The Great European Energy Disaster
Since 1990, the European Union has pursued a rapid decarbonisation strategy, at first based largely on emissions trading but increasingly reliant on thermodynamically incompetent renewable energy. The intention was to internalize the environmental and specifically the climatic externalities of the EU’s energy consumption, and in so doing to show leadership to the world and achieve dominant market share in the new low carbon industries that were believed to be on the verge of economic viability.
These aspirations lie in ruins. The results of over twenty years of unilateral and dirigiste environmental policy have been to increase energy costs both in absolute terms and relative to competitors, to suppress European energy demand, and to prevent demand recovery after exogenous shocks such as the financial crisis of 2008 and the global pandemic of 2020.
Figure 1 EU 27 (i.e. not including the United Kingdom) Total Primary Energy (TPE, black line red crosses) and Final Energy Consumption (FEC, red line, black crosses) (mtoe) 1990 to 2019, and FEC and TPE targets for year ending 2030. Source: Empirical data: International Energy Agency; Target magnitude, European Commission. Chart by the author.
Energy consumption, particularly electricity consumption, has fallen in the EU since about 2005, and it is reasonable to infer that these societies are now regressing towards thermodynamic equilibrium, that is to say becoming less complex and less well-adjusted to serving the needs of their citizens. However, the sharp and salient fall in living standards that would otherwise have been obvious has temporarily been obscured by the import of fossil-fuel manufactured goods from Asia.
The UK was particularly badly affected by the policies during its term of membership, with total energy consumption falling by about 30% since around 2005 and now standing at levels not seen since the 1950s. Electricity consumption has fallen by a little under 20 per cent since 2005, a particularly worrying fact since electricity is an extremely superior energy carrier and the very index of a modern society, and one on which decarbonisation plans rely in the form of electric vehicles and heat-pumps. – If renewable energy costs are inhibiting electricity consumption at present, then deep decarbonisation through electrification is likely to prove impossible.
Furthermore, the member states of the EU have a minority and dwindling share of global renewable energy equipment manufacture, and are largely dependent on imports, particularly of solar panels, from Asian factories, factories which have been created by European subsidies but may ultimately be repurposed to manufacture other materials or indeed materiel.
Perhaps worst of all, the cost of abatement per tonne of carbon dioxide is vastly in excess of even high-end estimates of the harm done to human welfare by the release of that tonne, meaning that the cure is worse than the disease, and consequently presents no compelling economic example to the developing world. On the contrary, European performance is both risible and off-putting for those we are attempting to influence by example.
A survey of the fundamental numbers tells the story. Phase 3 of the European Union Emissions Trading Scheme (EU ETS), a cap-and-trade scheme limiting emissions for certain sectors in the EU, ran from 2013–2021 and has added €78 billion to consumer costs in the bloc, with the annual cost now amounting to about €17 billion. Proof that this burden was competitively disadvantageous can be found in the fact that in 2020, EU member states returned €1.2 billion of ETS revenue to electro-intensive industries to compensate them for cost increases caused by the ETS itself in 2019. This amounts to about 12% of total ETS costs in that year. Germany paid €546 million, some 17% of its ETS revenue. A competent bureaucracy would have observed such a bizarre outcome and paused to ask whether this level of carbon taxation was wise or sustainable. The EU, on the contrary, has recently announced its intention to extend carbon trading to other sectors.
Income support subsidies (excluding tax expenditures) to the renewable sector in the EU27 in the period 2008–21 amount to approximately €770 billion. The annual cost of renewable subsidies to consumers in the EU27 currently amounts to €69 billion, with no end in sight. Renewables capacity has grown from about 100 GW in 1990, nearly all hydro, to over 500 GW in 2020, about 17% of the world total, with the vast majority of the increase being subsidised wind and solar. The only justification for subsidies of this order would be reduce costs to the point where the sector was able to stand on its own feet. However, there is no compelling evidence that the capital and operating costs of wind and solar have fallen as might be required, audited accounts suggesting otherwise (See The Costs of Offshore Wind Power: Blindness and Insight). Indeed, there is every reason in physics to conclude that, due to the very low quality of the energy of wind and solar radiation (technically their high entropy) the costs of using them to generate electricity, for example, are intrinsically and inevitably greater than those of high quality (low entropy) fuels such as coal, oil, gas and fissile uranium. The persistence of high costs for wind and solar should be no surprise to anyone; to hope for dramatically falling costs is an admission of ignorance.
This failed subsidy program has already greatly increased energy prices in the EU. In the period 2008 to 2018 electricity prices to households in the EU have been 80% above and prices to industries have been about 30% above those in the non-EU G20. Gas prices to households in the EU have been approximately double, while prices to industries in the EU have been between 20% and 30% above those in the non-EU G20. Diesel prices in the EU have been approximately 10% to 40% above, while petrol prices in the EU have been approximately 30% to 50% above those in the non-EU G20.
It is important to note that the EU’s underlying wholesale prices for electricity and gas were similar to those in the G20, while for both petrol and diesel the EU’s wholesale prices were actually below those in the G20, both indicating that the EU’s higher energy prices are due to policy – that is, to subsidies levied on bills to subsidise ‘Green’ energy production, emissions trading and other impositions.
Unsurprisingly, there has been a strong price-rationing effect in the EU member states, and while final energy consumption in the EU followed a rising trend up to 2005, when the policy costs began to rise sharply, consumption has been on a falling trend since that date and is now at levels not seen since the early 1990s. Electricity consumption followed a rising trend up to 2008, but has been falling since and is now at levels last seen in the early 2000s. This is also unprecedented. Such a deep and sustained declines in energy consumption are unprecedented in the modern era. As noted above, the UK was even more severely affected during its period of membership.
It must be noted at this point that energy efficiency cannot in principle result in the observed reduction in energy and electricity use. Counter-intuitive thought it may seem, efficiency measures actually increase consumption, by reducing the costs of goods and services, or, when demand for those goods and services is inelastic, by transferring the surplus (or economised) energy to serve another as yet unsatisfied human need. Total consumption therefore increases. Falling energy demand must, therefore, be the result of an external inhibiting factor, which in the EU case is the high cost of energy resulting from environmental and climate policies. This is a straightforward case of demand destruction.
A wise and reflective administration in Brussels would be alarmed at these outcomes and have ordered a moratorium pending review. However, and far from it, in its Green Deal announced last year, the EU has now adopted the symptoms of disaster as the criterion of success and is actually planning to legislate for further dramatic reductions in energy consumption, namely a 27% drop in total primary energy consumption and a 22% in Final Energy consumption by 2031 (Figure 1). Tragically, due to the embedded persistence of high-cost renewables policies these targets seem likely to be achieved, though at huge societal cost to the European peoples, including drastic reductions in domestic standard of living and decaying infrastructure, inferior medical care, and all-but complete deindustrialisation.
The European electricity supply industry has been disruptively transformed for the worse by the policies. In the period 1990–2020, total EU electricity generation capacity has nearly doubled due to growth in renewables, while thermal capacity – coal, oil, gas, and nuclear – which remains essential to system stability as a result of its superior physical properties, has declined sharply due to regulation and lack of investment signals. As a result, the enlarged generation fleet serves a smaller demand, implying reduced productivity. In 1990 the EU’s generation fleet load factor was approximately 56%, but by 2020 this has fallen to 37%, a sure recipe for higher costs to consumers.
The key test of any emissions mitigation policy is the comparison of the abatement cost and the social cost of carbon. The abatement cost represents the bill to be paid in preventing or avoiding the release of a quantity of carbon dioxide, while the social cost of carbon is a monetised estimate of the harm to human welfare that would be caused by the release of that carbon dioxide. In policy evaluation, abatement costs should, obviously, never exceed the social cost of carbon; otherwise the cure would be worse than the disease.
Abatement costs, though frequently intricate in calculation, are not deeply problematic and there is little real disagreement about them, although there is some uncertainty about the full system cost of renewables and for this reason most estimates ignore these costs, meaning that abatement estimates tend to be conservatively low. However, estimates of the social cost of carbon are complex and prone to deep uncertainties because there is so much disagreement about the sensitivity of the ocean-atmosphere system to the release of additional carbon dioxide, and consequently about the scale and pace of climate change and the threat that it poses. This debate results in a broad range of estimates for the social cost. Nevertheless, there is general agreement it is in the region of $50 (at 2007 prices) per tonne of carbon dioxide equivalent ($50/tCO2e), with estimates under that level being low and those above being regarded as high. A recent study by Rögnvaldur Hannesson, of the Norwegian School of Economics, has calculated the abatement costs from EU policies and compared them to the ‘very high, if unlikely’ social cost estimate of $105/tCO2e reported by President Obama’s Interagency Working Group on Social Cost of Greenhouse Gases. The Working Group’s central range was in the region of $11–56/tCO2e. Studies prepared for the Commission in 2020 take a somewhat different view and use a figure of about €100/tCO e 24 as their central benchmark. Hannesson found that nearly all abatement costs in these EU economies, whether industrial or household, are very significantly in excess of the estimated social cost of carbon, with abatement costs to households and industry in France six times as high, as are those to German households. The harm to human welfare from the mitigation policies is much greater than that of the climate change they aim to prevent. Results such as these shed a harsh and critical light on the EU’s emissions reduction policies. Regardless of whether one takes Hannesson’s position and sees €100/tCO2e as a high estimate or accepts the Commission’s view that this is a central value, it appears that after almost twenty years of subsidy support, the abatement routes selected by EU policy-makers remain economically irrational.
The situation in the UK is, if anything, even stranger. Extraordinary though it may seem, the UK government does not have an official or explicit estimate of Social Cost to employ as a benchmark for Cost Benefit Analysis. The department abandoned Social Cost estimates in 2009 in order to switch to a measure that it calls the “Target Consistent” price of carbon which is simply the price that must be paid to reach the emissions reductions targets specified in legislation, such as the Climate Change Act and the Net Zero targets. This is sleight of hand. Those targets, of course, imply a value for Social Cost of Carbon, but this is not made explicit, and is thus shielded from criticism and comparison with the abatement costs. This is obviously deeply unsatisfactory and should be rectified as soon as possible. The incoming Prime Minister must, as a matter of some urgency, initiate a rigorous re-examination of the Costs and the Benefits of the UK energy and climate targets. Needless to say, the EU has not even begun to ask this question.
A similar unwillingness to face the music characterises the EU’s approach to the so-called green economy. Despite vast investment of consumer funds, employment in the European wind and solar industries, which is invariably held out as a future bonanza of the ‘Green industrial revolution’, has in fact contracted sharply since 2008, with the Spanish industry falling from over 200,000 jobs in 2008 to under 50,000 in 2021, and the German industry halving from over 60,000 to under 30,000 full-time equivalent jobs. The EU’s share of global renewables industry employment has fallen from 20% in 2012 to 13% in 2021, and the bloc has substantial presence only in those areas of low-carbon technology, such as biomass, where there is little international competition. Subsidised deployment in Europe has failed to give European industries a secure position in the world markets for renewable energy equipment. The field is now dominated by China, which has greatly expanded its industrial base thanks to European subsidies, while using cheap fossil fuels to power the manufacture of ‘Green’ equipment for Europe.
The self-harm already inflicted by the EU’s energy and climate policies cannot be overstated, and it is far from certain that full recovery is possible; Europe was gradually losing its global position in any case, but appears to have voluntarily accelerated this process. Further reductions in energy consumption will make the situation critical.
However, distressed policy correction is inevitable, and may even be underway due to the Ukraine crisis, which has exposed the degree to which security of supply in Europe hangs by the single thread of natural gas, the sole thermodynamically capable fuel left in the system by green policies. While this gives some guarded grounds for hope, it is unfortunately true that the damage done by the green policy failure is so severe that even the wisest of recovery packages – designed around a gas to nuclear strategy – would entail significant reductions in European standards of living to fund the reconstruction of the energy supply. Deferring this correction and persisting with renewable energy, as the Commission currently plans, will only increase the depth of economic sacrifice required to put European society back on a thermodynamically sound footing.
It is now essential that the member states of the EU resume control of their national energy policies and begin to correct course individually according to their circumstances and as best they can. The UK’s physical position is in some ways worse than that of the EU, since there is very little residual coal generation to re-open. However, we are in a better legal position, being outside the Union, but Britain’s political classes are ignorant of the fundamentals of energy and show as little wisdom on this topic as the Commission itself.
In one sense this is unsurprising. To begin the required disaster mitigation and recovery measures requires the recognition that the intense support for renewable energy over the last two to three decades has been a mistake. Writing off the malinvestments made in wind and solar, many now owned by European pensions funds, will be painful in itself. In addition, we must provide resources for the required remedial investment in conventional and advanced nuclear. This huge investment will also require considerable medium- to long-term sacrifices in living standards. There is no easy path out of these policy-induced difficulties, and the future is now bleak whichever course, wise or foolish, is taken. Explaining this to the electorates of Europe will be the principal political challenge of the coming decades. It seems unlikely that the current generation of politicians has either the courage or the capacity for this daunting task.
John Constable is also the author of Europe’s Green Experiment: A costly failure in unilateral climate policy (GWPF: London, 2021), on which this article is based. Further exposition of some the arguments in this article can be accessed in https://quillette.com/2022/08/24/the-energy-of-nations/
 Rögnvaldur Hannesson, ‘How much do European households pay for green energy?’, Energy
Policy 131 (2019), 235–239.