The EU’s Poor Climate Policies Lead to Poor Results

A head of the traditional October summit of EU leaders, Germany’s leading business association, BDI, launched a stern warning that deindustrialization was no longer a risk but a reality. The association stated: “Today, this risk [of de-industrialisation] has become a reality in significant parts of the industry.”

It is not hard to understand why German industry is struggling. Natural-gas prices in Europe are projected to be five times higher than in the United States in 2025. For energy-intensive industries, this makes it very difficult to compete. But as the BDI made clear, those sectors of German industry that are not as vulnerable to changes in energy prices are also doing poorly.

One explanation is the fracking revolution in the U.S., which drove down energy prices. By some estimates, Europe has substantial reserves of recoverable shale gas, but it is hard to know for sure how big those reserves are and just as hard to exploit them , because Europe’s fracking bans discourage exploratory drilling. Secondly, there’s the European Union’s Emission Trading Scheme (ETS), a de facto climate tax that is so high that it exceeds the full U.S. natural-gas price.

Germany is notoriously wary of nuclear power, even going ahead with previous plans to shut down perfectly functional nuclear plants in the middle of the 2022 energy crisis caused by the end of Russian gas flows into the country. High energy prices may also have an impact on the industries of the future. The fact that Google and Amazon believe that access to abundant electricity is so important to developing Artificial Intelligence (AI) that it is worth building their own small nuclear reactors should really make alarm bells go off all over Europe.

Reality Is Hitting

Actions have consequences. Recently, a Financial Times headline declared that, “Corporate Germany is on sale,” noting how Covestro, a leading German company specializing in high-tech chemicals, is being taken over for €14.7 billion by ADNOC International, the international arm of ADNOC Group, which is based in the United Arab Emirates. It marks the largest cross-border deal on record for a UAE-based company. Previously, ADNOC group has also made strategic investments in OMV, Borealis, NextDecade’s Rio Grande LNG, and renewable energy.

The FT writes of the takeover that “high energy costs and sluggish demand have affected [Germany’s] industrial base, pushing the likes of Covestro into the arms of deep-pocketed suitors.” In fact, foreign takeovers like these are the one thing still providing hope for European industry. As a result, industries may make it after all: They soften the blow of the misguided policies at fault for the economic crisis currently engulfing Germany and Europe.

At the heart of those policies is a concern with reducing CO₂ emissions. At least now, a new consensus is brewing in Europe that in order to achieve that goal, it makes no sense to outlaw or otherwise reject nuclear power, as this is an energy source that can help the continent maintain living standards while reducing carbon emissions. The new Belgian government is widely expected to scrap its ban on nuclear power in the near future while extending the life of nuclear-power reactors scheduled to be closed. And in Germany, the Christian Democrats — who are likely to come to power after parliamentary elections next year — are now fully in favor of nuclear power.

Alternative Climate Policies

Still, scrapping the EU’s ETS system remains an absolute taboo, despite the dire consequences this approach is having for Europe’s economic well-being. The tragedy is that alternative, non-punitive climate policies are available, but Europe’s policy-makers refuse to consider them. In a new study, the Warsaw Enterprise Institute and like-minded think tanks for example suggest replacing the collectivist Paris Agreement with a “Climate & Freedom Accord.” Signatories to this treaty would benefit from trade advantages if they implement climate-friendly free-market policies, for example by introducing “tax changes . . . to make investing in PP&E (Property, Plant, and Equipment) more profitable in a way that incentivizes companies not only to maintain their current capacities but also to modernize and develop new projects.” The accord also contains language recommending that “subsidies of any kind should be abolished in an orderly and gradual manner.”

Europeans are wary that the incoming Trump administration will start a trade war, but at the moment, it is the EU that is introducing new tariffs under the pretext of climate policy, with its new Carbon Border Adjustment Mechanism or CBAM. The logic of the EU is that because the rest of the world refuses to follow its self-damaging energy policies, imports into the EU should be burdened with this new tariff to equalize the playing field. India, in particular, is very angry about this, which is souring the mood at the WHO.

In the U.K., some voices are calling for the introduction of a similar tariff in order to avoid jeopardizing the country’s access to the EU market. This would be an unwise thing to do. A new study by the U.K. Growth Commission warns Britain against taking this path, estimating that it “could lead to GDP per capita losses of between roughly £150 and £300” if supply chains stay as they are, and per capita losses of between £210 and £650 if supply chains realigned around the lowest-cost producers. The Commission separately calculates that replacing the punitive approach of the Paris Agreement with the aforementioned Climate and Freedom Accord could increase GDP per capita by over £1,000.

Thanks to Brexit, the U.K. at least has an option not to follow Europe into the abyss, although that appears to be an option that the new Labour government has no interest in exploring. Ed Milliband, the energy secretary, is a true climate zealot, eager to double down on the recently ousted Conservative Party’s reckless policies in this area.

But on the Continent, public opinion on climate policy is showing clear signs of changing. The Greens received a bad hammering across Europe during June’s European Parliament elections. Policies such as the EU’s 2035 ban (with limited exceptions) on the sale of new combustion-engine cars have come under severe criticism and may soon become politically indefensible. Even though the European Commission is resisting changes to those policies, more and more EU member states are moving toward following public opinion in favor of more pragmatic policies, grounded in reality. Once the rollbacks begin, they are unlikely to stop: Much of the EU’s punitive climate-regulation rulebook will be on the chopping block. With Europe’s economy itself currently facing the axe, the Continent is running out of other options.