Good morning.
Europe is facing the second energy shock in less than five years. It's still too early to tell what the economic impact will be, because it all depends on how long the US-Israeli war on Iran will last.
But with US president Donald Trump threatening Iran with civilisational death, further escalation is, regrettably, very much on the cards.
Against this background, the best thing European governments can do is invest as much as possible in clean energy, and bite the bullet on high upfront costs despite already high debt burdens.
That is, more or less, what European Central Bank (ECB) sustainable finance chief Frank Elderson wrote in an opinion on Tuesday (7 April) published on the bank’s website.
“Europe cannot eliminate geopolitical risk, but it can significantly reduce its exposure to it. The most effective way to do that is by cutting reliance on imported fossil fuels,” he said.
And it can do so through public investment. Clean investment in Europe will need to reach about €660bn a year between 2026 and 2030, according to EU Commission figures.
But focusing on these raw upfront costs is “profoundly misleading,” he said.
Why? First, because Europe spends nearly €400bn on fossil fuel imports each year. Costs that are “largely wasted,” he said.
Secondly, the upfront investment cost in solar, wind, grids, and batteries may be high, but once they are up and running, the power itself is almost free, stabilising prices.
What’s more, the upfront costs are more than offset by economic and societal gains.
Elderson pointed to a recent UK decarbonisation study finding that every pound invested in sustainable energy generates £2.1 (€2.5) to £4.4 in total “quantified benefits.”
Financial benefits come from running more efficient power systems, with energy losses in renewable systems roughly halved compared with today.
Society also gains from better health and air quality, improved diets, fewer damp homes, and most importantly, avoided climate damage.
Much of these things fall outside standard financial modelling and it is refreshing to hear this kind of argument coming from top European policymakers.
The EU's own budget models do not go anywhere near this territory.
Every euro spent by national governments is treated by the European Commission as generating just €0.60 of economic activity, no matter where it goes. Grid investment, education, tax cuts for the wealthy — all are treated as the same.
Some efforts are made to try and measure the impact of investments more precisely.
The EU Commission’s directorate for internal market is developing a fiscal model, Fidelio, to better capture the economic impact of clean energy investments.
Early results suggest that every euro spent on energy efficiency and clean power generates €1.69 in wider economic benefits.
But this work is not integrated into the EU’s aggregate models used by its economics department, where payoff from strategic and climate spending is ignored.
What is more, today’s €0.60 assumption was recently lowered from the already conservative ‘fiscal multiplier’ of €0.75 used until last year.
Why? Because member states and the commission decided last year that economic models should be calibrated only to “normal times.” Crisis years, when public investments tend to deliver the biggest returns, are excluded.
Wester van Gaal, economy editor
Geen opmerkingen:
Een reactie posten