Spiraling energy prices require policy measures that cushion their impact without preventing companies and households from adapting to permanently higher fuel and electricity prices.

At the same time, the war necessitates new public expenditures – from bolstering the military, to humanitarian aid for refugees or the reconstruction of Ukraine – in a time in which governments had only just begun to cut back on their high spending to tackle the economic consequences of the pandemic.

Consequently, the EU currently has to juggle a whole new set of conflicting economic policy goals. Beyond many complicated trade-offs, however, the war also puts some objectives on the agenda that are beyond reproach. Two are particularly important. First, the EU must end its dependence on Russian energy imports as quickly and as comprehensively as possible. And secondly, it should achieve this primarily by investing massively in energy efficiency and the expansion of renewable energy.

First and foremost, energy independence is a geopolitical necessity. As long as the EU does not wean itself off Russian coal, oil and gas, Europe will continue to pour billions into the Russian war chest and remain geo-economically vulnerable. Ending the dependency from Russia by accelerating the deployment of renewables, at the same time, is good economic policy: It reduces dependence on fossil energy overall (not just from Russia), cuts European emissions, and in the long run lowers energy prices and thus imported inflation. The war confronts the EU with many difficult economic policy decisions. However, the massive expansion of investments in energy independence is not one of them.

Question about financing remains unanswered

In May, the EU Commission presented a plan on how to achieve this goal. With REPowerEU, it wants to reduce gas imports from Russia by two-thirds by the end of this year. By 2027, all Russian energy exports to the EU should be stopped completely. To achieve this, the primary focus is on accelerating the energy transition (the share of renewables is lifted from previously 40 percent across the EU by 2030 to 45 percent) and on energy savings through greater energy efficiency and lower consumption. To a lesser extent, the plan also includes investments in fossil infrastructure to circumvent Russian energy imports.

One can rightly argue over some of the details of the plan. Overall, however, the Commission proposal consists of many sensible measures, such as a platform for the joint procurement of natural gas, liquefied gas and hydrogen, a solar initiative, recommendations for simplifying approval procedures for renewable energies, or a foreign policy strategy for energy imports. So far, however, the plan lacks a convincing strategy on how the new goals are to be financed. In fact, energy independence does not come cheap.

According to the Commission’s estimate, the costs of REPowerEU amount to €300 billion by 2030. Of this sum, €210 billion would already have to be invested by 2027. Importantly, these sums are needed in addition to the funds that were already budgeted for reaching European climate goals before the war. Overall, the costs of energy independence through the energy transition are therefore much higher. But so far, hardly any new financial resources have been made available at EU level.

Funding via countries does not make sense

For the financing of REPowerEU, the Commission proposes on the one hand that member states voluntarily reallocate money from the cohesion funds and the EU agriculture budget. Moreover, by selling additional CO2 certificates, a small share, €20 billion, would be generated, channeled into to the Recovery and Resilience Facility (RRF) and allocated according to the key used during the pandemic. This is problematic for a whole range of reasons, not least because it would finance the acceleration of the energy transition by emitting additional CO2, and because the additional funds would primarily benefit those countries that were particularly affected by the economic fallout of the pandemic, a completely different crisis.

The largest part of the costs, about €225 billion, would be financed with RRF loans that are so far untapped. For this, member countries would have to borrow money from the EU and invest in specific projects to facilitate energy independence. For some member countries, these loans come with more favourable conditions than on the international financial markets. However, they fully count towards national debt and must be repaid in the long term. In summary, the financing side of the plan is, thus, currently based primarily on national spending. Whether this will work is questionable for at least three reasons.

First, energy independence is a common European good. Many investments required for REPowerEU have a European added value. However, their direct benefit for the countries in which they would have to take place is often small in the short term. For example, from a European perspective, new solar plants would be particularly worthwhile in Spain, according to the Commission. However, Spain itself is hardly dependent on Russian energy and would not only have to finance new solar plants, but also the grid infrastructure necessary to sell the new electricity to other, less sunny parts of the EU.

It is unlikely that Spain and other countries will undertake such investments to a sufficient degree, especially in connection with a second reason. National budgets are already under considerable pressure due to the economic consequences of the war. To cushion high energy prices, member states across Europe have already earmarked over €180 billion for relief packages. If prices remain high or rise further, these expenditures are bound to increase.

In addition, there will be a significant increase in spending on national defense budgets (announcements to date of €200 billion for the coming years, and rising), the costs of taking in refugees (Bruegel estimates €43 billion for 2022 alone) and the financial repercussions of the pandemic. How much the war will cost Europe in the end remains difficult to estimate. However, given this context, it is already clear that new, long-term investments in green energy independence will compete in national budgetary plans with other pressing expenditures.

Common goals, common financing

And third, achieving energy independence is much more difficult for some member states than for others. For one, some member states are much more dependent on Russian energy than others. While France, for example, imported less than 10% of its energy from Russia before the war, it was more than half for Slovakia or Hungary, and about a quarter in the Czech Republic. On the other hand, some member states are currently suffering much more from the direct economic consequences of the war.

In particular, many Eastern European member states are narrowly avoiding a recession, even in more optimistic forecasts, and are also much more affected by high energy prices and energy poverty, compared to some countries in Western and Southern Europe. In these countries, investing sufficiently in green energy independence will prove particularly difficult.

To achieve the goals set in REPowerEU, the EU can, therefore, not rely primarily on national funding. Common European goals need common financing. Without additional funds, this can hardly be achieved. The funds of the EU budget are generally limited and its margins are already practically exhausted, in part for additional spending on humanitarian support for Ukrainian refugees. The next regular EU budget will not enter into force until 2028, much too late for the investments needed now. And the existing RRF grants have already been allocated and earmarked. New expenditures in energy independence could only be financed via existing RRF grants at the expense of investments that have already been approved, many of which were planned for the European energy transition anyway.

This leaves two options for the joint financing of energy independence. Either member states increase their contributions to the current EU budget. Should they not be willing to do so, the legal framework for taking on common debt could be utilized. This was first done during the pandemic, and against the backdrop of the deepest geopolitical crisis of recent decades, it could be employed once again. The political hurdles for both paths are high. But without joint financing, the EU will not succeed in implementing the urgently needed investments in energy independence. And this Europe cannot afford, neither geopolitically nor economically.

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