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- EU finance ministers aim to prevent market fragmentation with any energy price support
- EU Commission warns any response must be targeted, temporary and fiscally limited
- EU proposes support for vulnerable households to avoid inefficiencies
BRUSSELS, March 27 (Reuters) – European Union finance ministers will seek to coordinate on Friday their response to the energy price surge due to the Iran war, ensuring that the measures aid the vulnerable and move Europe further away from fossil fuels, while keeping the fiscal cost and demand in check.
Oil and gas prices have spiked since the U.S.-Israeli strikes on Iran began on February 28, creating a price shock similar to the energy crisis Europe went through after Russia invaded Ukraine in 2022, even as EU countries are now getting a lot more energy from renewable sources.
“EU-level coordination is essential to prevent market fragmentation and leverage economies of scale, thereby reducing the overall need for intervention,” the European Commission said in a note preparing the ministers’ discussions.
But because European governments don’t know how long the disruption to oil and gas shipments through the Strait of Hormuz will last, they are cautious about launching fiscally costly policies that might soon be unnecessary but will be hard to roll back.
EU finance ministers have invited the head of the International Energy Agency, Fatih Birol, to brief them on the latest developments.
“Short-term measures to provide relief to consumers (households and industries) could be considered,” the Commission said. “However, a key lesson from the 2022-2023 energy crisis is that many of these measures were broad and untargeted, leading to inefficiencies and very large fiscal costs.”
EU BETTER PLACED THAN BEFORE BUT STILL VULNERABLE
The Commission said the EU’s position had improved since 2022 as renewable sources now account for 48% of its energy, up from 36% in 2021.
But most of Europe’s cars and trucks still run on petrol, and almost 20% of Europe’s oil came from the Gulf, now largely shut off from business.
To reduce the impact of the more expensive oil and gas, the Commission proposed that governments could, as a preferred option, support the income of the most vulnerable households because that would not distort market price signals too much.
They could also encourage energy savings, such as the use of public transport, housing renovation, and energy efficiency in industry.
EU countries could also lower their taxes on electricity, but this measure should be used with caution because it could cut budget revenues at a time when most EU countries already struggle with high debt and relatively slow growth.
Finally, governments could consider price interventions for vulnerable consumers and firms in the form of two-tier pricing for electricity or natural gas, the Commission said.
The advantage of an arrangement where the price grows with usage is that it would provide price relief for vulnerable consumers and firms while keeping an incentive to save energy.
The Commission said any such measures should include a clear end-date. They could be financed from the carbon Emissions Trading System revenues, as well as taxing possible windfall profits of energy firms linked to high energy prices.
Reporting by Jan Strupczewski, editing by Andrei Khalip
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