Location: Europe

European Democracy Through the Lens of Party Manifestos

Posted on May 1, 2023 | Policy Brief

A group of flags representing European countries, displayed on flagpoles with a clear blue sky in the background representing European democracy

The subjects of political discourse are important but hard to quantify. This brief uses data from 30 years of party manifestos to study how the dominant topics in politics have evolved across Europe. Transition countries have seen the most significant shift in the content of political discourse. In the early 1990s, party manifestos in Eastern Europe focused on a distinct set of topics related to transition; by recent elections they had converged to those in Western Europe, with a heavy emphasis on the welfare state, education, infrastructure and technology. Political discourse can change rapidly in times of crisis as shown by the example of Ukraine.

“It’s the economy, stupid!”

James Carville, Bill Clinton’s strategist for the 1992 election.

The dominant topics in politics are not always as apparent as when Bill Clinton was elected US president in the midst of a recession. While it is easy to track winners across election cycles, it is much harder to know what got them elected and what they will do (or at least, promise to do) once in power. The key issues and topics that political parties and candidates talk about form as important a part in our democracies as vote shares.

In this brief, we use data collected by the Manifesto Project (Lehmann et al., 2022) to describe the development of political discourse across Europe, with a particular focus on the differences and similarities between western European countries and transition economies in Eastern Europe.

Political Manifestos as Data

In most countries, voters mainly participate in the democratic process by voting for candidates put forward by political parties. Political parties advertise themselves to voters and distinguish themselves from each other by issuing party programmes or party manifestos where they lay down their ideological and policy positions.

The Manifesto Project provides a publicly available dataset on parties’ policy platforms. The data are based on the manifestos of parties that have won at least one (Western Europe) or two seats (transition countries) in a national election. Coders manually analyse the content of the manifestos and provide the percentage of each party’s manifesto that falls into one of 56 content categories. These content categories summarise a party’s policy position on given issues, for instance, whether they favour environmental protection or an expansion of the welfare state or oppose protectionism or multiculturalism.

The Manifesto Project is an example of “text as data“. Quantitative analysis based on text is becoming increasingly important across the social sciences (Gentzkow et al., 2019) but it is particularly useful in political economy and political science given that “language is the medium of politics“ and objective numerical data are often limited (Grimmer and Stewart, 2013). Unlike many recent approaches which process data using automated text analysis tools, the Manifesto Project relies on the judgement of coders from over 50 countries who read the original text. The resultant dataset has limitations: the subjective choices made by individual coders, the to-some-extent arbitrary determination of content categories to summarise the most relevant issues across different contexts and time periods and the difficulty of imposing consistent classifications for texts written in over 40 languages. Despite these caveats, it is a unique resource for analysing the evolution of countries’ political discourse over time and across countries.

Key Issues in Political Discourse

Figure 1 summarises, through content categories, the policy positions of parliaments in Western Europe and transition countries at two points in time: the early 1990s (around the time of the first democratic elections in most transition countries) and after the latest election. We measure the importance of a policy position in a country’s parliament by weighting the importance of the relevant content category in each party’s manifesto by that party’s vote share. Over time, our measure of a policy position’s importance in political discourse may increase or decline for two reasons. First, parties may change the extent to which they emphasise a given position in their manifestos. For example, parties across the political spectrum are likely to have increased references to healthcare in their manifestos during election campaigns held during the Covid-19 pandemic. Second, as voters’ preferences shift, parties that gain support will see their issues receive greater weight in the aggregate measure relative to parties that lose vote shares. For example, if the pandemic shifted voters’ preferences towards a more comprehensive welfare system, voters could respond by voting for parties which discuss the expansion of the welfare state in their manifestos.

Figure 1. Policy positions of parties in parliament.

Source: The Manifesto Project and authors’ calculations.
Notes: This chart shows word clouds of the main topics that feature in the manifestos of political parties in parliament, weighted by each party’s vote share and averaged across countries within a region. Panels a and b are based on the first election after 1990 (and before 1995) and Panels c and d are based on the latest election (after 2015) in the sample. Western Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Transition economies include Armenia, Azerbaijan, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, Moldova, Montenegro, North Macedonia, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine. Not all countries are represented in both periods.

Some striking patterns emerge. While the policy priorities of Western European parliaments remain relatively stable over the past 30 years, those of transition countries have changed markedly. During the transition period, many parties focused on the political and economic aspects of transition. Support for democracy, freedom and human rights, as well as the free market economy, featured heavily in the manifestos of parties that formed the first democratic parliaments. Over time, policy priorities in transition countries have become more similar to those of their western neighbours, and issues such as the expansion of the welfare state, the provision of education, and the importance of technology and infrastructure, have come to the fore in all countries.

Nevertheless, some differences still remain. For instance, environmental protection is one of the most important topics in western European parliaments, though its importance has declined over time. In transition countries, the environment is slowly becoming more important, but even in the latest elections it ranked at only number 16 out of 56 issues. In contrast, support for the “national way of life” was and continues to be a prominent part of the political discourse in transition economies and it is also becoming more mainstream in the Western European countries.

Political corruption and governmental and administrative efficiency have become relatively more important issues in the parliaments of transition countries, both over time and relative to their western neighbours. Meanwhile, parties in Western Europe are devoting more of their manifesto to calls for equality and social justice.

A Closer Look at Ukraine

A country’s parliament’s policy platform can change suddenly in response to shocks. Figure 2 shows the big topic groups in the manifestos of political parties in the Ukrainian parliament from 1998 to 2019. The parliamentary election in October 2014 closely followed the Euromaidan Revolution, the annexation of Crimea by Russia and the start of the Donbas war. Compared to the previous elections, external relations became a major issue in the Ukrainian parliament, driven in particular by increased mentions of the military and the relationship with the EU. Party manifestos heavily featured appeals to Ukrainian nationhood, national solidarity, and unity (as evidenced by the increasing importance of the content category “Fabric of Society”). The trend of increasing attention to freedom and democracy also continued in this election cycle. In contrast, the previously most important issues in elections (welfare and quality of life) received much less attention in parliament at times of political upheaval and military conflict.

Figure 2. Topics in Ukrainian elections.

Source: The Manifesto Project and authors’ calculations.
Notes: This chart shows the percentage of mentions of topic groups in the manifestos of political parties in the Ukrainian parliament from 1998 to 2019, weighted by each party’s vote share.

Distribution of Political Ideology

While the previous section discussed the main policy issues in parliament, we now turn our focus to the ideology of individual political parties that make up a country’s parliament. A commonly used summary measure of political ideology is a left-right scale (RILE), where left positions favour peace, state intervention in the economy and the expansion of the welfare state and right positions support security, traditional values and the free market economy. The Manifesto Project provides a RILE value for each party at each election (based on Laver and Budge, 1992), which is calculated by subtracting the share of a party’s manifesto devoted to left-leaning policy issues, for instance support for the welfare state, from right-leaning content, such as support for the free market economy. Condensing the complexity of party programmes into a one-dimensional measure based on fixed definitions has advantages and drawbacks. The RILE makes it possible to compare diverse political parties that campaign on different issues (for instance ecological parties compared to nationalist parties) and measure how the same party’s policy stance may have shifted over time. As the definition of left- and right-leaning issues were based on influential political theories around the 1900s, some scholars argue that this measure has become less appropriate to empirically differentiate between modern political parties, particularly in transition countries (see, e.g., Mölder, 2016). In particular, Tavits and Letki (2009) show that during the transition process many leftist parties in Eastern Europe pursued economically right-wing policies and Vachudova (2008) argues that right-wing parties in the region often appealed to a nationalist discourse.

With these caveats in mind, Figure 3 shows the distribution of all parties in parliament in the Manifesto Project database on the RILE scale, weighted by their respective vote shares. In Western Europe in the 1990s, the chart shows the prominence of both centre-left and centre-right parties, as well as smaller parties both on the more extreme left and right. In contrast, the parties in parliament in transition economies at the time were more concentrated in the centre (and slightly towards the right). Fast forward 30 years and the distribution of political ideology has changed in both the east and the west. In Western Europe, the majority of parliamentarians are now situated slightly right of centre with little mass in the more extreme tails. In contrast, in the former transition countries, there is evidence of political polarisation with party representation moving both to the left and the right on the ideological spectrum and relatively few parliamentarians occupying the centre.

Figure 3. Left-right position of parties in parliament.

Source: The Manifesto Project and authors’ calculations.
Notes: This chart shows the density of parties in parliament on the left-right policy scale (RILE), weighted by each party’s vote share within their country. The dashed lines are based on the first election after 1990 (and before 1995) and the solid lines are based on the latest election (after 2015) in the sample. Western Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Transition economies include Armenia, Azerbaijan, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, Moldova, Montenegro, North Macedonia, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine. Not all countries are represented in both periods.

Conclusion

What are the main topics of political discourse? Are they different across countries? Do they change over time? While there is no perfect way to quantify and track political discourse over time, this brief uses data from parties’ manifestos provided by the Manifesto Project to illustrate some broad trends across Europe over the past 30 years.

We document two kinds of changes in the subject matter of party manifestos. First, there are gradual shifts in content that reflect underlying developments in society. As democracies have matured in Eastern Europe, the content of their parties’ manifestos has evolved away from the immediate concerns of economic and political transition and converged to those of Western European parties. Second, more abrupt shifts can arise when countries experience crises or institutional upheaval. Over the past decade Ukrainians have lived through a revolution, the Donbas war, and the ongoing Russian invasion. Most of the parties that represent them in parliament are new, and the issues that feature prominently in their manifestos are now markedly different from those before the Euromaidan revolution.

Manifestos are not just about substance but also about ideology. Using the Manifesto Project’s classification of parties on a left-right scale, we show how the distribution of parties has evolved in Western Europe and transition countries. By this measure, political polarisation has been increasing in transition countries where centrist positions are less well represented than in Western European parliaments.

References

  • Gentzkow, Matthew, Bryan Kelly, and Matt Taddy. (2019). “Text as data”, Journal of Economic Literature 57, no. 3: 535-74.
  • Grimmer, J., and Stewart, B. (2013). “Text as data: The promise and pitfalls of automatic content analysis methods for political texts”. Political analysis 21, no. 3: 267-297.
  • Lehmann, P., Burst, T., Matthieß, T., Regel, S., Volkens, A., Weßels, B. and Zehnter, L. (2022) The Manifesto Data Collection. Manifesto Project (MRG / CMP / MARPOR). Version 2022a. Berlin: Wissenschaftszentrum Berlin für Sozialforschung (WZB). https://doi.org/10.25522/manifesto.mpds.2022a
  • Laver, M. and Budge, I. (eds.). (1992). Party Policy and Government Coalitions, Houndmills, Basingstoke, Hampshire: The MacMillan Press.
  • Mölder, M. (2016). The validity of the RILE left–right index as a measure of party policy. Party Politics, 22(1), 37–48. https://doi.org/10.1177/1354068813509525
  • Tavits, M. and Letki, N. (2009). When Left Is Right: Party Ideology and Policy in Post-Communist Europe. American Political Science Review, 103(4), 555-569. doi:10.1017/S0003055409990220
  • Vachudova, M. A. (2008). Centre—Right Parties and Political Outcomes in East Central Europe. Party Politics, 14(4), 387–405. https://doi.org/10.1177/1354068808090252

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Energy Infrastructure Resilience and Sustainable Future

Posted on April 18, 2023 |

The Stockholm Institute of Transition Economics (SITE) and the Forum for Research on Eastern Europe: Climate and Environment (FREECE) would like to invite you to its 2023 SITE Energy Talk. This year it will focus on the opportunities and challenges that the energy infrastructure will face in the near future.

As we move towards sustainable, low-carbon energy systems, it is essential to guarantee the energy infrastructure’s resilience against various challenges, such as supply chain disruptions, network congestion, rising energy costs, and other potential threats. Valuable insights have been gained from recent shocks such as the Covid-19 pandemic, the energy crisis, and the ongoing Ukrainian war concerning the energy infrastructure’s resilience.

The next SITE Energy event will focus on the opportunities and challenges that the energy infrastructure will face in the near future.

Speakers

Ewa Lazarczyk Carlson

Associate Professor at Reykjavik University and also affiliated to Luleå University of Technology

Lazarczyk Carlson will focus on the Baltic Sea region’s energy security and the network dependency on Russia as an electricity power supplier.

Yuliya Markuts

Ph.D., Head of the Center of Public Finance and Governance at the Kyiv School of Economics, Associate Professor of Finance at the State University of Trade and Economics

Markuts will address the energy of Ukraine during the Russia full-scale invasion: resilience and future prospects for transformation.

Igor Piddubnyi

Analyst on Energy sector Damages and Losses, Researcher at the Center for Food and Land Use Research at Kyiv School of Economics

Piddbunyi addresses the question of Ukrainian energy infrastructure, its current status, and damage evaluations.

Mikael Toll

Senior Advisor at Ramboll Management Consulting

Toll will discuss how well-prepared the Nordic energy infrastructure is for the green transition from a security of energy supply perspective, in the light of recent and current energy crises.

Moderators

The seminar will be moderated by Chloé Le Coq, Professor of Economics at the University Paris-Panthéon-Assas (CRED) and Research Fellow at SITE, and Elena Paltseva, Associate Professor at SITE.

Registration

The event will take place in Terrasrummet at Holländargatan 32, 113 59 Stockholm (near the main building of SSE) and the registration opens at 11.45 near the entrance of Holländargatan.

The event will also be streamed online via Zoom for those who cannot join the event in person. Please register via the Trippus platform:

  • In-person participation (here)
  • Online participation (here)

NOTE: A light lunch will be provided for those who will participate the event in person.

Please contact site@hhs.se if you have any questions regarding the event.

Georgian Economy and One Year of Russia’s War in Ukraine: Trends and Risks

Posted on March 13, 2023 | News

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Russia’s invasion of Ukraine profoundly impacted the global economy, immediately sending shockwaves across the globe. The attack of a country that was once a major energy supplier to Europe on the country which was one of the top food exporters in the world, sent food and fuel prices spiralling, causing major energy shortages and the prospect of protracted recession in the United States and the European Union.

The unprovoked and brutal aggression resulted in nearly universal condemnation and widespread sanctions placed on Russia by the United States, the EU, and other Western allies. Financial sanctions were perhaps the most unexpected and significant with the potential for immediate impact on Russia’s neighbours, including those that did not formally join the sanctions regime. In addition to sanctions, the major consequence of the war was mass migration waves, particularly from Ukraine, but also from Russia and Belarus to neighbouring countries.

At the start of the war, it was expected that the Georgian economy would be severely and negatively impacted for the following reasons:

  • First, as a former Soviet republic, Georgia historically maintained close economic trade ties with both Russia and Ukraine. The ties with Russia have weakened considerably in the wake of the 2008 Russo-Georgian war but remained significant. Russia was the primary market for imports of staple foods into Georgia, such as wheat flour, maize, buckwheat, edible oils, etc. Russia and Ukraine were both important export markets for Georgia. Russia was absorbing about 60 percent of Georgian wine exports and 47 percent of mineral water exports, while Ukraine was one of the leading importers of alcohol and spirits from Georgia (46 percent of Georgia’s exports). Tourism and remittances are other areas where Georgia is significantly tied to Russia and somewhat weaker to Ukraine. Before the pandemic, in 2019 Russia accounted for 24 percent of all tourism revenues, while Ukraine for 6 percent. Remittances from Russia accounted for 16.5 percent of total incoming transfers in 2021.
  • Second, while the Georgian government chose to largely keep a neutral stance on the war (announcing at one point that they would not join or impose sanctions against Russia), the main financial and trade international sanctions were still in effect in Georgia due to international obligations and close business ties with the West. These factors were reinforced by strong support for Ukraine among the Georgian population, where the memory of the Russian invasion of Georgia in 2008 remains uppermost.
  • In addition, Georgia is a net energy importer, and while the dependence on energy imports from Russia is not significant, the rising prices would have affected Georgia profoundly.

Original publication: This policy paper was originally published in the ISET Policy Institute Policy Briefs section by Yaroslava Babych, Lead Economist of ISET Policy Institute. To read the full policy paper, please visit the website of ISET-PI. 

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

What Drives Belarus to Be One of the Most Optimistic Nations in Europe?

Posted on March 6, 2023 | Policy Brief

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War in Ukraine, imposed sanctions on Belarus and the worst yearly GDP drop since the 1990s. Despite these challenges, Belarusian households were the third most optimistic in Europe in late 2022, following Lithuania and Montenegro. The Belarusian Consumer Confidence Index, calculated on the basis of four household surveys conducted in Belarus by BEROC’s Belarus Monitoring Project in 2021 and 2022, shows surprising resilience among Belarusians – especially in Q3 and Q4, 2022.  This brief shortly describes the components of the index and their evolution and discusses what factors might have been driving this high index. The brief argues the found optimism among Belarusians could have been driven by a state-owned media influence and by the Belarusian economy performing better than expected.

Optimism Without Grounds?

In 2022, Belarus experienced a 4.7 percent yearly GDP drop, the worst since the 1990s. The main reasons behind the decline is the Russian war on Ukraine and Belarus’ involvement in it, and, consequently, the severe sanctions imposed on Belarus and its main trade and economic partner: Russia. A surge of exports to Russia to counter the sanctions helped prevent the severity of the drop, although it still remains large. Forecasts for 2023 are also not encouraging. The World Bank expects the Belarusian economy to shrink by 2.3 percent. The European Bank for Reconstruction and Development’s forecast is -1 percent, the International Monetary Fund (IMF)’s is +0.2 percent, and the Eurasian Development Bank’s +0.3 percent, whereas the announced official target is +3.8 percent. In total, the GDP decrease could be as large as -6.9 percent in the two coming years, following the World Bank’s worst prognosis. The question is; Is this a lot?

The last GDP decline occurred in 2020 and amounted to a moderate -0.7 percent, despite the apex of Covid-19 related shutdowns, the decrease in the world economy, and the political crisis following the rigged elections in August. The most recent severe GDP drop happened between 2015 and 2016 with a decline of 3.8 percent in 2015 and 2.5 percent in 2016.

Figure 1. A comparison of GDP changes and the CCI values in Belarus in 2021 and 2022.

Note: Based on Eurostat methodology. Source: Belstat, BEROC.

Surprisingly, the lower the GDP, the higher the consumer confidence, as measured by the Consumer Confidence Index (CCI). For example, the CCI was -18.7 percent in Q4 2021, while the GDP increased by 2.3 percent in 2021. On the contrary, the CCI in Q4 2022 was -15.0 percent, while the GDP dropped by massive -4.7 percent (see Figure 1).

The experience from numerous financial crises in the 2010s may play an important role here by moving the expectation baseline and conclusively undermining confidence in the country’s economic institutions. However, even if this is the case, it would not explain the dynamics of consumer confidence in Belarus in relation to the country’s economic performance. In this brief we dig deeper into the determinants of this seemingly ungrounded consumer optimism.

The Consumer Confidence Index

The Consumer Confidence Index (CCI) used for this brief is based on four household surveys conducted in Belarus by the Belarusian Economic and Outreach Center (BEROC)’s Belarus Monitoring Project. The online surveys were conducted in December 2021, and in April, August and November in 2022. The surveys are representative for the urban population aged 18-64 (approximately 5 million people). They have also been weighted by region, sex and age.

The index is designed to measure consumer confidence from -100 percent to + 100 percent (0 being neutral). Consumer confidence is defined as the degree of optimism regarding the state of the economy which consumers express through their saving and spending patterns.

A few approaches for calculating the index can be used. One of them is the Eurostat methodology, which includes answers to four questions about households previous and expected financial position, the expected economic situation in the country, as well as the propensity to buy durable goods. Another approach is the Rosstat methodology, which, in addition to the Eurostat approach, includes one extra question on the previous economic situation in the country. We considered both methodologies to allow for a comparison of Belarus to countries in Europe as well as to Russia.

Belarus Compared to Russia

The CCI value, applying the Rosstat methodology, was -19.4 percent in Belarus in November 2022 (a 3.6 percentage point growth as compared to August 2022), while the index value in Russia was -22.7 percent (a 0.3 percentage point growth).

It is worth mentioning that there was a sharp drop in Q2 2022 in both countries. However, the index values recovered in Q3 2022 to Q4 2021 values, i.e., to the index values prior to the introduction of large-scale economic sanctions and prior to the war.

The pattern is somewhat similar to that during Covid-19-related restrictions, displaying a sharp drop and then a strong recovery. The magnitude of the drop was however much higher in 2020: 20.3 percent in 2020 compared to 10.3 percent in 2022 for Russia. No data is available for Belarus prior to Q4 2021 but the trajectory was likely similar. Apparently, households in neither country appear be desperate (see Graph 1).

Graph 1. The CCI in Belarus and Russia.

Note: Q1 2022 data not available for Belarus. Source: BEROC, Rosstat.

Belarus Compared to Europe

The Belarusian CCI, when excluding the component of the past state of the economy (i.e. applying the Eurostat methodology), was -15.0 percent in November 2022. This was 3.4 percentage points higher than the value in December 2021 and the third highest value in Europe, following Lithuania (-9.2 percent) and Montenegro (-8.6 percent). Moreover, the index was the highest observed for the entire period of observations by BEROC (from December 2021), as depicted in Graph 2.

Graph 2. The CCI in Belarus and the EU.

Source: BEROC, Eurostat.

The index values of the European Union and the Eurozone have not changed significantly from Q2 2022 and currently stand at -26.3 and -24.9 percent, respectively. Naturally, some countries have faced slight reductions, while others have seen slight increases, for instance, the indices for Italy, Croatia and Cyprus had all increased by more than 4 percentage points in Q4, 2022.

As evident from Graph 2, Belarus has since Q4 2021, moved from a below average position to become a leader in optimism on the European continent.

The Past and the Future

Throughout all four surveys, evaluations of the current state of the country and of personal wellbeing contrasted the projections for the future (see Graph 3). The projections for the future are much more positive, which is evident if we compare question 4 and 2 to question 3 and 1. At the same time, the share of negative answers is higher than the share of positive answers for all questions, and the term “optimism” should therefore be taken as the lack of strong negative views on the past and future.

A higher share of “difficult to say or do not know” answers is unsurprisingly found for questions regarding the future.

Graph 3. The composition of the CCI in Belarus for Q4 2022.

Note: All answers to the questions are distributed along a Likert scale from “will improve (has improved)” or “very good” to “will decline (has declined)” or “very bad”. For question 1 (Q1) and question 2 (Q2), the answer options range from “has improved” and “has declined”; and for question 5 (Q5), the answer options range from ”very good” to “very bad”. Source: BEROC.

The largest negative contribution to the index was the question on the current assessment of the country’s economic situation in relation to the previous year (question 1). The share of negative answers was 72 percent in December 2021, and it decreased only to 63 percent in November 2022, even though the economic performance prior to those periods was a 2.3 percent GDP growth and 4.7 percent GDP decline, respectively. Apparently, the worse the economy performed, the better was the perception of the past.

This is however not the case regarding the state of the household’s financial position. The share of negative answers was 48 and 47 percent, and the share of positive answers was 13 and 14 percent in December 2021 and November 2022, respectively.

The answers concerning the future standing of the economy and one’s personal financial position follow the same logic, with large disparities between the evaluation of the country’s economy – which one is negative about – and personal finances – where respondents are more optimistic.

What could influence the changes? We hypothesize that there are at least four possible explanations for the improvement in the CCI from Q1 to Q4, 2022:

a) a stabilization of the situation on the foreign exchange market
b) a slowing GDP decline, reaching a “local minimum”
c) an influence from Belarusian and Russian state-owned mass media outlets
d) failed negative expectations in previous periods

As discussed in a previous FREE Network Policy Brief by Luzgina (2022), the Belarusian currency market has stabilized since April, 2022. The Belarusian exchange rate is somewhat of a “Holy Grail” and a crucial factor for Belarusians after numerous financial crises in 2010s, so its stabilization could act as a positive signal for households. Indeed, when asking respondents about the factors influencing their income, the share of those who attributed this to the exchange rate had in August 2022 decreased by 25 percentage points, as compared to April the same year (from 45 to 20 percent, respectively).

The GDP decline slowed in the second half of 2022, from -4.9 percent in August to -4,7 percent in November. An additional positive development for Belarusians was that the inflation declined in November.

Media consumption is another essential factor in understanding consumer confidence. State-owned and independent media consumers showed significant differences in their assessments of the economy. Only 22 percent of state-owned media consumers rated the economy as “bad” or “very bad” compared to 68 percent of independent media consumers.

In April 2022, the World Bank estimated a possible Belarusian GDP change at -6.5 percent, the IMF
-6.4 percent and S&P -15 percent. The CCI in April was also at the lowest throughout BEROC’s observations at -23.0 percent. Despite these extremely negative forecasts for Belarus’ GDP, the actual outcomes were less catastrophic than expected. This might have improved respondents’ assessment of the future economic situation.

Conclusion

Data from the online household surveys show that imposed sanctions, the Russian war on Ukraine, and a declining economic growth in 2022 have not yet significantly affected the sentiments of Belarusians on a large scale. Rather, Belarusians’ expectations have improved despite serious current and future challenges to the Belarusian economy. In fact, Belarus is among the most optimistic nations in Europe, according to the surveys.

This is arguably due to a financial stabilization and an economic performance above expected, as well as exposure to state-owned media.

With this in mind, we may see an increase in households’ consumption in the following months, which will contribute to a slowdown in the GDP decline or even a slight economic recovery in 2023 – pending no new shocks occur.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Leading Experts Advocate Tougher Sanctions Against Russia in the Wake of Year-long Aggression Against Ukraine

Posted on February 24, 2023 | News

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As of today, Russia’s aggression against Ukraine has persisted for a year. While several countries have helped Ukraine with military, financial and humanitarian aid, Ukraine requires additional assistance to endure the conflict with Russia. What other forms of support and aid are needed for Ukraine’s survival? And how can the EU and Sweden support Ukraine’s victory?

The Royal Swedish Academy of Engineering Sciences (IVA) hosted a seminar in which Ukraine’s needs were discussed from an economic and political science perspective by several leading economists, including:

  • Nataliia Shapoval, Director of the KSE Institute at the Kyiv School of Economics (KSE)
  • Torbjörn Becker, IVA member and Director of the Stockholm Institute of Transition Economics at the Stockholm School of Economics (SITE)
  • Fredrik Löjdquist, Director of the Centre for Eastern European Studies (SCEEUS)
  • Maria Perrotta Berlin, Assistant Professor at the Stockholm Institute of Transition Economics.

Nataliia Shapoval, Chairman of the KSE Institute at the Kyiv School of Economics, joined the seminar from Kyiv to share her views. According to Shapoval,

“Tougher sanctions across the board, hefty sanctions on energy, additional sanctions on trade, and more control over financial transactions with Russia are required by the outside world right now.”

As Russia’s war of aggression against Ukraine has lasted for a year, seminar experts advocated for tougher sanctions against Russia and discussed Ukraine’s needs from an economic and political science perspective.

Seminar Video

About IVA

The Royal Swedish Academy of Engineering Sciences (IVA) is an independent academy with a mission “…to promote engineering and economic sciences and the advancement of business and industry for the benefit of society.” Read more: IVA website 

Disclaimer: Opinions expressed during events and conferences are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

What Can We Learn from Regional Patterns of Mortality During the Covid-19 Pandemic?

Posted on February 20, 2023 | Policy Brief

Doctor outside COVID-19 isolation center representing covid-19 pandemic mortality

Given the nature of the spread of the virus, strong regional patterns in fatal consequences of the Covid-19 pandemic are to be expected. This brief summarizes a detailed examination of the spatial correlation of deaths in the first year of the pandemic in two neighboring countries – Germany and Poland. Among high income European countries, these two seem particularly different in terms of the death toll associated with the pandemic, with many more excess deaths recorded in Poland as compared to Germany. Detailed spatial analysis of deaths at the regional level shows a consistent spatial pattern in deaths officially registered as related to Covid-19 in both countries. For excess deaths, however, we find a strong spatial correlation in Germany but little such evidence in Poland. These findings point towards important failures or neglect in the areas of healthcare and public health in Poland, which resulted in a massive loss of life.

Introduction

While almost all European countries currently refrain from imposing any Covid-19 related restrictions, the pandemic still takes a huge economic, health and social toll across societies worldwide. The regional variation of incidence and different consequences of the pandemic, observed over time, should be examined to draw lessons for ongoing challenges and future pandemics. This brief outlines a recently published paper by Myck et al. (2023) in which we take a closer look at two neighboring countries, Germany and Poland.  Within the pool of high-income countries, these are particularly different in terms of the death toll associated with the Covid-19 pandemic. In 2020 in Poland, the excess deaths rate (with reference to the 2016-2019 average) was as high as 194 per 100,000 inhabitants, over 3 times higher than the 62 deaths per 100,000 inhabitants in Germany (EUROSTAT, 2022a, 2022b). While, in relative terms, the death toll officially registered as resulting from Covid-19 infections in 2020 was also higher in Poland than in Germany, the difference was considerably lower (about 75 vs 61 deaths per 100,000 inhabitants, respectively) (Ministry of Health, 2022; RKI, 2021). Population-wise Germany is 2.2 times larger than Poland and, before the pandemic struck, the countries differed also in other relevant dimensions related to the socio-demographic structure of the population, healthcare and public health. The nature of Covid-19 and the high degree of regional variation between and within the two countries along some crucial dimensions thus make Germany and Poland an interesting international case for comparison of the pandemic’s consequences. We show that the differences in the spatial pattern of deaths between Germany and Poland may provide valuable insight to the reasons behind the dramatic differences in the aggregate numbers of fatalities (Myck et al., 2023).

Regional Variation in Pandemic-Related Mortality and Pre-Pandemic Characteristics

We examine three measures of mortality in the first year of the Covid-19 pandemic in 401 German and 380 Polish counties (Kreise and powiats, respectively): the officially recorded Covid-19 deaths, the total numbers of excessive deaths (measured as the difference in the number of total deaths in year 2020 and the 2015-2019 average) and the difference between the two measures. Figure 1 shows the regional distribution of these three measures calculated per 1000 county inhabitants. All examined indicators were generally much higher in Poland as compared to Germany. In Poland, deaths officially registered as caused by Covid-19 were concentrated in the central and south-eastern regions (łódzkie and lubelskie voivodeships), while in Germany they were concentrated in the east and the south (Sachsen and Bayern). Excess mortality was predominantly high in German regions with high numbers of Covid-19 deaths, but also in nearby regions. As a result, these same regions also show greater differences between excessive deaths and Covid-19 deaths. On the contrary, high excessive deaths can be noted throughout Poland, including the regions where the number of Covid-19 deaths were lower. In the case of Poland, spatial clusters are much less obvious for both excess deaths and the difference between excess and Covid-19 deaths. To further explore the degree of regional variation between and within countries with respect to the mortality outcomes, we link them to regional characteristics such as population, healthcare and economic conditions, which might be relevant for both the spread of the virus and the risk of death from Covid-19. In Figure 2 we illustrate the scope of regional disparities with examples of (a) age structure of the population, (b) the pattern of economic activity and (c) distribution of healthcare facilities in years prior to the pandemic.

Figure 1. Regional variation of death incidence in 2020: Germany and Poland.

Note: The panels share a common legend based on the quintile distribution of Covid-19 deaths, with two additional categories added at the top and bottom of the scale. County borders in white, regional borders in yellow and country border in grey. Source: Myck et al. (2023).

Figure 2. Pre-pandemic regional variation of socio-economic indicators: Germany and Poland.

Note: Two top and bottom categories in the legend cover 10% of observations each, the rest of categories cover 20% of observations each. County borders in white, regional borders in yellow and country border in grey. Source: Myck et al. (2023).

Shares of older population groups (aged 85+ years) are clearly substantially higher in Germany compared to Poland, and within both countries these shares are higher in the eastern regions. On the other hand, the proportion of labor force employed in agriculture is significantly higher in Poland and heavily concentrated in the eastern parts of the country. In Germany, this share is much lower and more evenly spread. This indicator illustrates that socio-economic conditions in 2020 were still substantially different between the two countries. The share of employed in agriculture is also important from the point of view of pandemic risks – it reflects lower levels of education, and specific working conditions that make it challenging to work remotely yet entail less personal contact and more outdoor labor. The distribution of hospital beds reflects the urban/rural divide in both countries. It is also a good proxy for detailing the differences in the overall quality of healthcare between the two countries, i.e. displaying significantly better healthcare infrastructure in German counties.

Uncovering the Spatial Nature of Excess Deaths in Germany and Poland

While spatial similarities among regions are present along many dimensions, they are particularly important when discussing such phenomena as pandemics, when infection spread affects nearby regions more than distant ones. With regard to the spatial nature of excess deaths in the first year of the pandemic, a natural hypothesis is thus that the pattern of these deaths should reflect the nature of contagion. This applies primarily to excess deaths directly caused by the pandemic (deaths resulting from infection with the virus). At the same time, some indirect consequences of Covid-19 such as limitations on the availability of hospital places and medical procedures, or lack of medical personnel to treat patients not affected by Covid-19, are also expected to be greater in regions with a higher incidence of Covid-19. On the other hand, spatial patterns are much less obvious in cases where excess deaths would result, for example, from externally or self-imposed restrictions such as access to primary health care, reduced contact with other people, diminished family support, or mental health problems due to isolation. While these should also be regarded as indirect consequences of the pandemic, as they would arguably not have realized in its absence, these consequences do not necessarily relate to the actual spread of the virus. Our in-depth analysis of the spatial distribution of the three examined mortality-related measures, therefore, allows us to make a crucial distinction in possible explanations for the dramatic differences in the observed death toll in the first year of the pandemic in Germany and Poland. We explore the degree of spatial correlation in the three mortality outcomes using multivariate spatial autoregressive models, controlling for a number of local characteristics (for more details see Myck et al., 2023).

We find that in Germany, all mortality measures show very strong spatial correlation. In Poland, we also confirm statistically significant spatial correlation of Covid-19 deaths. However, we find no evidence for such spatial pattern either in the total excess deaths or in the difference between excess deaths and Covid-19 deaths. In other words, in Poland, the deaths over and above the official Covid-19 deaths do not reflect the features to be expected during a pandemic. As the results of the spatial analysis show, these findings cannot be explained by the regional pre-pandemic characteristics but require alternative explanations. This suggests that a high proportion of deaths results from a combination of policy deficits and individual reactions to the pandemic in Poland. Firstly, during the pandemic, individuals in Poland may have principally withdrawn from various healthcare interventions as a result of fear of infection. Secondly, those with serious health conditions unrelated to the pandemic may have received insufficient care during the Covid-19 crisis in Poland, and, as a consequence, died prematurely. This may have been a result of lower effectiveness of online medical consultations, excessive limitations to hospital admissions – unjustified from the point of view of the spread of the virus, and/or worsened access to healthcare services as a result of country-wide lockdowns and mobility limitations. The deaths could also have resulted from reduced direct contact with other people (including family and friends as well as care personnel) and mental health deterioration as a consequence of (self)isolation. Our analysis does not allow us to differentiate between these hypotheses, but the aggregate excess deaths data suggests that a combination of the above reasons came at a massive cost in terms of loss of lives. The consequences reflect a very particular type of healthcare policy failure or policy neglect in the first year of the pandemic in Poland.

Our study also shows that a detailed analysis of country differences concerning the consequences of the ongoing pandemic can serve as a platform to set and test hypotheses about the effectiveness of policy responses to better tackle future global health crises.

Acknowledgement

The authors wish to acknowledge the support of the German Research Foundation (DFG, project no: BR 38.6816-1) and the Polish National Science Centre (NCN, project no: 2018/31/G/HS4/01511) in the joint international Beethoven Classic 3 funding scheme – project AGE-WELL. For the full list of acknowledgements see Myck et al. (2023).

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Homeownership and Material Security in Later Life

Posted on November, 2022 | Policy Brief

20221106 Homeownership and Material Security Image 02

Many previous studies show that homeownership is related to various aspects of well-being, although the causal nature of this relationship is difficult to identify. We analyze the association between homeownership and material security, measured through subjective expectations of being better or worse off in the future, using data from 15 European countries. Our findings show that homeowners have a higher level of material security than renters, with larger differences among those living in big cities. We find that material security increases with the value of owner’s property and at the same time find no significant relationship with education, income or financial situation. We interpret the results as support for one of the most commonly emphasized mechanisms behind the positive effects of homeownership for well-being – that homeownership provides a particular form of material security in old age.

Introduction

Vast empirical literature links homeownership to numerous outcomes, such as well-being, health or mobility (Costa-Font, 2008; Dietz and Haurin, 2003; Rohe and Stewart, 1996 among others). In most cases the specific causal link with homeownership per se is however difficult to demonstrate. This because homeownership, especially in old age, usually reflects the financial resources accumulated over the life course through labor market history, as well as health and family developments (Angelini et al., 2013). This means that many unobservable characteristics can obscure the relationship between homeownership and welfare outcomes and bias the estimated parameters.

Material security is an important aspect of well-being, facilitating longer-term planning of financial decisions, smoothing of expenditures across periods of lower contemporaneous incomes and allowing exceptional spending when faced with various negative shocks. It seems particularly relevant in old age when people’s ability to adjust their current income to their specific needs is significantly reduced, and material needs increasingly depend on health.  As people age and as their ability to maintain labor market activity diminishes, the material resources available to them, and the security these can provide, are increasingly composed of pensions and accumulated assets. Among the latter, fixed assets, and in particular ownership of one’s home, play a very special role, as they provide some financial backup and secure a flow of regular consumption in the form of accommodation.

It is reasonable to expect that homeownership would influence well-being through the channel of material security, particularly in old age. Surprisingly, the findings in the literature directly exploring this mechanism are so far scarce. We address this gap using data collected in the Survey of Health, Ageing and Retirement in Europe (SHARE) on individuals aged 50 years and above. We take advantage of the 2006 edition of the survey from 14 European countries and Israel and develop a measure of perceived future material security using two consecutive questions on ‘the chances that five years from now the standard of living [of the participant] will be better/worse than today’. Participants reported the estimated chances on a scale from 0 to 100, where 0 means ‘absolutely no chance’ and 100 denotes ‘absolutely certain’. In line with previous behavioral literature, we calculate a difference between the chances of being better vs. worse off, and recode into a categorical variable with 5 outcomes spanning from ‘very likely worse off’, through ‘rather likely worse off’, ‘equally likely’, ‘rather likely better off’ and ‘very likely better off’ (more details in Garten et al., 2022). In our sample, ‘equally likely’ is the most frequent category (30 percent of total responses), and being either ‘very’ or ‘rather likely worse off’ was more frequently reported than being better off (48 percent of total responses coded as either outcome for being worse off as compared to 22 percent for the two categories of being better off).

The Impact of Homeownership on Expectations of Future Standard of Living

We regress the measure of perceived material security on an extended vector of characteristics including basic demographics, education, marital status, labor market status, the relative position in the distributions of income and financial assets, and physical and mental health. Our main variable of interest is a categorical measure of homeownership, where individuals are split between renters and homeowners, who are further divided based on the country-specific quartiles of their home value. This measure is then interacted with being a big city resident. Below we present some selected results, which are reported in full in Garten et al. (2022).

In Figure 1 we report the results for each outcome of perception of material security for owner occupiers (depending on the value of their home) as compared to renters, by place of residence. The correlation with material security is particularly strong among those living in cities. However, among other respondents, those in the top quartile of the home value distribution are also more likely to report being optimistic about their material conditions in the future. For big city dwellers, the differences between renters and home owners are statistically significant already for owners with home values in the second quartile of the distribution, and the effects carry through to higher quartiles. The differences for selected perceptions of material security are not only statistically significant but also large in magnitude in the case of city dwellers who own the most expensive properties. As compared to renters they are 3.7 percentage points more likely to expect that their future situation will be either ‘rather’ or ‘very likely’ better. Among those living in big cities, 17.5 percent and 8.5 percent respectively, declare these positive expectations. This means that proportionally, the estimated 3.7 percentage points correspond to respective increases of 21.2 percent and 43.3 percent. 

Figure 1. Marginal effects of homeownership for outcomes of perception of material security

Note: Results presented as marginal effects based on estimations using the ordered probit model with 95% confidence intervals. More details available in Garten et al. (2022).

We relate the marginal effect of owning a property in the top quartile of the home value distribution, as compared to owners with properties in the bottom quartile or renters, to the effect resulting from: higher education, being in the top income quartile or in the top financial assets quartile. While education, income and financial assets affect the perception of future material situation in the expected direction, the estimated relationships are statistically insignificant, and their magnitude is much lower compared to the estimated relationship with homeownership.

Conclusion

Relative to renters, individuals owning their homes tend to have higher levels of well-being across numerous dimensions (see Garten et al., 2022 for an overview). Due to the complex nature of the accumulation of wealth and its interaction with different spheres of life over the life cycle, the identification of the causal character of this relationship is a nearly impossible task. Although many mechanisms behind this relationship have been suggested, few have actually been put to the test against real-life data. Therefore, better understanding of these mechanisms might be a way to verify the hypothesis that homeownership actually matters for well-being.

Our findings confirm that homeowners – in particular those living in big cities – enjoy a higher level of self-perceived material security and are more likely to express optimism about their material standard of living in the future as compared to renters. Such feeling of security for the coming years may contribute to a more general positive outlook, and consequently to the higher reported levels of well-being and life-satisfaction observed in the literature. The examined relationship is especially strong among those in the top quartile of the distribution of property values, although for dwellers in big cities the effect is also strong for those with lower property value. While these findings cannot be interpreted as strictly causal, we suggest that owning a home offers a very particular type of material security in old age and that this security might be an important mechanism leading to the observed positive relationship between homeownership and overall well-being.

Acknowledgement

The authors wish to acknowledge the support of the German Science Foundation (DFG, project no: BR 38.6816-1) and the Polish National Science Centre (NCN, project no: 2018/31/G/HS4/01511) in the joint international Beethoven Classic 3 funding scheme – project AGE-WELL. For the full list of acknowledgements see Garten et al. (2022).

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Who Benefitted from the Gasoline Tax Cut in Sweden?

Posted on September 2, 2022 | Policy Brief

20220902 Who Benefitted from the Gasoline Tax Image 01

Against the background of fast rising gasoline and diesel prices in 2022, a number of European countries have reduced fuel tax rates, often in the form of temporary “gas tax holidays”. Sweden reduced its fuel tax rate by 1.81 SEK (€0.17) per litre on May 1st 2022, of which 1.31 SEK is a temporary reduction set to expire at the end of September. When the tax holiday was announced, Finance Minister Mikael Damberg commented “I am pragmatic, for me it is important that we can compensate households” (Davidsson and Nilsson, 2022). However, just one month after implementation, the pump price for gasoline rose to a new high, which gives rise to the question of how much of the tax cut has actually been passed through to the consumers. In this policy brief, we analyse the tax incidence by comparing the gasoline price development in Sweden to that in Denmark, where the fuel tax rate remained unchanged. We find that the tax reduction was fully reflected in consumer prices, with a pass-through rate of around 100 percent. Nevertheless, we argue that spill-over effects pushing up gasoline prices outside of Sweden are likely biasing our estimate. Based on economic theory, we conclude that our estimate of the pass-through rate needs to be corrected downwards, meaning that only a part of the tax cut benefit was passed along to Swedish consumers.

Introduction to Tax Incidence

In standard economic theory, the pass-through rate to consumers from a change in gasoline tax rates is determined by the equation:

20220902 Equation

where p is the tax inclusive price, t is the tax, and η and ε are the price elasticities of supply and demand, respectively. The price elasticities give us the percentage change in quantity when the price changes by one percent. It follows from this equation that the relatively inelastic side of the market bears most of the tax burden from a tax increase – or most of the benefit from a tax reduction. Under normal circumstances, short-run demand for gasoline is highly inelastic in Sweden, with ε close to zero (Gren and Tirkaso, 2020; Dahl, 2012). In contrast, short-run supply is considered relatively elastic due to the competitive nature of the industry. Thus, changes in gasoline tax rates in Sweden are usually passed through fully to the consumers (Andersson, 2019). This implies that consumers bear the entire burden in the case of a tax increase but reap all the benefits in the case of a tax reduction.

Using Denmark as a Counterfactual

The problem is that existing price elasticity estimates – computed using historical price data – do not capture the temporary supply restrictions in the context of the war in Ukraine or the supply and demand shocks from the Covid-19 pandemic. In the lack of reliable estimates of current price elasticities, we revert to analysing the tax incidence using a quasi-experimental and empirical approach. This requires a counterfactual – a comparison unit that captures the evolution of gasoline prices in Sweden had the tax cut never been implemented. Denmark is well suited for this purpose given that it is geographically close, socio-economically comparable, and has similar levels of gasoline tax rates as Sweden. More importantly, Denmark has not made any recent fuel tax rates changes.

Figure 1. Gasoline pump price in 2022

Figure 1. Gasoline pump price in 2022

Source: Gasoline prices in Sweden and Denmark are provided by CirkleK (2022). Daily exchange rates are provided by Riksbanken (2022).

Figure 1 shows that the gasoline price in Sweden and Denmark track each other closely, displaying parallel trends in the time period leading up to the announcement of the tax cut on March 14. This reassures us that Denmark is a credible comparison unit for Sweden. Gasoline prices start diverging in the interim period of around 7 weeks between the announcement and the implementation of the policy. The fact that the gasoline price in Sweden is slightly higher during this period than in Denmark provides some speculative evidence that suppliers in Sweden intentionally raised prices in anticipation of the tax cut, allowing them to capture parts of the benefit. As soon as the tax cut enters into effect, the gasoline price is notably lower in Sweden compared to Denmark, although prices continue to rise until June.

Figure 2. Gap plot of price difference

Figure 2. Gap plot of price difference

Note: The figure plots the difference between the Swedish and Danish gasoline prices from Figure 1.

It can be observed graphically from the gap plot in Figure 2 that most of the tax cut of 1.81 SEK was immediately passed through to Swedish consumers on May 1. Furthermore, there are no obvious signs of the effect wearing off over time; the pass-through rate remains fairly constant over the three months following the tax cut.

In order to obtain estimates of the pass-through rate, we run a simple difference-in-differences regression – comparing the average difference in gasoline price between Sweden and Denmark both before and after the tax cut. The price reduction after the introduction of the tax holiday is estimated at -1.89 SEK per litre compared to the price level before the introduction. This estimate is statistically significant and indicates a pass-through rate slightly above 100 percent. But since the price development in the interim period raises concerns about strategic price setting, it appears more appropriate to use the price level before the announcement as a baseline. By doing that, we find a relative reduction in the Swedish gasoline price of -1.82 SEK per litre, matching the size of the tax cut almost exactly, with a pass-through rate of 101 percent.

The Estimated Pass-through Rate Is Biased

Our finding is in line with recent work on the German counterpart – known as the “Tankrabatt“. On June 1st 2022, the German Government lowered taxes on fuels for a duration of three months, amounting to a total tax relief of around 35 cent for gasoline and 17 cent for diesel, respectively. A number of studies find a full or close to full pass-through rate from the Tankrabatt, with estimates ranging between 85 and 102 percent (Fuest et al., 2022; Dovern et al., 2022; Montag and Schnitzer, 2022). Analogous to our approach, these studies rely on a comparison with a counterfactual unit, either France or a weighted average of Germany’s neighbouring countries.

Yet, by focusing on the pass-through rate at the national level only, we risk not capturing the full tax incidence. The supply of gasoline is more inelastic at the EU level than at the national level. As Sweden cuts the tax on gasoline, the after-tax price falls and this leads to an increase in demand; supply adjusts as more gasoline comes in from neighbouring countries. At the aggregate level however, supply is more constrained, so the tax cut in Sweden results in a marginal increase in gasoline prices across countries in the EU. This marginal increase in prices amplifies as more countries implement their own tax cuts. Indeed, Sweden and Germany are not the only countries to have implemented tax cuts in response to increasing oil prices, but are part of a larger group of countries to have done so, including Belgium, Italy and Poland (Sgaravatti, Tagliapietra, and Zachmann, 2022).

The spill-over effect from the tax cuts onto gasoline prices in “untreated” countries has two important implications for our analysis. First, our estimated pass-through rate to consumers in Sweden is biased upwards. The gasoline price development in Denmark can only act as a credible counterfactual for that in Sweden in the absence of the tax cut provided that it is not affected by the tax cut itself. But this condition is not fulfilled as the tax cuts employed in Sweden and elsewhere can be suspected to have led the gasoline price in Denmark to increase more than it would have otherwise. Estimates of pass-through rates near 100 percent thus appear overstated and consumers likely benefit less from the tax relief in reality. Second, the benefit to consumers in countries that implement gasoline tax cuts comes at the expense of consumers in countries without such measures in place. An analysis of tax incidence at the national level may find that most of the benefit from the tax cut is captured by consumers, whereas an analysis at the EU level as a whole would instead find that a much larger share of the benefit is actually captured by the supply side – in and outside of Sweden. This demonstrates that the national incidence of the tax cut is different from an international one.

The Swedish Tax Cut Benefits Producers and Richer Households

The prevalence of spill-over effects makes it difficult to conduct causal inference analysis and estimate the true effect of transport fuel tax cuts empirically. Still, the previously outlined theoretical framework on tax incidence can help provide valuable insights. As discussed, gasoline demand is much more inelastic than supply in normal times, so we could expect the tax cut to be passed through to consumers at fairly high rates. However, gasoline supply today is likely more inelastic than usual in light of the repercussions from the economic fallout of the Covid-19 pandemic and the Russian invasion of Ukraine: with oil companies unable to ramp up production in the short term because of underinvestment into existing and new fields during the pandemic (Ashraf et al., 2022). In Europe, Russia accounts for more than 20 percent of the oil supply but production in Russia has gone down since the launch of the war in Ukraine. Many European companies had started to engage in self-sanctioning by cutting ties with the Russian energy sector even before the European Council agreed to embargo most oil imports from Russia by the end of the year 2022 (Adolfsen et al., 2022). Furthermore, the refining industry is facing capacity constraints due to shutdowns that took place in the course of the Covid-19 pandemic as well as high prices for gas powering its operations. All of these factors together illustrate why gasoline supply at the EU level has become more inelastic in the past weeks and months. As a consequence, the relative elasticity of gasoline supply and demand is distorted towards benefitting the producers more than usual. Hence, we can infer from economic theory that not all of the benefit from the gasoline tax cut went to Swedish consumers, but that producers in Sweden and abroad captured some of it.

Apart from this, the tax cut does not benefit all households equally. Among the 20 percent of households with the lowest disposable income in Sweden, only about half have a direct expenditure on transport fuel. But among the 20 percent of richest households, around 95 percent have positive transport fuel expenditures (Statistics Sweden, 2020). A cut in transport fuel tax rates therefore disproportionately benefits high-income households in Sweden.

Finally, it is important to keep in mind that the transport fuel tax cuts employed in various countries do not come without a price tag – they represent a cost to the state budget and ultimately its citizens in the form of foregone tax revenues. In the case of Sweden, this amounts to 6.2 billion SEK in 2022, or around $60 per person (Swedish Government, 2022; Ministry of Finance, 2022). A broader evaluation of the welfare effect of the tax cut needs to take into consideration what the tax revenue would have been spent on had the tax cut not been implemented.

Conclusion

In mid-August, a report published by Konjunkturinstitutet (National Institute of Economic Research) stirred up the public debate on the gasoline tax holiday in Sweden. According to their report, considering what they call a notification and a pick-up effect (Konjunkturinstitutet, 2022), only 62 percent of the tax reduction on gasoline was passed on to Swedish consumers. The authors claim that sellers of gasoline exploited their market power through charging higher prices in the weeks leading up to the introduction of the tax reduction – the notification effect – and again shortly after the introduction – the pick-up effect. In this policy brief, we obtain a considerably higher estimate of the pass through rate of around 100 percent. In addition, we only find evidence for a weak notification effect and do not share the view that a pick-up effect has taken place.  Even though our studies have in common that we consider Denmark as a counterfactual, we see several advantages in our empirical methodology that may explain the different results: The data we use for both Sweden and Denmark come from the same gasoline company, which improves the comparability of prices. The time period we study after the tax cut covers three months instead of only one, and our finding is robust to the inclusion of a time trend, whereas the main results in the report by Konjunkturinstitutet (2022) rely heavily on the addition of such variable in their model.

What we would like to emphasise in the present case is that any methodology based on counterfactuals is prone to bias. If you shift the level of analysis from a single country in isolation to the whole of the European Union, it becomes clear that the Swedish gasoline tax cut brings about a marginal increase in gasoline prices outside of Sweden. This is why our estimates are likely biased upwards, revealing a flaw in both this study and the report by Konjunkturinstitutet (2022). In order to pin down the true pass-through rate to a precise number, a more comprehensive analysis is needed, although this may prove difficult. Without reliable empirical results, we should trust economic theory until now. The conclusions we can already draw are the following:

  • Firstly, some of the benefits from the tax reduction is passed through to Swedish consumers but a full pass-through is an overstatement. It is important to note that even if gasoline companies only capture a small percentage of the benefit, this can still amount to large profits in absolute terms.
  • Secondly, the gain from the tax reduction in Sweden produces losses for consumers in countries that have not lowered their tax rates.
  • Thirdly, the policy favours high-income groups as the gains are not distributed equally among consumers within Sweden.
  • Lastly, the corresponding loss in government revenue could potentially reduce welfare where expenditure is cut.

At the bottom line, the above economic reasoning suggests that the pass-through of the gasoline tax reduction to Swedish consumers is limited. And while we arrive at a similar conclusion as the report by Konjunkturinstitutet (2022), we follow a different line of argument. In our view, the reason for the imperfect pass-through to consumers does not necessarily lie exclusively in strategic price setting on the part of gasoline companies, but in the dynamics of the global market.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Hedging EU’s “Winter Risk” by Curbing Gas Demand: Solidarity, Nudge, and Market Solutions

Posted on July 27, 2022 | Policy Brief

20220727 Hedging EU Winter Risk 01

The concern of Russian gas supply disruption and its implications has never been as serious. Experts agree that supply-side measures would not be enough to cover the shortage. Demand cuts are needed. The EC has just proposed a solidarity-based plan of 15% gas demand reduction across the EU Member states. However, getting all EU countries to commit to this plan has been challenging due to asymmetries in their exposure to the Russian gas crisis. As a result, the EU approved a compromise plan with numerous exemptions. This brief argues that market-based solutions may improve participation incentives helping the EU to coordinate decreasing gas demand.  Nudging energy consumers to lower their demand may be an efficient complementary solution. All member states should adopt this latter strategy now, as it takes time to trigger behavior changes in energy consumption. Acting now should strengthen resilience in the coming winter.

Background

Since the beginning of the conflict between Ukraine and Russia, both politicians and analysts have expressed concerns about cuts in Russian gas supply and their implications for the European economy. These concerns have only deepened as the crisis has unfolded. First, Russia stopped gas deliveries to five EU member states in April 2022 following their refusal to pay for gas in rubles. Then, Gazprom cut the capacity of the NordStream pipeline, initially by 40% and then by another 20% in June 2022, claiming technical problems originating from sanctions (i.e., a sanction-driven late return of a gas turbine repaired in Canada).

Gazprom’s July 18th announcement of its inability to deliver contracted gas amounts due to “force majeure” further added to the concern. Meanwhile the EU has dismissed the alleged technical failure stressing political reasons. According to EC President Ursula von der Leyen, the delivery stop reflects a “use of energy as a weapon”.
The panic somewhat settled on July 21, 2022, when Russian gas shipments via Nord Stream resumed at 40% of its original capacity, i.e., the mid-June level. However, Gazprom just announced another cut to 20% of the original capacity from July 27th. Overall, Russian gas exports to the EU are unprecedently low, see Figure 1.

Figure 1. Russian gas exports 2021 vs. 2022

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Source: McWilliams, B., G. Sgaravatti, G. Zachmann (2021) ‘European natural gas imports’, Bruegel Dataset, based on Entsog

Whether Russian gas supplies are likely to be stopped completely in a very close future is unclear. In similar vein, the IEA Executive Director, Dr Fatih Birol, warns that “…it would be unwise to exclude the possibility that Russia could decide to forgo the revenue it gets from exporting gas to Europe in order to gain political leverage”. Regardless of this risk, large-scale adjustments are necessary even under the more optimistic scenario with Russian gas supplies kept at the current level.

The most direct way to tackle the shortage of Russian gas is from the supply side. It can be done via three main channels: diversification of gas suppliers, replacement by alternative fuels, or use of storage. Multiple sources have studied these options extensively (see, e.g., SITE (2022) for an overview of earlier assessments, as well as Di Bella et al. (2022) for more recent estimates and a literature overview). Despite different shortage estimates across reports, experts agree that supply adjustment will not be enough to compensate for ‘the missing Russian gas. This suggests that curbing demand will be a substantial part of gas crisis management.

Most of the demand-linked measures decided by the EU member states have been to counteract the sky-rocking gas prices and subsidize gas consumption by setting a price cap or providing an energy check (see von der Fehr et al. 2022 for an overview). While such measures may protect consumers against increased energy bills in the short run, they foster energy consumption rather than curb it. However, on July 20th, the European Commission issued a plan for the EU nations to cut their gas consumption by 15% between August 2022 and March 2023. This move is part of a wider EU strategy to respond to the gas crisis by pushing for a solidarity mechanism between the member states, including pooling (i.e., sharing) of economic losses. While the targets in this plan would be voluntary, the restrictions could become binding in an emergency. The main demand restrictions would apply to the industrial consumers, but countries are also expected to facilitate households’ demand adjustments. This plan faced resistance from a range of EU Member states, claiming unfairness of 15% cut for their countries, or objecting binding demand cuts for their countries. The resulting compromise agreement, accepted by the EU states on July 26th, incorporated numerous exemptions for both countries and industries.

This brief focuses on the current options in the EU to curb energy demand. We discuss the feasibility of a solidarity mechanism in this context and offer economic mechanisms that may improve its functionality. We also stress the important policy features in incentivizing consumer response.

Solidarity Rule and Market Mechanism

Solidarity and coordination between Member states constitute a crucial part of EU’s response to the current gas crisis. Implementing these rules would limit the direct (gas shortage) and indirect (price-driven) shocks through, e.g., mutual backing-up and buyer power (see, e.g., Le Coq and Paltseva, 2012, 2022 or IEA, 2022).

The solidarity approach was discussed long before the current gas crisis, at least since 2006 (EC, 2006). However, its implementation has proven challenging because of the energy-related asymmetries between Member states in terms of import dependency, diversification of suppliers, energy portfolio, etc. These asymmetries undermine a “one size fits all” policy approach and make some countries consistently benefit more from solidarity mechanisms than others. The solidarity mechanism may also create moral hazard problems (Le Coq and Paltseva, 2008). As a result, the EU could never fully adopt a common energy policy approach.

The recent EU call to cut energy demand by 15% is subject to the same shortcomings. The EU countries are unequally affected by the current gas crisis due to differences in their exposure to Russian gas, access to storage or alternative fuels, gas transportation bottlenecks, etc. These differences undermine countries’ willingness to coordinate as witnessed by Portugal’s and Spain’s explicit opposition to the call on the ground that their energy reduction would be unfair given their energy portfolio with almost no Russian gas. Poland, whose gas storage is full, and Hungary, whose government imposed an export ban on gas earlier in July, have also objected the deal.

There are several ways to improve coordination: one could provide part-taking incentives via a monetary transfer scheme, incorporate demand-side energy cuts into a larger political agenda so that the (asymmetric) losses in one area are compensated by gains in another one (Le Coq and Paltseva, 2008). However, both solutions are likely unfeasible in the current, relatively short-run context, as they require the collection of large volumes of information to determine the correct transfer size. Additionally, the incentives for EU countries to correctly report such details might be low. One can also design a mutual support scheme with country-specific participation requirements/exemptions. This solution, while also informationally demanding, may be easier to achieve. It is likely to improve participation incentives, but the effects of solidarity may be weaker than under a plan without exemptions.

The EU decided to follow this latter route: On July 26th, the EU managed to reach an agreement on a softer plan with multiple exemptions from the 15% cut, accounting for countries’ energy market asymmetries (as well as much more demanding procedure to make the demand cut binding). While this agreement is definitely a step forward, it is currently uncertain whether it would be sufficient to meet the gas demand challenges in the coming winter.

A number of market solutions can potentially improve on the situation. For example, one could establish a market for energy demand reduction quotas in line with the cap-and-trade program designed for CO2 emissions. Alternatively, an emergency gas auction (like the one discussed in Germany for industrial firms) could allow gas savings to be offered in an auction. The winning, cheapest bid would get a market-price level compensation. Of course, such market mechanisms are likely to imply (at least some) consumers will face surging gas prices, but this appears inevitable in view of the difficulties to implement rationing mechanisms to cope with the reduced gas supply.

Market solutions could also be implemented at member state level. However, such an implementation would likely limit solidarity between member states and increase the costs associated with reduced gas consumption. Indeed, purely national solutions (almost by definition) lack solidarity mechanisms between member states and in addition inhibit that the gas reductions take place where they are the least costly.

Nudging and Information Campaign

Given the gas crisis and implementation frictions, the EU should benefit from complementing the regulatory and market solutions (mainly targeting the industry) by incentivizing the demand-cutting behavior of private consumers. There are many ways to trigger behavioral change, from changing legislation to nudging consumers to persuade them to lower their gas (and energy) consumption. Some nudging policies have been successful in the past. One example is Japan’s “setsuden” (electricity-saving) campaign, run after the 2011 Fukushima nuclear plant disaster. It started as an unofficial movement and continued into regulatory restrictions for large firms and voluntary but highly encouraged household targets. The information campaign stressed how close the country was to blackout and successfully prevented blackouts.

In the current crisis the EU states’ policies towards consumers were concentrating on shielding them from high energy prices (see von der Fehr et al, 2022 for an overview). Nudging and energy-saving information campaigns in the EU are yet to gain momentum. Some of the larger EU members are leading the movement. For example, in France, the president called for an immediate “energy sobriety” on the last National Day. Businesses and public buildings were asked to switch off the light at night and anticipate a lower winter heating consumption. While fines for infringement are under discussion, the French government is hoping for a nudging effect. Similarly, Germany has started an intense information campaign to convince individuals to reduce their electricity consumption by taking fewer showers and turning down the air conditioning. However, much broader, intensive energy-saving campaigning is urgently needed to lower energy demand effectively.

Several results from the experimental economic literature motivate such campaigns. The first point concerns the usefulness of nudging in the energy context. The evidence on the effect of incentivizing consumers’ energy saving behavior via monetary or non-monetary interventions is mixed (see Andor and Fels, 2018 and Lingyun Mi et al., 2022 for an overview). However, a recent meta-study combining the results from 112 field trials between 1976 and 2021 (Lingyun Mi et al., 2022) supports the effectiveness of non-monetary incentives (such as nudging by providing information or offering social comparisons) in creating energy-saving behavior. Moreover, it finds that non-monetary incentives are also more effective and longer lasting in promoting energy conservation than the monetary ones. One possible reason for this finding is that non-monetary incentives may affect individual’s values and their intrinsic motivation to save energy. This result implies that information campaigns, target-setting, and providing social comparisons can be an effective and relatively cost-efficient way to lower energy demand.

The second question concerns the timing of such intervention. Again, while there is no clear-cut evidence concerning the long-term impact of nudging, some literature documents effects lasting months and even years after the intervention stopped (Andor and Fels, 2018 overview a few such studies). Further, the same meta-study by Lingyun Mi et al., 2022 found that interventions lasting 1–6 months were the most effective. A combination of antecedent (before actual behavior, such as goal setting) and consequence (when the incentives to act are affected by the results of the action) nudge-based interventions produced the best energy-saving effect. These findings suggest that campaigns should start now to be ready for the winter 2022-23 season.

Last but not least, there is evidence that energy conservation goal-setting is effective only when the goals are realistic. For example, in Harding and Hsiaw (2014), a moderate energy saving goal set by a household led to a sizable consumption reduction, and the effect lasted for one and a half years. With more ambitious goals the initial strong response quickly vanished. Finally, there is no consumption adjustment pattern with unrealistically high goals. One possible, even if somewhat stretched, interpretation of these results could be that a drastic change in consumption may be more challenging to incentivize through nudging than a series of more minor adjustments. This consideration provides another rationale for the early start of nudging policies, suggesting a meager initial consumption reduction, and gradually increasing the threshold.

Conclusion

Cutbacks in gas consumption are essential to surviving the EU energy crisis, especially in case of a complete Russian gas halt. The EC has recently proposed a plan for the EU nations to decrease their gas consumption by 15% between August 2022 and March 2023. This plan is included in a wider solidarity approach to EU energy crisis management. However, approval of this plan by the EU nations faced difficulties due to asymmetries in exposure to Russian gas across EU member states and the resulting unwillingness to share the costs of the crisis. The resulting compromise plan features multiple exemptions from the 15% rule. Market solutions, such as trade in demand reduction quotas, may help to improve EU coordination on demand reduction. Another essential component of crisis management is the EU-wide nudging of private consumers encouraging energy saving behavior. Based on historical examples and the experimental literature such nudge-based policy may be effective and cost-efficient if started now.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Energy and Climate Crisis Facing Europe: How to Strike the Right Balance

Posted on May 24, 2022 | Policy Brief

20220524 The Energy and Climate Crisis Image 01

Policymakers in Europe are currently faced with the difficult task of reducing our reliance on Russian oil and gas without worsening the situation for firms and households that are struggling with high energy prices. The two options available are either to substitute fossil fuel imports from Russia with imports from other countries and cut energy tax rates to reduce the impacts on firms and household budgets, or to reduce our reliance on fossil fuels entirely by investing heavily in low-carbon energy production. In this policy brief, we argue that policymakers need to also take the climate crisis into account, and avoid making short-term decisions that risk making the low-carbon transition more challenging. The current energy crisis and the climate crisis cannot be treated as two separate issues, as the decisions made today will impact future energy and climate policies. To exemplify how large-scale energy policy reforms may have long-term consequences, we look at historical examples from France, the UK, and Germany, and the lessons we can learn to help guide us in the current situation.

The war in Ukraine and the subsequent sanctions against Russia have led to a sharp increase in energy prices in the EU since the end of February 2022. This price increase came after a year when global energy prices had already surged. For instance, import prices for energy more than doubled in the EU during 2021 due to an unusually cold winter and hot summer, as well as the global economic recovery following the pandemic and multiple supply chain issues. Figure 1 shows that the price of natural gas traded in the European Union has increased steadily since the summer of 2021, with a strong hike in March 2022 following the beginning of the war.

Figure 1. Evolution of EU gas prices, July 2021-May 2022

Source: https://tradingeconomics.com/commodity/eu-natural-gas

Concerns about energy dependency, towards Russian gas in particular, are now high on national and EU political agendas. An embargo on imports of Russian oil and gas into the EU is currently discussed, but European governments are worried about the effects on domestic energy prices, and the economic impact and social unrest that could follow. Multiple economic analyses argue, however, that the economic effect in the EU of an embargo on Russian oil and gas would be far from catastrophic, with estimated reductions in GDP ranging from 1.2-2.2 percent. But a reduction in the supply of fossil fuels from Russia would need to be compensated with energy from other sources, and possibly supplemented with demand reductions.

In parallel, on April 4th, the Intergovernmental Panel on Climate Change (IPCC) released a new report on climate change. One chapter analyses different energy scenarios, and finds that all scenarios that are compatible with keeping the global temperature increase below 2°C involve a strong decrease in the use of all fossil fuels (Dhakal et al, 2022). This reduction in fossil fuel usage over the coming decades is illustrated in red in Figure 2.

It is thus important that, while EU countries try to decrease their dependency on Russian fossil fuels and cushion the effect of energy-related price increases, they also accelerate the transition to a low-carbon economy. And how they manage to balance these short- and long-run objectives will depend on the energy policy decisions they make. For instance, if policymakers substitute Russian oil and gas with increased coal usage and new import terminals for LNG, this can lead to a “carbon lock in” and make the low-carbon transition more challenging.  In this policy brief, we analyze what lessons can be drawn from past historical events that lead to large-scale structural changes in energy policy. Events that all shaped our current energy systems and conditions for climate policy.

Figure 2. Four energy scenarios compatible with a 2°C temperature increase by 2100.

Source: IPCC sixth assessment report on Mitigation of Climate Change, chapter 3, p23

Structural Changes in Energy Policy in France, the UK, and Germany

We focus on three “energy policy turning points” triggered by three geopolitical, political or environmental crises: the French nuclear plan triggered by the 1973 oil crisis; the UK early closure of coal mines and the subsequent dash for gas in the 1990s, influenced by the election of Margaret Thatcher in 1979; and the German nuclear phase-out triggered by the 2011 Fukushima catastrophe.

In response to the global oil price shock of 1973, France adopted the “Messmer plan”. The aim was to rapidly transition the country away from dependence on imported oil by building enough nuclear capacity to meet all the country’s electricity needs. Two slogans summarised its goals: “all electric, all nuclear”, and “in France, we may not have oil, but we have ideas” (Hecht 2009). The first commissioned plants came online in 1980, and between 1979-1988 the number of reactors in operation in France increased from 16 to 55. As a consequence, the share of nuclear power in the total electricity production rose from 8 to 80 percent, while the share of fossil fuels fell from 65 to 8 percent.

Figure 3. French electricity mix

Source: Data on electricity and heat production in France is provided by the IEA (2022).

In the UK, the election of Margaret Thatcher in 1979 opened the way for large market-based reform of the energy sector. Thatcher’s plan to close dozens of coal pits triggered a year-long coal miners’ strike in 1984-85. The ruling Conservative party eventually won against the miners’ unions and the coal industry was deeply restructured, with a decrease in domestic employment – not without social costs (Aragon et al, 2018) – and an increase in coal imports. At the same time, the electricity market’s liberalization in the 1990s facilitated the development of gas infrastructure. As an indirect and unintended consequence, when climate change became a prominent issue at the global level in the 2000s, there was no strong pro-coal coalition left in the UK (Rentier et al, 2019). Aided by a portfolio of policies making coal-fired electricity more expensive – a carbon tax in particular – the coal phase-out was relatively easy and fast (Wilson and Staffel, 2018, Leroutier 2022): between 2012 and 2020, the share of coal in the electricity production dropped from 40 to 2 percent.

In 2011, the Fukushima nuclear catastrophe in Japan triggered an early and unexpected phase-out of nuclear energy in Germany. The 2011 “Energiewende” (energy transition) mandated a phase-out of nuclear power plants by 2022, while including provisions to reduce the share of fossil fuel from over 80 percent in 2011 to 20 percent in 2050. The share of nuclear energy in the electricity production in Germany was halved in a decade, from 22 percent in 2010 to 11 percent in 2020. At the same time, the share of renewable energy increased from 13 to 36 percent, and that of natural gas from 14 to 17 percent.

In these three examples, climate objectives were never the main driver of the decision. Nevertheless, in the case of France and the UK, the crisis resulted in an energy sector that is arguably more low-carbon than it would have been without the crisis. Although the German nuclear phase-out was accompanied by large subsidies to renewable energies, its effect on the energy transition is ambiguous: some argue that the reduction in nuclear electricity production was primarily offset by an increase in coal-fired production (Jarvis et al, 2022).

The three crises also had different consequences in terms of dependence on fossil fuel imports. The French nuclear plan resulted in an arguably lower energy dependency on imported fossil fuels. The closure of coal mines in the UK had ambiguous effects on energy security, with an increase in coal imports and the use of domestic gas from the North Sea. Finally, Germany’s nuclear phase-out, combined with the objective of phasing out coal, has been associated with an increase in the use of fossil fuels from Russia: gas imports remained stable between 2011 and 2020, but the share coming from Russia increased by 60 percent over the period. In 2020, Russia stood for 66 percent of German gas imports (Source: Eurostat). Which brings us back to the current war in Ukraine.

The Current Crisis is Different

The context in which the current energy crisis is unfolding is different from the three above-mentioned events in two important ways.

First, scientific evidence on the relationship between fossil fuel use, CO2 emissions and climate damages has never been clearer: we know quite precisely where the planet is heading if we do not drastically reduce fossil fuel use in the coming decade. From recent research in economics, we also know that price signals work and that increased prices on fossil fuels result in lower demand and emission reductions (Andersson 2019; Colmer et al. 2020; Leroutier 2022). High fuel prices can also have long-term impacts on consumption patterns: US commuters that came of driving age during the oil prices of the 70s, when gasoline prices were high, still drive less today (Severen and van Benthem, 2022). The other way around, low fossil fuel prices have the potential to lock in energy-intensive production: plants that open when electricity and fossil fuel prices are low have been found to consume more energy throughout their lifetime, regardless of current prices (Hawkins-Pierot and Wagner, 2022).

Second, alternatives to fossil fuels have never been cheaper. It is most obvious in the case of electricity production, where technological progress and economies of scale have led to a sharp decrease in the cost of renewable compared to fossil fuel technologies. As shown in Figure 4, between 2010 and 2020 the cost of producing electricity from solar PV has decreased by 85 percent and that of producing electricity from wind by 68 percent. From being the most expensive technologies in 2010, solar PV and wind are now the cheapest. Given the intermittency of these technologies, managing the transition to renewables requires developing electricity storage technologies. Here too, prices are expected to decrease: total installed costs for battery electricity storage systems could decrease by 50 to 60 percent by 2030 according to the International Renewable Agency.

Finding alternatives to fossil fuels has historically been more challenging in the transport sector. However, recent reductions in battery costs, and an increase in the variety of electric vehicles available to customers, have led to EVs taking market share away from gasoline and diesel-powered cars in Europe and elsewhere. The costs of the battery packs that go into electric vehicles have fallen, on average, by 89 percent in real terms from 2010 to 2021.

Figure 4. Evolution of the Mean Levelised Cost of Energy by Technology in the US

Source: Lazard

Options for Policy-Makers

Faced with a strong increase in fossil fuel prices and an incentive to reduce our reliance on oil and gas from Russia, policy-makers have two options: increase the availability and decrease the price of low-carbon substitutes – by, for example, building more renewable energy capacity and subsidizing electric vehicles – or cut taxes on fossil fuels and increase their supply, both domestically and from other countries.

Governments have pursued both options so far. On the one hand, the Netherlands, the UK, and Italy announced an expansion of wind capacities compared to what was planned, in an attempt to reduce their dependence on Russian gas, and France ended gas heaters subsidies. On the other hand, half of EU member states have cut fuel taxes for a total cost of €9 billion by the end of March 2022, the UK plans to expand oil and gas drilling in the North Sea, and Italy might re-open coal-fired plants.

To guide policymakers faced with the current energy crisis, there are valuable lessons to draw from the experiences of energy policy reform in France, the UK and Germany. France’s push for nuclear energy in the 1970s shows that large-scale structural reform of electricity and heat production is possible and may lead to large drops in CO2 emissions and an economy less dependent on domestic or foreign supplies of fossil fuels. A similar “Messmer plan” could be implemented in the EU today, with the goal of replacing power plants using coal and natural gas with large-scale solar PV parks, wind farms and batteries for storage. Similarly, the German experience shows the potential danger of implementing a policy to alleviate one concern – the risk of nuclear accidents – with the consequence of facing a different concern later on – the dependence on fossil fuel imports.

One additional challenge is that the current energy crisis calls for a short-term response, while investments in low-carbon technologies made today will only deliver in a few years. Short-term energy demand reduction policies can help, on top of long-term energy efficiency measures. For example, a 1°C decrease in the temperature of buildings heated with gas would decrease gas use by 10 billion cubic meters a year in Europe, that is, 7 percent of imports from Russia. Similarly, demand-side policies could reduce oil demand by 6 percent in four months, according to the International Energy Agency.

Ending the reliance on Russian fossil fuels and alleviating energy costs for firms and households is clearly an important objective for policymakers. However, by signing new long-term supply agreements for natural gas and cutting energy taxes, policymakers in the EU may create a carbon lock-in and increase fossil fuel usage by households, thereby making the inevitable low-carbon transition even more difficult. The solutions thus need to take the looming climate crisis into account. For example, any tax relief or increased domestic fossil fuel generation should have a clear time limit; more generally, all policies decided today should be evaluated in terms of their contribution to domestic and European climate objectives. In this way, the current energy crisis is not only a challenge but also a historic opportunity to accelerate the low-carbon transition.

References

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Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.