According to Norwegian energy group Equinor—Europe’s largest source of natural gas since Russia halted most of its gas supplies in 2022—Europe’s energy supplies are “in a much better place” than last year. The Netherlands, Italy, and France have all just announced long-term gas deals with Qatar, and in August, two-and-a-half months ahead of target, EU countries managed to fill storage facilities.
Still, Natasha Fielding, head of European gas pricing at Argus, a price reporting agency, warns that “If something happened to rapidly tighten the global LNG market, such as a shutdown at a large LNG (liquefied natural gas) export plant, and both Europe and Asia got into a tug of war for available LNG supplies, then European gas prices could spike again.”
EU gas prices still remain high. This is hurting Germany’s economic competitiveness in particular, as German gas prices remain roughly double what they were in 2021. Following the renewed unrest in the Middle East and sabotage to Baltic gas pipelines, the European Commission is considering extending the EU gas price cap through the winter.
This really is quite telling: artificial fossil fuel shortages are being compensated for with price regulation, or more precisely, taxpayers are chipping in to suppress the bills of energy consumers. Ironically, the EU’s climate policies created this strategic vulnerability that they are struggling to fix. Until around 2015, over 30% of the EU’s gas demand was met through EU production. Now that’s down to around 10%, due to phasing out fossil fuel production. In the meantime, dependence on Russian pipeline gas has been replaced with dependence on global LNG, which comes with large price volatility.
It is one thing to phase out fossil fuels in the name of the ‘climate,’ but to first phase out domestic production before cutting imports from unstable suppliers is quite another.
All of this is happening while European industry is suffering, first and foremost as a result of high energy prices, which are estimated to be four times as expensive as prices in the United States. This particularly hurts the European chemical industry. To add insult to injury, Europe is currently importing lots of U.S. LNG produced through fracking, which is banned in Europe.
Still, strategic and economic realities are now forcing Europe to moderate the large-scale energy policy experiment it embarked upon. Fossil fuels and nuclear energy are no longer taboo.
Italy has expanded Adriatic gas drilling rights, in an attempt to double Italian output to 6 billion cubic meters per year and lower energy prices. Denmark has also just opened up a new concession in the North Sea, seeking bids to drill for oil and gas—reversing the country’s decision to end new O&G exploration.
In Belgium and Germany, new gas-fired energy stations are under construction to cope with irresponsible shutdowns of nuclear power capacity. Germany hopes to double gas firing capacity, and has also constructed new LNG container hubs to replace the gas that is no longer flowing from Russia.
Meanwhile, Danish business federations have just issued a call to join the global nuclear renaissance, already underway from Japan to Poland. France has also reversed a planned nuclear phase out and instead intends to build new nuclear plants. The French ‘ecological transition’ minister, Agnès Pannier-Runacher, recently accused Greenpeace of “climate sabotage” after the activist network organized yet another campaign against nuclear power. Remarkably, Greenpeace has exited the climate mainstream.
These developments are not only hopeful, but also necessary. Last winter, after President Putin turned off most of Russian gas supply, Europe was spared thanks to mild winter conditions, weak Chinese energy demand—the result of continuing ‘zero COVID’ lockdowns—and of course American LNG gas supply. Conditions may not be so lucky in the future.
As Europe realizes that fossil fuels will remain essential for the foreseeable future, the debate now moves on. As TotalEnergies CEO Patrick Pouyanne puts it, “the question is not fossil fuels, it is emissions, to lower the emissions.”
Suggestions from members of the Climate & Freedom International Coalition provide useful answers to the question. In a nutshell, they point out that streamlined free markets have been, and always will be, the fastest way to discover and develop the most efficient and profitable innovations. The key is to remove all the market, cost, and fiscal barriers in the way of beneficial innovators. When streamlined policy makes new investments cheap and easy, newer, cleaner technologies replace older, dirtier technologies at an ever faster pace, accelerating innovation and the energy transition.
Based on this insight, working groups of economists, think tanks, scholars, and policy makers have developed a series of proposals forming a framework for an international free market climate agreement, dubbed the Climate & Freedom Accord. The basic idea is an agreement that opens up markets to competition, trade, innovation, and accelerated capital flows, by reducing key market and fiscal barriers.
The strategy seems on target. Studies show not only that the freest economies are the cleanest, but that competition itself accelerates decarbonization. A recent study comparing competitive versus monopoly U.S. power markets finds that competitive power markets are decarbonizing 66% faster than un-competitive power markets.
The reason for this phenomenon is easy to understand: competitive markets drive down costs, give new innovators easier market access, and allow consumers to demand newer, cleaner, cheaper, healthier, more reliable electricity and products. Monopolies, and most government owned businesses, have no economic reason to innovate or care about consumer desires, or cut costs. They chase off innovative competitors.
The Climate & Freedom Accord suggests a very enticing carrot to encourage international investment flows to all signatories: CoVictory bonds, loans, savings accounts, and investment funds. These are tax exempt private debt securities used to finance property, plant, and equipment, including conservation investments, in any Accord nation. No tax on interest income reduces the cost of debt by perhaps 30%. That accelerates investment in new equipment, along with decarbonizing innovation and the energy transition. This is because new equipment is always cleaner.
Entrepreneurs, developers, banks, investment funds would be able to raise these tax exempt CoVictory Funds in any Accord nation, and invest them in every Accord nation. Accord signatories gain access to vast capital flows that would not otherwise flow. To them, at least.
These are called CoVictory Funds because they enable multiple victories for the free world even beyond their climate benefits. They could help rebuild Ukraine or Gaza; solve the problem of plastic pollution; open up new trade relationships; direct increased private capital to the global south. They could help expand and defend the free world.
Free market streamlining, as described above, is the essence of Accord, the first and most essential step to accelerate innovation.
Beyond this, for nations seeking to drive emissions reductions as fast as free markets can possibly go while fostering prosperity, the Accord recommends, but does not require, clean tax cuts. These are tech neutral, supply-side tax rate cuts to business and investor income taxes, designed to drive innovation, competition, growth, and decarbonization in the four economic sectors that produce 80%-90% of GHG emissions: electric power generation, transportation, real estate, and industry.
We can lower emissions in all four with a simple ‘performance bonus’ supply side tax cut tied to emissions reduction. This does not replace basic supply side tax policy, but merely adds a small bonus rate reduction, say five percentage points, for firms that achieve the greatest emissions reductions. For example in the automobile industry, sustainability can be summarized in one number: the average vehicle fleet emissions. So the lower the emissions, the lower the tax rate on business and investor income. This simple method aligns corporate behavior with a goal of emissions reduction. From the boardroom to the shop room floor, every investor and employee owns stock in the company, which gets more valuable as emissions and the tax rate go down.
The same kind of clean tax cut could apply across the transportation sector and to manufacturers of energy efficient appliances and industrial equipment. It can drive ever more efficient buildings, more low and zero emission power generation, and even lower emissions in oil and gas production.
The Accord offers further ideas for accelerating the spread of decarbonizing competiton and game changer innovation. But bottom line, the answer is yes, if we streamline free markets, we will use fossil fuels (and everything else) ever more efficiently and cleanly, while driving emissions reductions. We will also accelerate the decarbonizing game changer innovations, foreseen and unforeseen, that will get us to zero profitably in ways we cannot imagine today.
