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  • January 24th, 2014

High energy prices hold Europe back

Europe is slowly emerging from the crisis and economic growth is picking up however the sluggish nature of the recovery means governments cannot ease up in the pursuit of reforms that boost investment and jobs.

Much of the discussion about improving competitiveness revolves around labour market reforms and reductions in red tape. But far too little attention is paid to what has become a significant burden on European growth: the high cost of energy in Europe when compared with the US and other markets.

On Tuesday the European Commission published a report setting out in alarming detail the difference in energy costs between the EU and its main trading partners. The report notes that electricity prices for industrial consumers are more than double those in the US, and 20 per cent higher than in China. The situation on gas prices is worse. These are three to four times higher than comparable US and Russian tariffs.

This gap creates a problem for the EU as it tries to attract and retain investors who are large energy users. Last weekend Paolo Scaroni the chief executive of Italian oil and gas company Eni, warned that the energy price differential was creating a “massive competitive advantage for the US” and a “real emergency for Europe”.

Lakshmi Mittal, chairman and CEO of ArcelorMittal, declared on Tuesday that lower prices would encourage energy-intensive industries to shift to the US. “If we paid US prices at our EU facilities,” he wrote in the FT, “our costs would drop by more than $1bn a year”.

Why are European energy prices so much higher? To a large degree, it is because of differences in supply. Europe has allowed gas to become its fuel of choice. With its indigenous reserves in decline, the continent increasingly relies on costly imports from Russia, Algeria and Norway. The shale gas revolution in the US means Americans enjoy much cheaper gas supplies. US prices are therefore much lower than in Europe, where shale is not yet being significantly explored in any state, except Poland.

Supply is only part of the picture, however. Regulation also has a part to play, not least in relation to EU climate policies. In 2007, EU member states set legally binding commitments to be reached by 2020. States must cut greenhouse gas emissions by 20 per cent from 1990 levels. Governments must also use renewable sources to supply 20 per cent of Europe’s energy. These latter measures have bumped up the fuel bill for companies and households to pay for wind farms and solar panels.

What can the EU now do to reduce this price disparity? One idea would be to pursue shale exploration with greater vigour. Euro-shale gas will never be as cheap as its US counterpart. The cost of fracking in Europe would be much higher than in the US, partly because of the continent’s greater population density. Still, Brussels and national regulators should encourage shale development.

Europe must also beware of adopting policies that add unduly to costs. On Wednesday the commission will unveil its energy and climate policy package for 2030. Some states – among them Britain, France and Germany – want a binding cut of 40 per cent in greenhouse gas emissions when compared with 1990. But the commission must not opt for a target that is so far ahead of other countries that it drives industries based in Europe to the higher-emitting economies.

It is also essential that Brussels does not impose binding targets on the proportion of energy that each state must generate through renewables. This will not only force consumers to subsidise yet more relatively inefficient technologies. It will also push up energy prices. That is something Europe does not need.

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