Everything for the transition

Ultra-long read featuring lots of quotes

Note: I will be removing the paywall from this post a week from now. The reason I didn’t make it free to begin with is that I strongly believe paying subscribers have literally earned the privilege to be horrified and infuriated before everyone else here. Also, I got a headache writing it.

Twice in recent stories I’ve referenced a paper produced by the Bruegel think-tank, with a promise to look into it in more detail because of its potential implications for future EU energy policies. The time has come to dissect An investment strategy to keep the European Green Deal on track or at least take out some organs and examine them.

For starters, Bruegel estimates that the EU would need to invest some 7.7% of its GDP in the transition in order to hit its 2030 decarbonisation targets. That’s a modest 1.304 trillion euro until 2030, rising to an even more modest 1.537 trillion euro between 2031 and 2050 for the ultimate net-zero goal.

Neither of these figures is certain, however. It could end up costing either more or less. But it’s unlikely to cost a lot less. In fact, it’s most likely to cost even more than estimated because of the many costs that the EU has not factored into its estimates, such as workforce reskilling “from brown to green jobs” and unspecified “climate adaptation”.

Okay, so we’re talking about a lot of money that has to come from somewhere. In previous references, I mentioned the emphasis that Bruegel puts on so-called behavioural changes such as buying EVs and consuming less energy. But even with behavioural changes, which by the way are not exactly forthcoming, European countries would need to spend heftily on their transition. And they don’t wanna. So some brainwashing is in order.

“Even before the 2024 US presidential election, swings to populist nationalist parties in large countries including Germany and France suggested unease among voters about climate policy,” Bruegel tells us.

“These parties indeed often preach the false belief that decarbonisation is detrimental to competitiveness and security, when it is exactly the opposite. Green investment is fundamental for the EU to meet its pressing competitiveness and security objectives, even if complex trade-offs exist between these different societal objectives.”

It’s good of the authors to admit there are “complex trade-offs”, which is essentially an admission that the transition will cost an arm, a leg, and a pair of… never mind. Yet this admission’s only purpose is to double down and then triple down on:

• prioritising transition industries above all others in terms of accessible capital costs

• subsidising the living hell out of unviable technology, and

• squeezing living standards to fit into the net-zero mould.

And how are they going to do it? By:

• tying transition action to all national policies

• even more regulation, read mandates

• a lot more centralisation, and

• carbon prices

Here’s some more:

“Being poorly endowed with domestic resources, Europe is highly dependent on fossil-fuel imports, as dramatically illustrated by the 2022-2023 energy crisis. This exposes the EU to global oil and gas market volatility, undermining competitiveness and threatening security. For Europe, the only structural solution is the green transition. The EU is endowed with abundant domestic renewable energy resources, which can be exploited in a cost-effective manner, as generating electricity with wind and solar energy is now cheaper than doing so with coal and gas (Ember, 2024).”

Those abundant domestic renewable energy resources, collectively known to common folk as the weather, have already turned wind generation into “Germany's primary source of electricity,” per Reuters’ Gavin Maguire. The twist? “Wind power generation in Germany - Europe's largest wind producer - is on track to record its longest stretch of below-normal production since early 2021 due to a spell of low wind speeds since October.”

As a result, Germany is sucking all available export electricity from its neighbours, pulling the whole continent’s electricity prices higher. More specifically, EU electricity prices are “at their highest in nearly two years and roughly 70% above their average from 2020 through 2021, according to LSEG.” Yes, definitely abundant.

The above is just one instance of how problematic the whole transition thing already is and how problematic it will remain going forward. Because Bruegel is honest enough to describe how mutually exclusive the EU’s goals are.

On the one hand, the EU wants cheaper energy. But it also wants to improve competitiveness. On the third hand, it wants people to not riot. Carbon pricing will cause riots. Local production of transition tech will increase the cost of the transition — and of energy. And subsidies will also increase the cost of the transition in order to lower the cost of energy. What’s an EU to do? Double down, obviously. How? By assuring people and businesses that it is not joking around.

Bruegel offers six proposals for ensuring net-zero goals are being met and number one on the list states Ensure the credibility of the EU climate-policy framework and overall policy consistency. Again, how? Well, by sticking to the most ambitious goals and “avoiding the temptation to water down its provisions because of competitiveness concerns.” Right after they told us the transition is crucial for improving competitiveness.

As Big Oil in the United States signalled recently, certainty about future policies is indeed essential for long-term planning. For households, knowing for sure that there is no going back to cheap abundant energy is the equivalent of that policy consistency. In summary: we’re doing net-zero and there is no going back.

Only there is, because as I mentioned earlier the biggest party in the EP is already demanding watered-down targets, not to mention that some national governments are speaking up, notably Romania’s energy minister, Sebastian Burduja, who was particularly eloquent so I’m naming our next cat Sebastian.

“Like any ideology imposed without careful planning, it [the "greening" policy] has turned into a utopia that is costing us dearly - economically, socially and strategically. It is scandalous to learn that Europeans' money has also been used to finance NGOs and lobbying campaigns for the greening of the EU. An absurd paradox: with our money, we have destroyed our industries,” that wonderful man said this week.

That credibility thing is going to be rather difficult, then. And it won’t be the only difficult thing. Because Bruegel’s next idea is more centralisation of decision-making power, or, as they put it, Unleash green private investments through a capital markets union that works, an effective sustainable finance framework and a stronger European Investment Bank.

In essence, the idea is for total financial centralisation to avoid those pesky national governments daring to have their own opinions on what’s good for their pesky little countries. Per, Bruegel, “Reform should also streamline the jumble of market infrastructures, asset management and auditing frameworks that currently prevent the efficient pan-European allocation of European savings to European projects, including those needed for the green transition.”

This is indeed a marvelous idea. The suggestion that my savings could be used to fund a solar installation in northern Germany fill me with volcanic emotions as I am sure they do with millions of other Europeans, including ones in northern Germany. To hedge against such volcanic emotions, Bruegel uses language skillfully, calling national financial systems “fragmented”, which is bad, and urges the EU to build “a single European financial system that can finance projects at a European scale,” which is good. Allow me to erupt.

Fun fact: Bruegel considers the European Investment Bank crucial for this centralisation push and, of course, for future transition investments, to be accompanied by stricter emission disclosure rules and clearer definitions of what constitutes green energy (both among Bruegel’s proposals). However, it was the very same EIB that recently cried foul over the EU’s intention to address those definitions — because it would shatter its green reputation. This is not a joke, the FT wrote about it:

“The reporting reforms would force the bank to declare a “Green Asset Ratio” — an EU standard intended to show the proportion of a bank’s assets considered climate-friendly — of “around 1 per cent”, compared with its current “Climate Action ratio” based on EIB-defined metrics that stands “above 50 per cent”.”

This is certainly worth a one-hour comedy special on Netflix but it’s not all. By far the most concerning proposal put forward by the formerly respectable think tank is the one about tying all national policies to the transition with no loopholes. Per Bruegel, Turn NECPs into national green-investment strategies and attach conditions to the disbursement of EU funds.

“NECPs [national energy and climate plans] must be turned into real national green-investment strategies, providing a point of reference for investors, stakeholders and citizens in making investment decisions. Governments should be obliged to set out in their NECPs a detailed, bottom-up analysis of their green investment needs, and an implementation roadmap with clear milestones or key performance indicators (KPIs).”

In other words, make every single thing a government does about the transition. Force businesses to prioritise the transition above everything else and then go and do the same to the citizens. Carrot time is over, it’s time for the stick. Unless national governments pledge their complete allegiance to net zero, it’s EU money over. How do a loathe thee — let me count the exits.

In further proposals, Bruegel suggests more preferential treatment for transition projects, by exempting them from a mechanism called the excessive deficit procedure, or EDP for short. The procedure is used to prevent EU members from going too deeply into debt and incurring a deficit of above 3% of GDP. It’s a sound mechanism aimed to ensure the stability of the bloc. But obviously there are exceptions. You’d never guess why.

“The problem with public investment in decarbonisation is that many of these investments are unprofitable at the current carbon price, taking into account the prevailing discount rate (for households) or the cost of capital (for businesses and local governments).”

I know, shocking. Because of this enormous injustice, Bruegel proposes an exemption to the EDP rule for countries that really, really want to go green but can’t afford it without bankrupting themselves — which is all EU countries if we are being honest, but never mind. As if that’s not ridiculous enough, Bruegel also proposes that the exemption is made conditional on these countries using “the future savings from reductions in fossil-fuel consumption to the reduction of public deficits.” Again, they are not joking. They actually believe there will be savings.

Bruegel’s next idea —there are just two more, I promise — is to Put the EU budget at the service of the green transformation. Because subjugating national governments to the pan-European transition leaders is not enough, let’s do it to the EU budget as well. The motive for this proposal is fear — the current money bag available for throwing at the transition is about to be emptied soon. The solution: a new money bag that is managed centrally. Of course. In addition to national budgets. In addition to the EU budget. And in addition to ETS revenues.

Maximise the use of ETS revenues is Bruegel’s last idea for securing the necessary funds for the transition. Currently, most of the income from emission trading goes to national governments. Until recently, they were under no obligation to spend all of this money on the transition. That has changed. Now, we must use all of that money for the transition. And still, it’s not enough.

More money will be coming from the ETS beginning in 2027 because of its expansion to transport and other fuel combustion. All of that money will be directed towards transition activities, except a few billions every year for “vulnerable communities” starting in 2026 and ending in 2032 — because by then the transition will have started making money, according to hopes and dreams.

Since that still won’t be enough, member states will be also mandated to cough up a quarter of the money necessary for the support of those “vulnerable communities”, which in a few years will be about 99% of the population, so that will be one tough job, even though Bruegel thinks that “Being in the order of €50 billion to €100 billion in 2030, ETS revenues accruing to member states would thus be significant, and should be used to maximum benefit for the transition.”

Bruegel’s assumptions about transition benefits and carbon credit prices are questionable, to put it mildly. What’s not questionable is the intention of forcing European economies to turn into transition cash cows or, failing that, cogs in a giant pan-European totalitarian system. It could have worked, if the architects of that system hadn’t made excessively expensive energy its foundation. Because they did, come 2030, there’s not going to be an EU in its current form.