Nothing says net zero emissions like zero economic activity

Last month, EU leaders met to consider the impact of high energy prices on Europe’s industrial competitiveness.  After many hours of deliberation, they issued a statement that “… industrial competitiveness and decarbonisation must proceed in tandem.”  Sadly, the immense power of a joint statement will not overcome the fundamental contradiction between the high energy prices driven by the EU’s Net Zero campaign and the low energy prices needed to restore Europe’s industrial competitiveness.  After all, nothing would reduce Europe’s carbon emissions like even higher energy prices, which would, however, also destroy Europe’s industrial competitiveness.

Nothing says net zero emissions like zero economic activity.  Once again, the EU demonstrates that just because leaders can agree on a policy doesn’t mean it’s any good: Two objectives in fundamental opposition can’t be harnessed “in tandem” by a simple declaration.   

European industry will still need vast quantities of fossil fuels if it is to remain export competitive and maintain its current levels of prosperity. The untold billions of euros poured into windmills and solar farms didn’t buy dispatchable electricity, which could have been secured by equivalent investments in nuclear power.  The (once) world-leading European chemicals sector requires fossil fuel feedstocks, as does backup power generation when renewable utilisation falls below the levels needed for grid stability.  Profitable steel making depends on both cheap electricity and coking coal. The distant transition to a “clean” hydrogen economy depends on a Saudi pipeline providing hydrogen derived from (yes) natural gas. 

Available sources of liquified natural gas suffer from either supply or political constraints. EU imports of Russian LNG are still financing Putin’s war machine at a total sum exceeding Europe’s aid to Ukraine.  Qatar was Europe’s alternative until an Iranian strike knocked out its biggest LNG processing facility. Resumption of exports requires both extensive repairs and a cessation of hostilities in the Persian Gulf.  Algeria was a reliable source of gas but a surge in domestic consumption has relatively little left for exports.  Continued US economic growth coupled with the spread of energy-hungry data centres may limit American exports.  Ironically, the continued use of coal for power generation in the US preserves gas stocks available for export to Europe.  These supplies are now subject to spot market fluctuations as China and other Asian countries bid against Europe for tanker cargos. Looming shortages of diesel and jet fuel across Europe underscore the current lack of substitutes for the fossil fuels needed by industrial economies. 

Rational policy-making in Brussels would entail the diminution or outright abandonment of the EU’s decarbonisation programme, and the loosening of restrictions on domestic fossil fuel production. Laws banning fracking prevent the exploitation of reserves capable of supplying the EU’s needs for decades.  Europe’s largest gas field at Groningen has shut down over the threat of minor tremors. Great Britain, which owns the bigger chunk of the North Sea oil and gas fields has blocked new exploration licenses, and in any case imposes taxes on production high enough to deter investment.  Coal remains abundant in Europe, and could reduce Europe’s dependence on imported gas for power generation.  Eliminating these rules would unlock cheap and reliable energy for Europe.

None of these reforms will happen. The EU often finds itself hostage to arcane coalition politics in Berlin, be it the CDU’s opposition to common debt, or the environmental fundamentalism embedded in German politics.  Europe’s current eco-fetish originated in Germany back in the 1980’s, and the fantasy world of carbon-free prosperity promulgated by German Greens have migrated (or metastasized) across EU regulations and laws.  Any dramatic reorientation of EU policies toward industrial competitiveness would need to originate from Germany, yet the paralysed coalition in Berlin is completely incapable of such a radical departure.  The Social Democrats often serve as the swing party on major policy changes: Gerhard Schroeder imposed neoliberal reforms on the German Social state long sought by the CDU; Olaf Scholz adopted the Greens Party’s target for carbon neutrality by 2045 and phase out of coal by 2030.  But today, as the junior partner in an unpopular coalition, the SPD is fighting a battle for its very survival. 

You might think that as the traditional representative of German labour, the Social Democrats might join with the CDU to rescue workers from the policies threatening their employment.  Yet this would not save the party from opponents feasting on its different constituencies.   The Greens have poached the affluent professionals who can afford Teslas and heat pumps, Die Linke have claimed the young activists dubious of capitalism, while the AfD has drawn working class voters angered by economic stagnation and immigration.  Surveys show the Social Democrats polling at only 14 per cent of the electorate, well behind both the CDU and the AfD and just a hair ahead of the Greens.  What was once the largest party in Germany is now a few bad elections away from irrelevance.  Such weakness doesn’t lend itself to dramatic policy initiatives.

The one sentiment that prevails across the political spectrum in Germany is an inchoate longing for the easy prosperity that prevailed before 2022.  Cheap raw material imports were transformed into high value industrial exports and sold to eager Chinese and American consumers.  German technical superiority ensured high wages and national affluence.  Ensconced in the assumption of continued prosperity, Germany indulged in a post-material quest for an eco-phantasm unmoored from physical realities of energy production and emerging Chinese industrial prowess. Now that the actual world of intense competition, disruptive conflicts, and energy scarcity has intruded, Germany and the broader EU can no longer afford to pine for the halcyon world of yesterday.  Crisis will inevitably force dramatic policy changes.  Ruinous net zero mandates cannot operate “in tandem” with industrial competitiveness and will be abandoned either quietly or (more likely) after protracted and divisive debate between economic realists and eco-fundamentalists.  Whether the industry needed to support current levels of European prosperity will survive until then remains to be seen.