Europe's green push cuts emissions, but can its economy bear the cost now?

Europe's drive to cut emissions has delivered big climate gains, but soaring energy costs, factory closures and political backlash are forcing a tough choice between ecological ambition and economic s

Don't want to miss the best from Business Standard?

Europe set out to rescue the planet with the confidence of a continent that believed the idea itself could pay for itself. The sales pitch was simple: a promise of cleaner skies, greener jobs and cheaper power, all fitting neatly into one sweeping transition. But somewhere between shuttering coal plants and subsidising wind farms, the story turned on itself. Factories have begun to stutter, energy bills are swelling, and the continent is realising it has marched deep into a quagmire of its own making. In trying to save the environment, Europe now finds itself wondering how much of its economy it can afford to lose.

 

Nearly 20 years after Europe attempted to give its energy system a makeover, the results are far more complicated. According to The Wall Street Journal (WSJ), the continent has achieved the world’s steepest emissions drop of 30 per cent from 2005 levels, compared with a 17 per cent decline in the US. But it has come at the cost of higher electricity prices, industrial strain and deepening political tensions.

 

Europe cuts emissions but pays more for power

  The rush to renewable energy has, ironically, pushed up electricity prices across much of Europe. Germany now has the highest domestic electricity prices in the developed world, while the UK has the highest industrial rates, based on an International Energy Agency comparison of 28 major economies. Italy is close behind. Heavy industries in the European Union, on average, pay roughly twice as much for electricity as their US counterparts and about 50 per cent more than firms in China, the WSJ noted. Price volatility has also increased as reliance on intermittent power sources has grown.

 

These pressures are beginning to weigh on Europe’s economy and its efforts to lure power-hungry industries such as artificial intelligence and advanced computing, which depend on cheap, reliable electricity. Moreover, the high costs are adding to a wider cost-of-living burden for households.

 

What is driving industry pullbacks and power constraints across Europe? 

However, the story is not symmetrical across the continent. For example, Spain benefits from abundant sunshine, and Nordic nations leverage hydropower to stabilise their grids. France’s nuclear plants continue to support relatively lower costs. But across much of the continent, the report noted mounting evidence of strain.

 

In October, British chemical company Ineos said it would close two plants in western Germany over high energy costs. Days ago, ExxonMobil announced plans to shut its chemical plant in Scotland and threatened a broader exit from Europe’s chemicals industry, citing green policies that it said undermined competitiveness.

 

Electricity demand across Europe has fallen over the past 15 years partly because it has become so expensive, even as supply constraints have intensified. Ireland’s grid operator has effectively halted new data centre approvals until 2028 after such facilities consumed more than 20 per cent of national electricity output last year, WSJ said.

 

Is replacing fossil fuels entirely proving to be a flawed strategy? 

Unlike the US, China, India and Brazil, which are adding renewables while continuing to build fossil-fuel plants, Europe chose what the report described as an exclusively “or” strategy. It moved to replace fossil fuels rapidly through high carbon taxes, renewable subsidies and accelerated closures of fossil-fuel plants.

 

Britain last year became the first large industrialised economy to close all its coal-fired power stations. It has also banned new offshore oil-and-gas drilling. Denmark plans to eliminate gas for home heating by 2035, and around one-fifth of German municipal utilities aim to shut gas networks in the coming years.

 

The result is that Europe cut off a major energy source before the alternatives were fully in place. Consumers and businesses now face the disadvantages of both exposure to fossil-fuel price swings and large upfront costs to support renewable infrastructure. In the UK, levies and carbon taxes used to subsidise renewable energy and grid upgrades now make up nearly half of domestic bills and have risen faster than wholesale gas prices, the report noted.

 

Can Europe afford the next decade of investment to keep the transition on track? 

Goldman Sachs Research estimates that Europe will need to invest up to Euro 3 trillion over the next decade in power generation and infrastructure, about double what it has spent in the past 10 years. To make matters worse, governments will have to foot the bill amid issues of ageing populations (read: shrinking working-age labour force), higher defence spending and rising debt-servicing costs.

 

As a consequence, Europe’s energy transition, once marketed as seamless and cost-saving, is now entering a more complex and contested phase. The coming decade is set to test whether the region can build the infrastructure needed to make its green ambitions economically sustainable.