Europe has been told it has to drive home the benefits of a transition to green energy and dismiss the myth that renewable energy will come with inflation and additional costs.
Fabio Panetta, member of the executive board at the European Central Bank told members of the Italian Banking association that if the continent’s policymakers came together to deliver a clear message on the need for green energy the benefits would be profound.
“The EU economy is highly dependent on fossil fuels, which represent close to three-quarters of its total energy consumption,” he said. “Most of this fossil fuel energy is imported: while the EU accounts for 8 per cent of global fossil fuel demand, it accounts for only 0.5 per cent of global oil production and 1 per cent of global gas production.
“A major cost of this dependence, which we are reminded of daily, is that energy-producing countries can use their fossil fuel exports to pressure or even threaten energy importers, creating geopolitical tension in the process. Historically, the price of crude oil has often spiked in the context of war, as is the case today. This underlines the need to reduce our dependence on fossil fuels.”
Panetta said: “The price of energy affects the cost of virtually everything we consume and produce. As a result, the cost-push shock from an increase in energy prices is felt throughout the economy. Given that the ECB’s primary mandate is to preserve price stability, understanding the relationship between the transition to a greener economy and the price of energy is crucial.
“To start with, let me be clear: we cannot blame today’s high oil and gas prices on the green transition. The culprit is clearly Russia’s manipulation of the energy supply, which has resulted in higher and more volatile energy prices in an already tight market. Reduced supply has exacerbated the effects of the strong post-pandemic recovery in fossil fuel demand, resulting in the high energy prices we are seeing today.
“But the massive shift required by the green transition may matter for energy prices in the future. In this respect, the argument is often made that the green transition will cause a persistent rise in energy commodity prices and inflation.”
Panetta said the move to a green future should not come with a heavy cost, far from it.
“The green transition is often presented as a threat to fundamental aspects of our daily lives, including growth opportunities or purchasing power,” he said. “This negative narrative is unjustified. The divine coincidence is not a pipe dream: greener can mean cheaper. This depends crucially on the policies we adopt.
“If properly managed, the global response to the climate crisis can increase productivity and growth through several channels: by improving the allocation of resources, enhancing health conditions and stimulating technological progress. Under these conditions, we can place ‘…climate action at the heart of a new growth story, powered by investment, technology, policy and finance’.”
Panetta said the myth that such a transit would drive inflation needed to be challenged by policymakers.
“The green transition need not lead to higher inflation,” he explained. “In fact, appropriate public policies that compress the demand for fossil fuels and stimulate the production of cheaper renewable energy sources can help to contain inflationary pressures and may even help to reduce inflation compared with a counterfactual situation that does not contain these policies. “In reality, we are already using the lower cost of renewable energy to cushion the impact of the fossil fuel shock on electricity prices.”
Panetta said the high levels of energy inflation currently being observed cannot be blamed on the green transition.
“They are mainly the result of fossil fuel supply manipulation by Russia. If the green transition had happened earlier, it would have been easier to progress towards our climate goals and we would have reduced our exposure to the current energy shock and its inflationary consequences. The European economy would have been more resilient to the ongoing energy crisis.”
He urged action to accelerate the move to green energy transition.
“In order to act on climate change, policymakers need to take swift, bold and ambitious measures that garner the support of citizens. This result can only be obtained by establishing a realistic and positive narrative on the green transition,” Panetta continued. “In particular, we need to reassure citizens that, under well-designed policies, the green transition would increase, not decrease, their job opportunities, the quality of their lives and their purchasing power. The counterfactual situation would be worse, with the likely repetition of the kind of crisis we are currently living through.”
“In shaping this narrative and taking policy action, a European approach is in our collective interest,” Panetta added. “Common policies are more likely to deliver the necessary reduction in energy intensity, protect our energy security and finance the investments required. Unity makes us stronger when facing shocks and gives us greater influence in determining our climate and energy future.”