Clean Energy Damaging Europe’s Competitiveness

For years Europe has been at the forefront of the renewable energy revolution, promoting and establishing global rules in this sector. There are signs however that this trend might change.

The economic crisis has forced many European countries to reassess their clean energy policies, heavily reliant on substantial, and often irrational subsidies, that have started to severely bite into the seriously strained European budgets. So far, Spain, the Czech Republic and Bulgaria have decided to retroactively tax renewable energy operators.

It is widely expected that Germany will follow the same path following this month’s general elections. The EU’s energy commissioner Günther Oettinger has already advised Germany against the move, as it might create great uncertainties in the market and make investors wary of further investments in the clean energy sector.

Still, Oettinger has warned that Europe cannot afford new taxes on energy to make its industry competitive globally. The current European model of promoting renewable energy regardless of the price and burden to public finances puts European economies in a clearly disadvantaged position, primarily compared to their American counterpart.

For years, Europe had to struggle with Asian economies driven by cheap labour, but in the past several years the energy boom in the United States has created a large gap in energy prices on the two sides of the Atlantic. Average energy prices in Europe are already 40% higher than in the US, and 20% higher than in Japan. According to the German industrial lobby group BDI this trend is expected to last until at least 2020.

The consequences are already visible. European industry is increasingly turning to the US to take advantage of cheaper energy. The German chemical manufacturer BASF has invested $5.7 billion in its US facilities, and the carmakerBMW has followed suit with a $100m plant investment powered by hydroelectric power of the Columbia river. The cost of electricity for the German car giant is 3 dollar cents per kWh, compared to the cost of electricity in Germany, which is six times higher.

Paradoxically, Europe’s aggressive renewable energy policy does not necessarily result in a cleaner environment. The US Energy Information Agency data shows that the US is reducing its carbon footprint faster than Europe: in the period from 2007 to 2012, the US has cut its carbon dioxide emissions by 12%, compared to Europe’s 8%.

This is primarily an effect of cheap and abundant shale gas and a fall in coal consumption in the US. On the other hand, cheap US coal has become the main substitute for the more expensive natural gas in Europe. As a result, imports of the US coal to Europe have actually increased by 29% in 2012 alone.

Fortunately, this trend is short-lived. Coal consumption in Europe will inevitably fall with the planned closure of the existing coal powered energy plants and the increases in renewable sources. However, these confusing trends show that there is something fundamentally wrong with the EU’s energy policy.

If Europe wants to preserve its industrial competitiveness with the rest of the world and continue to promote its clean energy agenda, it will need to make renewable energy more sustainable and better-balanced with other sources of energy, and at the same time create a truly integrated European energy system.

This piece is cross-posted from OilPrice.com with permission.