Over the last two years, the world has experienced a global energy crisis, with surging oil, coal, and natural gas prices. For European households, this translates into higher gasoline and diesel prices at the pump as well as increased electricity and heating costs. The increase in energy related costs began in 2021, as the world economy struggled with supply chain disruptions caused by the Covid-19 pandemic, and intensified as Russia launched a full-scale invasion of Ukraine in late February 2022. In response, European governments have implemented a variety of energy tax cuts (Sgaravatti et al., 2023), with a particular focus on reducing the consumer cost of transport fuel. This policy paper aims to contextualize current transport fuel prices in Europe by addressing two related questions: Are households today paying more for gasoline and diesel than in the past? And should policymakers respond by changing transport fuel tax rates? The analysis will focus on case studies from Sweden, Georgia, and Latvia, countries that vary in economic development, energy independence, reliance on Russian oil, transport infrastructure, and transport fuel tax rates. Through this study, we aim to paint a nuanced picture of the implications of rising fuel prices on household budgets and provide policy guidance.
Record High Gasoline Prices, Historically Cheap to Drive
Sweden has a long history of using excise taxes on transport fuel as a means to raise revenue for the government and to correct for environmental externalities. As early as in 1924, Sweden introduced an energy tax on gasoline. Later, in 1991, this tax was complemented by a carbon tax levied on the carbon content of transport fuels. On top of this, Sweden extended the coverage of its value-added tax (VAT) to include transport fuels in 1990. The VAT rate of 25 percent is applied to all components of the consumer price of gasoline: the production cost, producer margin, and excise taxes (energy and carbon taxes).
In May 2022, the Swedish government reduced the tax rate on transport fuels by 1.80 SEK per liter (0.16 EUR). This reduction was unprecedented. Since 1960, there have only been three instances of nominal tax rate reductions on gasoline in Sweden, each by marginal amounts in the range of 0.04 to 0.22 SEK per liter. Prior to the tax cut, the combined rate of the energy and carbon tax was 6.82 SEK per liter of gasoline. Adding the VAT that is applied on these taxes, amounting to 1.71 SEK, yields a total excise tax component of 8.53 SEK. This amount is fixed in the short run and does not vary with oil price changes.
Figure 1. Gasoline Pump Price, 2000-2023.
Source: Drivkraft Sverige (2023).
Figure 1 shows the monthly average real price of gasoline in Sweden from January 2000 to October 2023. The price has slowly increased over the last 20 years and has been historically high in the last year and a half. Going back even further, the price is higher today than at any point since 1960. Swedish households have thus lately been paying more for one liter of gasoline than ever before.
However, a narrow focus on the price at the pump does not take into consideration other factors that affect the cost of personal transportation for households.
First, the average fuel efficiency of the vehicle fleet has improved over time. New vehicles sold in Sweden today can drive 50 percent further on one liter of gasoline compared to new vehicles sold in 2000. Arguably, what consumers care about the most is not the cost of gasoline per se but the cost of driving a certain distance, as the utility one derives from a car is the distance one can travel. Accounting for vehicles’ fuel efficiency improvement over time, we find that even though it is still comparatively expensive to drive today, the current price level no longer constitutes a historical peak. In fact, the cost of driving 100 km was as high, or higher, in the 2000-2008 period (see Figure 2).
Figure 2. Gasoline Expenditure per 100 km.
Source: Trafikverket (2023) and Drivkraft Sverige (2023).
Second, any discussion of the cost of personal transportation for households should also factor in changes in household income over time. The Swedish average real hourly wage has increased by more than thirty percent between 2000-2023. As such, the cost of driving 100 km, measured as a share of household income, has steadily declined over time. Further, this pattern is consistent across the income distribution; for instance, the cost trajectory for the bottom decile is similar to that of all wage earners (as illustrated in Figure 3). In 1991, when the carbon tax was implemented, the average household had to spend around two thirds of an hour’s wage to drive 100 km. By 2020, that same household only had to spend one third of an hour’s wage to drive the same distance. There has been an increase in the cost of driving over the last two years, but in relation to income, it is still cheaper today to drive a certain distance compared to any year before 2013.
Figure 3. Cost of Driving as a Share of Income, 1991-2023.
Source: Statistics Sweden (2023).
Taken all together, we see that on the expenditure side, vehicles use fuel more efficiently over time and on the income side, households earn higher wages. Based on this, we can conclude that the cost of travelling a certain distance by car is not historically high today.
Response From Policymakers
It is, however, of little comfort for households to know that it was more expensive to drive their car – as a share of income – 10 or 20 years ago. We argue that what ultimately matters for households is the short run change in cost, and the speed of this change. If the cost rises too fast, households cannot adjust their expenditure pattern quickly enough and thus feel that the price increase is unaffordable. In fact, the change in the gasoline price at the pump has been unusually rapid over the last two years. Since the beginning of 2021, until the peak in June 2022, the (nominal) pump price rose by around 60 percent.
So, should policymakers respond to the rapid price increase by lowering gasoline taxes? The perhaps surprising answer is that lowering existing gasoline tax rates would be counter-productive in the medium and long run. Since excise taxes are fixed and do not vary with the oil price, they reduce the volatility of the pump price by cushioning fluctuations in the market price of crude oil. The total excise tax component including VAT constitutes more than half of the pump price in Sweden, a level that is similar across most European countries. This stands in stark contrast with the US, where excise taxes make up around 15 percent of the consumer price of gasoline. As a consequence, a doubling of the price of crude oil only increases the consumer price of gasoline in Sweden by around 35 percent, while it increases by about 80 percent in the US. Households across Sweden, Europe, and the US have adapted to the different levels of gasoline tax rates by purchasing vehicles with different levels of fuel efficiency. New light-duty vehicles sold in Europe are on average 45 percent more fuel-efficient compared to the same vehicle category sold in the US (IEA 2021). As such, US households do not necessarily benefit from lower gasoline taxation in terms of household expenditure on transport fuel. They are also more vulnerable to rapid increases in the price of crude oil. Having high gasoline tax rates thus reduces – rather than increases – the short run welfare impact on households. Hence, policymakers should resist the temptation to lower gasoline tax rates during the current energy crisis. With imposed tax cuts, households will, in the medium and long run, buy vehicles with higher fuel consumption and thus become more exposed to price surges in the future – again compelling policymakers to adjust tax rates, creating a downward spiral. Instead, alternative measures should be considered to alleviate the effects of the heavy price pressure on low-income households – for instance, revenue recycling of the carbon tax revenue and increased subsidies of public transport.
To reach environmental and climate goals, Sweden urgently needs to phase out the use of fossil fuels in the transport sector – Sweden’s largest source of carbon dioxide emissions. This is exactly what a gradual increase of the tax rate on gasoline and diesel would achieve. At the same time, it would benefit consumers by shielding them from the adverse effects of future oil price volatility.
The most common response from policymakers regarding fuel tax rates however goes in the opposite direction. In Sweden, the excise tax on gasoline and diesel was reduced by 1.80 SEK per liter in 2022 and the current government plans to further reduce the price by easing the biofuel mandate. Similar tax cuts have been implemented in a range of European countries. Therefore, the distinguishing factor in the current situation lies in the exceptional responses from policymakers, rather than in the gasoline costs that households are encountering.
Gasoline Price Swings and Their Consequences for Georgian Consumers
The energy crisis that begun in 2021 has also made its mark on Georgia, where the operational expenses of personal vehicles, encompassing not only gasoline costs but also maintenance expenses, account for more than 8 percent of the consumer price index. The rise in gasoline prices sparked public protest and certain opposition parties proposed an excise tax cut to mitigate the gasoline price surge. In Georgia, gasoline taxes include excise taxes and VAT. Until January 1, 2017, the excise tax was 250 GEL per ton (9 cents/liter), it has since increased to 500 GEL (18 cents/liter). Despite protests and the suggested excise tax reduction, the Georgian government chose not to implement any tax cuts. Instead, it initiated consultations with major oil importers to explore potential avenues for reducing the overall prices. Following this, the Georgian National Competition Agency (GNCA) launched an inquiry into the fuel market for motor vehicles, concluding a manipulation of retail prices for gasoline existed (Georgian National Competition Agency, 2023).
The objective of this part of the policy paper is to address two interconnected questions. Firstly, are Georgian households affected by gasoline price increases? And secondly, if they are, is there a need for government intervention to mitigate the negative impact on household budgets caused by the rise in gasoline prices?
The Gasoline Market in Georgia
Georgia’s heavy reliance on gasoline imports is a notable aspect of the country’s energy landscape. The country satisfies 100 percent of its gasoline needs with imports and 99 percent of the fuel imported is earmarked for the road vehicle transport sector. Although Georgia sources its gasoline from a diverse group of countries, with nearly twenty nations contributing to its annual gasoline imports, the supply predominantly originates from a select few markets: Bulgaria, Romania, and Russia. In the last decade, these markets have almost yearly accounted for over 80 percent of Georgia’s total gasoline imports. Furthermore, Russia’s share has substantially increased in recent years, amounting to almost 75 percent of all gasoline imports in 2023. The primary reason behind Russia’s increased dominance in Georgia’s gasoline imports is the competitive pricing of Russian gasoline, which between January and August in 2023 was almost 50 percent cheaper than Bulgarian gasoline and 35 percent cheaper than Romanian gasoline (National Statistics Office of Georgia, 2023). Given the dominance of Russian gasoline in Georgia, the end-user (retail) prices of gasoline in Georgia, are closer to gasoline prices in Russia than EU gasoline prices (see Figure 1).
Figure 1. End-user Gasoline Prices in Georgia, Russia and the EU, 2013-2022.
Source: International Energy Agency, 2023.
However, while the gasoline prices increased steadily in 2020-2022 in Russia, gasoline prices in Georgia increased sharply in the same period. This more closely replicated the EU price dynamics rather than the Russian one. The sharp price increase in gasoline raised concerns from the Georgian National Competition Agency (GNCA). According to the GNCA one possible reason behind the sharp increase in gasoline prices in Georgia could be anti-competitive behaviour among the five major companies within the gasoline market. Accordingly, the GNCA investigated the behaviour of major market players during the first eight months of 2022, finding violations of the Competition Law of Georgia. Although the companies had imported and were offering consumers different and significantly cheaper transport fuels compared to fuels of European origin, their retail pricing policies were identical and the differences in product costs were not properly reflected in the retail price level. GNCA claims the market players coordinated their actions, which could have led to increased gasoline prices in Georgia (National Competition Agency of Georgia. (2023).
Given that increased gasoline prices might lead to increased household expenditures for fuel, it is important to assess the potential impact of recent price developments on household’s budgets.
Exploring Gasoline Price Impacts
Using data from the Georgian Households Incomes and Expenditures Survey (National Statistics Office of Georgia, 2023), weekly household expenditures on gasoline and corresponding weekly incomes were computed. To evaluate the potential impact of rising gasoline prices on households, the ratio of household expenditures on gasoline to household income was used. The ratios were calculated for all households, grouped in three income groups (the bottom 10 percent, the top 10 percent and those in between), over the past decade (see Figure 2).
Figure 2. Expenditure on Gasoline as Share of Income for Different Income Groups in Georgia, 2013-2022.
Source: National Statistics Office of Georgia, 2023.
Figure 2 shows that between 2013 and 2022, average households allocated 9-14 percent of their weekly income to gasoline purchases. There is no discernible increase in the ratio following the energy crisis in 2021-2022.
Considering the different income groups, the upper 10 percent income group experienced a slightly greater impact from the recent rise in gasoline prices (the ratio increased), compared to the overall population. For the lower income group, which experienced a rise in the proportion of fuel costs relative to total income from 2016 to 2021, the rate declined between 2021 and 2022. Despite the decline in the ratio for the lower-level income group, it is noteworthy that the share of gasoline expenditure in the household budget has consistently been high throughout the decade, compared to the overall population and the higher-level income group.
The slightly greater impact from the rise in gasoline prices for the upper 10 percent income group is driven by a 4 percent increase in nominal disposable income, paired with an 8 percent decline in the quantity of gasoline (Figure 3) in response to the 22 percent gasoline price increase. Clearly, for this income group, the increase in disposable income was not enough to offset the increase in the price of gasoline, increasing the ratio as indicated above.
For the lower 10 percent income group, there was a 23 percent increase in nominal disposable income, paired with a 9 percent decline in the quantity of purchased gasoline (Figure 3) in response to the 22 percent gasoline price increase . Thus, for this group, the increase in disposable income weakened the potential negative impact of increased prices, eventually lowering the ratio.
Figure 3. Average Gasoline Quantities Purchased, by Household Groups, per Week (In Liters) 2013-2022.
Source: National Statistics Office of Georgia, 2023.
The Georgian energy market is currently fully dependent on imports, predominantly from Russia. While sharp increases in petrol prices have been observed during the last 2-3 years, they do not seem to have significantly impacted Georgian households’ demand for gasoline. Noteworthy, the lack of impact from gasoline price increases on Georgian households’ budgets, as seen in the calculated ratio (depicted in Figure 2), can be explained by the significant rise in Georgia’s imports from the cheap Russian market during the energy crisis years. Additionally, according to the Household Incomes and Expenditures survey, there was in 2022 an annual increase in disposable income for households that purchased gasoline. However, the data also show that low-income households spend a high proportion of their income on gasoline.
Although increased prices did not significantly affect Georgian households, the extremely high import dependency and the lack of import markets diversification poses a threat to Georgia’s energy security and general economic stability. Economic dependency on Russia is dangerous as Russia traditionally uses economic relations as a lever for putting political pressure on independent economies. Therefore, expanding trade and deepening economic ties with Russia should be seen as risky. Additionally, the Russian economy has, due to war and sanctions, already contracted by 2.1 percent in 2022 and further declines are expected (Commersant, 2023).
Prioritizing actions such as diversifying the import market to find relatively cheap suppliers (other than Russia), closely monitoring the domestic market to ensure that competition law is not violated and market players do not abuse their power, and embracing green, energy-efficient technologies can positively affect Georgia’s energy security and positively impact sustainable development more broadly.
Fueling Concerns: The True Cost of Transportation in Latvia
In May 2020, as the Latvian Covid-19 crisis began, Latvia’s gasoline price was 0.99 EUR per liter. By June 2022, amid the economic effects from Russia’s war on Ukraine, the price had soared to a record high 2.09 EUR per liter, sparking public and political debate on the fairness of fuel prices and potential policy actions.
While gas station prices are salient, there are several other more hidden factors that affect the real cost of transportation in Latvia. This part of the policy paper sheds light on such costs by looking at some of its key indicators. First, we consider the historical price of transport fuel in Latvia. Second, we consider the cost of fuel in relationship to average wages and the fuel type composition of the vehicle fleet in Latvia.
The Price of Fuel in Latvia
Latvia’s nominal retail prices for gasoline (green line) and diesel (orange line) largely mirror each other, though gasoline prices are slightly higher, in part due to a higher excise duty (see Figure 1). These local fuel prices closely follow the international oil market prices, as illustrated by the grey line representing nominal Brent oil prices per barrel.
The excise duty rate has been relatively stable in the past, demonstrating that it has not been a major factor in fuel price swings. A potential reduction to the EU required minimum excise duty level will likely have a limited effect on retail prices. Back of the envelope calculations show that lowering the diesel excise duty from the current 0.414 EUR per liter to EU’s minimum requirement of 0.33 EUR per liter could result in approximately a 5 percent drop in retail prices (currently, 1.71 EUR per liter). This at the cost of a budget income reduction of 0.6 percent, arguably a costly policy choice.
In response to recent years’ price increase, the Latvian government opted to temporarily relax environmental restrictions, making the addition of a bio component to diesel and gasoline (0.065 and 0.095 liters per 1 liter respectively) non-mandatory for fuel retailers between 1st of June 2022 until the end of 2023. The expectation was that this measure would lead to a reduction in retail prices by approximately 10 eurocents. To this date, we are unaware of any publicly available statistical analysis that verifies whether the relaxed restriction have had the anticipated effect.
Figure 1. Nominal Retail Fuel Prices and Excise Duties for Gasoline and Diesel in Latvia (in EUR/Liter), and Nominal Brent Crude Oil Prices (in EUR/Barrel), January 2005 to August 2023.
The True Cost of Transportation
Comparing fuel retail prices to average net monthly earnings gives insight about the true cost of transportation in terms of purchasing power. Figure 2 displays the nominal net monthly average wage in Latvia from January 2005 to June 2023 (grey line). During this time period the average worker saw a five-fold nominal wage increase, from 228 EUR to 1128 EUR monthly. The real growth was two-fold, i.e., the inflation adjusted June 2023 wage, in 2005 prices, was 525 EUR.
Considering fuel’s share of the wages; one liter of gasoline amounted to 0.3 percent of an average monthly wage in 2005, as compared to 0.12 percent in 2023, with diesel displaying a similar pattern. Thus, despite recent years’ fuel price increase, the two-fold increase in purchasing power during the same time period implies that current fuel prices may not be as alarming for Latvian households as they initially appeared to be.
Figure 2. Average Nominal Monthly Net Wages in Latvia and Nominal Prices of One Liter of Gasoline and Diesel as Shares of Such Wages (in EUR), January 2005 to June 2023.
Another factor to consider is the impact of technological advancements on fuel efficiency over time. The idea is simple: due to technological improvements to combustion engines, the amount of fuel required to drive 100 kilometers has decreased over time, which translates to a lower cost for traveling additional kilometers today. An EU average indicator shows that the fuel efficiency of newly sold cars improved from 7 liters to 6 liters per 100 km, respectively, in 2005 and 2019. While we lack precise data on the average fuel efficiency of all private vehicles in Latvia, we can make an informed argument in relation to the technological advancement claim by examining proxy indicators such as the type of fuel used and the average age of vehicles.
Figure 3 shows a notable change in the fuel type composition of the vehicle fleet in Latvia. Note that the decrease in the number of cars in 2011 is mainly due to a statistical correction for unused cars. At the start of the 21st century, 92 percent of Latvian vehicles were gasoline-powered and 8 percent were diesel-powered. By 2023, these proportions had shifted to 28 percent for gasoline and 68 percent for diesel. Diesel engines are more fuel efficient, usually consuming 20-35 percent less fuel than gasoline engines when travelling the same distance. Although diesel engines are generally pricier than their gasoline counterparts, they offer a cost advantage for every kilometer driven, easing the impact of rising fuel prices. A notable drawback of diesel engines however, is their lower environmental efficiency – highlighted following the 2015 emission scandal. In part due to the scandal, the diesel vehicles growth rate have dropped over the past five years in Latvia.
Figure 3. Number of Private Vehicles by Fuel Type and the Average Age of Private Vehicles in Latvia, 2001 to 2023.
Figure 3 also shows that Latvia’s average vehicle age increased from 14 years in 2011 to 15.1 years in 2023. This is similar to the overall EU trend, although EU cars are around 12 years old, on average. This means that, in Latvia, the average car in 2011 and 2023 were manufactured in 1997 and 2008, respectively. One would expect that engines from 2008 have better technical characteristics compared to those from 1997. Recent economic research show that prior to 2005, improvements in fuel efficiency for new cars sold in the EU was largely counterbalanced by increased engine power, enhanced consumer amenities and improved acceleration performance (Hu and Chen, 2016). I.e., cars became heavier, larger, and more powerful, leading to higher fuel consumption. However, after 2005, cars’ net fuel efficiency started to improve. As sold cars in Latvia are typically 10-12 year old vehicles from Western European countries, Latvia will gradually absorb a more fuel-efficient vehicle fleet.
The increase of purchasing power, a shift to more efficient fuel types and improvements in engine efficiency have all contributed to a reduction of the overall real cost of transportation over time in Latvia. The recent rise in fuel prices to historically high levels is thus less concerning than it initially appears. Moreover, a growing share of cars will not be directly affected by fuel price fluctuations in the future. Modern electric vehicles constitute only 0.5 percent of all cars in Latvia today, however, they so far account for 10 percent of all newly registered cars in 2023, with an upward sloping trend.
Still, politicians are often concerned about the unequal effects of fuel price fluctuations on individuals. Different car owners experience varied effects, especially when considering factors like income and location, influencing transportation supply and demand.
First, Latvia ranks as one of the EU’s least motorized countries, only ahead of Romania, with 404 cars per 1000 inhabitants in 2021. This lower rate of vehicle ownership is likely influenced by the country’s relatively low GDP per capita (73 percent of the EU average in 2022) and a high population concentration in its capital city, Riga (32 of the population lives in Riga city and 46 percent in the Riga metropolitcan area). In Riga, a developed public transport system reduces the necessity for personal vehicles. Conversely, areas with limited public transport options, such as rural and smaller urban areas, exhibit a higher demand for personal transportation as there are no substitution options and the average distance travelled is higher than in urban areas. Thus, car owners in these areas tend to be more susceptible to the impact of fuel price volatility.
Second, Latvia has a high Gini coefficient compared to other EU countries, indicating significant income inequality (note that the Gini coefficient measures income inequality within a population, with 0 representing perfect equality and 1 indicating maximum inequality. In 2022, the EU average was 29.6 while Latvia’s Gini coefficient was 34.3, the third highest in the EU). With disparities in purchasing power, price hikes tend to disproportionately burden those with lower incomes, making fuel more costly relative to their monthly wages.
These income and location factors suggest that inhabitants in rural areas are likely the most affected by recent price hikes. Distributional effects across geography (rural vs urban) are often neglected in public discourse, as the income dimension is more visible. But both geography and income factors should be accounted for in a prioritized state support, should such be deemed necessary.
- Commersant. (2023). Economic dependence on Russia is growing rapidly – reasons and risks. Commersant.
- Drivkraft Sverige. (2023). Drivkraft Sverige: Data Set. drivkraftsverige.se/statistik/priser/bensin/
- Hu, K. and Chen, Y. (2016). Technological growth of fuel efficiency in European automobile market 1975–2015. Energy Policy, 98, pp.142-148.
- IEA. (2021). Fuel Consumption of Cars and Vans. Tracking Report. International Energy Agency.
- International Energy Agency. (2023). End-Use Prices Data Explorer. https://www.iea.org/data-and-statistics/data-tools/end-use-prices-data-explorer?tab=Overview
- National Competition Agency of Georgia. (2023). Regarding the investigation carried out in accordance with the order of the Chairman of the National Competition Agency of Georgia dated August 16, 2022 N04/165.
- National Statistics Office of Georgia. (2023). External Trade Portal. Retrieved from https://ex-trade.geostat.ge/en
- National Statistics Office of Georgia. (2023). Households Incomes and Expenditures Survey. https://www.geostat.ge/en/modules/categories/128/databases-of-2009-2016-integrated-household-survey-and-2017-households-income-and-expenditure-survey
- Sgaravatti, G., Tagliapietra, S., & Zachmann, G. (2022). National policies to shield consumers from rising energy prices. Bruegel Datasets.
- Statistics Sweden. (2023). Average hourly wage statistics. http://www.statistikdatabasen.scb.se
- Trafikverket. (2023). Vägtrafikens utsläpp 2022. Technical report. Swedish Transport Administration.
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.
In the wake of Russia’s full-scale invasion of Ukraine, large parts of Europe have experienced skyrocketing energy prices and a threat of power shortages. The need to transition to low-carbon energy systems, driven by sustainability concerns, further adds to the pressure put on the European energy infrastructure. This year’s Energy Talk, organized by Stockholm Institute of Transition Economics, invited four experts to discuss the opportunities and challenges of energy infrastructure resilience in a foreseeable future.
Energy infrastructure has an indispensable role in facilitating the functioning of modern society, and it must – today as well as in the future – be resilient enough to withstand various challenges. One of the most important challenges – the green transition: shifting towards economically sustainable growth by decarbonizing energy systems and steering away from fossil fuels – requires energy infrastructure to absorb subsequent shocks. Another, and preeminent challenge, is that, even when directly targeted and partly destroyed as in the ongoing Russian war on Ukraine, energy infrastructure should be withstanding. Additionally, energy infrastructure is increasingly subject to supply chain disruptions, energy costs increase or network congestions. How does our energy infrastructure react to these challenges? How do they affect its ability to facilitate the needs of the green transition? Which regulations/measures should be implemented to facilitate energy infrastructure resilience?
Stockholm Institute of Transition Economics (SITE) invited four speakers to the 2023 annual Energy Talk to discuss the future of Europe’s Energy infrastructure resilience. This brief summarizes the main points from the presentations and discussions.
Energy System Resilience in the Baltics
Ewa Lazarczyk, Associate Professor at Reykjavik University, addressed the question of energy system resilience, focusing on the Baltic States and their dependence on Russia and other neighbors to fulfill their electricity needs.
The Baltic States are not self-sufficient when it comes to electricity consumption. Since 2009, Lithuania has become a net importer of electricity, relying on external sources to fulfill its electricity demand. Similarly, Estonia experienced a shift towards becoming a net importer of electricity around 2019, following the closure of environmentally detrimental oil fueled power plants.
The Baltics are integrated with the Nordic market and are heavily dependent on electricity imports from Finland and Sweden. Additionally, all three Baltic States are part of the BRELL network – a grid linking the electricity systems of Belarus, Russia, Estonia, Latvia, and Lithuania – which provides stability for their electrical networks. As a result, despite the absence of commercial electricity trading between Estonia and Russia, and limited commercial trading between Russia and the other two Baltic states, the power flows between the Baltic States and Russia and Belarus still exist. This creates a noticeable dependency of the Baltics on Russia, and a potential threat, should Russia decide to disconnect the Baltics from BRELL before the planned separation in 2024/2025.
This dependency was put on trial when Russia on May 15th 2022 cut its electricity trade with Europe. On the one hand, the system proved to be relatively resilient as the cut did not lead to any blackouts in the Baltics. On the other hand, price volatility amplified in its main import partner countries, Sweden and Finland, and congestion increased as compared to 2021.
Figure 1. Price volatility in Sweden and Finland before and after the trade cut.
This increased price volatility and congestion following the Russian halt in electricity trade gives an indication that the Baltics and the Nordics are vulnerable to relatively small supply cuts even at the current demand levels.
In the future, electricity consumption is however expected to increase throughout the region as a result of the electrification of the economy (e.g., by 65 percent in 2050 in the Nordic region). This highlights the need to speed up investments into energy infrastructure of internal energy markets.
In summary; recent events have demonstrated a remarkable resilience of the Baltic State’s electricity system. While the disruption of commercial flows from Russia did have some impact on the region, overall, the outcome was positive. Nonetheless, it is important to note that the region relies heavily on electricity imports, and with increasing demand for power in both the Baltics and the neighboring areas, potential issues with supply security could arise if the demand in the Nordics cannot be met through increased production. The risk of an early disconnection from the BRELL network further amplifies this concern. However, the case of Ukraine – which managed to abruptly disconnect from Russian electricity networks – serves as an example that expediting the process of establishing new connections is feasible, although not risk free.
The Ukrainian Energy Sector and the Immediate Threat from Russia
While the Baltics are facing the effects from the Russian halt in electricity trade and the threat of a potential premature disconnection from BRELL, Ukraine’s energy networks are at the same time experiencing the direct aggression from Russia.
Yuliya Markuts, Head of the Center of Public Finance and Governance at the Kyiv School of Economics (KSE), and Igor Piddubnyi, Analyst on Energy Sector Damages and Losses and Researcher at the Center for Food and Land Use Research at KSE, both gave insight into the tremendous damages to the Ukrainian energy system from Russian attacks, the short-term solutions to cope with the damage, as well as the long-term implications and reconstruction perspectives.
Since the invasion, about 50 percent of the energy infrastructure has been damaged by shelling. In addition, several power plants are under Russian control or located in Russian occupied territories. As of February 2023, nearly 16 GW of installed capacities of power plants remained in Russian control, equivalent of the peak demand. Apart from the damages to the producing side, transmission and distribution facilities have also been severely affected, as well as oil storage facilities. In April 2023, the damages to Ukraine’s energy infrastructure were estimated to amount to $8.3 billion, almost 6 percent of the total estimated direct damages from the war.
While the damages are massive, the population did not experience complete blackouts, and the Ukrainian energy system did not collapse. This is partly due to diesel-driven generators substituting much of the damaged electricity generation and partly due to a fall in demand of about 30-35 percent in 2022, mainly driven by decreased industry demand.
In the short term, Ukraine is likely to continue to face Russian attacks. Its top energy priorities would thus be to restore damaged facilities and infrastructure like heating and clean water, increase the stocks of fuel, gas, and coal, and to try to liberate occupied areas and facilities. Another vital aspect of the Ukrainian energy infrastructure and its resilience towards the Russian goal of “freezing” the country relates to energy efficiency. Ukraine’s energy efficiency has been relatively low, with the highest rate of electricity losses in Europe, and the numbers are also high for gas supply and district heating. Here, minor changes such as light bulb switching, can have great impacts. Additionally, solar panels – especially those that can also store energy – can help alleviate the acute pressure on the transmission grid. Other vital measures involve continued donations from Ukraine’s partners, sustained efforts from energy workers – at the risk of their lives – and persistent successful deterrence of cyber-attacks currently targeting the country.
Achieving a greener energy system is currently challenging (if not nearly impossible) due to the use of diesel-driven generators, the attacks on the energy system, and the fight for control over nuclear power plants such as Zaporizhzhia, which since March 2022 is under the control of Russian forces. Damages to renewable energy production further exacerbate these difficulties.
Thus, it is crucial to ensure that the planning and reconstruction of Ukraine’s energy sector is done in accordance with the European Green Deal. By 2030, the country should have at least 25 percent renewables in its energy mix, which would require substantial installations of at least 13 GW of wind, solar, small hydro and biogas capacities. In addition, transition entails decommissioning old coal power plants to run on natural or biogas instead of coal.
While this is a tall task, investments targeted to the energy system are not only essential for Ukraine’s population to sustain through the 2023/2024 winter – but also to facilitate the green transition in Europe. The potential for export of biomethane, green hydrogen, and nuclear power from Ukraine to Europe is considerable. As Europe’s biofuel demand is expected to increase by 63 percent while Ukrainian grain exports are still proving to be challenging, biofuel production for export on the European market is a particularly likely future scenario for the Ukrainian energy market.
In summary; the Ukrainian energy sector has done remarkably well, considering the impact of the damages from the Russian aggression. As Ukrainian short-term energy priorities lie in facilitating quick and efficient responses to infrastructural damages, current measures may not be particularly environmentally friendly. However, the longer-term reconstruction of Ukraine’s energy sector has great potential for being in line with the green transition objectives.
Energy System’s Resilience in the Green Transition
Mikael Toll, Senior Advisor at Ramboll Management Consulting highlighted the importance of infrastructure resilience. He emphasized the significance of the Energy Trilemma in achieving a successful transition to greener energy systems. This trilemma implies balancing between energy security, environmental sustainability, and affordability, all representing societal goals. Focusing on the energy security aspect of this trilemma, he stressed that energy infrastructure should be part of a more holistic approach to the problem. It is essential to establish resilient supply chains and implement efficient management procedures to prevent and mitigate the negative consequences of disruptions. It entails ensuring the performant infrastructure and supply, but also fostering well-functioning markets, putting in place state-governed crisis management mechanisms, and cooperation with other states. By combining these elements, one can enhance preparedness both in normal times and during crises.
Sweden as an Example
Sweden has since long been increasing its share of renewables in the energy mix, as depicted in Figure 2. This suggests that it is relatively well-prepared to the needs of the green transition. However, electricity demand is expected to increase by 100 percent in the coming years, driven by increased electrification of the industry and transport sectors, adding pressure to Sweden’s electricity system. The need for more investments in several energy systems is tangible, and investment opportunities are numerous. However, political decisions concerning the energy system in Sweden tend to be short-sighted, even though energy infrastructures have a long lifespan – often well over 50 years. As a result, investment risks are often high and change character over time, which creates a lack of infrastructure investment. Other challenges to Sweden’s energy resilience include limited acceptance of new energy infrastructure among the public, time-consuming approval processes, and a lack of thorough impact assessment.
Figure 2. Total supplied energy in Sweden, 1970-2020.
Further, the current geopolitical context creates an increased need to consider external threats – such as energy system disruptions resulting from the Russian war on Ukraine – and increased dependency on China as a key supplier of metals and batteries required for electrification. It is also important to realize that external influence may affect not only physical infrastructure but also domestic decision-making processes. This calls for more energy and political security alongside the green transition, in combination with higher readiness against security threats and a reassessment of global value chains.
In summary; to successfully move into a greener future, it is necessary to invest in energy systems and infrastructure based on a careful multi-dimensional analysis and with the support of long-sighted political decisions. At the same time, we must push investments that also consider the security threats from and dependencies on global actors.
This year’s Energy Talk provided an opportunity to hear from leading experts on the current situation of Europe’s energy resilience. It outlined the key challenges of the green transition in the current geopolitical and economic context. Greener solutions for Europe’s energy system will require tremendous physical efforts and investments but also political will and public understanding. There are, however, immense benefits to be realized if the associated risks are not overlooked.
On behalf of the Stockholm Institute of Transition Economics, we would like to thank Ewa Lazarczyk, Yuliya Markuts, Igor Piddubnyi and Mikael Toll for participating in this year’s Energy Talk. The presentations from the webinar can be seen here.
- Swedish Energy Agency. (2022). Energy in Sweden 2022 – an overview. https://energimyndigheten.a-w2m.se/Home.mvc?ResourceId=208766
- Lazarczyk, E. and Le Coq, C. (2023). Power coming from Russia and Baltic Sea Region’s energy security. REPORT 2023:940. Energiforsk.
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.
Throughout 2022, the reduction in Russian gas imports to the EU and the resilience of European energy markets have been subject of significant public discourse and policy-making. Of particular concern has been the EU’s ability to maintain its environmental goals, as substitution from Russian pipeline gas to liquified natural gas and other fuels such as coal, could result in increased emissions. This brief aims to reevaluate the consequences from the loss of Russian gas and the EU’s response to it on greenhouse gas emissions in the region. Our analysis suggests that the energy crisis did not result in a rise in emissions in 2022. While some of the factors that contributed to this outcome – such as a mild winter – may have been coincidental, the adjustments caused by the 2022 gas squeeze are likely to support rather than jeopardize the EU’s green transition.
Energy markets in Europe experienced a tumultuous 2022, with the Russian squeeze on natural gas exported to the region bringing a major shock to its energy supply. Much attention has been devoted to the effects of the succeeding spiking and highly fluctuating energy prices on households’ budget and on the production sector, with numerous policy initiatives aimed at mitigating these effects (see, e.g., Reuters or Sgaravatti et al., 2021). Another widely discussed concern has revolved the consequences of the gas crisis – such as switching to coal – on the EU’s climate policy objectives (see e.g. Bloomberg or Financial Times). In this brief, we analyze and discuss to what extent this concern turned out to be valid, now that 2022 has come to an end.
We consider greenhouse gas (GHG) emissions stemming from the main strategies that allowed the EU to weather the gas crisis throughout 2022 – namely the substitution from Russian gas to other energy sources. These strategies include increased imports of liquified natural gas (LNG), a lower gas demand, and an increased reliance on coal, oil, and other energy sources. We also discuss the implications of the crisis for climate mitigation in the EU and try to draw lessons for the future.
Substitution to LNG and Pipeline Gas from Other Suppliers
Prior to 2022, Russian natural gas largely reached Europe by pipeline (92.4 percent in 2021 according to Eurostat). More than half of these pipeline imports, 86 billion cubic meters (bcm), were lost during the 2022 Russian gas supply squeeze, predominantly through the shut-down of both the Yamal and the Nordstream pipelines. 57 percent of this “missing” supply was met through an increase in LNG imports from several countries, the largest contributor being the U.S. Another 27 percent of the “missing Russian gas” was substituted by an increase in pipeline gas imports from other suppliers, with the UK (20 percent) and Norway (7 percent) taking the lead. A substantial part of the replaced gas was stored, rather than combusted. With this in mind, here we concentrate on the upstream emissions associated with this change – i.e., emissions that occurred during the extraction, processing, and transportation. The change in the combustion emissions is postponed to the next section.
There is an ongoing debate in the literature on whether the greenhouse gas pollution intensity of LNG is higher or lower than that of gas delivered through pipelines – prior to final use. In comparison to pipeline gas, LNG is associated with emissions resulting from energy-intensive liquefaction and regassification processes in upstream operations as well as with fuel combustion from transportation on ocean tankers. For both LNG and pipeline gas it is also crucial to consider fugitive methane emissions, as methane has up to 87 times greater global warming potential than carbon dioxide in the first 20 years after emission, and up to 36 times greater in the first 100 years. One source of methane emissions is leaks from the natural gas industry (both “intentional” and accidental) since methane is the primary component of natural gas. Both LNG and pipeline gas infrastructure are subject to such leaks, and the size and frequency of these leaks during transportation varies greatly depending on the technologies used, age of infrastructure, etc. Further, the risk of these leaks may also be different depending on the technology of gas extraction.
Currently there is limited knowledge about the size of greenhouse gas emissions, including methane emissions resulting from leaks, from specific gas projects. Until recently, most estimates were based partially on self-reported data and partially on “emission factors” data. Modern and more reliable methods, for instance satellite-based measures for methane emissions, suggest that the resulting figures are greatly underestimated (see, e.g., Stern, 2022; IEA; ESA) but the coverage of these new estimates is currently limited.
As a result, there is considerable disagreement in the literature on the emissions arising from Russian pipeline gas imports vs. LNG imports to the EU. For example, Rystad (2022) argues that the average LNG imports to Europe have a CO2 emission intensity that is more than 2.5 times higher than that from pipeline gas from Russia (although they do not explicitly state whether these figures include fugitive methane emissions). On the contrary, Roman-White et al. (2019) suggest that the life-cycle GHG emission intensity of EU LNG imports (from New Orleans) is lower than EU gas imports from Russia (via the Yamal pipeline).
For the purposes of this exercise, we choose to rely on middle-ground estimates by DBI and Sphera, which assess GHG emission intensity along different Russian gas import routes (DBI, 2016) and across different LNG suppliers to the EU (Thinkstep – Sphera, 2020). This allows us to account for substantial heterogeneity across routes.
We also account for the change in upstream emissions associated with the switch from imports of pipeline Russian gas to pipeline gas imports from Norway and the UK. For this, we approximate the GHG emission intensity of the new flows using the estimate suggested by Thinkstep – Sphera (2017).
The results of our assessment are presented in the top three rows of Table 1. They suggest that a substitution from Russian gas imports to LNG imports and pipeline imports from other sources resulted in an increase in upstream GHG emissions by approximately 14 million tons (Mt) of CO2eq. Details on calculations and assumptions are found in the online Appendix.
Table 1. Change in EU GHG emissions resulting from Russian gas squeeze.
The Decline in Gas Demand and the Switch to Other Fuels
A decrease in gas use in the EU constituted another response to the Russian gas squeeze. Gas demand in the EU is estimated to have declined by 10 percent (50 bcm or 500 TWh) in 2022 with respect to 2021 (IEA, 2022). Part of this decline was facilitated by switching from gas to other polluting fuels, such as oil and coal. The extent to which switching occurred however differed across the three main uses of gas; power generation, industrial production, and residential and commercial use. Below we discuss them separately.
At the onset of the 2022 energy crisis, a prevalent expectation was that there would be significant gas-to-coal switching in power generation. However, gas demand for power generation, which accounts for 31.4 percent of the gas demand from EU countries (European Council), increased by only 0.8 percent in 2022 (EMBER, 2022, p.29), implying that there was no direct substitution from gas-fired to coal-fired generation.
One of the reasons to why there was no major switching to coal in spite of the increase in gas prices is that CO2 emissions are priced in the Emissions Trading System (ETS) program, and the average carbon price has been growing recently, reaching an average of around €80/ton in 2022. Given that coal has a higher emission intensity than gas, the carbon price increases the relative cost of coal versus gas for power generators.
Instead, the decline in demand came from industry, residential and commercial use, which together account for nearly 57 percent of the EU’s gas demand (European Council).
For the industry, IEA calculations (2022) suggest a demand drop of 25 bcm, which would correspond to approximately 50 Mt CO2eq. However, half of the industrial gas reduction came from gas to oil switching. Based on our estimates, this switch implies an additional 41 Mt CO2eq emissions, considering both upstream emissions and emissions from use in furnaces (assuming this to be the prevalent use of the oil that substituted gas, see McWilliams et al., 2023). The remaining half of the industrial demand decline resulted from energy-efficiency improvements, lower output, and import of gas-intensive inputs where possible (ibid.). These changes are either neutral in terms of life-cycle emission impact (import increases) or emission-reducing (efficiency improvements and lower output).
Residential and Commercial Use
Residential and commercial use represented the remaining part of the 500 TWh gas demand decline. In this case, lower gas demand is unlikely to imply massive fuel switching to other fossil fuels, simply because of the lack of short-term alternatives. For example, European households use gas mostly for space heating and cooking, and albeit both higher use of coal for home-heating (BBC) and a surge in installations of heat pumps (Bruegel, 2023 and EMBER, 2023) have been reported, the net change in emissions resulting from these two opposite developments is likely relatively minor as compared to other considered sizeable changes.
The Rise of Coal
As observed, there was no direct switch from gas to coal in European power generation. However, coal generation in the EU did increase by 6 percent in 2023 (IEA, 2022), to help close the gap in electricity supply created by the temporary shut-down of nuclear plants in France and the reduced performance of hydro. In our calculations we assume that in a counterfactual world with no Russian gas squeeze, gas-fired electricity would have covered most of the gap that was instead covered by coal. Therefore, we estimate that, as an indirect result of the Russian gas squeeze in 2022, CO2eq emissions increased by 27 Mt, specifically because of the ramp-up in coal generation (see the second section in Table 1).
Gas Shortage and the EU’s Climate Objectives
In recent years, the EU has made substantial progress in climate change mitigation. Despite widely expressed concerns, it achieved its 2020 targets – reducing emission by 20 percent by 2020, from the 1990 level. However, its current target of a 55 percent net GHG emission reduction by 2030, requires average yearly cuts of 134 Mt CO2eq, from the 2021 level. This is an ambitious target: while the emission cut between 2018 and 2019 exceeded this level, the average yearly cut between 2018 and 2021 however fell short (Eurostat).
The question is if the Russian gas squeeze can significantly undermine the EU’s ability to achieve these climate goals?
First, based on our assessment above, the changes prompted by the Russian squeeze – namely a move from pipeline-gas to LNG, a decline in gas demand and an increase in coal and oil use – made 2022 emissions decline by 18 Mt CO2eq. This suggests that the energy shock prompted overall emission-reducing adjustments in the short run. One important question that arises from this is therefore how permanent these adjustments are.
The increased reliance on LNG (and other gas suppliers) is likely to be permanent as a return to imports from Russia is hardly imaginable and as the 2022 surge in LNG imports entailed significant investments and contractual obligations. According to our estimates, overall, this shift is going to cause a relatively modest increase in yearly CO2eq emissions, approximately 10 percent of the needed emission reduction outlined above. Moreover, this is accounting for emissions throughout the EU’s entire supply chain – which is increasingly advocated for, but not currently applied in the typical emission accounting. It is, of course, important to make sure that ongoing LNG investments do not result in “carbon lock-ins”, postponing the green transition.
The decline in gas demand is a welcome development for climate mitigation if it is permanent. Part of the decline, from improved energy efficiency or installation of heat pumps, is indeed permanent. However, European households also responded temporarily (to warmer than usual winter and high gas prices (for instance by reducing their thermostats). Their behavior in the near future will therefore depend on the development of both these variables.
Overall, our assessment is that the Russian gas squeeze did force some adjustments in demand that might translate into a permanent decline in greenhouse gas emissions.
The question however remains of how the shortage of gas can be met in a scenario with higher gas demand due to, for instance, colder winters. In terms of climate objectives, it is of paramount importance that coal-powered generation does not increase (which would happen if, for instance, the price of gas continues to raise due to shortages). In this sense some lessons can be learned from the response to the shortage in electricity supply following the exceptional under-performance of nuclear and hydro in 2022. Wind and solar, which provide the lowest-cost source of new electricity production, in combination with declines in electricity demand, were able to cover 5/6 of the 2022 shortage created by the nuclear and hydro shock (EMBER, 2023), thus relegating coal to a residual contribution. We expect this pattern to emerge also in the future in the presence of other crises. However, we also caution that the lower production of electricity was at least partially caused by the dramatic heatwaves and droughts experienced throughout the summer in Europe. These events are likely to happen more often in the face of climate change. European policy-makers should therefore carefully assess the capacity of the EU energy system to address potentially multiple and frequent shocks with minimal to no-reliance on coal, in a scenario where also reliance on gas needs to be in constant decline given the Russian gas squeeze and unreliability.
Finally, the dramatic circumstances of 2022 led the EU to adopt the REPowerEU plan, which outlines financial and legal measures to, among other things, speed up the development of renewable energy projects and induce energy-saving behavior.
The outlined observations lead us to conclude that the Russian gas squeeze is ultimately unlikely to sizably reduce the chances of the EU reaching its climate goals, suggesting that the 2022 concerns in this regard were somewhat exaggerated. Nonetheless, learning from the costly lessons of the 2022 energy crisis is crucial for efficient policy making in the future.
- BBC. (2022, September 29). Energy prices: Households turning to coal ahead of ‘hard winter’. https://www.bbc.com/news/uk-england-somerset-63072561
- Bloomberg. (2022, July 22). Putin’s War Threatens Europe’s Ambitious Climate Goals. https://www.bloomberg.com/news/articles/2022-07-07/ukraine-invasion-threatens-europe-s-climate-change-goals#xj4y7vzkg
- DBI. (2016). Critical Evaluation of Default Values for the GHG Emissions of the Natural Gas Supply Chain. https://www.dbi-gut.de/emissions.html?file=files/PDFs/Emissionen/Report_english.pdf&cid=5808
- EMBER. (2023). European Electricity Review 2023. https://ember-climate.org/insights/research/european-electricity-review-2023/#supporting-material-downloads
- ESA. (2020). Mapping methane emissions on a global scale. https://www.esa.int/Applications/Observing_the_Earth/Copernicus/Sentinel-5P/Mapping_methane_emissions_on_a_global_scale
- European Commission. (2022). REPowerEU: affordable, secure and sustainable energy for Europé. https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/repowereu-affordable-secure-and-sustainable-energy-europe_en
- European Council. (2023). Infographic – Where does the EU’s gas come from? https://www.consilium.europa.eu/en/infographics/eu-gas-supply/#:~:text=Gas%2520consumption%2520in%
- Eurostat. (2023). https://ec.europa.eu/eurostat/databrowser/view/ENV_AC_AIGG_Q/default/table?lang=en&category=env.env_air.env_air_aa
- Financial Times. (2020, June 20). EU Warns against Fossil Fuel ‘Backsliding’ as Coal Replaces Russian Gas. https://www.ft.com/content/a8b179e2-b565-42b6-bb41-90aea44536e1.
- ICAP. (2023). ICAP Allowance Price Explorer. https://icapcarbonaction.com/en/ets-prices
- IEA. (2020). Global methane emissions from oil and gas. https://www.iea.org/articles/global-methane-emissions-from-oil-and-gas
- IEA. (2022). “How to Avoid Gas Shortages in the European Union in 2023”, https://www.iea.org/reports/how-to-avoid-gas-shortages-in-the-european-union-in-2023
- IEA. (2023). Electricity Market Report 2023. https://www.iea.org/reports/electricity-market-report-2023
- McWilliams, B., Sgaravatti, G. and Zachmann, G. (2021). European natural gas imports. Bruegel Datasets, first published 29 October, available at https://www.bruegel.org/publications/datasets/european-natural-gas-imports/
- McWilliams, B., Tagliapietra, S., Zachmann, G. and Deschuyteneer. T. (2023). Preparing for the next winter: Europe’s gas outlook for 2023. Policy Brief 01/2023, Bruegel. https://www.bruegel.org/policy-brief/european-union-gas-survival-plan-2023
- Reuters. (2023, February 13). Europe’s spend on energy crisis nears 800 billion euros. https://www.reuters.com/business/energy/europes-spend-energy-crisis-nears-800-billion-euros-2023-02-13/
- Roman-White, S., Rai, S., Littlefield, J., Cooney, G. and Skone, T. J. (2019). Life cycle greenhouse gas perspective on exporting liquefied natural gas from the United States: 2019 update. DOE/NETL-2019/2041. National Energy Technology Laboratory. https://www.energy.gov/sites/prod/files/2019/09/f66/2019%20NETL%20LCA-GHG%20Report.pdf
- Rystad. (2022). LNG import boom could drive up European emissions by 35 million tonnes. Rystad Energy.
- Sgaravatti, G., Tagliapietra, S., Trasi, C. and Zachmann, G. (2021). National policies to shield consumers from rising energy prices. Bruegel Datasets. https://www.bruegel.org/dataset/national-policies-shield-consumers-rising-energy-prices
- Thinkstep – Sphera. (2017). Greenhouse Gas Intensity of Natural Gas. http://gasnam.es/wp-content/uploads/2017/11/NGVA-thinkstep_GHG_Intensity_of_NG_Final_Report_v1.0.pdf
- Thinkstep – Sphera. (2020). Life Cycle Emissions of Natural Gas Transported via TurkStream. https://energijabalkana.net/wp-content/uploads/2021/10/ts-Sphera-LCA-TurkStream_Final-Report.pdf
- Stern, J. P. (2022). Measurement, Reporting, and Verification of Methane Emissions from Natural Gas and LNG trade: Creating transparent and credible frameworks, OIES Paper: ET, No. 06, ISBN 978-1-78467-191-4, The Oxford Institute for Energy Studies, Oxford.
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.
Although much smaller than Russian exports of other energy commodities, Russian electricity exports to Europe have been a part of the European electricity systems. There are several connection points between the Russian and EU markets, but the Baltic States are the most exposed to Russian influence in the electricity sector. This brief discusses the Baltics’ dependency on Russian electricity, which currently accounts for 10 percent of the total Baltic electricity consumption. We argue that, while the Baltic states have some resilience (partly due to their connection to the Nordic countries), they are not immune to a complete halt to the Russian electricity trade, at least not in the short run.
The continuing military conflict in Ukraine and cut-offs of Russian gas to Europe are driving energy prices to unprecedented levels and creating concern about energy security all over Europe. The reliance on the Russian gas supply and the consequences of this has been profoundly discussed (for an overview, see e.g., Le Coq and Paltseva, 2022). At the same time, the topic of Russian electricity delivered to the EU has been largely left out of the current conversation.
Russia is exporting electricity directly to Europe, although at a much smaller scale than it has been exporting other energy commodities. There are several transmission connection points between the Russian and EU markets, but the situation of the Baltic States is the most precarious. They consume Russian electricity (about 10 percent of their needs) and their grids are still synchronised with Russia and Belarus. Therefore, they are exposed to some supply disruption and a desynchronization threat from Russia, potentially resulting in high market prices, severe congestion and even blackouts. Because the Baltics are connected to the leading power market in Europe, Nord Pool, any unexpected shocks may have consequences beyond the Baltic region.
Understanding how the Baltic States depend on Russia for their power consumption is an important element of the European energy security debate. This brief discusses the severity of the Baltics’ reliance on Russian electricity. We initially discuss the effect of a sudden halt to the Russian electricity trade in May 2022. We then address the potential consequences of the abrupt exclusion from the Russia-controlled transmission network. Finally, we discuss the future energy mix thought to replace Russian electricity in the Baltics.
The Baltic States’ Exposure to Indirect Imports of Russian Electricity
The Baltics’ exposure is analysed by examining the impact of a sudden stop of imports of Russian electricity to the EU in May 2022, which affected Nord Pool (https://www.nordpoolgroup.com/en/) prices as well as congestion in the Baltic States. This event cannot be qualified as an external shock, required for a rigorous empirical analysis. Nonetheless, it helps us assess the Baltics’ exposure.
On May 15th 2022, Russia broke off its electricity trade with Finland. This event is relevant to consider as Finland is increasingly a primary import source for the Baltic States. Any electricity supply disruption affecting Finland may therefore impact the Baltics’ energy system balance. To assess how the event impacted the Baltic electricity market, we compare the congestion occurrences in 2021 and 2022.
A standard way to assess the misfunctioning of a power market is to look at congestion episodes. The Nord Pool market, to which the Baltic states are connected, has several bidding areas. Prices between zones may differ in case of transmission bottlenecks. When transmission lines are saturated, no more electricity can, in that period, be transported from the cheap to the expensive areas to alleviate prices, referred to as congestion.
In the graphs below, we illustrate the congestion in the Baltics in 2021 as compared to 2022. Looking at the 2021 data for Estonia and Latvia, the countries belonged to the same price area most of the year; some price differences were observed in the summer months, but only 10 percent of the hours within those months were congested. In 2022 the price differences between the two countries grew substantially, since May reaching 20 percent, with more congested hours (Figure 1). In 2022 price differences also increased between Lithuania and Southern Sweden (region SE 4) as depicted in Figure 2.
Figure 1. Congestion between Estonia and Latvia (as percentage of congested hours out of all hours within a given month).
Figure 2. Congestion between Lithuania and Sweden (SE4) (as percentage of congested hours out of all hours within a given month).
Our aim is not to show a causal effect of the withdrawal of Russia from commercial electricity trading with the Baltic States region, but to describe some general, coincidental trends in congestion. Note that the congestion might be a result of the extreme prices observed in the Baltics – on August 17th 2022, prices reached the Nord Pool cap of 4000€/MW, the highest ever level in the region (Lazarczyk Carlson and Le Coq, 2022a).
To conclude, halting the electricity trade between Russia and Finland appears to have had some impact on the congestion in the Baltic States. Still, the consequences were not severe as the Baltics were already curtailing commercial exchanges with Russia and Belarus. Additionally, the Finnish yearly imports from Russia constituted at most 10 percent of the annual Finnish consumption.
The Baltic States’ Exposure to a Desynchronization Threat
The Baltics belong to the Moscow-controlled synchronous electrical power grid, BRELL, which connects power systems of Belarus, Russia, Estonia, Latvia and Lithuania. This grid dependency makes it virtually impossible for the Baltic States to completely stop Russian and Belarussian power from floating into the Baltics´ territory. A desynchronization from the BRELL network is currently not feasible. Although the Baltics have invested heavily in grid extensions and upgrade, the connection to the European grid is scheduled only for 2024/2025. Therefore, even though the Baltic States have been limiting commercial trading with Russia and Belarus on the Nordic electricity market, they are still receiving Russian/Belarusian electricity.
The Baltics’ dependency on the BRELL network creates a potential threat to the Baltic electricity supply security in case Russia should decide to weaponize its electricity supply further and disconnect the Baltic States from the network ahead of the planned exit in 2024/2025 (Lazarczyk Carlson and Le Coq, 2022a). Such premature disconnection could result in severe blackouts, and immediate reactions would be required to keep the system operational. In such scenario, strong support from the Nordic countries via Finland and/or Sweden would be needed. It is however important to keep in mind that a sudden disconnection from BRELL also could harm Kaliningrad – the Russian enclave between Lithuania and Poland, on the shores of the Baltic Sea. Although Russia has invested heavily in expanding Kaliningrad generation capacities and its energy self-sufficiency, it is not clear whether the region is to this day prepared to operate in island mode without the support of the BRELL and neighbouring countries. Up to date, three successful operating exercises in island mode have been conducted in Kaliningrad, the longest lasting for 72 hours. However, the two tests scheduled for 2022 have been cancelled.
The future re-initialization of electricity trading with Russia is uncertain at this point and the role of Russian electricity has diminished over the years. The Baltics are not planning to maintain any transmission connection with Russia and Belarus after synchronising with the European power grid. However, the Finnish standpoint needs to be clarified. If the Finnish-Russian electrical power trade exchange is re-established in the future, Russian electricity might once again flow into the Baltics´ transmission grid as imports from Finland are forecasted to increase in the coming years due to a third interconnector, which should become operational in 2035.
The Baltics’ (Future) Energy Mix Without Russian Electricity
The alternatives to Russian electricity depend on the Baltics’ energy mix and transmission system. In 2021 the demand for electric power in the Baltics was 27 TWh, with Latvia representing 26 percent, Estonia 30 percent, and Lithuania 44 percent of the total demand. Consumption is forecasted to grow by 60-65 percent by 2050, due to the electrification of the economy and increasing needs within industries, housing, transportation, etc. (Nordic Energy Research, 2022).
All Baltic States are today net importers of electricity. The main import sources are Finland and, to a lesser extent, Sweden, which have jointly exported 45 TWh of electric power to the region over the years 2016-2021. Finland is itself a net importer of electricity mainly importing power from Sweden. Until May 2022, Finland’s second import source was Russia.
The Baltics are heavily dependent on fossil fuels in their electricity mix as illustrated in Table 1.
Table 1. Energy mix for electricity production (MW) in the Baltics, 2022.
The region is now trying to limit the use of fossil-fuel energy and expand its green energy potential, as extensively discussed in Lazarczyk Carlson E. and Le Coq C. (2022b). The actual installed capacity for the onshore wind is however insufficient, with 326 MW in Estonia, 87 MW in Latvia, and 671 MW in Lithuania. The current offshore wind’s capacity is non-existent. There are some plans to develop 4.5 GW in Lithuania, 7 GW in Estonia, and 14.5 GW in Latvia by 2050, but this will require substantial investments (European Commission, 2019).
The region also plans to expand solar power production, especially in Latvia and Lithuania, where the current capacity is 14 and 259 MW respectively. There are also plans to expand Latvian hydro production for storage and balancing needs; currently, Latvia has 1588 MW of installed run-of-the-river hydro capacity, the highest among the Baltic States.
Investing in nuclear power is another possibility which is currently being considered. As part of the EU accession process, Lithuania shut down its Ignalina Nuclear Power Plant, the first unit in 2004 and the second in 2009, turning the country from a net exporter into a net importer of electric power (IEA, 2021). A project of replacing the Ignalina Nuclear Power Plant (NPP) by a new Polish-Lithuanian Plant, the Visaginas NPP, was discussed but later abandoned. The Estonian company Fermi Energy, in collaboration with the Swedish firm Vattenfall, are currently looking into small modular reactor (SMR) technology to develop nuclear energy. This project is however in the initial phases of development.
Renewables and nuclear power are credible alternatives to limit fossil-fuel energy usage and dependency on Russian electricity. The alternatives might however not be easily implemented in the short run.
The Baltic States’ dependency on the Russian electricity supply is limited. Nevertheless, discontinuing Russian electricity deliveries is not innocuous for at least two reasons.
First, the Baltics are still part of the BRELL network, so they are still physically dependent on Russia, although they plan to desynchronize from this network in the longer run. However, a sudden desynchronization initiated by Russia may have severe consequences in the short run (e.g. blackouts).
Second, considering the forecasted future increase in the demand for electrical power in the Baltics and the Nordic countries, the Baltics will remain dependent on power imports. Today, the Baltics rely on Finland and Sweden, as all three Baltic States are net electricity importers. To limit any future dependence on Russian/Belarussian electricity, the Baltics plan to sever any transmission connections with Russia and Belarus after desynchronization, thus cutting the potential for future electricity trade with both countries. If, however, the Nordic countries re-establish commercial exchanges with Russia via Finland, it is nevertheless possible that Russian electricity will be flowing in the Baltics transmission system again.
This policy brief is based on a project funded by the Energiforsk research program.
- Benedettini, S. and Stagnaro, C. (2022), Europe’s decoupling of electricity and gas prices: the crisis is temporary, so why do it? https://energypost.eu/europes-decoupling-of-electricity-and-gas-prices-the-crisis-is-temporary-so-should-it-be-done-at-all/
- ENTSO-E Transparency platform. Accessed on the 25th of November 2022 from https://www.entsoe.eu/
- European Comission. (2019). Study on Baltic offshore wind energy cooperation under BEMIP. Final report. ENER/C1/2018-456. June 2019. Accessed on the 12th of November 2022. https://op.europa.eu/lt/publication-detail/-/publication/9590cdee-cd30-11e9-992f-01aa75ed71a1
- IEA. (2021). Lithuania 2021 Energy Policy Review. Accessed on the 12th of November 2022 from https://www.iea.org/reports/lithuania-2021
- Juozaitis J. (2021). The Synchronisation of the Baltic States; Geopolitical Implications on the Baltic Sea Region and Beyond. Energy Highlights. NATO Energy Security Centre of Excellence.
- Le Coq, C. and Paltseva, E. (2022). What does the Gas Crisis Reveal About European Energy Security? FREE Policy Brief, https://freepolicybriefs.org/2022/01/24/gas-crisis-european-energy/
- Lazarczyk Carlson, E. and Le Coq, C. (2022a). The weaponization of electricity: the case of electricity trade between Russia and European Union, IAEE Energy Forum, Fourth Quarter 2022.
- Lazarczyk Carlson, E. and Le Coq, C. (2022b). Power coming for Russia and Baltic Sea region’s energy security, Energiforsk report.
- Nordic Energy Research. (2022). Baltic-Nordic Roadmap for Co-operation on Clean Energy Technologies. Accessed on the 12th of November 2022 from https://www.nordicenergy.org/publications/baltic-nordic-roadmap-for-co-operation-on-clean-energy-technologies/
- Nord Pool. Accessed on the 28th of November from https://www.nordpoolgroup.com/en/
The phasing out of coal is considered a key component of the upcoming energy transition. While environmentally appealing, this measure will have a devastating effect on those working in the coal industry. Using the dissolution of the UK coal industry under Margret Thatcher as a natural experiment, we estimate the long run costs of being displaced as a coal miner. We find that within the first year of displacement, earnings fall by 80-90 percent, relative to the earnings of a carefully matched blue-collar manufacturing worker, while the wages of miners who find alternative employment fall by 40 percent. The losses are persistent and remain significant fifteen years after displacement. Our results are considerably above the estimates provided by other studies in the job displacement literature and may serve as a guide for policy makers when aiming for a just energy transition.
The Coal Mining Industry and Global Warming
According to the recent IPCC report, limiting global warming to 2 degrees Celsius requires a near complete and rapid elimination of coal in the global use of energy. Such a drastic measure is bound to have devastating effects on anybody economically linked to and dependent on the coal industry. Our back-of-the-envelope calculation suggests that the closure of the currently 2300 active industrial coal mines would translate into more than 5 million displaced coal miners. In Figure 1 we plot the spatial distribution of coal mines, indicating the locations of the upcoming displacements globally.
Figure 1. Location of industrial coal mines. The seven biggest producers and exporters of coal are marked in green.
In a new paper (Rud et al., 2022), we estimate the average loss in the earnings of coal miners who have been displaced following one of the most notorious labor disputes of the 20th century: the dissolution of the coal sector in the UK. When Margaret Thatcher came into power many of the mines were unprofitable (Glyn, 1988). Considering the mines to be ripe for closures, the UK government publicly announced the closure of 20 mines in 1984. After additional information on further closures reached the press, the Union of Miners called for a general strike. The strike lasted for nearly a year and ended with a devastating defeat of the miners. From 1985 and onwards, the closure of mines proceeded at such an incredible pace that the dissolution of the UK coal industry is considered the most rapid in the history of the developed world (Beatty and Fothergill, 1996). As shown in Figure 2, the closures resulted in an equally rapid displacement of miners, from 250 000 employed miners in 1975 to less than 50 000 by 1995.
Figure 2. Coal Mining Employment in the UK 1975-2005
The Effects of UK Coal Mine Closures on Miners
At the heart of our empirical analysis is the New Earnings Survey, a longitudinal dataset covering 1 percent of the UK population since 1975. For the period 1979-1995 (marked in gray in Figure 2), among the 25-55 years old and those who were employed by the same mine for at least two consecutive years, we identify 2152 miners who experienced a final separation from a mine. In our baseline specification, these miners are matched to a single manufacturing worker using a large array of observables such as age, gender, hours worked, pre-separation employment and earnings, geographical administrative unit (county), as well as whether their respective wage was determined in a collective agreement. By the nature of the exercise we are unable to match on industry and instead match on detailed occupational information. A variety of other matching procedures suggest our results are robust.
In Figure 3 we plot the estimated differences in the evolution of earnings and wages for four years before, and fifteen years after displacement. The coefficients are estimated conditional on time and individual fixed effects. Due to the normalization of the dependent variable, the estimates should be interpreted as the percentage change relative to pre-displacement values. In Panel A of Figure 3 we show that hourly wages and weekly earnings conditional on employment drop by around 40 percent in the year after displacement and recover only slowly. It should be noted that the losses in earnings conditional on employment are not driven by changes in hours since the two series are close to identical.
In Panel B of Figure 3 we show the effect on earnings taking into account the losses of those who have not been successful in finding alternative employment in another industry. To get to these results we need to make some assumptions since the New Earnings Survey neither includes earnings information on the self-employed, nor on those who are active in the informal sector. Many other studies in the job displacement literature share similar data limitations, so we follow their approach in dealing with these. On the one hand, we assume zero individual earnings for periods without any observed labor earnings in the data, as assumed by Schmieder et al. (2022) and Bertheau et al. (2022). This assumption does not appear too strong since there is some evidence suggesting that ignoring the self-employed only marginally affects the results (Upward and Wright, 2017; Bertheau et al., 2022). On the other hand, we complement our results with an approach inspired by Jacobson (1993) where we keep only individuals who experience positive earnings within four years after displacement. The latter approach provides a more conservative estimate of displacement costs by assuming zero earnings only for individuals who eventually return to work.
Figure 3. The hourly wage and earnings conditional on employment (Panel A), and overall earnings costs of final displacement from a mine (Panel B).
Interpreting all periods of missing information as zeros, we find the initial losses to be around 90 percent of pre-displacement earnings within the first year after separation, while the more conservative estimates are only slightly lower at around 80 percent in the short run. In the long run, the losses are persistent and remain significantly depressed even fifteen years after displacement. Over the fifteen years after displacement these numbers amount to the miners losing on average between 4 to 6 times of their pre-displacement earnings. This implies that miners only receive 40-60 percent of the present discounted counterfactual earnings.
Our estimates are considerably above those provided by studies in the job displacement literature that focus on mass layoffs. Couch and Placzek (2010), for instance, report initial losses to amount to about 25-55 percent, while Schmeider et al. (2022) find initial earnings losses to be around 30-40 percent. Davis and Wachter (2012) estimate the long-run effects based on US data and find the present discounted earnings losses to be on average 1,7 times the workers’ pre-displacement earnings.
The large estimated individual costs to the displaced miners are likely due to a combination of at least two reasons. First, the complete collapse of the sector forces displaced miners to reallocate and search for another job in other industries, and likely other occupations. Since coal mining is a highly specialized occupation, this greatly reduces miners’ ability to transfer the accumulated human capital to another activity (Beatty and Fothergill, 1996; Samuel, 2016). Second, most coal miners are employed in remote and rural areas where mining is often the main employer, something which remains an issue for current miners around the world (see Figure 1). This feature reduces local economies’ capacity to absorb displaced miners after a mine closure and, due to the need to relocate, greatly increases workers’ job searching costs.
While it is important to globally transition away from the excessive use of fossil fuels, we should keep in mind the devastating effects such transition will end up having on some groups. And while coal miners are particularly vulnerable to the upcoming energy transition, the ramifications do not stop there. Individuals employed in industries linked to the coal industry are likely to also be affected by its dissolution. Moreover, individuals employed in industries providing local services, such as retail stores, restaurants and pubs are likely to experience a significant drop in demand. Thus, the impact of coal mine closures on coal dependent communities typically goes far beyond the displacement of miners (Aragon et al., 2018). The closure of mines will lead to spikes in local unemployment, often unregistered (“hidden”), as well as an exodus of the population. Estimating and accounting for these effects is important if we aim to provide a just energy transition for all.
Attempts have been made to foster economic recovery of affected communities. Regeneration policies have included re-training of local workers, support of small and medium-sized businesses, and investments in local infrastructure, among others. However, their success has been limited and former mining communities remain among the poorest in the UK (Beatty et al., 2007). Preparing a set of policies which will have the capacity to reduce the costs of the transition, as not to repeat the devastating experience of UK coal miners and their communities, is an important task ahead of current policy makers.
- Aragon, F., Rud, J. P. and Toews, G. (2018). Resource shocks, employment, and gender: Evidence from the collapse of the UK coal industry. Labour Economics, 52, pp. 54–67.
- Beatty, C. and S. Fothergill. (1996). Labour market adjustment in areas of chronic industrial decline: the case of the UK coalfields. Regional studies, 30(7), pp. 627–640.
- Beatty, C., Fothergill, S. and Powell, R. (2007). Twenty years on: has the economy of the UK coalfields recovered? Environment and Planning A, 39(7), p. 1654.
- Bertheau, A. Maria Acabbi, E., Barceló, C., Gulyas, A., Lombardi, S. and Saggio R. (2022). The unequal consequences of job loss across countries. American Economic Review: Insights. Forthcoming.
- Couch, K. and Placzek, D. (2010). Earnings losses of displaced workers revisited. American Economic Review, 100(1), pp. 572–589.
- Davis, S. and von Wachter, T. (2012). Recessions and the cost of job loss. Brookings Papers on Economic Activity.
- Glyn, A. (1988). Colliery results and closures after the 1984–85 coal dispute. Oxford Bulletin of Economics and Statistics, 50(2), pp. 161–173.
- Jacobson, L., Lalonde, R. and Sullivan, D. (1993). Earnings losses of displaced workers. American Economic Review, 83(4), pp. 685–709.
- Rud, J. P., Simmons, M., Toews, G. and Aragon, F. (2022). Job displacement costs of phasing out coal. IFS Working Paper, 22/37.
- Schmieder, J., von Wachter, T. and Heining, J. (2022). The Costs of Job Displacement over the Business Cycle and Its Sources: Evidence from Germany. Mimeo.
- Upward, R. and Wright, P. (2017). Don’t look down: The consequences of job loss in a flexible labour market. Economica, 2019(86), pp. 166–200.
The recent record-high gas prices have triggered legitimate concerns regarding the EU’s energy security, especially with dependence on natural gas from Russia. This brief discusses the historical and current risks associated with Russian gas imports. We argue that decreasing the reliance on Russian gas may not be feasible in the short-to-mid-run, especially with the EU’s goals of green transition and the electrification of the economy. To ensure the security of natural gas supply from Russia, the EU has to adopt the (long-proclaimed) coordinated energy policy strategy.
In the last six months, Europe has been hit by a natural gas crisis with a severe surge in prices. Politicians, industry representatives, and end-energy users voiced their discontent after a more than seven-fold price increase between May and December 2021 (see Figure 1). Even if gas prices somewhat stabilized this month (partly due to unusually warm weather), today, gas is four times as expensive as it was a year ago. This has already translated into an increase in electricity prices, and as a result, is also likely to have dramatic consequences for the cost and price of manufacturing goods.
Figure 1. Evolution of EU gas prices since Oct 2020.
These ever-high gas prices have triggered legitimate concerns regarding the security of gas supply to Europe, specifically, driven by the dependency on Russian gas imports. Around 90% of EU natural gas is imported from outside the EU, and Russia is the largest supplier. In 2020, Russia provided nearly 44% of all EU gas imports, more than twice the second-largest supplier, Norway (19.9%, see Eurostat). The concern about Russian gas dependency was exacerbated by the new underwater gas route project connecting Russia and the EU – Nord Stream 2. The opponents to this new route argued that it will not only increase the EU’s gas dependency but also Russia’s political influence in the EU and its bargaining power against Ukraine (see, e.g., FT). Former President of the European Council Donald Tusk stated that “from the perspective of EU interests, Nord Stream 2 is a bad project.”.
However, neither dependency nor controversial gas route projects are a new phenomenon, and the EU has implemented some measures to tackle these issues in the past. This brief looks at the current security of Russian gas supply through the lens of these historical developments. We provide a snapshot of the risks associated with Russian gas imports faced by the EU a decade ago. We then discuss whether different factors affecting the EU gas supply security have changed since (and to which extent it may have contributed to the current situation) and if decreasing dependence on Russian gas is feasible and cost-effective. We conclude by addressing the policy implications.
Security of Russian Gas Supply to the EU, an Old Problem Difficult to Tackle
Russia has been the main gas provider to the EU for a few decades, and for a while, this dependency has triggered concerns about gas supply security (see, e.g., Stern, 2002 or Lewis, New York Times, 1982). However, the problem with the security of Russian gas supplies was extending beyond the dependency on Russian gas per se. It was driven by a range of risk factors such as insufficient diversification of gas suppliers, low fungibility of natural gas supplies with a prevalence of pipeline gas delivery, or use of gas exports/transit as means to solve geopolitical problems.
This last point became especially prominent in the mid-to-late-2000s, during the “gas wars” between Russia and the gas transit countries Ukraine and Belarus. These wars led to shortages and even a complete halt of Russian gas delivery to some EU countries, showing how weak the security of the Russian gas supply to the EU was at that time.
Reacting to these “gas wars”, the EU attempted to tackle the issue with a revival of the “common energy policy” based on the “solidarity” and “speaking in one voice” principles. The EU wanted to adopt a “coherent approach in the energy relations with third countries and an internal coordination so that the EU and its Member States act together” (see, e.g., EC, 2011). However, this idea turned out to be challenging to implement, primarily because of one crucial contributor to the problem with the security of Russian gas supply – the sizable disbalance in Russian gas supply risk among the individual EU Member States.
Indeed, EU Member States had a different share of natural gas in their total energy consumption, highly uneven diversification of gas suppliers, and varying exposure to Russian gas. Several Eastern-European EU states (such as Bulgaria, Estonia, or Czech Republic) were importing their gas almost entirely from Russia; other EU Member States (such as Germany, Italy, or Belgium) had a diversified gas import portfolio; and a few EU states (e.g., Spain or Portugal) were not consuming any Russian gas at all. Russian natural gas was delivered via several routes (see Figure 2), and member states were using different transit routes and facing different transit-associated risks. These differences naturally led to misalignment of energy policy preferences across EU states, creating policy tensions and making it difficult to implement a common energy policy with “speaking in one voice” (see more on this issue in Le Coq and Paltseva, 2009 and 2012).
Figure 2. Gas pipeline in Europe.
The introduction of Nord Stream 1 in 2011 is an excellent example of the problem’s complexity. This new gas transit route from Russia increased the reliability of Russian gas supply for EU countries connected to this route (like Germany or France), as they were able to better diversify the transit of their imports from Russia and be less exposed to transit risks. The “Nord Stream” countries (i.e., countries connected to this route) were then willing to push politically and economically for this new project. Le Coq and Paltseva (2012) show, however, that countries unconnected to this new route while simultaneously sharing existing, “older” routes with “Nord Stream” countries would experience a decrease in their gas supply security. The reason for this is that the “directly connected” countries would now be less interested in exerting “common” political pressure to secure gas supplies along the “old” routes.
This is not to say that the EU did not learn from the above lessons. While the “speaking in one voice” energy policy initiative was not entirely successful, the EU has implemented a range of actions to cope with the risks of the security of gas supply from Russia. The next section explains how the situation is has changed since, outlining both the progress made by the EU and the newly arising risk factors.
Security of Russian Gas Supply to the EU, a Current Problem Partially Addressed
Since the end of the 2000s, the EU implemented a few changes that have positively affected the security of gas supply from Russia.
First, the EU put a significant effort into developing the internal gas market, altering both the physical infrastructure and the gas market organization. The EU updated and extended the internal gas network and introduced the wide-scale possibility of utilizing reverse flow, effectively allowing gas pipelines to be bi- rather than uni-directional. These actions improved the gas interconnections between the EU states (and other countries), thereby making potential disruptions along a particular gas transit route less damaging and diminishing the asymmetry of exposure to route-specific gas transit risks among the EU members. Ukraine’s gas import situation is a good illustration of the effect of reverse flow. Ukraine does not directly import Russian gas since 2016, mainly from Slovakia (64%), Hungary (26%), and Poland (10%) (see https://www.enerdata.net/publications/daily-energy-news/ukraine-launches-virtual-gas-reverse-flow-slovakia.html). The transformation of the gas market organization brought about the implementation of a natural gas hub in Europe and change in the mechanism of gas price formation. It is now possible to buy and sell natural gas via long-term contracts and on the spot market. With the gas market becoming more liquid, it became easier to prevent the gas supply disruption threat.
Second, Europe has made certain progress in diversifying its gas exports. According to Komlev (2021), the concentration of EU gas imports from outside of the EU (excluding Norway), as measured by the Herfindahl-Hirschman index, has decreased by around 25% between 2016 and 2020. While the imports are still highly concentrated, with the HHI equal to 3120 in 2020, this is a significant achievement. A large part of this diversification effort is the dramatic increase in the share of liquified natural gas (i.e., LNG) in its gas imports – in 2020, a fair quarter of the EU gas imports came in the form of LNG. An expanded capacity for LNG liquefaction and better fungibility of LNG would facilitate backup opportunities in the case of Russian gas supply risks and improve the diversification of the EU gas imports, thereby increasing the security of natural gas supply.
However, the above developments also have certain disadvantages, which became especially prominent during the ongoing gas crisis. For example, the fungibility of LNG has a reverse side: LNG supplies respond to variations in gas market prices across the world. This change has intensified the competition on the demand side – Europe and Asia might now compete for the same LNG. This is likely to make a secure supply of LNG – e.g., as a backup in the case of a gas supply default or as a diversification device – a costly option.
In turn, new mechanisms of gas price formation in Europe included decoupling the oil and gas prices and changing the format of long-term gas contracts. The percentage of oil-linked contracts in gas imports to the EU dropped from 47% in 2016 to 26% in 2020. In particular, 87% of Gazprom’s long-term contracts in 2020 were linked to spot and forward gas prices and only around 13% to oil prices (Komlev, 2021). This gas-on-gas linking may have contributed to the current gas crisis: Indeed, it undermined the economic incentives of Gazprom to supply more gas to the EU spot market in the current high-price market. Shipping more gas would lower spot prices and prices of hub-linked longer-term contracts for Gazprom. In that sense, the ongoing decline in Russian gas supplies to the EU may reflect not (only) geopolitical considerations but economic optimization.
Similarly, this new mechanism also finds reflection in the ongoing situation with the EU gas storage. The current EU storage capacity is 117 bcm, or almost 20% of its yearly consumption, and thus, can in principle be effective in managing the short-term volume and price shocks. However, the current gas crisis has shown that this option might be far from sufficient in the case of a gas shortage (see, e.g., Zachmann et al., 2021). One of the reasons for this insufficiency can be Gazprom controlling a sizable share of this storage capacity (see https://www.europarl.europa.eu/doceo/document/E-9-2021-004781_EN.html). For example, Gazprom owns (directly and indirectly) almost one-third of all gas storage in Germany, Austria, and the Netherlands. Combining this storage market position with a long-term gas contract structure may also lead to strategic behavior for economic (on top of potential political) purposes.
Last but not least, the EU gas market is likely to be characterized by increased demand due to the green transition agenda (see Olofsgård and Strömberg, 2022). Being the least carbon-intensive fossil fuel, natural gas has an important role in facilitating green transition and increasing the electrification of the economy. For example, Le Coq et al. (2018) argues that gas capacity should be around 3 to 4 times the current capacity by 2050 for full electrification of transport and heating in France, Germany, or the Netherlands. In such circumstances, the EU is not likely to have the luxury to diminish reliance on Russian gas.
Conclusions and Policy Implications
Keeping the above discussion in mind, should the EU try to diminish its dependence on Russian gas to improve its energy security? This may be true in theory, but in practice, this might be too costly, at least in the short-to-medium run.
The current situation on the EU gas market suggests that simply cutting gas imports from Russia is likely to lead to high prices both in the energy sector and, later, in other sectors of the economy due to spillovers. Substituting gas imports from Russia with gas from other sources, such as LNG, is likely to be very costly and not necessarily very reliable. Alternative measures, e.g., improving interconnections between the EU Member States or controlling transit issues via the use of reverse flow technology, are effective but have limited impact. Simply cutting down gas demand is not a viable strategy. Indeed, with the EU pushing for a green transition and the electrification of the economy, the EU’s gas imports may have to increase. Russian gas may play an important role in this process.
As a result, we believe that the solution to keep the security issue of Russian gas supply at bay lies in the area of common energy policy. It is essential that the EU implements and effectively manages a coordinated approach in dealing with Russian gas supplies. The EU is the largest buyer of Russian gas, and given Russian dependency on hydrocarbon exports, such a synchronized approach would give the EU the possibility to exploit its “large buyer” power. While the asymmetry in exposure to Russian gas supply risks among the EU Member States is still sizable, the improvements in the functioning of the internal gas market and gas transportation within the EU make their preferences more aligned, and a common policy vector more feasible. Furthermore, recent EU initiatives on creating “strategic gas reserves” by making the Member States share their gas storage with one another would further facilitate such coordination. Implementing the “speaking in one voice” gas import policy will allow the EU to fully utilize its bargaining power vis-à-vis Gazprom and spread the benefits of new gas routes from Russia – such as Nord Stream 2 – across its Member States.
- European Commission, 2011, “Speaking with one voice – the key to securing our energy interests abroad“, press release, https://ec.europa.eu/commission/presscorner/detail/en/IP_11_1005
- Komlev, S. 2021, “Evolution of Russian Gas Supple to Europe: Contracts and Prices”, Presentation at 34th WS2 GAC, https://minenergo.gov.ru/system/download/14146/158148
- Le Coq C. and E. Paltseva (2020), Covid-19: News for Europe’s Energy Security, FREE Policy brief. https://freepolicybriefs.org/2020/05/07/covid-19-energy-security-europe/
- Le Coq C., J. Morega, M. Mulder, S Schwenen (2018) Gas and the electrification of heating & transport: scenarios for 2050, CERRE report.
- Le Coq C. and E. Paltseva (2013) EU and Russia Gas Relationship at a Crossroads, in Russian Energy and Security up to 2030, Oxenstierna and Tynkkynen (Eds), Routledge.
- Le Coq C. and E. Paltseva (2012) Assessing Gas Transit Risks: Russia vs. the EU, Energy Policy (4).
- Le Coq C. and E. Paltseva (2009) Measuring the Security of External Energy Supply in the European Union, Energy Policy (37).
- Lewis, Paul, “Gas pipeline is producing lots of steam among allies“, New York Times, Feb. 14, 1982, https://www.nytimes.com/1982/02/14/weekinreview/gas-pipeline-is-producing-lots-of-steam-among-allies.html
- Olofsgård A., and S. Strömberg (2022) Environmental Policy in Eastern Europe | SITE Development Day 202, FREE Policy Brief, https://freepolicybriefs.org/2022/01/10/environmental-policy-in-eastern-europe-site-development-day-2021/
- Stern, J., 2002. Security of European Natural Gas Supplies—The Impact of Import Dependence and Liberalization, Royal Institute of International Affairs, available at: 〈http://www.chathamhouse.org.uk/files/3035_sec_of_euro_gas_jul02.pdf〉
- Zachmann, G., B. McWilliams and G.Sgaravatti, 2021, How serious is Europe’s natural gas storage shortfall? https://www.bruegel.org/2021/12/how-serious-is-europes-natural-gas-storage-shortfall/
The need for urgent climate action and energy transformation away from fossil fuels is widely acknowledged. Yet, current country plans for emission reductions do not reach the requirements to contain global warming under 2°C. What is worse, there is even reasonable doubt about the commitment to said plans given recent history and existing future investment plans into fossil fuel extraction and infrastructure development. This policy brief shortly summarizes the presentations and discussions at the SITE Development Day Conference, held on December 8, 2021, focusing on climate change policies and the challenge of a green energy transition in Eastern Europe.
Climate Policy in Russia
The first section of the conference was devoted to environmental policy in Russia. As Russia is one of the largest exporters of fossil fuel in the world, its policies carry particular importance in the context of global warming.
The head of climate and green energy at the Center for Strategic Research in Moscow, Irina Pominova, gave an account of Russia’s current situation and trends. Similar to all former Soviet Union countries, as seen in Figure 1, Russia had a sharp decrease in greenhouse gas emissions (hereinafter referred to as GHG emissions) during the early 90s due to the dramatic drop in production following the collapse of the Soviet Union. Since then, the level has stabilized, and today Russia contributes to about 5% of the total GHG emissions globally. The primary source of GHG emissions in Russia comes from the energy sector, mainly natural gas but also oil and coal. The abundance of fossil fuels has also hampered investments in renewable resources, constituting only about 3% of the energy balance, compared to the global average of 10%
Figure 1. Annual greenhouse gas emissions per capita
Pominova noted that it is a massive challenge for the country to reach global energy transformation targets since the energy sector accounts for over 20% of national GDP and 28% of the federal budget. Yet, on a positive note, the number of enacted climate policies has accelerated since Russia signed the Paris Agreement in 2019. One notable example is the federal law on the limitation of GHG emissions. This law will be enforced from the end of 2021 and will impose reporting requirements for the country’s largest emitters. The country’s current national climate target for 2030 is to decrease GHG emissions by 30% compared to the 1990 level. As shown in Figure 1, this would imply roughly a 10 percent reduction from today’s levels given the substantial drop in emissions in the 1990’s.
Natalya Volchkova, Policy Director at CEFIR in Moscow, discussed energy intensity and the vital role it fills in Russia’s environmental transition. Energy intensity measures an economy’s energy efficiency and is defined as units of energy per unit of GDP produced. Volchkova emphasized that to facilitate growth in an environmentally sustainable way it is key to invest in technology that improves energy efficiency. Several regulatory policy tools are in place to promote such improvements like bottom-line energy efficiency requirements, sectoral regulation, and bans on energy-inefficient technologies. Yet, more is needed, and a system for codification and certification of the most environmentally friendly technologies is among further reforms under consideration.
As a Senior Program Manager at SIDA, Jan Johansson provided insights on this issue from an international perspective. Johansson gave an overview of SIDA’s cooperation with Russia in supporting and promoting environmental and climate policies in the country. The main financial vehicle of Swedish support to Russia with respect to environmental policy has been a multilateral trust fund established in 2002 under the European Union (EU) Northern Dimension Environmental Partnership (NDEP). One of the primary objectives of the cooperation has been to improve the environment in the Baltic and Barents Seas Region of the Northern Dimension Area. Over 30 NDEP projects in Russia and Belarus have been approved for financing so far. Seventeen of those have been completed, and the vast majority have focused on improving the wastewater treatment sector.
Johansson also shed light on the differences that can exist between governments in their approach to environmental policy. For example, in the area of solid waste management, Russia prefers large-scale solutions such as landfills and ample sorting facilities. In Sweden and Western Europe, governments have a more holistic view founded on spreading awareness in the population, recycling, corporate responsibility, and sorting at the source.
Environmental Transition in Eastern Europe
In the second part of the conference environmental policies and energy transformation in several other countries in the region were discussed.
Norberto Pignatti, Associate Professor and Centre Director at ISET Policy Institute, talked about the potential for a sustainable energy sector and current environmental challenges in Georgia. The country is endowed with an abundance of rivers and sun exposure, making it a well-suited environment for establishing the production of renewable energy such as wind, solar, and hydro. As much as 95 % of domestic energy production comes from renewable sources. Yet, domestic energy production only accounts for 21% of the country’s total consumption, and 58% of imported energy comes from natural gas and 33% from coal. Furthermore, the capacity of renewable energy sources has declined over the last ten years, and particularly so for biofuel due to the mismanagement of forests. A notable obstacle Georgia faces in its environmental transition is attracting investors. Low transparency and inclusiveness from the government in discussions about environmental policy, along with inaccurate information from the media, has led to a low public willingness to pay for such projects. Apart from measures to overcome the challenges mentioned, the government is currently working on a plan to impose emission targets on specific sectors, invest in energy efficiency and infrastructure, and support the development of the renewable energy sector.
Like Georgia, Poland is a country where energy consumption is heavily reliant on imports and where coal, oil, and gas stand for most of the energy supply. On top of that, Poland faces significant challenges with air quality and smog and a carbon-intensive energy sector. On the positive end, Poland established a government-industry collaboration in September 2021, that recognizes offshore wind as the primary strategic direction of the energy transition in Poland. Pawel Wróbel, Founder and Managing Director of BalticWind.EU, explained that the impact of the partnership will be huge in terms of not only energy security but also job creation and smog mitigation. The plan implies the installation of 5.9 GW of offshore wind capacity by 2030 and 11GW by 2040. Wróbel also talked about the EU’s European Green Deal and its instrumental role in accelerating the energy transition in Poland. By combining EU-wide instruments with tailor-made approaches for each of the member states, the Deal targets a 55% reduction in GHG emissions by 2030 through decarbonization, energy efficiency, and expanding renewable energy generation. Michal Myck, Director of CenEA, highlighted the role of social acceptance in accelerating the much-needed energy transition in Poland. In particular, to build political support, there is a crucial need for designing carbon taxes in a way that ensures the protection of vulnerable households from high energy prices.
Adapting to the European Green Deal will also create challenges for countries outside of the EU, especially if a European Carbon Border Adjustment Mechanisms (CBAM) is put in place in 2026 as suggested. Two participants touched on this topic in the context of Belarus and Ukraine respectively. Yauheniya Shershunovic, researcher at BEROC, talked about her research on the economic implications of CBAM in Belarus. It is estimated that the introduction of CBAM can be equivalent to an additional import duty on Belarusian goods equal to 3.4-3.8% for inorganic chemicals and fertilizers, 6.7-13.7% for metals, and 6.5-6.6% for mineral products. Maxim Fedoseenko, Head of Strategic Projects at KSE, shared similar estimations for Ukraine, suggesting that the implementation of CBAM will lead to an annual loss of €396 million for Ukrainian businesses and a decrease in national GDP of 0.08% per year.
An example of Swedish support to strengthen environmental policies in Eastern Europe was presented by Bernardas Padegimas, Team Leader at the Environmental Policy and Strategy Team at the Stockholm Environment Institute. The BiH ESAP 2030+ project is supporting Bosnia and Herzegovina in preparing their environmental strategy. This task is made more challenging by the country’s unique political structure with two to some extent politically autonomous entities (and a district jointly administered by the two), and elites from the three different major ethnic groups having guaranteed a share of power. The project therefore aims to include a broad range of stakeholders in the process, organized into seven different working groups with 659 members on topics ranging from waste management to air quality, climate change and energy. The project also builds capacity in targeted government authorities, raises public awareness of environmental problems, and goes beyond just environmental objectives: mainstreaming gender equality, social equity and poverty reduction. The project is 80 percent finished and will produce a strategy and action plan for the different levels of governance in the country’s political system. There is also a hope that this process can serve as a model for consensus building around important but at times contentious policy issues more generally in the country.
Public Opinion and Energy Security
Finally, Elena Paltseva, Associate Professor at SITE, and Chloé le Coq, Professor at the University of Paris II Panthéon-Asses (CRED), shared two joint studies relating to the green transition in Europe.
Recent research shows that individual behavioral change has a vital role to play in the fight against climate change, both directly and indirectly through changes in societal attitudes and policies motivated by role models. A precondition for this to happen is a broad public recognition of anthropogenic climate change and its consequences for the environment. The first presentation by Paltseva and Le Coq focused on public perceptions about climate change in Europe (see this FREE policy brief for a detailed account). Using survey data the study explores variation in climate risk perceptions between Western Europe, the non-EU part of Eastern Europe, and Eastern European countries that are EU members. The results show that those living in non-EU Eastern European countries are on average less concerned about climate change. The regional difference can partly be explained by low salience and informativeness of environmental issues in the public discourse in these countries. To support this explanation, they study the impact of extreme weather events on opinions on climate change with the rationale that people who are more aware of climate change risks are less likely to adjust their opinion after experiencing an extreme weather event. They find that the effect of extreme weather events is higher in countries with less independent media and fewer climate-related legislative efforts, suggesting that the political salience of the environment and the credibility of public messages affects individuals’ perceptions of climate change risks.
The second presentation concerned energy security in the EU, and the impact of the environmental transition. It was argued that natural gas will play an important role in Europe’s green transition for two reasons. First, since the transition implies a higher reliance on intermittent renewable energy sources, there will be an increased need for use of gas-fired power plants to strengthen the supply reliability. Second, the electrification of the economy along with the phasing out of coal, oil, and nuclear generation plants will increase the energy demand. Today, about 20% of EU’s electricity comes from natural gas and 90% of that gas comes from outside EU, with 43% coming from Russia. To emphasize what issues can arise when the EU relies heavily on external suppliers, the presentation discussed a Risky External Energy Supply Index (Le Coq and Paltseva, 2009) that considers the short-term impact of energy supply disruptions. This index assesses not only the importance of the energy type used by a country but also access to different energy suppliers (risk diversification). The index illustrates that natural gas is riskier than oil or coal since natural gas importers in the EU depend to a greater extent on a single or few suppliers. Another crucial component of the security of gas supplies arises from the fact that 77% of EU’s net gas imports arrive through pipelines, which creates an additional risk of transit. Here, the introduction of new gas transit routes (from already existing suppliers) may increase diversification and decrease risks to the countries having direct access to the new route. At the same time, countries that share other pipelines with countries that now have direct access may lose bargaining power vis-à-vis the gas supplier in question, as demand through those pipelines could fall. Le Coq illustrated this point applying the Transit Risk Index developed in Le Coq and Paltseva (2012) to the introduction of the North Stream 1 pipeline. She concluded that the green transition and associated increase in demand for natural gas is likely to be associated with higher reliance on large gas producers, such as Russia, and resulting in energy security risks and imbalance in the EU. One way to counteract this effect is to exercise EU’s buyer power vis-a-vis Russia within the EU common energy policy. While long discussed, this policy has not been fully implemented so far.
This year’s SITE Development Day conference gave us an opportunity to highlight yet another key issue, not only for Eastern Europe, but for the whole world: global warming and energy transformation. Experts from across the region, and policymakers and scholars based in Sweden, offered their perspectives on the challenges that lie ahead, but also highlighted initiatives and investments hopefully leading the way towards a brighter future.
List of Participants
- Chloé Le Coq, Professor of Economics at the University of Paris II Panthéon-Assas (CRED). Paris, France. Research Fellow at SITE.
- Maxim Fedoseenko, Head of Strategic Projects at KSE Institute. Kyiv, Ukraine.
- Jan Johansson, Senior Program Manager, SIDA. Stockholm, Sweden.
- Michal Myck, Director of CenEA. Szczecin, Poland.
- Bernardas Padegimas, Team Leader: Environmental Policy and Strategy, Stockholm Environmental Institute. Stockholm, Sweden.
- Elena Paltseva, Associate Professor, SITE/SSE/NES. Stockholm, Sweden
- Norberto Pignatti, Associate Professor of Policy at ISET-PI, and Head of the Energy and Environmental Policy Institute at ISET-PI. Tbisili, Georgia.
- Irina Pominova, Head of Climatwe and Green Energy at the Center for Strategic Research. Moscow, Russia.
- Yauheniya Shershunovic, Researcher at BEROC, Minsk, Belarus. PhD Candidate at the Center for Development Research (ZEF). Uni Bonn.
- Natalya Volchkova, Policy Director at CEFIR, Assistant Professor at the New Economic School (NES). Moscow, Russia.
- Pawel Wróbel, Founder and Managing Director of BalticWind.EU. Poland.
- Julius Andersson, Researcher at SITE. Stockholm, Sweden.
- Anders Olofsgård, Associate Professor and Deputy Director at SITE. Stockholm, Sweden.
Changes in individual behavior are an essential component of the planet’s effort to reduce carbon emissions. But such changes would not be possible without individuals acknowledging the threat of anthropogenic climate change. This brief discusses the climate change risk perceptions across Europe. We show that people in Eastern Europe are, on average, less concerned about climate change than those in Western Europe. Using detailed survey data, we find evidence that the personal experience of extreme weather events is a key driver of green concern, and even more so in the non-EU Eastern part of Europe. We argue that this association might be explained by the relatively low quality and informativeness of public messages concerning global warming in this part of Europe. If information is scarce or perceived as biased, personal experience will resonate more.
Climate change is one of the main threats to humanity. Tackling it entails a combined effort from all parts of society, from regulatory changes and industries adopting new greener business models to consumers adjusting their behavior. While an individual’s contribution to climate change may appear insignificant, research shows that the aggregate effect of mobilizing already known changes in consumer behavior may allow the European Union (EU) to reduce its carbon footprint by about 25% (Moran et al., 2020).
However, the first step for people to adjust their consumption patterns is to acknowledge the threat of anthropogenic climate change. Public ignorance about climate change’s impacts remains high across the world. Furthermore, citizens of more polluting countries are often relatively less concerned about climate change. This lack of awareness is not well-understood, in part due to the multi-dimensional local factors affecting it (Farrell et al., 2019).
This brief discusses the potential drivers of climate risk perceptions, focusing on the differences between Western Europe, Eastern European states that are part of the EU, and non-EU Eastern European countries. We first present the climate change concerns across these regions. We then discuss to which extent the country’s pollution exposure measures and individuals’ socio-economic characteristics can explain these differences. We show that the personal experience of extreme weather events is a key driver of green concern, and even more so in the non-EU part of Eastern Europe. We relate this result to the relatively low salience and informativeness of public messages concerning climate in this part of Europe and discuss potential policy implications.
Green Concerns and Pollution Exposure Across Europe
Figure 1 compares, across Europe, the share of poll respondents who see climate change as a major threat, based on the data from the Lloyd’s Register Foundation World Risk Poll 2020. While there is a significant variation in climate risk perception within each region, respondents in Eastern Europe are, on average, less concerned about climate change than those in Western Europe. We observe a similar pattern between the EU and non-EU parts of Eastern Europe.
Exposure to pollution does not seem to clearly explain these differences. Moreover, the patterns of correlation between climate concern and pollution differ across regions and measures of pollution exposure. The left panel of Figure 2 presents averages across the regions for two pollution measures: carbon emissions (which is, perhaps, reflecting climate threat in general) and air quality (which is more directly associated with health risks). We can see that CO2 emissions are the highest in the non-EU part of Eastern Europe, the least environmentally concerned region. Still, the EU part of Eastern Europe has the lowest average emissions per capita across the three regions (this ranking likely results from the interaction between reliance on fossil fuels, industrial structure, and level of development across the three regions). At the same time, when it comes to the average air quality (measured as the percentage of population exposed to at least 10 micrograms of PM2.5/m3), the non-EU EasternEuropean region is doing better than its EU counterpart, which is more climate concerned. Here, better average air quality in the non-EU Eastern European region is due to its relatively low population density, and consequently, low PM2.5 exposure in large parts of Russia. (See, more on the air quality gap within the EU in Lehne, 2021).
Figure 1: Climate concerns in Eastern and Western Europe
The right panel of Figure 2 shows correlations between (country-level) climate concerns and pollution. For CO2, the correlation is negative in all three regions, suggesting that, within each region, more emitting countries are less concerned. This negative correlation, however, is the strongest in the EU-part of Eastern Europe and almost absent in the non-EU part. The differences between the regions are even more striking for the correlation between climate concerns and air quality: both in Western Europe and in the EU part of Eastern Europe, citizens of countries with worse air quality are more concerned about climate change. However, in non-EU Eastern Europe, the relation is the exact opposite: lower concerns about climate change go hand-in-hand with worse quality of air.
Figure 2: Emissions vs. Climate concerns in Eastern and Western Europe, 2018
Green Concerns and Socio-economic Characteristics
Lower climate concerns in EU-part of the Eastern bloc have been documented before; they are often explained by the Eastern-European economies’ high reliance on coal and other fossil fuels, low-income levels, and other immediate problems that lower the priority of climate issues (e.g., Lorenzoni and Pidgeon 2006, Poortinga et al., 2018, or Marquart-Pyatt et al., 2019). Additionally, the literature suggests that climate beliefs are linked to individuals’ socio-economic characteristics, such as level of education, income, or gender (see, e.g., Poortinga, 2019), which may be different across the regions.
However, the regional differences in climate beliefs also persist when we use individual-level data and control for respondents’ individual characteristics, as well as for country-level variables, such as GDP per capita, oil, gas, and coal dependence of the economies, and exposure to emissions (at the country level, as our individual data does not have this information). This is illustrated in Column 1 of Table 1.
Table 1: Climate change beliefs determinants, individual-level cross-section data.
In what follows, we explore another key driver, the personal experience of extreme weather events. While there is a sizable literature on the effect of experience on climate beliefs, that factor was never, to our knowledge, considered to understand the difference in climate risk perception between the EU- and non-EU parts of Eastern Europe.
Green Concern and Salience of Environmental Issues
In line with the recent climate risk perceptions literature (e.g., Van der Linden, 2015), we show that personal experience increases the likelihood of considering climate change as a major threat across all three regions (see column 2 in Table 1). The association is stronger in the EU part of Eastern Europe and even more so in the non-EU part (even if the difference between the last two is not statistically significant). This finding is confirmed when we control for (observable and unobservable) country-specific effects, such as social norms, via the inclusion of country-level fixed effects. In this case, extreme weather events make respondents more climate-conscious within each country (Column 3 of Table 1). In this specification, the effect differs statistically between the two groups of Eastern-European countries, even if only at a 10% significance level. To put it differently, the impact of personal experience with extreme weather events seems to close a sizable part of the gap in climate risk perceptions across the regions and more so in the non-EU part of Eastern Europe.
Our preferred explanation for this finding is that personal experience resonates with the quality and informativeness of public messages concerning global warming. If information is scarce or perceived as biased, personal experience will resonate more. The low political salience of environmental issues in Eastern Europe, inherited from its Soviet past (McCright, 2015), and lower media quality in Eastern Europe (see e.g., Zuang, 2021) are likely to affect the quality of public discourse concerning the risks of climate change, and, consequently, the information available to individuals.
The climate-related legislative effort across Eastern Europe reflects the low political importance of climate change in the region. According to the data from Grantham Research Institute on Climate Change and the Environment, non-EU transition countries, on average, have adopted 8 climate-related laws and policies, while the corresponding figure is 11.5 for EU transition countries and 18 for the countries in Western Europe. Further, Figure 3 shows a positive correlation between climate change concerns and the number of climate-related laws for Western Europe and the EU-part of Eastern Europe but a negative one for the non-EU part of Eastern Europe and Caucasus countries. One possible interpretation of these differences is that climate change is relatively low on the political agenda of (populist) regimes in the non-EU part of Eastern Europe, as climate-related legislative activity (proxied by, admittedly rough, a measure of the number of laws) does not reflect the intensity of population climate preferences.
Figure 3: Climate concern vs. Climate legislation
Regarding the influence of media quality, column (4) of Table 1 shows that the effect of personal experience on climate change concern is negatively correlated with media freedom. One interpretation could be that individuals in countries with freer media infer less from their extreme weather experience because more accurate media coverage about climate risks improves the population’s knowledge on the issue.
Of course, the causality of the climate belief-experience relationship could also go in the other direction – people who are more concerned about climate change could be more likely to interpret their personal experience as weather-related extreme events. It is impossible to distinguish with the data at hand. However, Myers et al. (2013) show that both channels are present in the US, and the former channel dominates for the people less engaged in the climate issue. Stretching this finding to the Eastern Europe case, we argue that more precise information on the importance of climate change may partially have the same effect as experience – i.e., it will increase people’s awareness and concern about the consequences of global warming.
This brief addresses the differences in climate change beliefs between Eastern and Western Europe, as well as within Eastern Europe. It discusses the determinants of these differences and stresses the importance of personal experience, especially in the non-EU part of Eastern Europe. It relates this finding to the relatively low accuracy of information and quality of public discourse about climate change in the region.
We know already that tackling climate change requires reliable and accurate sources of information. This is especially crucial given what we outline in this brief. This issue resonates with the current social science analysis of the diffusion of climate change denial (see e.g., Farell et al., 2019, on the significant organized effort in spreading misinformation about climate change). Such contrarian information that relays uncertainty and doubt regarding the severity of the global climate change threat could have a severe impact, especially in situations with low political salience of climate change, like in non-EU Eastern Europe. A significant effort of both governments and civil society is needed to provide adequate information and mobilize the population in our common fight against climate change.
- Farrell, J., McConnell, K., and Brulle, R. (2019). Evidence-based strategies to combat scientific misinformation. Nature Climate Change, 9(3), 191-195.
- Lehne, J. (2021), Pollution and the COVID-19 Pandemic: Air Quality in Eastern Europe, FREE Policy brief.
- Lorenzoni, I., Pidgeon, N.F., (2006). Public Views on Climate Change: European and USA Perspectives. Climatic Change 77.
- (2019) Climate Change Views, Energy Policy Preferences, and Intended Actions Across Welfare State Regimes: Evidence from the European Social Survey, International Journal of Sociology, 49:1, 1-26,
- McCright, A., Dunlap, R and Marquart-Pyatt, S. (2015). Political ideology and views about climate change in the European Union. Environmental Politics. 25. 1-21..
- (2020) Quantifying the potential for consumer-oriented policy to reduce European and foreign carbon emissions, Climate Policy, 20:sup1, S28-S38
- Myers, T., Maibach, E., Roser-Renouf, C., Akerlof, K. and Leiserowitz, A. (2013). The Relationship Between Personal Experience and Belief in the Reality of Global Warming. Nature Climate Change. 3. 343-347.
- Poortinga, W., S. Fisher, G. Böhm, L. Steg, L. Whitmarsh and C. Ogunbode, (2018) European Attitudes to Climate Change and Energy: Topline Results from Round 8 of the European Social Survey.
- Poortinga, W., L. Whitmarsh, L. Steg, G. Böhm, S. Fisher, (2019) Climate change perceptions and their individual-level determinants: A cross-European analysis, Global Environmental Change, Volume 55, 2019, Pages 25-35,
- Van der Linden, S. (2015). The social-psychological determinants of climate change risk perceptions: Towards a comprehensive model. Journal of Environmental Psychology, 41, 112-124.
- Zhuang M. (2021), Media Freedom in Eastern Europe, FREE Policy brief https://freepolicybriefs.org/2021/02/22/media-freedom-eastern-europe/
This policy brief summarizes the discussion at the 8th annual SITE Energy Day conference, devoted to market adaptations and policies necessary to address the green transition. Recent energy trends with ever more green energy-mixes will have consequences for the functioning of related markets as well as implications for appropriate policy responses. New financial solutions, technological developments, international cooperation, and national policy initiatives in both developing and developed countries are examples of adaptations to this transition process. To discuss these issues, the conference brought together a group of distinguished experts from the energy industry, policy community and academia.
In December 2014, world leaders have gathered in Peru (Lima) for the 20th annual meeting of the United Nations Framework Convention on Climate Change. This convention has as an objective to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system” (see UNFCCC’s webpage). Even though the agreement to reduce emissions to a sustainable level may take years to be negotiated, at least 195 countries have ratified the UFCCC convention. The willingness to reduce environmentally harmful emissions has led to many countries changing their energy profile to include more green energy, a process that is often referred to as “green transition”.
It may be worth mentioning that the label “green transition” consists of two conceptual components. “Green” refers to the ability to generate environmentally friendly energy, which has become a key challenge for our society. Indeed, a majority of people now recognize the pressing need to cut pollution in the face of climate change and environmental degradation. The wording “transition” acknowledges that a shift toward a greener energy mix seems unavoidable, but this shift may not occur immediately or uniformly around the globe. The required time for change is long and the shift itself may not be smooth. To put it differently, the green transition has had and will continue to have wide-ranging consequences for businesses, governments, and the international community.
As a result, there is a need to carefully address the potential implications for the existing energy and related markets and market players, and for government policies, as well as new markets and new policies triggered by the green transition. These topics were the focus of the 8th SITE Energy Day, a half-day conference held at the Stockholm School of Economics on December 2, 2014.
Green Transition and the Energy Markets
The first panel focused on how energy markets have responded to green transition and how they may react in the future. Speakers from electricity companies, regulatory bodies and think tanks discussed how the green transition may affect the use of traditional financial instruments by energy companies; the choice of economically viable technology for producing green energy; and the way markets could be integrated to increase the efficiency of green energy.
As green transition almost always introduces more intermittent production, it is likely that market uncertainty will increase. This is one of the reasons why traditional financial instruments may not be fully adequate. The first speaker Laurent Cheval, Head of Nordic and Fuel Origination in the business division Asset Optimization & Trading at Vattenfall discussed this issue extensively. Energy companies face substantial financial risks since both prices and quantities may be highly volatile. To mitigate these risks, market participants may use an array of financial products. In mature energy markets, the products are fairly standardized. However, more complex and tailor-made financial products are required to face the ongoing changes in the sector. For example, the increased share of renewable energy combined with more interconnected markets create specific market risks. To hedge against risks associated with weather changes, future fuel costs, interest rates and so on, more and more energy providers trade customized derivatives “over-the-counter” (OTC) rather than through a centrally-cleared exchange. Another example is the development of decentralized power production and the rise of the “Prosumer” who simultaneously produces and consumes power. So far, the relevant regulation is underdeveloped and there is an additional demand for innovative financial solutions. Large energy companies such as Vattenfall are for instance offering a range of financial hedging solutions combined with actual physical handling and delivery of energy products.
Green transition should in the long run lead to a domination of environment friendly energy. However it is important that only economically viable technologies subsist. It is therefore necessary to assess the cost of producing green energy. Lars Andersson, Head of Wind Power Unit at the Swedish Energy Agency, reported on an extensive study done by the Agency on this issue. Over the last five years, the production cost of wind power has fallen consistently and capacity usage has increased. This dramatic change in the wind power industry likely implies that the existing subsidies for building wind power plants gradually will be phased out. It is unclear how the industry will react to these cuts in subsidies. Furthermore, according to Andersson, wind production faces at least two challenges. Without developing the capabilities for energy storage, electricity markets will face more energy imbalances as the share of wind power increases. Additionally, the support from the local communities is needed to ensure an expansion of wind power. Addressing these issues requires the development of new regulation and defining a common goal which may promote cooperation between stakeholders.
Ultimately the green transition will end when and if the green energies are largely adopted around the globe. One way to accelerate this green transition may be to coordinate action and development of governmental policies. Martin Ådahl, Chefsekonom at Centerpartiet, and Daniel Engström, Programchef Miljö och Klimat at Fores, presented the current state of the international climate policy and discussed the benefits of linking carbon emission rights markets. Because of conflicting interests, the likelihood of reaching an agreement within the current United Nations climate negotiations is rather small.
However, Ådahl and Engström suggested that the focus should instead be on reaching agreements between big polluter countries that contribute the lion’s share of global emissions. Indeed, regional emission trading schemes already exist in the EU, the US and China, the three regions which together account for over 50 percent of global emissions. One potential shortcoming of this suggestion is that it may not be enough to stabilize greenhouse gas concentrations in the atmosphere. Thereby, Ådahl and Engström discussed the possibility to link current cap-and-trade markets, as a first step toward an international system with a more formal global agreement. Linking cap-and-trade markets has many benefits, especially in the form of efficiency gains. However, emission caps vary across countries and regions because of different political goals or priorities. When markets are linked, difference in abatement costs (or allowance prices) would lead to a flow of allowances and emissions from countries/regions with low abatement cost to countries with higher ones. Thereby prices would be equalized, benefiting entities with cheaper allowances. To avoid opportunistic behavior, countries would first have to agree ex ante on an exchange rate between different countries’ emission rights. Second, a clear regulatory framework is required. Both Ådahl and Engström emphasized the need of an international organization devoted to climate economics. Such an institutional body could not only regulate the links between cap-and-trade markets, but also provide concrete solutions and technical models to improve on the market design.
Environmental Policies: International Experience
The second panel focused on how governments may promote green transition. Anna Pegels, Senior Researcher at the German Development Institute (DIE), reviewed green policy initiatives in developing countries. Pegels argued based on evidence from e.g. India and South Africa that it is possible to combine substantial growth with green energy. This is good news since emerging countries are among the highest polluters. However, to change a country’s energy profile, governments need to intervene and develop new industrial policies.
Governments can set long-term goals, which are supported by short- and mid-term targets. However, given the large profits that are at stake, officials may likely be subject to the risk of capture and corruption. To limit such risks, Pegel emphasized the need to introduce competition in the energy sector as a whole. Subsidized feed-in tariffs for renewable energy for example should be only a first step, to reach a certain scale of production. But the technology is mature enough that producers should be able to bear some additional risk in their current activity. This should increase the scope for competition. Finally, it is essential that governments continuously engage in policy revision cycles and learn from other countries’ experiences.
Benjamin Sovacool, Professor of Business and Social Sciences at Aarhus University and Director of the Danish Centre for Energy Technologies, talked about the process of low carbon transition in the Nordic region. In spite of large investments into renewable energy, fossil fuels still dominate the consumption in the Nordic countries and considerable measures need to be taken in the decades ahead to make the transition to a greener energy mix. Sovacool highlighted four areas which could help reduce the carbon footprint of the Nordic countries: renewable energy, increased energy efficiency of buildings, transportation, and carbon capture and storage (CCS). In order to be successful, the green transition has to bring about a systemic change engaging actors across the economy, particularly including end-users. There should also be a focus on additional technological progress. Finally, Sovacool noted that a rapid emission reduction such as the one planned in the Nordic countries is unlikely to be followed on a global scale in the near future due to a lack of political feasibility.
The green transition is expected to have a profound impact on the functioning and structure of energy markets as well as the policies that facilitates this transition.
There is an ongoing process of decentralization in the energy sector, with the rise of “prosumer” market places that alter market dynamics. Moreover, market uncertainty is increasing due to more intermittent production (due to renewables) and a stronger interconnectedness between energy markets. It is likely that energy imbalances will be a major concern and that more and more energy trade will take place on real time markets (as opposed to e.g. on the day-ahead market). As markets’ linking becomes stronger, the interdependence between markets in terms of energy type and geographical location will be intensified. The need for coordination and international cooperation will be even more pressing. The uncertainty regarding the development of international cooperation, but also regarding national policy changes, may however disrupt energy markets. Measures such as withdrawing existing subsidies must be handled in a gradual and strategic manner so as not to discourage investment. A key issue for governments is to have a credible green policy in the long-term. Such credibility will also depend on the level of involvement of different actors in the green transition, including the necessity to have a multilevel engagement of the end-users.
- Energimyndigheten, (2014), Produktionskostnads-bedömning för Vindkraft i Sverige, ER 2014:16
- Pegels, A. (Ed.). (2014), Green industrial policy in emerging countries, Vol. 34, Routledge
- Rutqvist, J., Engström, A.and Ådahl, M., A Bretton Woods for the Climate. Fores, 2010
- SITE 8th Energy Day, http://www.hhs.se/en/about-us/calendar/site-external-events/2014/site-energy-day/
- UNFCCC, (n.d). First steps to a safer future: Introducing The United Nations Framework Convention on Climate Change, http://unfccc.int/essential_background/convention/items/6036.php [8 December 2014]