Energy and the Economy in Europe

Abstract

Europe’s energy landscape is characterized by a great heterogeneity due to differences in terms of population, economy, energy resources (availability of different energy sources) and differing policies in favor or against specific energy sources. Over the decades, the European energy mix has undergone important transformations. The EU set an energy policy framework based on three pillars (security of supply, competitiveness and sustainability) with the goal to address three different priorities: competitiveness (affordable prices), security (of energy supply) and sustainability (clean energy). These three pillars appear to pursue contradictory goals, especially in the short term, but they are seen as converging in the longer term. This chapter aims to analyze how these different objectives have been key drivers of the European energy policy and economics. To illustrate this, the authors also present five case studies: the United Kingdom, Italy, France, Germany and Poland. Lastly, the chapter presents the “European Green Deal”, whose ultimate goal is to reach carbon-neutrality by 2050. The chapter analyzes how a climate-neutrality goal requires a substantial transformation of the EU economy, which comes with some internal and external frictions.

1 Introduction

Europe is one of the most important components of the world’s economic and energy systems, but the European energy landscape is characterized by great heterogeneity due to important differences in terms of population, economy and energy resources of individual countries. This chapter presents an overview of the energy characteristics of geographical Europe¹ (not just the European Union [EU]). It then focuses in particular on the historical evolution of the European Union energy policy and energy mix and their interaction with the economy. It also discusses the energy evolution in some selected European countries (the United Kingdom [UK], Italy, France, Germany and Poland), taking into account the different resource bases, policy pathways and socio-economic dimensions. Lastly, the chapter presents the “European Green Deal”, which aims at reaching carbon-neutrality by 2050. To achieve the climate-neutrality goal, substantial transformation of the EU economy is required, which comes with internal and external frictions.

2 The Heterogeneity of Europe’s Energy Sector

Europe is one of the largest economic blocs in the world, with a total population of about 747 million inhabitants in 48 countries (UN DESA 2019). In 2019, the European Union (EU-28) had a population of 513.5 million people,² which accounts for 6.9% of total world population, and a GDP³ of €16.6 trillion, representing 20% of the global economy. This can be compared with the US, which represents about 4% of world’s population with 331 million citizens and 22% of world’s GDP with a GDP of $18.3 trillion, and China, which represents 19% of world’s population with 1.4 billion people and 14% of world’s GDP with a GDP of $11.5 trillion.

The European energy landscape by country is characterized by great heterogeneity due to differences in terms of population, economy and energy resources (Table 36.1).

Table 36.1 Key socio-economic and energy indicators of selected European countries

The diversity is reflected also in the energy system, policies and resources of each country. Indeed, there is great disparity across European countries in the energy mix related to both the structure of consumption and of production. The heterogeneity of the energy mix can be largely explained by the availability of different energy sources by country, such as coal, gas, oil, hydropower and other renewable energy potential, as well as differing policies in favor or against specific energy sources (fossil fuels, nuclear or renewables). This heterogeneous energy mix is well-represented in the following figures that show electricity production and total primary energy supply (TPES) in European countries by source in 2019 (Table 36.2).

Table 36.2 Total electricity production and TPES of selected European countries in 2019

Fossil fuels still dominate the energy system, with some diversity across the continent (Figs. 36.1 and 36.2). Natural gas is relevant in Northwestern European countries and Italy, due to past domestic production which led to the establishment of a well-developed network of pipelines. Coal still plays an essential role in the energy systems of Central and Eastern European countries (Germany, the Czech Republic and Poland). Other countries, notably France, Norway, Sweden and Switzerland, have a lower carbon energy mix mainly thanks to nuclear and hydro.

Fig. 36.1

Production share of electricity of key European countries by source, 2019. (Source: Authors’ elaboration on IEA data, https://www.iea.org/data-and-statistics?country=WORLD&fuel=Energy%20supply&indicator=ElecGenByFuel)

Fig. 36.2

Share of total primary energy supply (TPES) of key European countries by source, 2019. (Source: Authors’ elaboration on IEA data, https://www.iea.org/data-and-statistics?country=EU28&fuel=Energy%20supply&indicator=Total%20primary%20energy%20supply%20(TPES)%20by%20source. Note: latest data available for Bulgaria, Croatia and Romania are related to 2018)

3 Historical Evolution of the EU Energy Policy Framework

Notwithstanding some disparities, energy intensity⁴ and carbon intensity⁵ have decreased across Europe over the last decades. Between 1990 and 2017, a relative decoupling of gross inland energy consumption from economic growth occurred in the European Union (EU): while gross inland energy consumption in 2017 was at the same level as in 1990, GDP (measured in 2010 constant prices) grew by 1.7% per year, on average. As a consequence, energy intensity in the EU fell by 37% (1.7% per year on average) during this period (EEA 2019). The improvement of energy intensity in Europe is the result of technological developments, changes in the structure of the economy and energy policies. The change in the structure of the economy refers in particular to the general shift from industry (especially high energy-intensity productions such as iron and steel) toward a service-based economy. Also, delocalization of industrial production outside of Europe plays an important role in reducing energy and carbon intensity, shifting the related energy consumption and carbon emissions to third countries (carbon leakage). Currently, the measurement of carbon emissions is based on a production-based approach, which calculates the CO₂ produced within a country’s borders and does not fairly represent the reality of carbon intensity. A consumption-based approach, which calculates the emissions related to the production and supply of the goods and services consumed in the concerned country, would be much preferable.

One of the main reasons of energy heterogeneity between EU countries is that energy is a shared competence between Member States and European institutions. For several decades, energy issues remained of purely national competence. Indeed, energy has always been considered a strategic issue; thus, member countries were unwilling to give up any of their sovereignty in this area, and EU energy systems were shaped by national policies. For decades, energy policies struggled between being considered as a national prerogative versus a useful tool of European integration. In the aftermath of World War II, energy was at the heart of the first integration process of the European countries, which indeed started with the creation of the European Coal and Steel Community⁶ (ECSC) in 1951. The goal was the joint control of the French and Western German coal and steel industries, not only to foster economic recovery but also to prevent future wars between the two countries and in Europe. In 1957, the same European countries created the European Atomic Energy Community (EAEC) in the aftermath of the Suez Canal crisis. The EAEC was created with the goal of enhancing the uptake of nuclear technology in the European continent while being a main instrument of political integration. Among the three original treaties, EURATOM is the only one still in force, granting the European Commission important responsibilities and powers concerning the nuclear fuel cycle. Despite these positive and coordinated efforts to shape a common energy policy among some European countries, in the 1960s national policies prevailed over further integration. The 1973 oil crisis shocked the European importing countries, showing their vulnerability to external suppliers. The crisis substantially shaped the concept of energy security in the mind of Europeans, as well as globally. Security of supply started to be considered a key theme for European countries, becoming a pillar of the European energy policy.

After the 1973 oil crisis, European countries addressed energy security issues, mostly through national strategies, through development and increase of nuclear energy, domestic reserves and energy conservation policies. At the European Community (the predecessor entity to the European Union) level, there was an attempt to elaborate a common energy policy strategy with the Council Resolution of 17 September 1974.⁷ Hence, for almost three decades energy policy focused on issues related to security of supply, for example, mandating the creation of minimum strategic stocks for crude oil and products, but remained mainly dominated by national policies. Indeed, the energy mix was, and still largely is, a prerogative of Member States.

It is only with the conclusion of the Lisbon Treaty in 2005 that a proper common energy policy was defined. Indeed, the Treaty lays down the three pillars, which the EU’s energy policy is based on: security of supply, competitiveness (affordable prices) and sustainability (clean energy). These three goals appear to be contradictory, especially in the short term, but are seen as converging in the longer term.

The second pillar of the EU energy policy (competitiveness) had begun to be discussed already in the 1980s and 1990s. Due to the lack of legitimation for a common energy policy at that time, the European institutions leveraged the economic objectives of the EU internal market (liberalization and competitiveness), for which they had a mandate, and applied them to the energy sphere. Indeed, energy markets in the European countries were traditionally dominated by large vertically integrated companies, national monopolies, and characterized by the strong role of the State. The legal basis of the European Commission’s drive to liberalize and foster competition in the energy sector came from the 1957 Treaty of Rome, the 1987 Single European Act, and a later stage, the 1995 Green Paper. European institutions used existing legal frameworks to foster energy competition and liberalization. At the end of the 1990s, two key European directives were approved concerning the electricity and gas markets, in 1996 and 1998, respectively. These directives are driven mostly by economic considerations to make the energy sector more cost-efficient and provide affordable prices to consumers through the introduction of competition between national players. This policy was inspired by the British experience under the government of Margaret Thatcher.

Finally, the third pillar—sustainability—started to appear in the 1990s following the 1992 “Earth Summit” in Rio de Janeiro and the 1997 Kyoto Protocol. Since then, the fight against climate change has gained more and more relevance as the EU set ambitious energy and climate targets for the coming decades. In 2009, the EU launched its 2020 objectives in the “Green Package—A European strategy for Sustainable, Competitive and Secure Energy”, setting three targets, commonly known as “20-20-20” by 2020, which consist in achieving a 20% greenhouse gas (GHG) emission reduction compared to 1990, 20% market share of renewable energy compared to primary energy demand and 20% energy efficiency compared to a baseline scenario (EUROPA 2006).

The EU Emissions Trading System (ETS) is the cornerstone of Europe’s climate policy (see also Chap. 23). Its goal is to tackle climate change reducing greenhouse gas emissions cost-effectively. It was the result of the 1997 Kyoto Protocol, but officially started operating in 2005. It operates in phases and covers all EU countries plus Iceland, Liechtenstein and Norway. It is the largest example of emissions trading in operation, regulating emissions over 11,000 heavy energy-intensive installations as well as for airlines. It covers around 25% of the EU’s greenhouse gas emissions. It is based on the “cap and trade” principle, meaning that a “cap” is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. The EU creates allowances, each giving the holder the right to emit GHGs equivalent to the global warming potential of 1 ton of CO₂. The cap is designed to decrease annually over time so that total emissions fall in line with the desired objective. Within the cap, companies in selected sectors annually obtain emission allowances, through auctioning or free allocation (reducing the risk of carbon leakage). If a participant has insufficient allowances then it must either take measures to reduce its emissions or buy more allowances on the market. Participants can acquire allowances at auction or from each other. Ideally, as scarcity increases carbon prices are expected to rise correspondingly, supporting more decarbonization options.

Given the relevance of climate change issues and GHG emissions, in 2011 the European Council for the first time mentioned the objective to reduce emissions by 80–95% by 2050 compared to 1990 levels. In 2014, the EU proposed the 2030 Climate and Energy Framework. Under this framework, the European Union committed itself to (a) reduce its GHG emissions by 40% compared to 1990 levels; (b) increase the share of renewable energies in final energy consumption to at least 27% by 2030 and (c) increase the energy efficiency of its economy by 27% compared to a 2007 baseline (EC EUROPA 2014). A further effort was announced in the strategic long-term vision of the Commission in November 2018 called “A Clean Planet for all—A European strategic long-term vision for a prosperous, modern, competitive and climate neutral economy” (EC EUROPA 2018). The aim of this document was to create a prosperous, modern, competitive and climate-neutral economy by 2050. In 2019 and in line with the EU’s 2050 long-term strategy, the EU presented also a comprehensive update of its energy policy framework to facilitate the transition away from fossil fuels toward cleaner energy and to deliver on its Paris Agreement commitments for reducing GHG emissions. This new framework is called the “Clean energy for all Europeans package”, consisting of eight legislative acts (EC EUROPA 2019). In these documents, the EC reconsidered and extended the Renewable Energy Directive, with a binding EU-level target to increase the share of renewable energy in the energy mix to at least 32% by 2030, and updated the Energy Efficiency Directive, with an indicative target at EU level of reduced energy consumption by least 32.5% by 2030 (Consilium 2014). All these targets illustrate the strong political commitment to tackle climate change and the relevance of climate issues on the European energy agenda.

4 Historical Evolution of the EU Energy Mix

Over the last century, the EU energy supply structure underwent a great transformation. Initially, coal was replaced by oil and—later—by gas. In recent years there have been important policy driven investments in the EU in renewable energy sources (RES) which reached a share of 18.0% in gross final energy consumption in 2018.

After World War II, the supremacy of coal in Europe started to decline in favor of oil, thanks to the fast expansion of transport and consumption of goods and services. Nevertheless, coal remained a pivotal source despite its declining share. In 1990, coal provided for almost 41% of the gross energy consumption in the EU-28 Member States and 39% of power generation; while in 2019 it provided only 16% of EU energy consumption and about 24% of the power generation mix. Coal maintained its role especially in countries with significant domestic coal reserves, for example, Germany, Poland, the Czech Republic and other Eastern European countries. In these countries, coal currently accounts for a large share of electricity production. In the Czech Republic, Bulgaria, Greece and Germany, coal represents a share in power generation of around 40%; in Poland it reaches 80%.

The European natural gas industry effectively began with the discovery of the giant Groningen gas field in the Netherlands in 1959, and later in the 1970s and 1980s (after the first and second oil price shock) with exploration and production activities in the North Sea. Europe’s natural gas industry was strongly influenced by the Dutch commercial framework based on oil price indexation and “take-or-pay” contracts.⁸ Today’s gas demand is mainly concentrated in Northwestern Europe plus Italy and Spain.

Natural gas in the EU witnessed incredible growth between 1990 and 2008. Its market share increased rapidly from less than 10% of TPES in the early 1970s to about 24% in 2009 replacing the use of oil and to a lesser extent coal (it remained stable thereafter). While in the 1970s and 1980s gas demand growth was mainly due to the industrial, commercial and residential sectors, in the 1990s and 2000s the strong growth was mainly driven by power generation due to the development of combined cycle gas turbines (CCGTs). Despite some disparities between countries, natural gas became the fuel of choice for power generation in most European markets. The economic crisis of 2009 significantly halted the growth of gas demand in Europe, which was already slowing down due to its increasingly high prices (because of oil price indexation—see Chap. 20) during the second half of the 2000–2010 decade. In the post-2009 economic context, relatively expensive gas found itself squeezed in the power generation sector between on the one hand strong RES development and, on the other hand, cheap coal combined with a low CO₂ price in the EU ETS, due to the economic crisis.

Indeed, carbon prices fell from 15–17 €/ton of CO₂ in the late second phase of EU ETS (2008–2012) to 4–8 €/ton of CO₂ in its third phase (2013–2020). Only recently, due to strengthened EU regulation and an improved economy, the CO₂ prices soared, hitting an 11-year record in July 2019 (29 €/ton), and then stabilized around 25 €/ton before the coronavirus outbreak in 2020.

4.1 The Role of Energy Imports and Security Concerns

The sources of energy supply to each European country vary by country and fuel. In 2018, the production of primary energy in the EU-27⁹ totaled 635 million tons of oil equivalent (Mtoe), following constant decline (-9.2%) compared to a decade earlier. The general downward development of domestic production highlights the need to import significant volumes of energy to meet European gross inland energy consumption (1675 Mtoe in 2017). Therefore, in 2017 the EU produced around 45% of its own energy, while 55% was imported. The EU mainly depends on Russia for imports of crude oil, natural gas and solid fuels, followed by Norway for crude oil and natural gas. Other suppliers are Iraq and Kazakhstan for oil and Algeria and Qatar for natural gas. In the last decades, domestic energy production in the Netherlands, Norway and other countries helped to balance the increasing import dependency elsewhere in the EU.

EU-28 dependency on energy imports increased from 44% of TPES in 1990 to 55% by 2018 (EUROSTAT 2020). The dependency rate is different for each country, but all EU Member States are net importers of energy since 2013 (Fig. 36.3).

Fig. 36.3

Import dependency rate in 1990, 2000, 2010 and 2018 (%). (Source: Authors’ elaboration on EUROSTAT data (nrg_ind_id). Note: EU-28 (2013–2020); EU-27 (from 2020))

Looking in more detail, in 2018 the highest dependency of the EU-27 was recorded for crude oil (94.6%) and for natural gas (83.2%), while the EU-27 was dependent on solid fossil fuels imports for 43.6% (EC EUROPA 2020a).

During the 2020s, the import dependency rate is expected to further increase due to the combination of depletion of domestic production of fossil fuels and implementation of climate policies. Some Member States announced plans for the phasing-out of coal (Italy) and nuclear (Germany) already during the 2020s. Such climate policies will inevitably increase imports especially of natural gas, which is considered a bridge fuel for the energy transition. This trend is moreover enhanced also by the decision of the Dutch government to close the Groeningen gas field, due to social acceptance issues.

High natural gas dependency is often perceived as a security concern. In Europe, the high levels of Russian gas imports have always been considered a potential threat to Europe’s energy security. Remarkably, Russia accounts for the largest import volumes not only of natural gas but also of crude oil and coal (Table 36.3) where no security concerns are generally voiced. This is due to the global nature of the market for oil and coal, while gas remains mainly a regional market which is dependent on existing import infrastructure (in the case of Russia-EU gas trade: mainly pipelines).

Table 36.3 Main origin of primary energy imports, EU-28, 2009–2019 (% of extra EU-28 imports)

However, natural gas markets are also becoming more and more globalized, driven by increasing availability of liquefied natural gas (LNG), which is much more flexible than pipelines. The impressive growth of unconventional shale gas production in the US has allowed the country to become an LNG exporter, promoting flexibility and diversification of the natural gas market. Thus, Europe has become a battleground between LNG (from US and others) and Russian pipeline gas. LNG allows those countries strongly dependent on a single pipeline supplier—notably Poland, Eastern European and the Baltic countries—to improve their supply security and, at the same time, enhance market competition. As of 2020, in Europe there are 25 large-scale LNG import terminals (Map 36.1) with total regasification capacity of 158 million tons per annum (Mtpa)—or 215 bcma. Theoretically, that capacity could enable LNG to meet around 45% of EU gas demand. However, historically, the average level of utilization of these terminals has been very low; during 2012–2017 it was at just around 20%. Over the last few years LNG deliveries to Europe have strongly grown, driven by the increased availability of competitively priced gas in global LNG markets. In 2019 the average terminal utilization rate reached 48%, with record high volume of LNG imports of 104 bcm (Yafimava 2020).

Map 36.1

LNG import terminals in the EU. (Source: K. Yafimava (2020), OIES)

Import dependency also causes exposure to oil prices volatility. In 2018, the EU “import bill” was estimated to be €330 billion, which corresponds to 2% of EU’s GDP (EC EUROPA 2020b). The volatility of oil prices affects the size of the “import bill”, which can enlarge considerably when oil prices increase. Oil accounts for 70% of the total EU energy imports and natural gas 17%. The vulnerability to oil price volatility became a pressing issue in the 1970s following the two oil crises of 1973 and 1979. The oil price shock had important effects for the European energy sector, notably the push for improvement of energy conservation in various industries, notably the car industry, which was required to improve fuel efficiency. Due to the increase of oil prices and subsequent economic stagflation, governments relied on increased taxation on transport fuel, which has low short-term demand elasticity. However, a distortion arose from the structure of taxation on fuel for transport: diesel (mainly used at that time for heavy duty vehicles) was generally taxed at a lower rate than gasoline (mainly used for passenger cars) in most of the European countries. This disparity (coupled with improvement on diesel engine technology) led over the last three decades to a significant increase in the share of diesel vehicles (the so-called dieselization). Diesel vehicles now account for nearly 40% of the cars on the road. Since the 1970s, the price at the pump is driven to a large degree by tariffs and taxes. On average, over half the cost of fuel at the pump represents taxes. It is interesting to notice the high tax rate of gasoline and diesel in European countries compared to the US (Fig. 36.4). Fuels taxes contribute substantially to Member States’ revenues, on average some 7% (FuelsEurope 2019).

Fig. 36.4

Percentage of taxes on unleaded gasoline and automotive diesel for non-commercial purposes in selected European countries and the US, 4Q 2018. (Source: Authors’ elaboration on IEA Energy Prices and Taxes (2019))

5 Case Studies on Selected National Pathways

As mentioned, Europe’s energy supply has undergone profound transformation throughout the last decades. This transformation has occurred at a different scale and pace in each country according to political preference and availability of energy sources. Moreover, individual European countries decided to pursue different policies taking into account the energy trilemma (competitiveness, security and sustainability) depending on the time period and national characteristics. This trend is well-illustrated by five case studies: the United Kingdom, Italy, France, Germany and Poland, which underwent transformations at different paces and implemented different policies.

5.1 United Kingdom

Historically, coal mining has been the backbone of the British energy sector since the Industrial Revolution. However, coal consumption has been declining in the UK since it peaked in 1956. In that year, the UK enacted the Clean Air Act, prompted by the great London smog of 1952. With coal’s role diminishing, oil and gas increased their relevance in the British energy mix. The turning point was the oil price increases of 1973 which created the economic conditions to start exploration and production activities in the North Sea. Indeed, the combination of high oil prices and availability of new technologies made the operations in that region commercially feasible. Moreover, exploration in most of the Organization of Petroleum Exporting Countries (OPEC) countries was foreclosed because of ramping nationalizations in OPEC countries, so companies redirected their exploration spending, when possible, to the industrial countries of the Western world, for example Canada, Gulf of Mexico, Alaska and the North Sea (Yergin 2009). The British and Norwegian oil and gas sectors of the North Sea thus witnessed rapid development after the 1973 oil crisis.

Due to the different sizes of their population and economy, the development of oil and natural gas sector in Norway and the UK took diverging paths. The UK developed its oil and gas offshore reserves at a fast pace (Fig. 36.5), in order to meet its important energy needs due to its high population (56 million inhabitants in 1980) and size of the economy. This resulted in a fast depletion rate of its reserves. In contrast, Norway developed its North Sea resources at a slower pace (Fig. 36.6), pursuing thus a more sustainable exploitation thanks also to its small population (4 million inhabitants in 1980, less than a tenth of the British population) and thus smaller energy needs (Table 36.4).

Fig. 36.5

UK’s oil and gas production and consumption, 1970–2019. (Source: Authors’ elaboration on BP Statistical Review of Energy all data 1965–2019)

Fig. 36.6

Norway’s oil and gas production and consumption, 1970–2019. (Source: Authors’ elaboration on BP Statistical Review of Energy all data 1965–2019)

Table 36.4 Norway and United Kingdom population, 1960–2018 (million people)

The UK became self-sufficient in oil and a net oil exporter in 1981. However, oil exports peaked in 1985 and production in 1999. A similar trajectory occurred for gas production. The UK discovered and developed vast gas reserves offshore, becoming a net exporter in 1997, but production began to decline in 2000. The fast decline in oil and gas production turned the country into a net importer of oil and gas in 2004, resulting in the UK importing more than 50% of the gas needed to meet domestic demand via pipeline and liquefied natural gas (LNG) starting in 2019 (BEIS 2020).

The growth of the oil and gas sector helped the UK to transform its energy mix away from coal (Fig. 36.7). However, the price of the transition was great social unrest, as shown by the well-known 1984–1985 miners’ strike against the economic policies of the then-Prime Minister Margaret Thatcher. A clear motivation of social unrest was the collapse of the employment rate in the coal sector during her term. Indeed, employment in the coal sector dropped from 242,000 miners in 1979 (when Thatcher became prime minister) to 49,000 in 1990 (when she left Downing Street), to only 1000 in 2018 (UK GOV 2019). The British social unrest waged by coal miners provides an important warning on the importance of caring for social justice within the energy transition.

Fig. 36.7

UK’s total primary energy supply by source (Mtoe). (Source: IEA World Energy Balances 2019, p. 152)

But the most significant transformation of the British energy system occurred in the electricity generation (Fig. 36.8).

Fig. 36.8

UK’s electricity generation by source (TWh). (Source: IEA World Energy Balances 2019, p. 152)

As industrial, railroad and residential use of coal decreased, its consumption in the electric power sector increased, peaking in 1980 (EIA 2018). Since 1990, the power sector witnessed a decline of coal, a rise of gas and, only recently, of renewables. While coal-fired power generation has strongly decreased over the last decades to reach a historical record low of 6.9 TWh in 2019, gas-fired generation has soared from 0.4 TWh in 1990 to 132.5 TWh in 2019 (BP 2020). Along with the increasing role of gas, an even more impressive increase occurred with renewable energy sources (wind and solar especially). Indeed, in less than two decades, the share of renewable energy increased from almost zero to 35% of electricity generation in 2019, with a strong role for wind. Between nuclear (around 20%) and renewables, the share of low-carbon power generation is presently over 50%.

The recent phasing-out of coal, and the consequent coal-to-gas shift, in the British power sector was achieved thanks to the implementation of the U.K. Carbon Price Floor (CPF) in 2013. It was introduced in 2013 at the rate of GBP 16 per ton of carbon dioxide-equivalent (tCO₂e) to be increased to GBP 30/tCO₂e, increasing the cost of carbon emissions for electric generators. The UK’s CPF works in combination with the EU’s Emissions Trading System (ETS). If the EU ETS carbon price is lower than the UK CPF, electric generators have to buy credits from the UK Treasury to make up the difference. The CPF applies to both generators that produce electricity for the grid and companies that produce electricity for their own use.

5.2 Italy

Italy is heavily dependent on imported fossil fuels, due to its low coal supply and the absence of nuclear power plants. In the aftermath of World War II, Italy witnessed strong economic growth, which required increasing energy supply, mainly met with imported oil.

Like for other countries, the 1973 oil crisis deeply affected the Italian economy, highlighting the need of an adequate energy security strategy. To achieve that, Italy had to diversify its energy mix, reducing the share of oil imports. Since 1973, the share of natural gas has increased and recently displaced oil as the largest contributor to TPES (Fig. 36.9). Oil’s share has fallen from 76% in 1973 to 34% of the TPES in 2019. Natural gas share was 42% of TPES in 2019 (IEA 2016, 2020a). This strong increase of gas’ share in TPES has been achieved thanks to large-scale development of gas pipeline import infrastructures. The main import sources became Russia, Algeria, Northern Europe, later Libya and very recently Azerbaijan. Also, some LNG facilities were built.

Fig. 36.9

Italy’s total primary energy supply by source (Mtoe). (Source: IEA World Energy Balances 2019, p. 98)

A further transformation of Italy’s energy mix occurred since the beginning of the second millennium, with the rise of renewable energy sources (Fig. 36.10). While in 2000, fossil fuels covered about 88% of total Italian energy demand (oil accounted for 50%), this share fell to 74% in 2018. At the same time Italy has been able to boost its renewable energy contribution from 7% in 2000 to 20% of the total in 2018 (CDP et al. 2019). This increase was mostly driven by solar PV development.

Fig. 36.10

Italy’s electricity generation by source (TWh). (Source: IEA World Energy Balances 2019, p. 98)

Moreover, in its efforts to decarbonize its energy system, Italy decided to phase out coal for electricity generation by 2025.

An important earlier development was Italy’s decision to abandon its nuclear power development plans. The 1986 Chernobyl nuclear accident in Ukraine sparked an enormous and general debate on the implications of the use of nuclear energy in Italy. The debate resulted in a referendum in 1987, which stopped all activities in the nuclear sector. In 2009, the Italian government tried to restart an ambitious nuclear power program; this attempt was stopped in 2011, following a second popular referendum which was affected also by the 2011 Fukushima nuclear accident in Japan. In two decades, two successive generations decided to stop the development of a nuclear sector in Italy.

5.3 France

France took a completely opposite path. The country has today one of the least carbon intensive energy mixes thanks to its highly developed nuclear sector. Only 46% of TPES came from fossil fuels in 2019, whereas the share of nuclear energy made up 46% in the energy mix and 78% of electricity generation—the highest share worldwide (Figs. 36.11 and 36.12). The decision to develop the nuclear sector was supported by the 1973 oil crisis. That episode highlighted the risk of oil dependency and thus the political establishment decided to strongly pursue civil nuclear power development as a tool for energy independence and security. The share of oil in France’s TPES has declined markedly since the early 1970s, from 66.5% in 1973 to 28% in 2019 (IEA 2017, 2020a). Nevertheless, oil is still the second-largest energy source given its strong role in transport and industry.

Fig. 36.11

France’s total primary energy supply by source (Mtoe). (Source: IEA World Energy Balances 2019, p. 77)

Fig. 36.12

France’s electricity generation by source (TWh). (Source: IEA World Energy Balances 2019, p. 77)

France comes second only to the US for installed nuclear power capacity (61 GW vs. 98 GW in 2020), however, with only one-fifth of the US population. France has not only the highest share of nuclear power generation in the world but also became the largest net exporter of electricity. Yet, France must address some challenges to its well-developed nuclear sector: an aging nuclear fleet and increasing public concerns over safety, especially after the 2011 Fukushima nuclear accident. Despite having a low-carbon intensive energy system, France decided to further foster its decarbonization in line with the European climate commitment. In 2015 the French Parliament adopted the “Energy Transition for Green Growth” bill. This bill sets several environmental and energy goals, including reducing the nuclear share of electricity production from 78% in 2015 to 50% by 2025 (IEA 2017). Additionally, it caps nuclear power generation at the current capacity level of 63.2 GW. In 2018, the government presented the Multiannual Energy Program, revising its objective to diversify the energy mix and reduce nuclear energy to 50% by 2035. In order to do so, France plans to shut down 14 reactors by 2035, which represent a quarter of reactors in operation in 2018 (GOUVERNEMENT FR 2018). However, following the 2021 energy price crisis, President Macron unveiled a “France 2030” investment plan restoring a primary role for France’s nuclear sector—with a particular interest for small-scale nuclear reactors—through a €1 billion investment plan by the end of the decade. Moreover, the 2021 energy price crisis induced France along with some Eastern European countries to require nuclear energy to be labeled as “green” in the upcoming EU taxonomy that determines which economic activities can benefit from a “sustainable finance” label.

Within its decarbonization efforts, France decided to establish a new fuel tax in 2019. This was designed to discourage consumers from using diesel cars and raise additional revenue for funding renewable energies. However, the new tax set off a massive protest movement called Gilets Jaunes (“Yellow Vests”), accusing the government of widening social inequality. The social unrest in France highlighted the need to develop and implement just and inclusive climate policies.

5.4 Germany

In the last four decades, Germany’s energy mix has shifted from a clear dominance of coal and oil to greater diversification. Yet, fossil fuels still dominate the energy supply, mainly due to domestic coal production and significant imports of oil and gas.

In 2018, fossil fuels accounted for 80% of TPES (oil for 33%, natural gas for 24% and coal for 23%), while low-carbon energy sources accounted for 22% (Fig. 36.13). Among these sources, nuclear energy, which was introduced in the 1970s in the aftermath of oil crisis, accounted for 13% of TPES (IEA 2020b).

Fig. 36.13

Germany’s total primary energy supply by source (Mtoe). (Source: IEA World Energy Balances 2019, p. 80)

Being so much reliant on fossil fuels and with the pressing issue of decarbonization, in 2010 Germany launched its energy transition plan (Energiewende) in order to promote energy efficiency and renewable energy sources. In 2011, following the Fukushima accident, the German government announced the decision to completely phase out nuclear from electricity generation by 2022, responding to popular concerns over nuclear safety. The decision to phase out nuclear has made the ambition to create a low-carbon energy system by 2050 more challenging, especially in the short term. Germany has set long-term targets for the share of renewables in electricity to at least 50% by 2030, 65% by 2040 and 80% by 2050. In the 2018, this share was approximately 38% (Fig. 36.14) (IEA 2020b).

Fig. 36.14

Germany’s electricity generation by source (TWh). (Source: IEA World Energy Balances 2019, p. 80)

To achieve these targets, since 2000 Germany has successfully promoted the deployment of renewables—especially wind turbines in Northern regions, but also solar PV for power generation—through feed-in tariffs. However, the strong support for renewables through feed-in tariffs generated an oxymoron: higher retail electricity prices for consumers (households and small and medium industry), while wholesale prices witnessed a sharp decline (to the benefit of distributors and large-scale industry that can access the wholesale market directly). Indeed, the feed-in tariff scheme is funded through an ad hoc levy (the Erneuerbare Energien Gesetz or EEG), which is charged to retail consumers and can be particularly harmful for low-income households. Today, Germany has one of the highest electricity prices for households in the EU (Fig. 36.15).

Fig. 36.15

Average electricity price for households per 100 kWh in 2H 2018 (€). (Source: EUROSTAT)

Since 2000, the growth of renewable energy has mainly compensated the partial withdrawal of nuclear power. In 2018, coal and natural gas still accounted for 52% of total power generation. With a market share of 38%, coal is still the major source of power generation, down from about 50% a decade earlier (IEA 2020b). However, in line with its political commitment to foster decarbonization, Germany has started to plan the phase out of coal by 2038.

5.5 Poland

The political pressure and momentum against the use of coal in the European energy mix by the European Commission and its major Western Member States are at odds with the realities of some Central and Eastern European Member States, which are still highly dependent on coal. As shown in Fig. 36.2, the market share of coal in TPES in 2019 represents 44% for Poland, 32% for the Czech Republic and 29% for Bulgaria.

Poland in particular is strongly dependent on coal and fossil fuels. Besides having significant coal reserves, coal has been essential also in order to counterbalance its almost-entire dependence to Russian oil and gas, given the animosity between the two countries. In this effort, Poland started importing US LNG in order to reduce its vulnerability to Russian gas. Currently, coal accounts for almost 50% of TPES and 80% of the electricity generation (Figs. 36.16 and 36.17). Though in relative terms natural gas and renewables did replace part of coal’s share in the fuel mix between 1990 and 2017, in absolute terms, coal remained exactly stable (Rentier et al. 2019).

Fig. 36.16

Poland’s total primary energy supply by source (Mtoe). (Source: IEA World Energy Balances 2019, p. 128)

Fig. 36.17

Poland’s electricity generation by source (TWh). (Source: IEA World Energy Balances 2019, p. 128)

Although coal production grew steadily until the late 1970s, the sector and related industries became dysfunctional. In 1979, production reached its peak of 201 million tons. However, the relevance of coal in the energy mix also has social and employment implications. Poland’s coal sector employs around 100,000 workers. However, in the last decades coal in Poland has become uncompetitive and unprofitable on the international markets, facing competition from extra-EU coal producers and international climate pressure. Therefore, subsequent governments have provided financial aids and subsidies to the sector. It is estimated that between 2013 and 2018, Poland spent as much as €6.8 billion on bailouts of the country’s coal sector energy sector (DW 2020).

The Polish government started to reflect on some major transformations for its energy sector. Such considerations are driven by (i) the economic disadvantages to keep producing coal in Poland, (ii) the pressure of expected increasing costs under the EU ETS and (iii) political pressure from European institutions for decarbonization (POLITICO 2020). To do so, Poland considers the development of a nuclear sector and renewable energy (especially offshore wind). In 2020, Poland presented a $40 billion plan to build its first nuclear power plants, while setting out its new energy strategy for 2040 (FT 2020). Poland wants to build 6–9 GW of nuclear capacity and its first nuclear unit should come on line in 2033. In 2021, Poland announced a new scheme to support offshore wind farms for €22.5 billion until 2030.

6 The Green Deal: Toward a Carbon-Neutral EU in 2050

As mentioned before, climate issues and decarbonization efforts have been the top priority of the EU energy policy during the last decades. The political commitment of the EU on climate change was reaffirmed in 2019 by the new Commission President Ursula von der Leyen. She launched an ambitious and comprehensive policy program, called “European Green Deal”. The main goal of this plan is to transform the European society into a resource-efficient and competitive economy, making the EU a net-zero GHG emissions society by 2050. To do so, it is necessary to further decouple economic growth from resource use and decarbonize energy. To achieve the climate-neutrality goal, substantial transformation of the EU economy is required.

Over the last decades, EU decarbonization strategies have mainly focused on the power sector as it is by far the easiest sector to decarbonize, even though it is not an easy task. To reach carbon-neutrality, the EU needs not only to step up its efforts to decarbonize the power sector but also to address all other sectors including those which are difficult to decarbonize like buildings, industry and transport. Figure 36.18 presents the share GHG emissions by sector.

Fig. 36.18

EU-28 GHG emissions by aggregated sector in 2017. (Source: EEA https://www.eea.europa.eu/data-and-maps/daviz/ghg-emissions-by-aggregated-sector-5#tab-dashboard-02. Note: Transport includes international aviation and shipping)

In 2020 the European economies experienced an unprecedented health crisis (the COVID-19 pandemic) that quickly became an economic and social one. The European governments and the European Union needed to plan economic and social recovery. The initial recovery phase saw a return of the role of the State in the economy, with significant amounts of public debts and investments.

After long and difficult negotiations, the European Member States managed to agree on a €750 billion recovery plan, the Next Generation EU. The Recovery package consists of €390 billion of grants and €360 billion of loans to be directed to European economies. Through Next Generation EU, the European leaders seek to reshape the economic model, promoting a cleaner, more sustainable and digital society, while addressing some of the major issues generated by the 2020 health and economic crisis.

Thus, in light of the need of economic recovery, the EU not only maintained its commitment to decarbonization but further proposed to step up Europe’s 2030 climate ambition by reducing GHG emission by at least 55% below 1990 levels (Fig. 36.19). Moreover, in July 2021, the European Commission released its “Fit for 55” package, which is set to facilitate a GHG emissions reduction of 55% by 2030 compared to 1990. Although its approval and implementation will not be an easy task, the package would deepen and broaden the decarbonization of Europe’s economy and society in the 2020s in order to be on track to achieving climate-neutrality by 2050. The package contains several legislative proposals. Some proposals are the evolution of existing climate and energy policies and targets, such as the upgrading of renewable energy (from at least 32% to 40%) and energy efficiency (from at least 32.5% to 36%) or a profound restructuring of European energy taxation. On the other hand, other legislative proposals envisage the creation of new and ambitions climate tools. For example, the creation of a new EU ETS for buildings and road transport or the revision of CO₂ emissions standards for new cars—emissions should be cut by 55% by 2030 and by 100% by 2035.

Fig. 36.19

EU’s GHG emissions targets by 2030 and carbon-neutrality by 2050. (Source: European Commission 2020c)

In order to achieve the envisaged energy transition, the EU economy will need to adjust and adapt in order to remain competitive. To this end, the Commission has launched several initiatives: the European Battery Alliance, the European Clean Hydrogen Alliance and the European Raw Materials Alliance. These initiatives are expected to develop value chains in order to maintain Europe’s industry competitive as well as create new jobs preparing tomorrow’s low-carbon economy. With electrification conquering tomorrow’s automotive sector, the EU needs to transform its leading position in internal combustion engine technologies toward electric vehicles. The European Battery Alliance represents an example of this effort to avoid being left behind by other major technological hubs, notably China. Moreover, such initiatives are also motivated by energy security considerations, as technological know-how and access to rare earths are both needed for the transition.

The transformation of the European economy will cause profound socio-economic consequences. The EU must avoid negative distributive effects and minimize the burden of the transition. In 2019, the EU created the Just Transition Fund (JTF) to support the economic diversification and reconversion in areas negatively affected by the energy transition.

Although the EU decided to allocate funds to reduce the burden of the energy transition, the road toward carbon-neutrality is not exempt from challenges and opposition both among Member States and within Member States, especially in an increasingly polarized society. The EU is facing multiple divisions between East and West European countries as well as within its own societies between nationalism and Europeanism. At the national level, popular protests—like the French Yellow Vests—might erupt in the future because of the burden of additional costs of the transition and the loss of previous privileges, benefits and jobs, especially for the low- and middle-income classes. At the European level, some Member States are against a strong decarbonization due to their socio-economic characteristics and energy mix. For example, the Central and Eastern European countries regularly express their skepticism toward a full decarbonization because of the relevant role of coal in their economy.

Besides the internal European dimensions, the energy transition also includes external dimensions. The EU needs to cooperate with third countries to intensify the pursuit of a common and global response to climate change. In 2019, the EU accounted for about 9.5% of world’s CO₂ emissions, while China accounted for 28.8%, the US 14.5%, India 7.3% and Russia 4.5%. Thus, the participation and collaboration of other major world economies and emitters is crucial for achieving a global decarbonization and tackling climate change successfully. To do so, the EU engages with other countries pursuing a so-called climate diplomacy.

The EU also considers to implement a carbon border adjustment mechanism (CBAM) for certain sectors, in order to prevent potential reallocation of activities outside the EU (carbon leakage). The potential reallocation would be motivated by the need to avoid European climate policies and higher CO₂ prices. With a CBAM the price of imports would reflect more accurately their carbon content, ensuring that EU green targets are not undermined by producing goods in countries with less ambitious climate policies. However, the proposed mechanism encounters both legal and political obstacles. From the legal point of view, the EU must set a mechanism in line with WTO rules. Politically, such a mechanism encounters significant opposition from some major economies, notably the US, China and Russia. Despite the political controversy, the Commission included in its “Fit for 55” package a legislative proposal for the implementation of a CBAM, envisaging a transitional period until 2026 and for a limited set of goods.

In 2020, several major economies and emitters¹⁰ have pledged to reach carbon-neutrality by mid-century. The EU could benefit from the growing political commitment to carbon-neutrality worldwide. It will need to cooperate with those countries—and others which will commit in the future—to enhance the global effort to reach decarbonization and tackle climate change.

7 Conclusions

The EU energy mix has experienced successive transformations since World War II, driven by multiple goals (energy security, competitiveness and sustainability). As climate policies became more and more relevant over the last two decades, the EU strengthened its political commitment to reach carbon-neutrality by 2050. To achieve this goal, the EU must decarbonize all sectors, while developing all possible ways to offset remaining emissions. In this major effort, the EU has put in place several industrial policies in order to adjust and adapt its economy and remain competitive compared to other major economies and leading technological hubs, notably China.

However, the energy transition is not an easy path neither within the EU nor globally. Domestically, the energy transition could meet opposition both from specific population segments and from some Member States. Therefore, the EU seeks to avoid negative distributive effects reducing the burden of the transition for specific population segments as well as the most affected regions. Globally, the EU is engaging with other major economies and emitters in order to successfully tackle climate change and make sure that decarbonization gets implemented globally.