Will rising energy prices lead to climate populism in Europe?

After European governments sought to do 'whatever it takes' to protect people from the economic effects of pandemic lockdowns, politicians are once again taking out their checkbooks to help consumers - this time to ride out a post-reopening jump in energy prices. France will hand out 580 million euros ($682 million) to help poor households cope with rising costs ahead of elections next year

After European governments sought to do 'whatever it takes' to protect people from the economic effects of pandemic lockdowns, politicians are once again taking out their checkbooks to help consumers - this time to ride out a post-reopening jump in energy prices.

France will hand out 580 million euros ($682 million) to help poor households cope with rising costs ahead of elections next year. Spain is slapping a windfall tax on utilities and a cap on consumers' power bills. And Greece is offering monthly subsidies and higher one-off payments for low-income earners.

Such moves are a no-brainer. Europe's benchmark power price has doubled this year, to 100 euros per megawatt-hour, for the first time ever. On an annual basis, this implies Europeans would pay 150 billion euros ($176.7 billion) more for their electricity, according to think tank Bruegel's Simone Tagliapietra and Georg Zachmann.

The pressure on Europe's leaders is likely just beginning, though. Even if the underlying causes of this surge are varied and complex - rising demand as lockdowns are lifted, a natural-gas supply crunch and a lack of renewable power sourced from wind amid clement weather - and might be short-lived, Europeans are becoming acutely aware of the potential for social unrest during the long-term shift to cleaner energy.

The threat of a populist backlash over rising energy costs amid a broader European Union shift to net-zero emissions by 2050 is likely going to keep the handouts coming. Decarbonization isn't just going to be "bloody hard," as top EU climate official Frans Timmermans has said, but also doubtless bloody expensive. The EU's new package of climate proposals, from expanding an emissions-trading system to banning fossil fuel cars, are set to push up costs.

Economist Jean Pisani-Ferry compares the EU's net-zero transition to the oil shock of the 1970s, albeit more drawn out, with a "negative" impact on public finances as governments seek to cushion lower-income groups from the disproportionate burden of making carbon pricier.

As European leaders fine-tune these policies, there should be more recognition of the costs ahead, which have been underestimated in the past. Climate laggard Poland has been only too happy to tell consumers higher energy bills are due to EU carbon policy. This kind of populist finger-pointing may be cheap - Poland is the EU's most coal-dependent nation - but so is the urge to respond by doubling down on an even quicker shift to clean energy. The disruption to livelihoods from new industries like electric cars, for example, is triggering more job cuts and will lead to the need for more up-skilling and retraining.

Proposals that would make carbon-fueled transport and residential heating pricier, for example, probably face a re-think. They look like a lot of potential pain for consumers in return for little gain, according to Thomas Pellerin-Carlin, of think tank Institut Jacques Delors. The redistribution component most likely needs expanding at least: A proposed social redistribution fund worth 72 billion euros is unlikely to be enough on its own.

Given the need for more investment in green technology, the EU must be more flexible with rules limiting deficit spending. Public spending will need to increase by an estimated 100 billion euros to meet the bloc's climate targets, according to estimates from Bruegel. It makes no sense to throttle the growth opportunity while potentially worsening the hit to households.

There will also have to be a clear choice on what counts as green investment in the first place, with the fate of nuclear energy still in the balance. The current gas squeeze is leading to dirtier coal-power plants coming online - not a good look. Nuclear as a reliable clean-energy alternative shouldn't be discouraged for countries politically open to it. (Countries with a long-standing aversion to nuclear, or those in the process of phasing it out like Italy and Germany, are unlikely to suddenly change their attitudes). Marco Giuli, of the Institute of European Studies, reckons small modular reactors are an interesting future technology that shouldn't be ignored.

What's happening now is a "perfect storm" for European energy bills, according to BNP Paribas Wealth Management's Edmund Shing. As the EU embarks on the road to net-zero, it should brace for more to come. (Bloomberg)