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How the energy crisis started, how global energy markets are impacting our daily life, and what governments are doing about it

Global Energy Crisis

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What is the energy crisis?

Record prices, fuel shortages, rising poverty, slowing economies: the first energy crisis that's truly global.

Energy markets began to tighten in 2021 because of a variety of factors, including the extraordinarily rapid economic rebound following the pandemic. But the situation escalated dramatically into a full-blown global energy crisis following Russia’s invasion of Ukraine in February 2022. The price of natural gas reached record highs, and as a result so did electricity in some markets. Oil prices hit their highest level since 2008. 

Higher energy prices have contributed to painfully high inflation, pushed families into poverty, forced some factories to curtail output or even shut down, and slowed economic growth to the point that some countries are heading towards severe recession. Europe, whose gas supply is uniquely vulnerable because of its historic reliance on Russia, could face gas rationing this winter, while many emerging economies are seeing sharply higher energy import bills and fuel shortages. While today’s energy crisis shares some parallels with the oil shocks of the 1970s, there are important differences. Today’s crisis involves all fossil fuels, while the 1970s price shocks were largely limited to oil at a time when the global economy was much more dependent on oil, and less dependent on gas. The entire word economy is much more interlinked than it was 50 years ago, magnifying the impact. That’s why we can refer to this as the first truly global energy crisis.

Some gas-intensive manufacturing plants in Europe have curtailed output because they can’t afford to keep operating, while in China some have simply had their power supply cut. In emerging and developing economies, where the share of household budgets spent on energy and food is already large, higher energy bills have increased extreme poverty and set back progress towards achieving universal and affordable energy access. Even in advanced economies, rising prices have impacted vulnerable households and caused significant economic, social and political strains.

Climate policies have been blamed in some quarters for contributing to the recent run-up in energy prices, but there is no evidence. In fact, a greater supply of clean energy sources and technologies would have protected consumers and mitigated some of the upward pressure on fuel prices.

Russia's invasion of Ukraine drove European and Asian gas prices to record highs

Evolution of key regional natural gas prices, june 2021-october 2022, what is causing it, disrupted supply chains, bad weather, low investment, and then came russia's invasion of ukraine.

Energy prices have been rising since 2021 because of the rapid economic recovery, weather conditions in various parts of the world, maintenance work that had been delayed by the pandemic, and earlier decisions by oil and gas companies and exporting countries to reduce investments. Russia began withholding gas supplies to Europe in 2021, months ahead of its invasion of Ukraine. All that led to already tight supplies. Russia’s attack on Ukraine greatly exacerbated the situation . The United States and the EU imposed a series of sanctions on Russia and many European countries declared their intention to phase out Russian gas imports completely. Meanwhile, Russia has increasingly curtailed or even turned off its export pipelines. Russia is by far the world’s largest exporter of fossil fuels, and a particularly important supplier to Europe. In 2021, a quarter of all energy consumed in the EU came from Russia. As Europe sought to replace Russian gas, it bid up prices of US, Australian and Qatari ship-borne liquefied natural gas (LNG), raising prices and diverting supply away from traditional LNG customers in Asia. Because gas frequently sets the price at which electricity is sold, power prices soared as well. Both LNG producers and importers are rushing to build new infrastructure to increase how much LNG can be traded internationally, but these costly projects take years to come online. Oil prices also initially soared as international trade routes were reconfigured after the United States, many European countries and some of their Asian allies said they would no longer buy Russian oil. Some shippers have declined to carry Russian oil because of sanctions and insurance risk. Many large oil producers were unable to boost supply to meet rising demand – even with the incentive of sky-high prices – because of a lack of investment in recent years. While prices have come down from their peaks, the outlook is uncertain with new rounds of European sanctions on Russia kicking in later this year.

What is being done?

Pandemic hangovers and rising interest rates limit public responses, while some countries turn to coal.

Some governments are looking to cushion the blow for customers and businesses, either through direct assistance, or by limiting prices for consumers and then paying energy providers the difference. But with inflation in many countries well above target and budget deficits already large because of emergency spending during the Covid-19 pandemic, the scope for cushioning the impact is more limited than in early 2020. Rising inflation has triggered increases in short-term interest rates in many countries, slowing down economic growth. Europeans have rushed to increase gas imports from alternative producers such as Algeria, Norway and Azerbaijan. Several countries have resumed or expanded the use of coal for power generation, and some are extending the lives of nuclear plants slated for de-commissioning. EU members have also introduced gas storage obligations, and agreed on voluntary targets to cut gas and electricity demand by 15% this winter through efficiency measures, greater use of renewables, and support for efficiency improvements. To ensure adequate oil supplies, the IEA and its members responded with the two largest ever releases of emergency oil stocks. With two decisions – on 1 March 2022 and 1 April – the IEA coordinated the release of some 182 million barrels of emergency oil from public stocks or obligated stocks held by industry. Some IEA member countries independently released additional public stocks, resulting in a total of over 240 million barrels being released between March and November 2022.

The IEA has also published action plans to cut oil use with immediate impact, as well as plans for how Europe can reduce its reliance on Russian gas and how common citizens can reduce their energy consumption . The invasion has sparked a reappraisal of energy policies and priorities, calling into question the viability of decades of infrastructure and investment decisions, and profoundly reorientating international energy trade. Gas had been expected to play a key role in many countries as a lower-emitting "bridge" between dirtier fossil fuels and renewable energies. But today’s crisis has called into question natural gas’ reliability.

The current crisis could accelerate the rollout of cleaner, sustainable renewable energy such as wind and solar, just as the 1970s oil shocks spurred major advances in energy efficiency, as well as in nuclear, solar and wind power. The crisis has also underscored the importance of investing in robust gas and power network infrastructure to better integrate regional markets. The EU’s RePowerEU, presented in May 2022 and the United States’ Inflation Reduction Act , passed in August 2022, both contain major initiatives to develop energy efficiency and promote renewable energies. 

The global energy crisis can be a historic turning point

Energy saving tips

1. Heating: turn it down

Lower your thermostat by just 1°C to save around 7% of your heating energy and cut an average bill by EUR 50-70 a year. Always set your thermostat as low as feels comfortable, and wear warm clothes indoors. Use a programmable thermostat to set the temperature to 15°C while you sleep and 10°C when the house is unoccupied. This cuts up to 10% a year off heating bills. Try to only heat the room you’re in or the rooms you use regularly.

The same idea applies in hot weather. Turn off air-conditioning when you’re out. Set the overall temperature 1 °C warmer to cut bills by up to 10%. And only cool the room you’re in.

2. Boiler: adjust the settings

Default boiler settings are often higher than you need. Lower the hot water temperature to save 8% of your heating energy and cut EUR 100 off an average bill.  You may have to have the plumber come once if you have a complex modern combi boiler and can’t figure out the manual. Make sure you follow local recommendations or consult your boiler manual. Swap a bath for a shower to spend less energy heating water. And if you already use a shower, take a shorter one. Hot water tanks and pipes should be insulated to stop heat escaping. Clean wood- and pellet-burning heaters regularly with a wire brush to keep them working efficiently.

3. Warm air: seal it in

Close windows and doors, insulate pipes and draught-proof around windows, chimneys and other gaps to keep the warm air inside. Unless your home is very new, you will lose heat through draughty doors and windows, gaps in the floor, or up the chimney. Draught-proof these gaps with sealant or weather stripping to save up to EUR 100 a year. Install tight-fitting curtains or shades on windows to retain even more heat. Close fireplace and chimney openings (unless a fire is burning) to stop warm air escaping straight up the chimney. And if you never use your fireplace, seal the chimney to stop heat escaping.

4. Lightbulbs: swap them out

Replace old lightbulbs with new LED ones, and only keep on the lights you need. LED bulbs are more efficient than incandescent and halogen lights, they burn out less frequently, and save around EUR 10 a year per bulb. Check the energy label when buying bulbs, and aim for A (the most efficient) rather than G (the least efficient). The simplest and easiest way to save energy is to turn lights off when you leave a room.

5. Grab a bike

Walking or cycling are great alternatives to driving for short journeys, and they help save money, cut emissions and reduce congestion. If you can, leave your car at home for shorter journeys; especially if it’s a larger car. Share your ride with neighbours, friends and colleagues to save energy and money. You’ll also see big savings and health benefits if you travel by bike. Many governments also offer incentives for electric bikes.

6. Use public transport

For longer distances where walking or cycling is impractical, public transport still reduces energy use, congestion and air pollution. If you’re going on a longer trip, consider leaving your car at home and taking the train. Buy a season ticket to save money over time. Your workplace or local government might also offer incentives for travel passes. Plan your trip in advance to save on tickets and find the best route.

7. Drive smarter

Optimise your driving style to reduce fuel consumption: drive smoothly and at lower speeds on motorways, close windows at high speeds and make sure your tires are properly inflated. Try to take routes that avoid heavy traffic and turn off the engine when you’re not moving. Drive 10 km/h slower on motorways to cut your fuel bill by around EUR 60 per year. Driving steadily between 50-90 km/h can also save fuel. When driving faster than 80 km/h, it’s more efficient to use A/C, rather than opening your windows. And service your engine regularly to maintain energy efficiency.

Analysis and forecast to 2026

Fuel report — December 2023

Europe’s energy crisis: Understanding the drivers of the fall in electricity demand

Commentary — 09 May 2023

Where things stand in the global energy crisis one year on

Commentary — 23 February 2023

The global energy crisis pushed fossil fuel consumption subsidies to an all-time high in 2022

Commentary — 16 February 2023

Fossil Fuels Consumption Subsidies 2022

Policy report — February 2023

Background note on the natural gas supply-demand balance of the European Union in 2023

Report — February 2023

Analysis and forecast to 2025

Fuel report — December 2022

How to Avoid Gas Shortages in the European Union in 2023

A practical set of actions to close a potential supply-demand gap

Flagship report — December 2022

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The world’s energy problem

The world faces two energy problems: most of our energy still produces greenhouse gas emissions, and hundreds of millions lack access to energy..

The world lacks safe, low-carbon, and cheap large-scale energy alternatives to fossil fuels. Until we scale up those alternatives the world will continue to face the two energy problems of today. The energy problem that receives most attention is the link between energy access and greenhouse gas emissions. But the world has another global energy problem that is just as big: hundreds of millions of people lack access to sufficient energy entirely, with terrible consequences to themselves and the environment.

The problem that dominates the public discussion on energy is climate change. A climate crisis endangers the natural environment around us, our wellbeing today and the wellbeing of those who come after us.

It is the production of energy that is responsible for 87% of global greenhouse gas emissions and as the chart below shows, people in the richest countries have the very highest emissions.

This chart here will guide us through the discussion of the world's energy problem. It shows the per capita CO2 emissions on the vertical axis against the average income in that country on the horizontal axis.

In countries where people have an average income between $15,000 and $20,000, per capita CO 2 emissions are close to the global average ( 4.8 tonnes CO 2 per year). In every country where people's average income is above $25,000 the average emissions per capita are higher than the global average.

The world’s CO 2 emissions have been rising quickly and reached 36.6 billion tonnes in 2018 . As long as we are emitting greenhouse gases their concentration in the atmosphere increases . To bring climate change to an end the concentration of greenhouse gases in the atmosphere needs to stabilize and to achieve this the world’s greenhouse gas emissions have to decline towards net-zero.

To bring emissions down towards net-zero will be one of the world’s biggest challenges in the years ahead. But the world’s energy problem is actually even larger than that, because the world has not one, but two energy problems.

The twin problems of global energy

The first energy problem: those that have low carbon emissions lack access to energy.

The first global energy problem relates to the left-hand side of the scatter-plot above.

People in very poor countries have very low emissions. On average, people in the US emit more carbon dioxide in 4 days than people in poor countries – such as Ethiopia, Uganda, or Malawi – emit in an entire year. 1

The reason that the emissions of the poor are low is that they lack access to modern energy and technology. The energy problem of the poorer half of the world is energy poverty . The two charts below show that large shares of people in countries with a GDP per capita of less than $25,000 do not have access to electricity and clean cooking fuels. 2

The lack of access to these technologies causes some of the worst global problems of our time.

When people lack access to modern energy sources for cooking and heating, they rely on solid fuel sources – mostly firewood, but also dung and crop waste. This comes at a massive cost to the health of people in energy poverty: indoor air pollution , which the WHO calls "the world's largest single environmental health risk." 3 For the poorest people in the world it is the largest risk factor for early death and global health research suggests that indoor air pollution is responsible for 1.6 million deaths each year, twice the death count of poor sanitation. 4

The use of wood as a source of energy also has a negative impact on the environment around us. The reliance on fuelwood is the reason why poverty is linked to deforestation. The FAO reports that on the African continent the reliance on wood as fuel is the single most important driver of forest degradation. 5 Across East, Central, and West Africa fuelwood provides more than half of the total energy. 6

Lastly, the lack of access to energy subjects people to a life in poverty. No electricity means no refrigeration of food; no washing machine or dishwasher; and no light at night. You might have seen the photos of children sitting under a street lamp at night to do their homework. 7

The first energy problem of the world is the problem of energy poverty – those that do not have sufficient access to modern energy sources suffer poor living conditions as a result.

The second energy problem: those that have access to energy produce greenhouse gas emissions that are too high

The second energy problem is the one that is more well known, and relates to the right hand-side of the scatterplot above: greenhouse gas emissions are too high.

Those that need to reduce emissions the most are the extremely rich. Diana Ivanova and Richard Wood (2020) have just shown that the richest 1% in the EU emit on average 43 tonnes of CO 2 annually – 9-times as much as the global average of 4.8 tonnes. 8

The focus on the rich, however, can give the impression that it is only the emissions of the extremely rich that are the problem. What isn’t made clear enough in the public debate is that for the world's energy supply to be sustainable the greenhouse gas emissions of the majority of the world population are currently too high. The problem is larger for the extremely rich, but it isn’t limited to them.

The Paris Agreement's goal is to keep the increase of the global average temperature to well below 2°C above pre-industrial levels and “to pursue efforts to limit the temperature increase to 1.5°C”. 9

To achieve this goal emissions have to decline to net-zero within the coming decades.

Within richer countries, where few are suffering from energy poverty, even the emissions of the very poorest people are far higher. The paper by Ivanova and Wood shows that in countries like Germany, Ireland, and Greece more than 99% of households have per capita emissions of more than 2.4 tonnes per year.

The only countries that have emissions that are close to zero are those where the majority suffers from energy poverty. 10 The countries that are closest are the very poorest countries in Africa : Malawi, Burundi, and the Democratic Republic of Congo.

But this comes at a large cost to themselves as this chart shows. In no poor country do people have living standards that are comparable to those of people in richer countries.

And since living conditions are better where GDP per capita is higher, it is also the case that CO 2 emissions are higher where living conditions are better. Emissions are high where child mortality is the lowest , where children have good access to education, and where few of them suffer from hunger .

The reason for this is that as soon as people get access to energy from fossil fuels their emissions are too high to be sustainable over the long run (see here ).

People need access to energy for a good life. But in a world where fossil fuels are the dominant source of energy, access to modern energy means that carbon emissions are too high.

The more accurate description of the second global energy problem is therefore: the majority of the world population – all those who are not very poor – have greenhouse gas emissions that are far too high to be sustainable over the long run.

The current alternatives are energy poverty or fossil-fuels and greenhouse gases

The chart here is a version of the scatter plot above and summarizes the two global energy problems: In purple are those that live in energy poverty, in blue those whose greenhouse gas emissions are too high if we want to avoid severe climate change.

So far I have looked at the global energy problem in a static way, but the world is changing  of course.

For millennia all of our ancestors lived in the pink bubble: the reliance on wood meant they suffered from indoor air pollution; the necessity of acquiring fuelwood and agricultural land meant deforestation; and minimal technology meant that our ancestors lived in conditions of extreme poverty.

In the last two centuries more and more people have moved from the purple to the blue area in the chart. In many ways this is a very positive development. Economic growth and increased access to modern energy improved people's living conditions. In rich countries almost no one dies from indoor air pollution and living conditions are much better in many ways as we've seen above. It also meant that we made progress against the ecological downside of energy poverty: The link between poverty and the reliance on fuelwood is one of the key reasons why deforestation declines with economic growth. 11 And progress in that direction has been fast: on any average day in the last decade 315,000 people in the world got access to electricity for the first time in their life.

But while living conditions improved, greenhouse gas emissions increased.

The chart shows what this meant for greenhouse gas emissions over the last generation. The chart is a version of the scatter plot above, but it shows the change over time – from 1990 to the latest available data.

The data is now also plotted on log-log scales which has the advantage that you can see the rates of change easily. On a logarithmic axis the steepness of the line corresponds to the rate of change. What the chart shows is that low- and middle-income countries increased their emissions at very similar rates.

By default the chart shows the change of income and emission for the 14 countries that are home to more than 100 million people, but you can add other countries to the chart.

What has been true in the past two decades will be true in the future. For the poorer three-quarters of the world income growth means catching up with the good living conditions of the richer world, but unless there are cheap alternatives to fossil fuels it also means catching up with the high emissions of the richer world.

Our challenge: find large-scale energy alternatives to fossil fuels that are affordable, safe and sustainable

The task for our generation is therefore twofold: since the majority of the world still lives in poor conditions, we have to continue to make progress in our fight against energy poverty. But success in this fight will only translate into good living conditions for today’s young generation when we can reduce greenhouse gas emissions at the same time.

Key to making progress on both of these fronts is the source of energy and its price . Those living in energy poverty cannot afford sufficient energy and those that left the worst poverty behind rely on fossil fuels to meet their energy needs.

Once we look at it this way it becomes clear that the twin energy problems are really the two sides of one big problem. We lack large-scale energy alternatives to fossil fuels that are cheap, safe, and sustainable.

This last version of the scatter plot shows what it would mean to have such energy sources at scale. It would allow the world to leave the unsustainable current alternatives behind and make the transition to the bottom right corner of the chart: the area marked with the green rectangle where emissions are net-zero and everyone has left energy poverty behind.

Without these technologies we are trapped in a world where we have only bad alternatives: Low-income countries that fail to meet the needs of the current generation; high-income countries that compromise the ability of future generations to meet their needs; and middle-income countries that fail on both counts.

Since we have not developed all the technologies that are required to make this transition possible large scale innovation is required for the world to make this transition. This is the case for most sectors that cause carbon emissions , in particular in the transport (shipping, aviation, road transport) and heating sectors, but also cement production and agriculture.

One sector where we have developed several alternatives to fossil fuels is electricity. Nuclear power and renewables emit far less carbon (and are much safer) than fossil fuels. Still, as the last chart shows, their share in global electricity production hasn't changed much: only increasing from 36% to 38% in the last three decades.

But it is possible to do better. Some countries have scaled up nuclear power and renewables and are doing much better than the global average. You can see this if you change the chart to show the data for France and Sweden – in France 92% of electricity comes from low carbon sources, in Sweden it is 99%. The consequence of countries doing better in this respect should be that they are closer to the sustainable energy world of the future. The scatter plot above shows that this is the case.

But for the global energy supply – especially outside the electricity sector – the world is still far away from a solution to the world's energy problem.

Every country is still very far away from providing clean, safe, and affordable energy at a massive scale and unless we make rapid progress in developing these technologies we will remain stuck in the two unsustainable alternatives of today: energy poverty or greenhouse gas emissions.

As can be seen from the chart, the ratio of emissions is 17.49t / 0.2t = 87.45. And 365 days/87.45=4.17 days

It is worth looking into the cutoffs for what it means – according to these international statistics – to have access to energy. The cutoffs are low.

See Raising Global Energy Ambitions: The 1,000 kWh Modern Energy Minimum and IEA (2020) – Defining energy access: 2020 methodology, IEA, Paris.

WHO (2014) – Frequently Asked Questions – Ambient and Household Air Pollution and Health . Update 2014

While it is certain that the death toll of indoor air pollution is high, there are widely differing estimates. At the higher end of the spectrum, the WHO estimates a death count of more than twice that. We discuss it in our entry on indoor air pollution .

The 2018 estimate for premature deaths due to poor sanitation is from the same analysis, the Global Burden of Disease study. See here .

FAO and UNEP. 2020. The State of the World’s Forests 2020. Forests, biodiversity and people. Rome. https://doi.org/10.4060/ca8642en

The same report also reports that an estimated 880 million people worldwide are collecting fuelwood or producing charcoal with it.

This is according to the IEA's World Energy Balances 2020. Here is a visualization of the data.

The second largest energy source across the three regions is oil and the third is gas.

The photo shows students study under the streetlights at Conakry airport in Guinea. It was taken by Rebecca Blackwell for the Associated Press.

It was published by the New York Times here .

The global average is 4.8 tonnes per capita . The richest 1% of individuals in the EU emit 43 tonnes per capita – according to Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1–12. https://doi.org/10.1017/sus.2020.12

On Our World in Data my colleague Hannah Ritchie has looked into a related question and also found that the highest emissions are concentrated among a relatively small share of the global population: High-income countries are home to only 16% of the world population, yet they are responsible for almost half (46%) of the world’s emissions.

Article 2 of the Paris Agreement states the goal in section 1a: “Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.”

It is an interesting question whether there are some subnational regions in richer countries where a larger group of people has extremely low emissions; it might possibly be the case in regions that rely on nuclear energy or renewables (likely hydro power) or where aforestation is happening rapidly.

Crespo Cuaresma, J., Danylo, O., Fritz, S. et al. Economic Development and Forest Cover: Evidence from Satellite Data. Sci Rep 7, 40678 (2017). https://doi.org/10.1038/srep40678

Bruce N, Rehfuess E, Mehta S, et al. Indoor Air Pollution. In: Jamison DT, Breman JG, Measham AR, et al., editors. Disease Control Priorities in Developing Countries. 2nd edition. Washington (DC): The International Bank for Reconstruction and Development / The World Bank; 2006. Chapter 42. Available from: https://www.ncbi.nlm.nih.gov/books/NBK11760/ Co-published by Oxford University Press, New York.

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• Published: 16 February 2023

Burden of the global energy price crisis on households

• Yuru Guan   ORCID: orcid.org/0000-0003-4426-7017 1   na1 ,
• Jin Yan 1   na1 ,
• Yuli Shan   ORCID: orcid.org/0000-0002-5215-8657 1 , 2 ,
• Yannan Zhou   ORCID: orcid.org/0000-0001-8982-5030 1 , 3 , 4 ,
• Ye Hang 1 , 5 ,
• Ruoqi Li 1 , 6 ,
• Binyuan Liu 1 ,
• Qingyun Nie 1 , 8 ,
• Benedikt Bruckner 1 ,
• Kuishuang Feng   ORCID: orcid.org/0000-0001-5139-444X 9 &
• Klaus Hubacek   ORCID: orcid.org/0000-0003-2561-6090 1  

Nature Energy volume  8 ,  pages 304–316 ( 2023 ) Cite this article

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• Energy economics
• Energy policy
• Energy supply and demand

The Russia–Ukraine conflict has triggered an energy crisis that directly affected household energy costs for heating, cooling and mobility and indirectly pushed up the costs of other goods and services throughout global supply chains. Here we bridge a global multi-regional input–output database with detailed household-expenditure data to model the direct and indirect impacts of increased energy prices on 201 expenditure groups in 116 countries. On the basis of a set of energy price scenarios, we show that total energy costs of households would increase by 62.6–112.9%, contributing to a 2.7–4.8% increase in household expenditures. The energy cost burdens across household groups vary due to differences in supply chain structure, consumption patterns and energy needs. Under the cost-of-living pressures, an additional 78 million–141 million people will potentially be pushed into extreme poverty. Targeted energy assistance can help vulnerable households during this crisis. We emphasize support for increased costs of necessities, especially for food.

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The refinery of the future

Energy markets have tightened since the COVID-19 pandemic, and the situation was exacerbated considerably following the Russia–Ukraine conflict in late February 2022, contributing to a global energy crisis 1 . Global energy prices surge because of a variety of factors, including the ongoing geopolitical conflict, a rapid global post-pandemic economic recovery, continued high reliance on fossil fuels and the severe mismatch between energy demand and supply 1 , 2 . Russia is a major exporter of oil (12.3% of global supply in 2021) and natural gas (23.6%) 3 . European countries reliant on oil and natural gas imports from Russia, already at high risk since gas storages were nearly and probably deliberately emptied before the war 4 , face unprecedented fuel supply shortages only slightly tempered by slowing economic growth and a mild winter in 2022–2023. At the same time, emerging economies suffer from high fuel-import costs and fuel deprivation 5 , 6 . Missed opportunities to redirect investments after the COVID-19 crisis with huge amounts of money used to kick-start the economy 7 and earlier slow progress in the energy transition 8 are reflected in and have been amplifying the dependency on fossil fuel imports and the severity of the cost-of-living crisis. This crisis has pushed a number of economies into recession, caused higher inflation 9 , and put painful cost-of-living pressures on households around the world 10 , 11 .

High energy prices impose cost burdens on households in two ways. On the one hand, fuel price rises directly increase household fuel bills (for example, for heating and cooling, cooking and mobility). On the other hand, energy and fossil feedstock inputs needed for the production of goods and services for final household consumption will lead to higher prices of household-expenditure items 12 , 13 . Due to the unequal distribution of income, reflected in different household consumption patterns, surging energy prices could affect households in very different ways 11 , 14 , 15 . Unaffordable costs of energy and other necessities would push vulnerable populations into energy poverty and even extreme poverty 16 . Understanding how global energy prices are transmitted to households through global supply chains and how they are affected is crucial for effective and equitable policy design.

Numerous studies have analysed the potential impacts of the Russia–Ukraine conflict on the energy system 8 , 17 , 18 , global food supply 19 , 20 , 21 , 22 and global economy 9 , 23 . In terms of household losses, research has focused on increased household energy costs 14 , 15 , 24 , energy insecurity 17 , 25 and poverty 16 caused by the crisis. However, quantitative research on the distribution of effects across households is limited, especially for developing countries. Many governments have introduced multiple fiscal measures to subsidize soaring energy bills for households 24 , 26 . These measures might be insufficient given the burden imposed by energy costs.

To fill these gaps, this paper provides a detailed assessment of the energy price shock on households and highlights the disparities of direct and indirect energy burden across different expenditure groups. We conduct a global comparative analysis of household burden across consumption levels under a set of price scenarios triggered by the Russia–Ukraine conflict. We design one base case and nine energy price scenarios (Supplementary Table 1 ) to examine the potential impacts of global price spikes on five fuels and fuel products (that is, coal, coal products, crude oil, petroleum products and natural gas). By linking a highly detailed expenditure database 27 based on the World Bank’s Global Consumption Database (WBGCD) 28 to a global multi-regional input–output database 29 , we model the direct and indirect burden of increased energy prices on households with different consumption patterns. We distinguish between 201 expenditure groups in 116 different countries, covering 87.4% of the global population, with a focus on developing countries. Given huge cost-of-living pressures, we quantify the additional population in energy poverty and extreme poverty under each price scenario. Our model captures short-term effects including ripple effects through global supply chains (Methods) 30 , 31 . It provides robust results at fine-sector resolution for a large number of countries and categories of households. Our results help to identify vulnerable households, thereby offering a basis for targeted support measures. Assumptions and limitations are given in Methods.

Surge in household burden for different scenarios

Since the conflict began, energy prices have increased sharply but with varying levels and volatilities for different fuels (as shown in Fig. 1 ). To measure the impacts triggered by this crisis, we collected recent global daily energy price data. We set the pre-crisis energy price scenario (SC0) to the average energy prices of 2021. For comparison, we set nine additional energy price scenarios (SC1–SC9) to reflect price changes for coal and coal products, crude oil and petroleum products and natural gas since 24 February 2022. SC1 refers to the average price scenario based on average prices from 24 February to 13 September 2022. SC2–SC8 model the possible effects under monthly average price increases. SC9 is an extreme scenario (based on peak prices for all fuels). Differences in levels and combinations of energy price increases help to reveal the potential magnitude of short-term impacts on households’ cost burden.

Prices for crude oil (Brent; orange), natural gas (US natural gas futures; blue) and coal (Newcastle; red) are shown. SC1 (horizontal dashed lines) refers to the average price for coal and coal products (+176%), crude oil and petroleum products (+51%) and natural gas (+94%) from 24 February to 13 September 2022. SC9 (black circles) refers to peak prices for coal and coal products (+235%), crude oil and petroleum products (+80%) and natural gas (+159%) during this period. SC2–SC8 (highlighted by vertical dotted lines) refer to monthly average prices. All references for price-scenario settings are provided in Supplementary Table 1 .

As shown in Fig. 2 , we assessed the changes in household energy costs, including direct energy costs for fossil fuel bills and indirect energy costs that affect price changes in goods and services based on energy requirements and input of fossil feedstock to production throughout global supply chains. Rising energy prices have created additional burdens on households’ daily consumption. We calculated the change in energy cost burden rates, which refers to additional energy costs in household total expenditure compared with pre-crisis levels. We choose the share of total expenditures rather than income as the former is less volatile, effectively reflecting patterns in household income, consumption and asset accumulation 32 .

a – c , Bars refer to per capita household energy cost increases compared with the pre-crisis energy price (SC0) for total ( a ), direct ( b ) and indirect ( c ) costs. Stacked bars show the contribution of each fuel to energy cost increases with blue representing natural gas, orange representing oil and petroleum products and red representing coal and coal products. Yellow dots refer to the increases in per capita energy cost burden rate (that is, the additional energy cost as a percentage of total household expenditure).

Under different energy price scenarios, total per capita household energy costs increased by a range of 62.6% (SC3) to 112.9% (SC9) at the global level, contributing to a 2.7–4.8% increase in household expenditure. Direct energy costs contributed 15.0–29.6% of additional costs, while indirect costs contributed 44.8–83.4%. Households’ indirect energy costs increased considerably more than their direct energy costs. Taking SC1 as an example, indirect energy costs rose by 82.3% (2.4% of total expenditure), compared with a 56.8% (0.8% of total expenditure) increase in direct energy costs. Rising prices for crude oil and petroleum products contributed the majority of the increase in total household energy costs (23.6–56.6%), followed by coal and coal products (14.0–28.8%) and natural gas (4.9–27.5%). The difference in fuel products’ contribution becomes larger when only direct energy costs are considered (that is, 29.7–71.3% from crude oil and petroleum products, 2.9–16.5% from natural gas and 1.1–2.3% from coal and coal products).

Energy cost burden for households across countries

As shown in Fig. 3 , direct and indirect impacts of household burden show considerably different distributions across countries. The distribution of total impacts is mainly determined by indirect impacts (Supplementary Fig. 1 ). Under SC1, the increases in direct energy costs of households in 116 countries range from 51.1% to 176.1%. Central Asian households saw the largest increases (70.3%), particularly in Mongolia (176.1%) and Tajikistan (176.1%). In comparison, Latin American households were the least directly affected (51.5%). When we consider the total (both direct and indirect) energy cost changes, households in Central Asia are still the most affected (80.7%), followed by South and Southeast Asia (74.5%). For example, direct energy costs for households in Laos ‘only’ increased by 51.1% (0.9% of total expenditure), but their total energy costs increased by 100.8% (5.2% of total expenditure). Total energy cost increases for households in Russia (71.6%) are slightly lower than the global average (73.9%).

SC1 refers to average prices for coal and coal products (+176%), crude oil and petroleum products (+51%) and natural gas (+94%) from 24 February to 13 September 2022. a , Direct impacts. b , Total (that is, direct and indirect) impacts. The colour of countries shows the per capita energy cost increase (grey countries are missing from the WBGCD and are not analysed). The size of the circle refers to the change in the per capita energy cost burden rate (that is, the additional energy cost as a percentage of total household expenditure). The results shown here do not involve actual devastation and disruption of production caused by the war and national measures to alleviate cost burdens such as national transfer payments and subsidies (more information is provided in the Limitations section in Methods). Base map layer: ‘World Countries’. Downloaded from http://tapiquen-sig.jimdo.com . Carlos Efraín Porto Tapiquén. Orogénesis Soluciones Geográficas. Porlamar, Venezuela 2015. Based on shapes from Environmental Systems Research Institute. Free distribution.

Higher energy costs imposed different levels of additional burdens on household consumption. Countries’ direct and indirect energy cost burden rates show different results. When considering only direct impacts, many sub-Saharan African and central Asian countries face huge increases in energy cost burden rates. Angola (6.4%), Azerbaijan (3.5%) and Benin (3.5%) are the top three countries. In terms of total burden rates, the largest increase occurred in Tajikistan (12.7%). Overall, the burden of household energy costs increased more in lower-income economies.

Notably, for some countries in sub-Saharan Africa, we found that the increases in household energy costs would be relatively small, but the burden rate would increase substantially. In the case of households in Rwanda, a low-income country in East Africa, its total energy cost increase (59.5%) would be 19.5% lower than the global average (73.9%). In comparison, Rwanda’s total energy cost burden rates would increase by 11.1%, three times higher than the global average (3.2%). One reason is that residential energy use in these countries is less dependent on fossil fuels (for example, 99.6% of households in Rwanda cooked with biomass in 2018 (ref. 33 )), but the indirect energy costs through the supply chain have large negative impacts on these poor households.

To highlight the differences between economies at different income levels, we grouped country-level results into four groups based on the latest World Bank country classification by income 34 . In general, direct impacts for countries in each income group are more concentrated around the global average than their indirect results (Supplementary Fig. 2 ). It implies that household direct energy use is more uniform, but global supply chains vary widely across countries. For example, indirect impacts in middle-income economies have a larger variance than their direct impacts, compared with households in high- and low-income countries due to their consumption patterns and structure of supply chains. When considering total impacts, households in upper-middle-income countries show larger energy cost increases (a median of 68.1%). There are 19 countries where the average energy cost increases for households are higher than the world average, 16 of which are upper-middle- and lower-middle-income countries. Households in three high-income countries (Estonia (82.3%), Poland (78.0%) and the Czech Republic (75.5%)) suffer from above-global-average rises in energy costs, mainly due to their relatively high dependence on energy-intensive industries. In contrast, changes in energy costs for households in high-income and low-income countries are more clustered below the world average. The difference is that most high-income countries also have below-average rates of energy costs to total expenditure, which means more expenditure is spent on less energy-intensive products and services. In low-income countries, for poorer households already facing extreme energy poverty and severe food shortages, an increase in energy cost could lead to a greater risk of energy poverty 14 .

In addition, we decomposed the indirect impacts of rising energy prices on households into 33 expenditure items for 116 countries. Figure 4 shows the results for electricity, food and other items. Across different expenditure categories, changes in household energy burden are disproportionate to their pre-crisis energy cost burden rates (SC0). Compared with other items, households’ electricity costs tend to be most affected, but with large disparities between countries. For low-income countries, the cost increase in electricity (a median of 72.9%) is much lower than the global average (114.5%) because many households still lack access to electricity 35 . For upper-middle- (a median of 93.2%) and lower-middle-income (a median of 83.0%) countries, the impacts on electricity costs vary widely across countries. For example, electricity costs increased by 172.4% in Laos but only 56.7% in Haiti (a Latin American country). Energy cost changes in electricity in most high-income countries are below global levels because their electricity systems are less dependent on fossil fuels and thus less affected by rising fuel prices 36 . But there are noteworthy exceptions. For example, the electricity costs for Polish households are more affected than in other European countries because Poland is more dependent on coal for electricity generation (68.5% of coal power in 2020 (ref. 37 )). When considering food consumption, the increase in energy costs is lower than that for electricity in most countries. Taking Kyrgyzstan (a country in central Asia) as an example, the increase in indirect energy costs for food (79.7%) in Kyrgyzstan is 40.5% lower than its rising electricity costs (133.9%). The energy cost-burden rate for food (1.7%) in Kyrgyzstan is 349.6% higher than for electricity (0.4%). In addition, for households in most low-income countries, the increase in indirect energy costs in food expenditure is slightly higher than for other products. It is noteworthy that under the pre-crisis scenario (SC0), Ukrainian households bore a huge cost burden from food consumption. Although the study does not consider war-induced supply chain disruptions, it can be inferred that soaring energy prices greatly exacerbated this burden.

The x axis represents the per capita energy cost burden rate (that is, the energy cost as a percentage of total household expenditure) under SC0 (that is, the pre-crisis energy price). The y axis represents the change in per capita energy cost between SC0 and SC1 (that is, average prices for coal and coal products (+176%), crude oil and petroleum products (+51%) and natural gas (+94%) from 24 February to 13 September 2022). The size of the bubble indicates the average per capita daily expenditure, expressed in 2021 purchasing power parity (PPP) for each country. The dotted lines represent the global average. The numbers in the upper right corner of each box are the median (Med.) for that group. The classification of countries by income is based on the World Bank 34 .

Distribution of energy cost burden across expenditure groups

We further explored the uneven effects across household groups by using detailed survey data from 116 countries. To highlight the differences between economies at different income levels, we aggregated the country-level results into four income groups.

We examined the distribution of direct and indirect energy cost burden (both energy cost change and burden rate) for population deciles under SC1 (Fig. 5 ). We found substantial variations in household burden across population deciles. In general, the distribution of total burden in high- and low-income countries is largely dominated by their indirect burden, while that in middle-income countries depends to a larger extent on their direct results. For energy cost burden rates, the differences among population deciles are huge in upper- and lower-middle-income countries. Poorer households tend to bear higher total energy burden rates than richer households in most countries. Only for households in low-income countries, the total energy cost-burden rates show a progressive trend. When only the direct burden is considered, poorer households have lower increases in energy costs but suffer from higher burden rates, especially in middle-income countries.

SC1 refers to average prices for coal and coal products (+176%), crude oil and petroleum products (+51%) and natural gas (+94%) from 24 February to 13 September 2022. Points/curves show the per capita energy cost changes (in percent) per expenditure decile. The size of the circle refers to the energy cost burden rate (that is, the energy cost as a percentage of total household expenditure). The height of points on curves and the size of circles are comparable only within each subplot. The range (Δ, the maximum minus the minimum) among population deciles for each subplot is given in the upper right corner. Δcc equals the highest energy cost increases minus the lowest energy cost increases in each subplot. Δbr indicates the highest energy cost burden rates minus the lowest rates in each subplot.

The distribution of energy cost burden rates differs across household consumption categories. It is worth noting that the impacts on household food consumption are regressive across all country groups. Rising energy prices impose a huge burden on food consumption of the bottom 10% of the population. For example, the average energy cost burden rate in food of the bottom 10% of the population in Guinea (a West African country) is 65.7% higher than that of Guinea’s top 10%. For electricity, it is regressive within high- and upper-middle-income countries but progressive in low- and lower-middle-income countries.

We found the distributional effects differ notably between and within countries. Most of the high-income countries, such as the United States and Germany, show regressive effects, with poorer deciles facing higher rates of energy cost burden. Some countries, such as China, show greater cost increases in middle population deciles (trend shows inverted U shapes). Even countries with regressive or progressive distribution patterns, the burden of energy costs across population deciles can differ considerably. For example, Rwanda (a sub-Saharan African country) and Luxembourg (a high-income European country) show regressive effects. However, the total energy cost burden rate of the poorest decile in Rwanda is six times higher than the burden rate of the poorest decile in Luxembourg and ten times higher than that of the wealthiest decile in Luxembourg.

Differences in distribution between countries are determined by consumption structure and their supply chains. We investigated consumption patterns of groups via decomposing their energy cost-related expenditures, as shown in Fig. 6 . Wealthier groups tend to have higher energy costs on goods and services with high value added, while poorer households tend to spend more on meeting daily needs such as food and direct energy. More vulnerable households tend to be more reliant on purchasing energy-intensive, processed goods and services. For each country group, direct energy and electricity use plays a dominant role, followed by food and clothing. For high-income countries, the proportion of direct energy costs is similar and relatively small across population deciles. Households bear declining direct energy cost burdens as their consumption levels increase in middle-income countries. For households in low-income countries, indirect energy services contribute notably to energy costs across all population deciles, especially poorer ones. Embodied energy costs in food consumption vary across populations and across different countries. For example, for the bottom 10% of the population in low-income countries, energy costs embodied in food consumption accounted for 24.9% of total energy costs, compared with 10.2% for the top 10% in high-income countries.

SC0 refers to the pre-crisis energy price. We aggregated 33 expenditure items represented in the WBGCD into nine sub-categories (Supplementary Table 2 ). Energy use for private transport is included in ‘Direct energy’. ‘Transport’ includes transportation services and motor equipment purchased by households.

Additional poverty caused by the energy crisis

Rising energy prices are making households more vulnerable to energy poverty, particularly during the cold season 38 . People in energy poverty do not have access to affordable energy services that support a decent standard of living, including adequate heating, cooling, lighting and energy to power appliances 39 . The International Energy Agency (IEA) recently reported that the number of people living without electricity is increasing worldwide. The IEA predicts that the population without access to electricity will rise by 2.7% in 2022 compared with 2021, with the rise occurring mostly in sub-Saharan Africa 25 . In this study, households are defined as being in energy poverty when their energy costs account for more than 10% of total expenditures 40 . We found that 166 million–538 million people (2.4–7.9% of the global population) in the 116 countries analysed are potentially moving into energy poverty due to global energy price spikes.

Referring to the World Bank’s latest international poverty line (US$2.15 in 2017 purchasing power parity (PPP) per person per day, updated in September 2022), we estimated that an additional 78 million–141 million people (1.2–2.1% of the global population) could be pushed into extreme poverty. Our results are 5–48% larger than the estimates from the World Bank (75 million–95 million compared with pre-crisis projections) 16 . There are three explanations for this variation. First, the two estimates are based on different scopes. We focus on the household-living burden due to direct energy price increases for fossil fuel products but also on indirect price increases induced by energy inputs to all final-use items. In contrast, the World Bank estimates look at the consequences of food and non-food inflation. According to the World Bank estimates, every 1% increase in food prices will bring nearly ten million more people to extreme poverty 41 . Second, the World Bank report assumed that all households within a country are equally impacted by the rising prices. However, according to our estimates, different households have been hit differently by the current crisis. Therefore, they underestimated the impacts of the ongoing crisis on global poverty. Third, our upper-bound estimates are based on an extreme scenario (SC9, based on peak prices for all fuels), which is higher than the World Bank’s potential price increases.

Discussion and conclusions

This study is motivated by the energy and cost-of-living crisis triggered by the Russia–Ukraine conflict. The relationship between resources and conflicts is complex 42 , 43 . Energy can be a cause of conflict, such as securing energy resources and competing for other resources 44 . Energy also can be a means of conflict. For example, involved countries limit energy supply to increase leverage over energy-dependent countries 45 . The 2022 energy crisis is one such example. In contrast to the oil shocks of the 1970s, the energy crisis under the Russia–Ukraine conflict involves soaring prices for all fossil fuels 1 . The global economy is much more interconnected than before, magnifying negative impacts through global supply chains, putting painful cost-of-living pressures on households 12 , 13 . In this context, this paper quantifies short-term living cost increases experienced by households worldwide due to global energy price hikes following the Russia–Ukraine conflict. This reflects economic actors’ limited ability to adopt new technologies and switch to other fuels in the short run. We detail how household burdens vary with international energy prices across and within 116 countries.

Distributional impacts on households show considerable variation across and within different countries, which are largely determined by household consumption patterns and the fossil fuel dependency of global supply chains. Comparing across countries, households in central Asian countries are most affected in terms of total energy cost, and sub-Saharan African countries are most affected in terms of total energy cost burden rate. Wealthier households tend to have heavier burden rates of energy costs in low-income countries, whereas poorer households tend to have higher rates in high-income countries. Wealthier groups tend to have higher energy costs on goods and services with high value added, while poorer households tend to spend more on meeting daily needs such as food and direct energy. Furthermore, we show how this crisis is exacerbating energy poverty and extreme poverty worldwide. For poor countries (for example, sub-Saharan African countries), living costs undermine their hard-won gains in energy access and poverty alleviation. Ensuring access to affordable energy and other necessities is even more urgent for those countries 25 .

At this juncture, protecting vulnerable households should be a clear priority. European governments have successively adopted several fiscal measures to shield households from soaring energy bills, such as energy tax reductions, energy retail price freezes, energy bill discounts or subsidies and energy price caps 24 , 26 . For example, most European governments including Romania, Estonia and Latvia have provided one-off energy subsidies for low-income groups 26 . Developing countries such as Thailand also took action, including extending the diesel tax cut and increasing subsidies for household electricity bills 46 . In addition to policies on direct energy consumption, some countries have increased assistance to vulnerable groups (for example, pensions, rent subsidies and child benefits) to ease the rise of the cost-of-living burden 26 . Our research emphasizes the necessity to alleviate increased costs of necessities caused by energy price hikes, especially for food and especially for low-income households. In response to the surge in food costs, governments can alleviate such household burden in many ways, such as setting price subsidies, implementing import taxes with clear sunset clauses for basic staple food, direct transfers for low-income households 31 and investing in and providing incentives for and legislation to support food supply chains with sustainable sources of energy. In this crisis, energy companies reaped higher profits 5 . To recoup some of the additional strains on national budgets, governments are implementing and discussing windfall taxes for energy companies (for example, the United Kingdom, Italy and Cyprus) 47 .

It is worth noting that short-term policies addressing the cost-of-living crisis must be in line with climate-mitigation goals and other long-term sustainable development commitments. However, the energy transition is threatened by existing subsidies for fossil fuels 17 , fuel-tax cuts 48 and increased investments in quickly available fossil resources 10 . High energy prices are reshaping global energy markets and pushed some European countries to delay the phase out of fossil fuels 49 while seeking alternative sources abroad (for example, liquefied natural gas (LNG) from the Asia–Pacific region) and investing more in carbon-intensive infrastructure (for example, floating storage and regasification units in Southeast Asia) 50 . The fuel scramble led by the advanced economies creates potential spillover effects on others 5 , 49 . For example, if Europe dominates the global LNG supply and LNG terminal (for example, floating storage and regasification units), some traditional consumers, especially in the Asia–Pacific region, could revert to quickly available fossil-intensive resources 10 . Moreover, increased energy costs might squeeze poor countries’ investment in renewable energy infrastructure due to limited budgets 5 . Overall, these emergency measures could temporarily solve the current dilemma but create carbon lock-in, slow down the energy transition and further delay already short-falling climate-mitigation efforts globally 2 , 50 . In addition, and frequently overlooked, is the fact that renewables have their own set of problems such as a potential increase in prices for scarce materials required to produce technologies based on renewables, with similar or even higher dependencies and market concentrations 51 .

This unprecedented global energy crisis should come as a reminder that an energy system highly reliant on fossil fuels perpetuates energy-security risks and accelerates climate change 8 , 52 . In particular, existing high energy prices and recent Organization of Petroleum Exporting Countries limits on oil exports have further pushed prices higher 53 . These emphasize the urgency to realize diversified energy sources and develop a more secure, diverse, reliable and independent energy system by accelerating the clean energy transition for all countries. The European Commission proposed the REPowerEU Plan to spur massive investment in renewable energy, scale up electrification and seek substitute fuels in industry, building and transport sectors 52 . The EU solar energy strategy plans to increase the installed capacity of solar photovoltaics to 320 GW by 2025, more than doubling current levels 52 . For poor countries, the 27th United Nations Climate Change Conference of the Parties emphasizes international cooperation to provide tailor-made financial and technical assistance (for example, affordable loans to local public authorities) to wean them off coal and build renewable energy markets. We call for more attention to countries that have been severely affected by this crisis. Multilateral action is critical to address potential energy transition bottlenecks and alleviate inequalities in access to affordable energy for households worldwide 35 .

In this study, we used an environmentally extended multi-regional input–output (EEMRIO) approach to estimate both direct and indirect household energy costs. This model is able to reflect the short-term energy price transmission throughout global supply chains. In the short run, companies and households have only limited options to adjust their consumption patterns and underlying technological choices (for example, switch from a gas burner to solar photovoltaics) as they are locked into their past technology choices and thus their current energy use. Compared with other models, it has the advantage to estimate the direct and indirect impact of energy prices on households. To measure the magnitude of the impact of energy price fluctuations, we designed one base case, that is, the pre-crisis energy price scenario (SC0) and nine energy price scenarios (SC1–SC9) to capture the potential distributional impacts of different energy price scenarios. Additional poverty was assessed under each energy price scenario. Data sources and processing are provided. Assumptions and uncertainties for all calculations are also given. Datasets for different expenditure groups in 116 countries are available in Supplementary Dataset 1 .

Household energy costs

The total household energy costs of the expenditure group g for fuel k in region r (ec g , k , r ) can be calculated as the sum of direct energy costs ec direct, g , k , r and indirect energy costs ec indirect, g , k , r :

Direct energy costs for households

The direct energy costs can be calculated using the household direct energy consumption en hhs, g , k , r multiplied by the energy price of fuel k ( p k ):

Indirect energy costs for households

The EEMRIO framework was applied to estimate the indirect energy costs (ec indirect, g , k , r ). Indirect energy costs refer to expenditure of goods and services due to fossil fuel uses throughout global supply chains. Taking plastic consumption as an example, oil is not only used as a direct feedstock for producing plastic, but oil and other forms of energy are used during the entire global supply chain from extraction to transport, transformation in factories and so on, all the way to the final product and to the final consumer. The production processes involved in consumption-based accounting (indirect results) are highly complex but traceable through the EEMRIO approach.

EEMRIO analysis has been widely used in numerous energy, environmental and economic studies to reveal impacts through entire global supply chains 54 , 55 , 56 . We selected the EEMRIO approach due to its unique ability to provide robust results at fine-sector resolution for a large number of countries and categories of households (for similar studies see, for example, refs. 31 , 57 , 58 ). Our model is able to estimate short-term effects of energy price hikes on households before changes in industrial production processes and the adoption of adaptive measures by consumers (for example, changing lifestyles and consumption behaviours 59 ). Such short-term estimates could be good references for socially acceptable public policies for rising energy prices 31 , 60 . Numerous studies have examined the distributional effects of environmental and economic elements (for example, energy footprints 61 , carbon footprints 27 , 57 , 62 and carbon pricing 30 , 31 ) on households across countries and regions using the EEMRIO framework with MRIO tables at its core 54 , 56 , 63 .

The MRIO approach is able to characterize the monetary flows among sectors and consumers of different regions. For each row of an MRIO table, a linear equation can be used to depict the production of the economy:

where \(x_i\!^r\) is the total output of sector i in region r ; \(z_{ij}\!^{rs}\) denotes the intermediate inputs from sector i in region r to sector j in region s ; \(y_i\!^{rs}\) is the final demand (that is, household consumption, government consumption and investment) of region s from sector i in region r . On the basis of the Leontief framework 64 , the basic linear equation can be expressed in matrix form as:

where \({{{\mathbf{X}}}} = \left( {x_i\!^r} \right)\) is the total output vector; L  = ( I  −  A ) −1 is the Leontief inverse matrix or total requirements matrix, with the element \(l_{ij}\!^{rs}\) showing the total inputs of sector i in region r required to satisfy one unit of final demand in sector j in region s ; \({{A}} = \left( {a_{ij}^{rs}} \right) = \left( {z_{ij}^{rs}/x_j^s} \right)\) refers to the technological coefficient matrix in which \(z_{ij}\!^{rs}\) represents the intersectoral economic linkages between the regions, and I is an identity matrix with the same size of A ; \({{{\mathbf{Y}}}} = \left( {y_i\!^{rs}} \right)\) is the final demand vector. As we focus on the burden of the global energy price crisis on households, thus, the energy costs by government consumption and investments are not included in the analysis. Therefore, the final demand vector Y covers only household consumption.

We created a row vector \({{{{\varepsilon }}}} = \left( {\varepsilon _i^r} \right)\) to represent the energy cost coefficient (that is, energy costs per unit of total output), with the element \(\varepsilon _i\!^r\) representing the energy cost coefficient of sector i in region r :

where \(\mathrm{ec}_i\!^{\mathrm{industry},g,k,r}\) is the industrial energy costs of the expenditure group g for fuel k of sector i in region r , which can be calculated as follows:

where \(\mathrm{en}_i\!^{\mathrm{industry},g,k,r}\) is the industrial energy consumption, and p k is the price of fuel k as defined in equation ( 2 ).

Thus, the indirect energy cost ec indirect matrix can be calculated by pre-multiplying X with an energy cost coefficient as follows:

where the element \(\mathrm{ec}_i\!^{\mathrm{indirect},g,k,r}\) in ec indirect refers to the indirect energy costs induced by the household final demand of group g for fuel k in sector i in region r .

Burden of rising energy costs on households

Given an increase in energy prices, we can calculate direct and indirect energy cost changes, separately. We introduced three indicators to evaluate the household burden due to energy price hikes.

One is energy cost change, which includes direct energy cost changes for fossil fuel bills and indirect energy costs affecting price changes of goods and services based on the energy requirements throughout global supply chains. It is worth mentioning that the change in indirect energy costs does not refer to the increase in the actual purchasing price for products but the increase in energy costs reflected in products. In this case, the change in indirect energy costs can be much higher than direct cost changes. The second indicator is the energy cost-burden rate, which refers to the share of direct and indirect energy costs in total household expenditures. The last is the change in the energy cost burden rates, which measures the increase in the energy burden rate compared with the pre-crisis level (SC0).

The global energy crisis is exacerbating the plight of the world’s poor 41 . Given the combined crises of COVID-19, growing inflationary pressures and the war in Ukraine, many reports and news have mentioned the impacts on global poverty 14 . However, quantitative research on the potential consequences of rising energy prices on global poverty is still lacking but much needed. To fill these gaps, we assessed the households’ additional expenditures due to increased direct and indirect energy costs. We considered the differential impacts on households with various consumption patterns. Assuming that the total expenditure of households remained the same in the short term as before the price increase, the additional energy costs will lead to a reduction in the purchasing power for other essential needs. As a result, some people living above US$2.15 a day in 2017 PPP (that is, the international poverty line, a global absolute minimum, updated in September 2022) would be pushed to extreme poverty due to their inability to meet basic living needs. In this context, we assessed the additional population in extreme poverty under each energy price scenario. According to a recent World Bank report 65 , the global poverty rate (at the extreme poverty line) in 2021 is 8.9%. On the basis of this poverty rate and our matched expenditure and population data for 201 expenditure groups, we derived a relative poverty line for the year 2021. For each expenditure group, we subtracted their additional energy costs from the corresponding total household expenditures. The rest was compared with the relative poverty line to determine whether the group has been pushed into extreme poverty. Our approach makes it possible to obtain an additional number of people in poverty due to costs of living pressures under each price scenario.

In addition, rising energy prices are also putting more people at risk of energy poverty. Energy poverty is a multi-dimensional issue and can be measured by various definitions and indicators 39 . On the basis of our estimated rises in energy costs during this crisis, we selected the maximum percentage of household energy costs in consumer income or expenditure as a measure of energy poverty. We use 10% of households’ total expenditure spent on energy bills (for residential fuels and electricity use) as our energy poverty set point 40 . For each expenditure group, the additional number of people considered to be energy poor due to increased energy bills was estimated under each price scenario.

Data sources and processing

To model the different impacts of rising energy prices on households, we applied the following data sources and preparation steps:

Energy price data

Energy price data are based on daily price data from 1 January 2021 to 13 September 2022 for five fossil fuels and fuel products: coal, coal products, crude oil, petroleum products and natural gas. We used Newcastle coal futures, Brent futures and US natural gas futures as benchmarks for coal and coal product prices, oil and petroleum product prices and natural gas prices, respectively. All price data were collected from the Trading Economics website ( https://tradingeconomics.com/commodities ).

Energy-consumption data and processing

Energy-consumption data are derived from IEA World Energy Balances 36 for the year 2019. On the basis of a mapping approach provided by the Global Trade Analysis Project (GTAP) energy date set 66 , we processed the final energy consumption for the year 2019, consistent with the GTAP regional and sectoral classification. Final energy-use data cover energy used for combustion and non-energy used as feedstock. Household direct energy use is considered a separate vector, including private vehicle fuel use for mobility and residential energy use for heating, cooling and cooking. We extrapolated the energy-consumption data to the year 2021 based on the average annual gross domestic product (GDP) growth rate (from 2019 to 2021) for our research topic.

MRIO data and processing

The multi-regional input–output table is taken from the GTAP 11 Data Bases 29 , which contains high-resolution information on the interregional and intersectoral transactions of the world economy for the year 2017 in the purchaser’s price for 141 countries and regions. Each country or region has 65 economic sectors. Using consumer price indices from the World Bank 67 , the GTAP MRIO table of 2017 was inflated to the prices of 2021 to match our research topic.

Household-expenditure data and processing

Household-expenditure data are taken from the World Bank’s Global Consumption Database (WBGCD) 28 . The WBGCD provides consumer expenditure survey data for the year 2011 for 116 countries, representing 87.4% of the global population, especially with representation from developing countries 28 . For each country, the expenditure share and corresponding population share for 201 expenditure groups among 33 expenditure items are listed (Supplementary Table 2 ). Expenditure groups represent consumption levels ranging from US$0 to US$1 million per capita per year, expressed in 2011 PPP. For example, Group 0th (that is, the lowest consumption level) represents people consuming less than US$50 in 2011 PPP per year and Group 200th (that is, the highest consumption level) is for the group consuming between US$0.95 million and US$1 million in 2011 PPP per capita per year. Not all countries will have populations in all groups. For consistency reasons, we used the detailed expenditure structure (instead of real consumption data) for the year 2011 from the WBGCD to disaggregate the total household final demand in the GTAP MRIO table. Given the lack of more recent consistent data, we assumed that the expenditure structure of each expenditure group in each country remains the same as they were in 2011.

Bridging and matching WBGCD to GTAP 11

The expenditure data from the WBGCD come with different regional and sectoral classifications than the GTAP, so it is necessary to transform them into a GTAP format. Following the approaches of previous studies 27 , 61 , 62 , we bridged and matched the WBGCD with GTAP 11 household final demand vectors in three steps.

First, we matched the country and region classification between the two datasets. First, we downscaled household final demand of aggregated regions in the GTAP to the national level. We assumed that households in countries within one aggregated region have similar consumption patterns. Therefore, these aggregated final demand vectors can be divided into country levels based on their population share in the overall population of the corresponding aggregated region. We used the latest population data for 2020 from the World Bank 67 . Second, we calculated the final demand for each expenditure group in each country by multiplying the expenditure share of groups from the WBGCD with the household final demand from the GTAP MRIO. Third, using a bridging matrix, we linked the 33 expenditure items in the WBGCD to the 65 economic sectors in the GTAP MRIO. The bridging matrix reflects the corresponding relationships of sectors between the two datasets. We ended up with a matrix of 9,165 rows by 23,316 columns, containing household final demand for 201 expenditure groups from 116 WBGCD countries from 65 economic sectors in 141 GTAP countries and regions. Due to data availability, especially of the household-expenditure dataset, which is the main focus of our study, we cover 116 countries representing 87.4% of the global population and 80.3% of global GDP (more details in the Limitations section). We list the 116 countries analysed in this study in Supplementary Table 3 .

Price scenarios

To quantify possible effects on global household burdens, this study developed one base case and nine scenarios drawn from daily energy prices. All references for price-scenario settings are provided in Supplementary Table 1 .

In short, we chose the average energy prices of 2021 as the base case, called the pre-crisis energy price scenario (SC0). We developed an average price scenario (SC1) to capture the distributional impacts of the global energy crisis on household living burdens. SC1 refers to the price for coal and coal products (+176%), crude oil and petroleum products (+51%) and natural gas (+94%) from 24 February to 13 September 2022. As a sensitivity analysis, we also modelled the possible effects of price increases under the monthly average price scenario (SC2–SC8). An extreme scenario (SC9) was set, referring to peak prices for coal and coal products (+235%), crude oil and petroleum products (+80%) and natural gas (+159%) from 24 February to 13 September 2022. This study makes no statements about the likelihood of SC9 occurring.

Limitations

In modelling the energy costs for households, consistent with existing research 30 , 31 , we assumed that energy price changes in production sectors are fully passed on to final consumers. In other words, households bear both the direct and indirect effects of rising energy prices. Expenditure levels were used to group households, without specifically considering other indicators that affect household consumption, such as household size, housing area and temperature 27 . We assumed that under price shocks, households maintain their previous consumption patterns in the short term. We focused on short-term consequences without considering demand elasticities and substitution possibilities. The short-term model assumes fixed coefficients of production and consumption and thus its micro-foundation is based on Leontief production function 64 , which is a commonly perceived limitation of input–output studies 60 , 68 , 69 but a reasonable assumption in the short run where economic actors cannot easily switch to new technologies or fuels. In this context, the ability to adapt to and recover from energy disruptions, such as changing consumption patterns, fuels or energy technologies, all factors contributing to energy resilience, was not addressed in our research, given the relative short-term focus and assumption of technology lock-in. In addition, the aggregation of economic sectors in the MRIO table leads to uncertainties in indirect energy cost estimates. There are 65 sectors in the GTAP 11 Data Bases with all products and services allocated. Such relatively high aggregation makes it difficult to distinguish the economic activities of various products and services within sectors. Another major uncertainty comes from the collected data and the balancing procedures for the MRIO table.

In terms of data and data processing, this study is limited by the availability of relevant datasets. The consumer expenditure survey dataset from the WBGCD is for the year 2011. Consumption patterns and population share for each expenditure group were assumed to be the same as in 2011. Another limitation is that the GTAP 11 Data Bases and the WBGCD do not cover the data for all countries in the world. Some energy-consuming giants, such as Canada and Australia, are not covered in this study due to data availability. However, 141 countries and regions in GTAP 11 Data Bases account for 99.1% of the global GDP and 96.4% of the global population 29 . Data on 116 countries in the WBGCD cover 87.4% of the global population in 2020, especially with representation from developing countries. These datasets are the most detailed available datasets to date. Final energy-use data leads to another limitation. We assumed the same volume and structure of global energy demand in 2022 as in 2021, ignoring the impacts of energy supply-related issues behind the Russia–Ukraine conflict (for example, the import embargo of fossil fuels from Russia).

In price-scenario settings, we focused on the international price volatility of fossil fuels caused by this crisis without differences in purchase-price increases across countries. Global energy prices fluctuate on a daily basis, and we selected nine representative price scenarios.

We did not investigate the economic impacts of the disruptions and destruction within Russia and Ukraine caused by the war as without current data and a clear overview of the level of disruptions, these cannot yet be assessed.

Data availability

Global MRIO tables were obtained from the GTAP 11 Data Bases 29 . Energy-consumption data were retrieved from IEA 36 . The global expenditure data can be collected from the World Bank 28 . Energy price data were collected from the Trading Economics website ( https://tradingeconomics.com/commodities ). All other socioeconomic data (for example, population, GDP and inflation) used in this study were obtained from the World Bank 67 . All data generated and analysed in this study are available within the article and Supplementary Dataset 1 . More detailed results are available from the corresponding author on reasonable request.

Code availability

Code developed for data processing in MATLAB is available in Supplementary Code 1 .

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Acknowledgements

We acknowledge funding from the National Natural Science Foundation of China (72243004, 72125010, 72243011, 71974186), the United Kingdom Research and Innovation (UKRI) Research England QR policy support fund (PSF-16) and the China Scholarship Council PhD programme (Y.G., J.Y. and B.L.).

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These authors contributed equally: Yuru Guan, Jin Yan.

Authors and Affiliations

Integrated Research on Energy, Environment and Society (IREES), Energy and Sustainability Research Institute Groningen, University of Groningen, Groningen, Netherlands

Yuru Guan, Jin Yan, Yuli Shan, Yannan Zhou, Ye Hang, Ruoqi Li, Binyuan Liu, Qingyun Nie, Benedikt Bruckner & Klaus Hubacek

School of Geography, Earth and Environmental Sciences, University of Birmingham, Birmingham, UK

Key Laboratory of Regional Sustainable Development Modeling, Institute of Geographic Sciences and Natural Resources Research, Chinese Academy of Sciences, Beijing, China

Yannan Zhou

College of Resources and Environment, University of Chinese Academy of Sciences, Beijing, China

College of Economics and Management and Research Centre for Soft Energy Science, Nanjing University of Aeronautics and Astronautics, Nanjing, China

State Key Laboratory of Pollution Control and Resource Reuse, School of the Environment, Nanjing University, Nanjing, China

College of Urban and Environmental Sciences, Peking University, Beijing, China

School of Economics and Management, North China Electric Power University, Beijing, China

Qingyun Nie

Department of Geographical Sciences, University of Maryland, College Park, MD, USA

Kuishuang Feng

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Y.G., J.Y., Y.S. and K.H. designed the research. Y.G. and J.Y. led the analysis. Y.G. developed the model and performed the research with contributions from Y.Z., Y.H. and B.B. Y.G. visualized the results with contributions from Y.H. Y.G. and J.Y. drafted the manuscript with efforts from Y.S. and K.H. Y.L. and K.F. provided the data sources (expenditure data and global multi-regional input–output tables). Y.S. and K.H. supervised and coordinated the overall research. All authors participated in the revising of the manuscript.

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Correspondence to Yuli Shan or Klaus Hubacek .

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Davos 2022: We are in the middle of the first global energy crisis. Here’s how we can fix it

Fatih Birol and Hardeep Singh Puri discuss how to tackle the energy crisis at Davos 2022. Image:  World Economic Forum/Manuel Lopez

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• The global energy landscape and market has been massively reshaped by the Russian invasion of Ukraine.
• The long-term answer is not to replace fossil-fuel supplies but instead to focus on the energy transition.
• The Energy Outlook: Overcoming the Crisis panel at Davos discussed why the energy crisis needs to be tackled alongside other issues such as rising costs of living.

The world is in the middle of its first truly global energy crisis. The answer is not additional fossil fuels, but instead putting efforts into the energy transition, according to the Executive Director of the International Energy Agency.

Fatih Birol told the Energy Outlook: Overcoming the Crisis panel on the opening morning of Davos 2022, that the world needs to make energy investments that look beyond the immediate term and are viable for the future.

Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.

Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index , which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.

To future-proof the global energy system, the Forum’s Centre for Energy & Materials is working on initiatives including Clean Power and Electrification , Energy and Industry Transition Intelligence, Industrial Ecosystems Transformation , and Transition Enablers to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Partnership (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.

Is your organisation interested in working with the World Economic Forum? Find out more here .

The global energy landscape has been radically reshaped since the Russian invasion of Ukraine on 24 February, prompting governments, businesses and other organizations to reduce their dependence on Russian energy. Now they need to prioritize bringing to a halt the energy crisis and provide greater energy security and sustainability.

“We are in the middle of the first global energy crisis. In the Seventies, it was the oil crisis and now we have an oil crisis, a natural gas crisis, a coal crisis – all prices are skyrocketing and energy security is a priority for many governments, if not all,” Birol told the panel.

“Of course, we are not living in a dream world. The world has to replace the oil and gas from Russia with first oil and gas and then other technologies. I completely agree that the immediate response should include bringing additional oil and gas into the markets. But I would prefer that our immediate response does not look into our energy infrastructure for fossil fuels for many years to come.”

Key to alleviating the current energy crisis, he said, is to make the most out of the existing oil and gas fields, plus using shale oil and gas because it’s quick to come to market, as well as reducing the amount of methane emissions from fossil fuel operations and ensuring that liquefied natural gas terminals are built to store ammonia or hydrogen in the future.

“But, in my view, the biggest part of the response comes from putting emphasis on clean energy, renewables, energy efficiency and, in the countries where they have nuclear capacity, increasing nuclear production there,” he added.

"We don’t need to choose between an energy crisis and a climate crisis – we can solve both of them with the right investment."

Germany is one of the countries which had been badly hit by a dependence on Russian gas. Robert Haback, Federal Minister for Economic Affairs and Climate Action, acknowledged that this had been a strategic error and told the panel that the country is ready to fight the energy crisis and is now looking to diversify its fossil fuel imports at incredible speed – with processes that once took decades now taking months.

“We are really improving our ability to get things done, which hasn’t been done so good in the past. We are building up energy infrastructure and trying to get new suppliers for oil and coal,” said Haback.

“But this is only short term, of course. It is only one step in the direction to become not only independent of Russian fossil fuels, but of fossil fuels. From my point of view, caring about a new security of energy supply is not a contradiction to the greater goal of getting independent from fossil fuels at all.”

Haback added that global security has been rocked by at least four interwoven crises – high inflation, the energy crisis, food poverty and the climate crisis. “And we can’t solve the problems if we only focus on one,” he warned.

“But if none of the problems are solved, I am really worried we are running into a global recession, with a tremendous effect on climate action but also on global stability. Imagine that part of the world is starving next year, it’s not only about hunger which is terrible enough, it’s about global stability.”

He added that the international community needs to stick to global markets. If countries just care about their own food and energy supplies, it will have disastrous effects on prices and other countries, Haback warned.

Hardeep Singh Puri, Minister of Petroleum and Natural Gas and Minister of Housing and Urban Affairs, Ministry of Petroleum and Natural Gas of India, agreed that such challenges needed tackling together. “The energy crisis is there, it’s real,” he said. “Let’s make no mistake. Oil at $110 a barrel constitutes a challenge for the entire world.”

But, citing high inflation rates and the steep decline in the quality of living, he added: “We need to be able to successfully navigate out of the current crisis without adding more problems in terms of sustainability and going green.”

Catherine MacGregor, CEO of French utility giant Engie, also echoed these sentiments and stressed the importance of working together to fight the energy crisis and improve energy security and global stability and accelerating the renewable energy transition. “Because renewable energy – whether you talk about power or gas – will reinforce European energy independence, because it is energy that is produced locally.”

But she also added that there had been strong resistance against renewables such as wind farms and solar plants in much of Europe. “What I’m hoping here is that, with this crisis, this acceptability, we can transfer that and translate that into appropriation that European citizens understand that the energy transition can be a solution to that energy independence challenge that is thrown at us – of course, keeping in mind affordability.”

The panel concluded that collaboration and tackling the energy crisis needed to be done alongside action on issues such as the rising cost of living. “All stakeholders in the global system need to do some serious introspection and subject whatever they’ve been saying and doing to a reality check,” said Puri in his closing remarks.

“We need to deal with all these crises simultaneously, without allowing the solution of one crisis to exacerbate the other crisis. You’ve got to navigate your way out of the high-cost situation – this is not sustainable – at the same time you have accelerate the green energy transition.

“Taken together, yes, we will come out of it. The cost will be there, there will be pain. But at the end of the day, we’ll be working towards a better energy world."

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U.S. Responses to the Global Energy Crisis

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Transcript — April 26, 2022

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Joseph Majkut: Hello, all. Welcome to CSIS. My name is Joseph Majkut and I direct the Energy Security and Climate Change Program here. We’re pleased to be hosting today’s dialogue for both a virtual and – a first for us in this endemic era for COVID – an in-person and public audience.

For those of us – those of you, excuse me, who have joined us in person, we welcome you warmly. I’m very happy to see you all. While you’re here, please know that CSIS takes great efforts to secure the health and safety of our guests with a vaccinated staff, high cleaning standards, and upgraded ventilation. Should an alarm sound or another emergency arise, emergency exits are marked in this room and I encourage you to follow the instructions of a CSIS staff member to locate an assembly point outside behind the building. We’re grateful that you’re here and I hope we have an open and fulsome conversation.

For those joining online, good morning to you as well. As we proceed through our program, please use the text box on the event page to submit questions for our speakers or for our panel. Our CSIS colleagues will collect those questions and give them to our moderators. Comments and suggestions for improving the digital experience for these conversations are always welcome.

With that, let’s begin. Two months ago, the Russian Federation invaded Ukraine. And this unprovoked aggression reinvigorated Europe, spurred a coordinated military assistance to the – to Ukraine, and led to the imposition of severe tariffs on the Russian financial system and nearly every sector except energy. We don’t know how long this war will last or how it might affect international energy supply going forward, so I think we should be prepared and preparing for multiple outcomes.

The invasion came at a time of already tight energy markets so that fear of supply disruptions, self-sanctioning, and outright sanctions on one of the top oil and gas producers drive global oil prices upward of $120 in the first days after the conflict began. And they’ve settled now to around 100 (dollars). Self-sanctioning and voluntary measures have not cut into Russian oil income in the way that we thought they might. Meanwhile, Europe is caught in a trap of its own manufacture. Dependency on pipeline gas means that it cannot immediately abandon energy trade with Russia, or be cut off – or it may be cut off. The EU Commission has drafted a plan to accelerate its energy transition and get off Russian gas, but meeting new targets will impose costs in Europe and abroad.

The U.S. response to this energy crisis has been somewhat underwhelming, in my opinion. The administration is working hard to secure gas supplies for Europe, has announced a six-month release from the strategic petroleum reserve and invoked the Defense Production Act to secure supplies of critical minerals. But it is limited in what it can do. Congress is, as you might guess, still deliberating. While our peer countries are pivoting energy strategies in the face of this crisis, knowledgeable of the risks of climate change and the need to decarbonize as well, there’s a sense that the U.S. is sitting on its hands, which is frustrating.

The U.S. is the world’s largest oil and gas producer. We can guarantee energy security for the planet and our allies by producing more. But doing so without sacrificing climate outcomes will require careful planning, decent regulation, and a significant effort to reduce our own emissions, build a clean export energy economy – clean energy export economy. So formulating U.S. response will be a topic for discussion today. We’ll begin with a distinguished guest to hear the view from the White House. Then my colleagues will present some recommendations that we’ve generated here at CSIS. And we’ll close with a panel featuring CSIS associates, led by our senior fellow Ben Cahill. So I encourage you to strap in, think of good questions along the way.

It’s my honor to introduce our first speaker, Melanie Nakagawa. Melanie serves as special assistant to the president and sits on the National Security Council where she’s the senior director for climate and energy. She’s led important work in bringing our country back into global climate negotiations and establishing a leadership role for us in decarbonization. And I’m interested in her thoughts on how this moment creates new opportunities for American leadership. Before working in the White House, Melanie was deputy assistant secretary under John Kerry. She served as a counsel in the Senate Foreign Relations Committee and was previously an attorney at the National Resources Defense Council.

Melanie, I’m really grateful that you’ve come. Welcome to the first Energy Security and Climate Change Program in the endemic era. I look forward to our discussion. If you can start us off with your thinking of the situation over the past couple months, I think that’s a great place to begin a conversation.

Melanie Nakagawa: Well, thank you. And congratulations on your first in-person event in such a wonderful space. So thank you so much for having me. And for those tuning in on video, you know, please do – I think this is much more interesting the more we can hear from everyone through the conversation and through our discussion as well. It’s a perfect time to be having this sort of informal conversation around the state of play with our energy economy and what’s happening with these volatile energy markets and what we’re doing about it.

I really appreciated some of your opening framing remarks of, you know, the state of play and what’s happening. You know, over the last several months the U.S., working with our European allies, have been watching what was happening on the border of Ukraine and thinking through what are the options, what are the possible scenarios and outcomes. And, of course, even before the invasion, top of mind was energy – energy to Europe, the reliance and dependence on Russian energy.

And so we’ve been thinking and strategizing and working with our European partners and partners around the world for several months about how to diversify supply going into Europe, especially ahead of the last – this past winter. You saw some of the fruits of that effort in terms of – you saw some cargos being swapped by Asian partners, redirecting their supply over to Europe ahead of this past winter as their storage levels were quite low, and Japan was coming out of their winter and their storage levels were relatively stable and secure and they can manage the remaining of the winter.

But now we are very much in a state of war. It’s a wartime footing happening in Ukraine and Russia in particular. And there’s a real challenge ahead of us, according – basically a challenge in advance of this coming winter and next winter. You stated it correctly, which is we do have an increased supply challenge between now and next year. We’re not seeing increased volume of gas in particular out of the United States or into Europe. This is merely a physical-infrastructure limitation. We don’t have more export terminals that can be turned online overnight. There are permitted ones. There’s ones that are construction. But in terms of – everything is running at max capacity.

Import capacity in Europe is also constrained, and they’re beginning to build out more import terminals, as indicated by the German announcement just a few weeks ago that they’re looking to build out two new import terminals as well as a floating storage, a gasification unit.

So really, as we look at sort of the state of the world today, particularly in Europe, we’re looking at a twofold challenge. One is, how do we help them diversify energy and diversify LNG and gas in particular, but also how do we help them reduce the demand for gas overall? And really that sort of fundamental thinking is what led to the creation and the announcement on March 25th by President Biden and President von der Leyen of the European Commission to announce the U.S.-EU Energy Security Task Force.

This task force has those two prongs as a fundamental underpinning to its work. It really is about, in the near term, the acute scenario that we’re facing in Europe. How do they help diversity that supply? The task force announced a target of 15 billion cubic meters biannually to move into Europe by the end of this year to help them with their storage levels. And then they also talked about a 50-billion-cubic-meter goal by – you know, let’s call it middle of this decade – you know, 2025-2026 – to move into Europe, and ideally from U.S. LNG players.

And this is, you know, completely possible. If you look at what we’ve already permitted and what’s under construction today, where there’s uncontracted volumes, there’s a real potential here for Europe to signal the demand for U.S. LNG and for our U.S. LNG providers to provide that gas to them in the form of long-term contracts.

So through the task force, we’re engaging with key industry players that have the ability to move their volume to Europe of that volume of 50 (billion cubic meters). We’re talking to European member states that have, you know, indicated a willingness and an interest to building the import capacity to absorb this additional gas by 2025-2026. And we’ve done that with the overarching framework of making this climate-aligned.

Europe has very ambitious climate targets – Fit for 55, net-zero commitments. So do we. And we believe it’s completely aligned to be able to do both. We can provide this gas in a way that we call, you know, climate-aligned, this gas that you understand the carbon intensity of it. We hear constantly from many companies talking about what they’re doing to reduce the greenhouse-gas intensity of their gas. And we’re also talking, in the statement with the presidents, about hydrogen-ready infrastructure on the European side. So on both sides of the Atlantic, you’re looking at infrastructure that will be climate-aligned to our overall objectives.

So really, as I step back and I think about what we’re doing in the short run to address the immediate crisis that’s been created by Putin’s invasion of Ukraine, we also take a look at what are we doing in the medium term and longer term. And I do believe a fundamental theme that we continue to see is a rapid acceleration to a decarbonized economy, a rapid acceleration to an economy that isn’t reliant on a single source of fossil fuels, and it’s incredibly volatile and leaves us at the whims of that dictator in some cases.

And so what we’re trying to do is, really, think through what does that look like. How do we manage this transition? How do we smooth the transition in a way that allows us to accelerate deployment of clean-energy technologies, deployment of smart technologies that help reduce gas demand, as well as thinking through how are we looking at alternative sources of energy as well to supply Europe and, really, kind of getting quite creative about the innovative approaches one can take to this challenge?

And all of this is, again, frameworked within the – both the U.S. targets on climate, the European targets on climate. And I do, fundamentally, you know, to show my own bias, believe that it is possible to do both and we are doing both and, frankly, this only underscores the need to go faster.

Dr. Majkut: That’s all my questions.

Ms. Nakagawa: Great.

Dr. Majkut: For our audience, I think we have a microphone. We’ll, definitely, open the floor here in a couple of minutes. But if you’ll permit me to take moderator’s privilege, some of the stuff we see out of Ukraine is, truly, horrifying. To date, the importance of Russia as an energy exporter has kept energy sanctions sort of on the table.

In a world where this conflict lasts a long time, are we in a tenable place? Like, when you talk to colleagues from Europe or when you talk to your colleagues in the White House, is a world where Russian energy is unsanctioned something that you think we can live with for a long time?

Ms. Nakagawa: Well, you were talking about, you know, the self-sanctioning that’s happening in the market to date, looking at where the current energy is being absorbed in other countries or other regions. We’ve been really clear about when we took the action of banning imports of Russian oil crude and gas – really, we don’t take gas, but it was Russian oil and crude and coal. That’s what it was.

When we took that action, we recognized that we have the ability to take that action. We’re an energy superpower. We can do that. I mean, we’re not asking other countries to come with us. But we were talking to other countries that were already thinking about what they can do themselves to restrict that supply of energy from Russia.

You see already in the press, you know, over the last several weeks what Europe is thinking about in terms of how they’re thinking about addressing this. You have the U.K. moving out with their own import restriction on Russia. And, again, across kind of the European Union side, they’ve been thinking through their own ways of addressing this issue because as this continues the question becomes what do we do.

And I think Germany and the European Commission have been very clear. They see a future where they are out of the game of investing or supporting Russian energy supply and they have a goal of, last I saw, it was, like, 2027 to be completely phased out. But they also talk about as soon as possible, and the way to do that is by working closely with the U.S. and other partners to rapidly accelerate that transition away from Russian supply.

So I do think that, again, through the Europeans’ own stated commitments, they’re going to be out of the business of investing or supporting Russia. You see companies around the world – multinationals – already pulling out of the energy sector in Russia.

So I think it’s – it’d be sort of inconsistent or incorrect to say that we’re still in the game on energy because we are very much, especially for the United States, looking at what U.S. businesses have been doing, multinational businesses have been doing, and the fact that there is a transition afoot to get us out of that business.

That being said, this is a volatile energy market. This is a transition we’ve got to manage, and we’re not about trying to affect security of supply. You know, first and foremost, as we recover from the global pandemic, we’ve got to ensure security of supply and that was a key part of the way we designed our sanctions to go at where it would hit Russia the most. We looked at the banks. We looked at some of the key export markets, sort of critical technologies.

So these are some key areas where we really focused our sanctions regimes, and they’re working and we can see them working today.

Dr. Majkut: I think – you know, I think credit to the administration, I think, putting out the fires of the immediate energy challenges that our European allies faces has been a real achievement. But you talked about this sort of intermediate timescale, right – 2027 getting off Russian energy supply. U.S. LNG can play a huge role there.

I also heard the term long-term contracts, and this is where it does get, I think, tough for our European allies where building out additional infrastructure, which is the limiting step, the rate limiter at the moment – does imply some – perhaps, some challenge to long-term climate goals in Europe or just globally.

How are you thinking through what are the right ways to measure the impact of additional capacity that comes on over the next few years so that we don’t end up sacrificing our climate goals?

Ms. Nakagawa: It’s a great question. Well, first and foremost, it comes down to we are very much emissions focused – carbon-emissions focused, so technologies like carbon capture, utilization, and storage; things such as methane regulations on flaring. There are technologies and there are policies and there are incentives that can be put in place that actually strip the emissions, right, the carbon – the carbon intensity and the emissions from some of our actions when it comes to natural gas. You know, we talk to companies in the United States that are looking at – frankly, supporting methane regulations and methane rules to reduce their methane intensity. We’re looking at companies that are trying to track every molecule, and looking at the emissions intensity, and also looking and trying to lean forward into carbon capture utilization and storage, as well as on-site, you know, solar power, renewable power, kind of clean energy powered on their facility itself, to really kind of create the lowest carbon molecule of a fossil gas, right? To be clear, this is still a fossil fuel that’s being moved.

And then on the European side, again, you’re looking at the role of renewables in degasification. You’re looking at the role of pipeline infrastructure that could be hydrogen ready to fuel a clean – a green hydrogen or a clean hydrogen economy. And so at the end of the day when you think about these 2030 targets, 2050 targets, and the role that gas plays, it’s also tied to the carbon intensity of that gas. Is it today’s gas? Is it a future gas? And it’s also tied to the fact that some of these contracts, while long-term in nature, you know, questions come up as to can you resell those contracts? Can those contracts go elsewhere? Are you locked into that contract in perpetuity, right, for that life?

And so there’s questions around what kind of flexibility is there in that? And we see that in the United States. We all have destination flexible contracts as well. So you have these contracts but, as you saw – you saw volumes moving, cargos moving from one destination to another destination over the past several months. So I think there’s this conversation that’s happening right now around how to make this aligned with these carbon goals and these climate goals as well because, again, it’s about not the fuel itself but the carbon intensity and the carbons attached to it.

In the case of Europe, you’re looking at if you can reduce the demand for gas, that can be very much in line. I think about the REPower EU plan which, again, in the U.S.-EU joint statement or even if you just take a look at what Europe today gets from Russia, which is anywhere between 150 to 155 bcm, if that’s what Russia supplies Europe today if you look at the REPowerEU package and Fit for 55, I think – and James is here – is that you see – I think it’s about 170 billion cubic meters is what the REPowerEU package, Fit for 55’s measures would save in gas.

So you have 170 of savings that’s possible if you implement the forward movement of clean energy, the smart technology deployment, and then you have the Russian gas volume, which is 150. So again, that’s an ambitious package, but if we go all-in on that you can see how the numbers net out in terms of how you can lean forward into the transition that actually helps decarbonize and keep us on line with our climate goals.

Dr. Majkut: Editorial question. A lot of the conversation thus far in the U.S. has been around how do we open up more supply and how do we guarantee international energy security. Do we need to focus more on what we’re doing on demand and how we can help our allies reduce demand as well for, like, oil and gas?

Ms. Nakagawa: I mean, definitely. I mean, this is – as you’ve seen in all of the president’s announcements over the last several months, it is a two-part announcement. I always like to focus on the two-part notion to that. So for example, on the U.S.-EU Energy Security Task Force, two parts. First, diversifying supply and then, secondly, reducing demand for gas. When the president announced the largest-ever release of the Strategic Petroleum Reserve – a million barrels a day – you mentioned it earlier in your opening remarks, a million barrels a day for six months – two parts to that statement.

How do we provide supply to the market in the next six months while U.S. production comes online? We’re seeing that already today through rig counts going up. The U.S. industry CEOs in the oil and gas sector have already said and energy experts have all stated they expect about a million barrels a day of new oil production coming online from the U.S. by the end of the year. So our SPR release is a nice bridge between those two – you know, a quick release over six months to bridge to the increased production that we expect by the end of the year.

But that statement had a second part. It had what you mentioned, the DPA for critical minerals, the clean energy EV supply chain for batteries for EVs, which gets us off of oil, right? It reduces demand for oil. And so again, I think you continue to see this two-part approach, which is always about we might have to deal with an immediate supply issue while also reducing the demand across the board. And that’s why we’re, you know, working with the Europeans on their means to reduce demand as well, and that’s, again, across oil and it’s – and it relies on gas as well.

Dr. Majkut: Yeah. Colleagues, if you want to start queuing for questions I’m going to invite you to do so now. I’ve got two more for Melanie, if you’ll permit me.

Ms. Nakagawa: Of course.

Dr. Majkut: I know you’re not an engineer. Do you have any idea what – how we make LNG infrastructure hydrogen-ready? (Laughs.)

Ms. Nakagawa: I’m not an engineer. I have other degrees; I’m not an engineer.

Well, for example, one of them is the pipeline infrastructure itself, so the type of steel and the reinforced steel within the pipeline infrastructure is one way to do that. We can blend today, you know, I’m told, 20 to 30 percent hydrogen in a pipeline. There are other experts out there that many of you have heard of that will say that we can go higher than that, but part of that is the infrastructure question of can the steel, the pipeline infrastructure itself, handle a higher volume of hydrogen, and I’m being told that you could invest in tech infrastructure today that is ready for that kind of technology. So that’s the kind of infrastructure we’re thinking about is the ones where – if you’re going to build new, which in the case of Europe they’re looking to build new, let’s build it new so that it is usable for this next – the next transition of this gas infrastructure.

Dr. Majkut: And final question before we open the floor. The president has an ambition climate agenda, whole-of-government approach. The congressional piece of that agenda had stalled in advance of this crisis. What – how do you, you know – to what percentage is this new energy – this new set of – concerns around energy security aligned with the congressional package we had before? And if there are changes that you feel need to be made to emphasize certain aspects of that agenda, what are they?

Ms. Nakagawa: Well, we have – what’s really interesting is, you take a look at what’s already passed, right, the bipartisan infrastructure law, and some of the investments it’s making in domestic infrastructure already to date, and then you couple that with what’s pending before Congress today. In there you’ve got – you know, things such as CCUS credits, right, which is critical in this moment we’re in. I think it only further underscores the importance of the current package that’s pending because, as I mentioned, we are looking to – we are under construction with increased export terminal capacity; they’ve already been permitted. But if Europe’s going to be the off-taker and the buyer of that, Europe is going to be wanting and wanting to make sure that we’re doing everything we can on our side to make that the lowest carbon intensity possible, and to do that, things like tax credits for CCUS matter on really important – to being utilized by these key industry players. And so the current package today is one where I think it just underscores some of those key elements like the tax credits, which will help ensure that Europe is going to be able to contract for the kind of fossil infrastructure that they want to see, that would align with that Fit for 55 and REPower EU climate commitments.

So I would say that’s sort of where the key piece I see is happening right now in Congress, and I do think, as we continue these negotiations going forward, again, it continues to remind us about the importance of really leaning into this transition as fast as possible, and these different types of incentives that are job-creating and economic-growing are really critical for that.

Dr. Majkut: Great. If anyone cares to stand, I only remind you that a question has a prepositional statement at the start and then it’s followed by a short statement that goes up at the end. (Laughter.) Go ahead, sir.

Q: So I just – question. I’ve heard that they want to close – remove all the dams on the Snake River in Washington state to preserve the salmon there. I guess with this energy situation we have now, were they rethinking and reconsidering that? Thank you.

Ms. Nakagawa: Terrific question, and unfortunately completely – (laughs) – outside of my remit as I don’t follow closely the domestic Snake River-related issues, so I would be remiss to try to answer that and then say the wrong thing, so apologies; I’m not going to take on that question.

Dr. Majkut: Thank you for the question, sir.

Q: Hi, I’m Emily Meredith at Energy Intelligence.

And I was wondering if you could talk about – I mean, you spoke about the SPR release is to be a bridge, right? To get towards the end of the year, there are already projections of increased oil output towards the end of the year. But Russia obviously makes up about 10 percent of the global oil supplies, so, you know, to what extent do you think the administration needs to still be encouraging increased oil and gas output beyond what was already expected, and what tools might you be exploring for that? And then also, are you looking at, like, what tools you can use to encourage additional FID for LNG facilities beyond what’s already planned?

Ms. Nakagawa: Thank you so much for that question. So in terms of anything that we can be doing to encourage more, we very much believe that the current market and the energy signals in the market today, from price alone, should be sending the strong market signals to these industries and these companies to continue to do what they are doing, which is – which has been increasing production in response to that. We continue to hear from industry a need for more conservative measures, and so we’ve been having active conversations with them about trying to understand what is – their future projections look like? Are they bringing those forward in any way? And really highlighting the moment that we’re in, this wartime footing that we’re in. Secretary Granholm conveyed this in her remarks in Houston a few months ago regarding where she’s been with the industry as well. And that’s where I would say on the – on the oil side.

Regarding FID, on that piece of it, again, part of what we did with the Europeans – European Union, the European Commission just a few – last month, I guess it was, the statement, was to talk about where the demand is coming from and the type of demand that is coming for U.S. LNG specifically. And we don’t want to get involved in the nitty gritty of those aspects, but what we want to do is be able to show where the market demand is growing, the kind of demand that’s out there, and ensuring that U.S. LNG, as they reach contractual close or as they reach final construction, that they’re finding partners and they’re helping to support Europe in their stated goals of getting off of Russian gas and moving to more diversified sources, to which the U.S. can play an important role.

Dr. Majkut: I think we’ve got one more person in the queue and then I’m taking – I’m accepting questions digitally as well. But, sir.

Q: Thank you. Good morning. I’m Aaron Padilla, the director for climate and ESG policy at the American Petroleum Institute, API. Thank you very much, Melanie, for your time this morning and for your framing remarks.

I wonder if the administration has in mind a particular target for carbon intensity for U.S. natural gas. Let’s pick a point along the value chain such as at the moment that it’s loaded into an LNG tanker and then would go on to global markets. I think it could be helpful for everyone to know what the performance target is because then we could all unify around it. If you think about the value chain of natural gas, there’s a value chain on the industry side from producers, to pipeline companies and transporters, to liquefaction companies, and then onward to global markets, and so they need to work in concert toward a particular carbon-intensity target. And then, on the government side, there is a value chain of regulators as well, starting with the EPA for the exploration and production of natural gas; the FERC for pipeline, transport, and liquefaction terminals; and then the Department of Transportation and PHMSA along that part of the value chain as well. If they could all be oriented to a carbon-intensity target as well, it seems like it would help us all to be working together towards something that would then unleash U.S. volumes of LNG that would be climate aligned in a way that we can all recognize as the performance target that we’re shooting for.

Ms. Nakagawa: It’s a great question, and it’s one where we’re in constant conversation about one step before you actually get to the target, which is the methodology, right? How are we measuring – what are we measuring and how are we measuring those molecules of carbon through the supply chain, through the lifecycle of gas? And there’s lots of different – you know, each company has perhaps their own way of doing it. There are third-party providers that we’ve met with that talked about their methodology and their technique. Consultants are doing this as well. And so we’re actually in active conversations right now really trying to understand how industry themselves are all looking at their lifecycle, how they’re thinking about measuring each of these emission streams that come into – that come through to that point of export before we can even get to a specific number of intensity. We’re still doing that first step of homework on our side and really understanding how to do this. And it’s really – frankly, it’s a global conversation that’s happening around this methodology piece, because we don’t have a number in mind specifically right now but we’re in active conversations to really understand the methodologies that different companies have put forward because we want to make sure it’s apples to apples and not apples, oranges, limes, and a turkey. (Laughter.)

Q: Joe, if I may, just as a quick follow up I – we as an industry agree and are at the leading edge of increasing deployment of direct detection and measurement of emissions. So I would submit that the performance target, though, is still important and not a conversation to wait to have until later, because I think we can all agree that we want to deploy the most accurate methodologies. Whether it’s the continued use of emission and activity factors to estimate GHGs and the increased deployment of direct measurement, we all want accuracy. And we’re moving toward increasing ways of deploying technology to enhance that accuracy. But if we accept that as a premise, that we’re going to accurately measure GHGs, the performance target needs to be considered now so that we can orient ourselves toward achieving that while we’re going to be enhancing our ways to accurately measure it the best way.

Ms. Nakagawa: And that’s part of what – as I said, we’ve been having these initial conversations of the taskforce where we’re looking at, you know, transatlantic, U.S.-EU, you know, workstreams for the taskforce. And one of them has been actually thinking through methane in particular because that’s a key input into this, as there are different ways to measure and regulate and monitor methane, which will be key for exactly what you’re pointing to.

But we don’t want a proliferation of different types of standards and regulations out there, because, again, you won’t have consistency there. So as the task force is under way, it’s complemented by the U.S.-EU Energy Council, a longstanding partnership between the U.S. and EU, where, again, through the Energy Council, you’ve seen similar workstreams around energy, and particularly around the oil-and-gas sector. And so we’ve got a really strong connective tissue with the European Commission, European Union.

And again, this has been really, frankly, a horrible sort of unfolding in the Ukraine, as you mentioned these horrific images. But I think if there was one thing that has been a positive development in terms of how we’re handling this is the strength of the U.S.-EU relationship. Truly, you know, having served in the government before under – a few years ago, it’s been really fascinating and wonderful to see the strong connection between the U.S. and the EU, whether it’s on sanctions or it’s on this energy-security work.

But there really has been a strong alignment of recognizing we’re in this together in many ways, whether we’re the supplier of the energy security to Europe and being part of the solution, or if Europe’s part of the solution for our energy-supply response as well. So it’s been, I think, a real testament to President Biden and President von der Leyen’s partnership throughout this and their lockstep nature, which is only indicated by what we’re doing together on energy issues.

Dr. Majkut: I would – I mean, we can’t control what happened in Ukraine. We’re working well together to bust as many tanks as the – help the Ukrainians bust as many tanks as they can. But I think the next few years are going to create a lot of opportunities for figuring out how do we articulate the methane agenda well. How do we make choices around the spectrum of emissions that governs hydrogen and the hydrogen trade? And how do we, as I think the administration has taken pretty clear steps – we’d love to see more – create a more diverse supply chain for clean energy so that, as this accelerates the transition, we don’t create the same problems that have led us to this moment today?

Melanie, if I may, I want to – you’ve been so generous with your time, but, you know, the immediate crisis that we face is not the only challenge that you’ve – that you have under your portfolio. So maybe we can close just by soliciting your forecast and your thoughts on COP next fall. Amidst an energy crisis, amidst the war in Ukraine, how has this changed your outlook for that event and you think the political dynamics that will lead to it? And any final words for us as we close are also welcome.

Ms. Nakagawa: Well, this year, after Glasgow, was really focused on being the implementation year. We had ambitious nationally determined contributions put on the table by many countries. Going into Glasgow, you had IAEA come out with an analysis that we were, based on the commitments coming into Glasgow and out of it, were just shy maybe two degrees, that they added up to – maybe it was like 2.2, I think, is what it was, of where we are.

So we could do more, and there’s more countries that need to come to the table. But we were trending in the right direction of getting really ambitious targets on the table. And this year was really focused around the implementation, making sure the policies are matching the commitments and the targets that finance is moving. And given the current state of COP-27, it’s sort of the adaptation-resilience COP. It’s going to be focused a lot around those commitments and what we can do to help the most vulnerable communities and populations.

And for better or worse, that theme persists. I think it’s – you know, and probably even more so, given what we haven’t talked about, which is somewhat related to this conversation, is the food-security crisis that is looming, you know, in terms of where our food supplies are and a real need and desire, as we get into crop-planting season, crop-reaping season, which requires diesel and energy and fuels to do that.

I think there’s a lot of challenges and concerns about what the future food supply is going to look like for the most vulnerable affected communities around the world. And this upcoming COP needs to really continue to focus around building adaptation, building resilience into the economy.

Last year’s COP was really about ambition and mitigation targets and finance coming into that one. This year’s COP has to be about what are we doing about it. How are we mobilizing finance? How are we mobilizing resilience and adaptation in these key communities? And that hasn’t shifted, and, again, I think has only been accelerated in how much more we need to do on that front, especially with this – an unforeseen factor, which was this food security. We’ve always known that we’re food-vulnerable. We know that climate change is going to exacerbate our food insecurities and water insecurities. But definitely this war has further moved that closer to our front of mind than it has ever been before, and so that would be a key part of – as we think about COP-27 this year.

Another key part will be around finance commitments. How are we showing and demonstrating that we are investing in these communities, we’re investing around the world? We have – this will be the year that the U.S. is starting to move the bipartisan infrastructure law dollars. So, you see the Department of Energy standing up new programs, new teams, new, you know – the Loans Program Office has made already two investments out of their shop in critical mineral-related technologies.

So, this is really about a year kind of – last year was a whirlwind year because I had the privilege of being part of a year one. I had never been in a year one of an administration before. I’d usually turn off the lights last time. This time turning on the lights. And I’ve had –

Dr. Majkut: I believe you’ve earned the privilege of year one.

Ms. Nakagawa: – I’ve had the full experience, and it was a really exciting year. We had an incredibly aggressive climate agenda that we were implementing. So, now this is the year that – now that we’ve set all that foundational steps – you know, we’ve launched our, you know, executive orders. We have, you know, initials – a first tranche of investments already made. We have the President who launched a global structure initiative called Build Back Better World. We really have the foundational pieces.

We’ve come back to the global stage, humbly of course, but we have returned from a position of strength, frankly, of a lot of the successes we’ve had at home in terms of some of the EV charging efforts, our transportation transition, all amid coming out of a global pandemic, right? So, there’s also that piece to the equation.

So, this year – again, I think this war has shifted our focus in terms of looking at how the energy transition is not something that can be a light turned on or off over a night, but rather, how do you leverage this to just rapidly accelerate these other pieces that, frankly, were unheard of. I mean, the fact that you have a European Union looking at a thermostat play, a heat pump acceleration, a weatherization program, far faster than they had two years ago really is a sign of the times, of where we are, and I do think that, you know, this year is going to underscore how we take this transition and how we transition it into – and how we help to smooth it out through some of these tools.

Dr. Majkut: Let me just say thank you for your service. Thank you for coming to CSIS this morning. We’re really excited for this conversation, and we look forward to seeing how it develops.

Ms. Nakagawa: Well, thank you so much for having me.

Dr. Majkut: If you can join me exiting stage right?

Dr. Majkut: My colleague Nikos Tsafos is going to come up and take over the program. Colleagues from the Web, thank you kindly for your questions, and onward. (Applause.)

Nikos Tsafos: Thank you. Hello, everyone. My name is Nikos Tsafos. I’m the Schlesinger Chair for Energy and Geopolitics at CSIS, and I caught the short straw and have to present the group project. (Laughter.)

So, Joseph Majkut, Ben Cahill and I published a commentary yesterday sharing some ideas about how we might respond to the moment. And so, I’m going to try to spare you the effort of reading it and try to summarize and give some context about why we wrote this, and then I’ll be joined by Ben and John Larsen to talk about these things.

So, as Joseph said, you know, we’re at an odd moment in this crisis because if I were to show you the price of oil and the price of gas and you weren’t reading the news, you would think something weird happened in February and then it was over, right? The price kind of like spiked and then it’s kind of come down again. It’s a little bit higher in oil. Gas has mostly reverted back to where it was.

At the same time, it doesn’t feel that way. It doesn’t feel like this is something that came and went. And so, as Joseph said, you know, we made a decision at the beginning to not sanction Russian energy, and low and behold we haven’t sanctioned Russian energy – that Russian energy flows seem to be continuing at roughly the same rate as they were before the war. And every week we have new estimates about how horrible the oil numbers are going to be out of Russia, and then a week later we realize that, actually, no, Russian oil exports seem to be tracking more or less what they were the month before.

And so, we put these ideas on paper – some of them are from previous commentary; some of them are ideas that we’ve talked about in presentations – to try to articulate essentially what we think the U.S., in particular, should be doing. And our guiding principle was to say there is no tension between providing energy security now and accelerating decarbonization later. This isn’t a free for all to just go back to the good old days – if you can call them the good old days.

This is about recognizing that Russia is the largest exporter of oil in the world, and the largest exporter of gas in the world. And we’re trying to win a war against them, and we’d like to sanction those exports. And to sanction those exports, it would be really helpful if the U.S. could make up for some of the slack. And it would be even better if we could do that in a way that doesn’t increase cumulative emissions over time, right?

That’s our starting point, right? Our starting point is that in our view the way that market forces are working, market forces are not well-engineered for sanctioning the world’s largest oil exporter, right? That’s not what markets are designed to do. Markets are not designed to accommodate the European Union deciding we no longer want to import Russian gas overnight, right? And so we need public policy to supplement that.

So we have grouped our ideas around three main themes – oil, gas, clean energy. And so I wanted to start, before I go to the recommendations, with a diagnosis of why we sort of tried to put the things that we’ve put on the table. On the oil side, you know, we have, I think, fundamentally in our view, a problem of scale and market mechanics, right? So the scale problem is that Russia was exporting about 8 million barrels a day of oil, right? So if we’re talking about market forces producing an extra one, or two, or two and a half, you know, that is a long way out before you can say: I can significantly sanction Russian energy, right? So there’s a question of scale.

The other thing that has very much guided our recommendations is that the U.S. production system, which is probably the one that could be most responsive, is clogged up right now, right? People have different views about why it’s clogged up. Our, I would say, collective assessment is it’s largely because of market forces, for lack of a kinder description. The industry lost a lot of money, or investors thought they lost a lot of money the last decade and they’re not keen to invest and jump into increased production. And because if they jump into increased production, they’re going to crash the price again. And so that is holding back sort of U.S. industry from being able to produce the kind of volumes that you would need if you wanted to sanction Russian oil.

And so our recommendations for the oil side, one, is we think that there should be some clear political messaging. As Melanie said, you know, Secretary Granholm has said this, that this is a wartime footing. I think this kind of language is important. I think bringing people to the White House and understanding that it’s not just the oil industry. It’s the service sector. It’s also the investors who are telling the oil industry not to invest. It’s really trying to bring people together and try to figure out how do you articulate a response. Again, at the moment, we’re not sanctioning Russian oil. And we’re not sanctioning Russian oil, because we can’t afford to sanction Russian oil, right? So this is really about how do you develop a response that allows you to sanction Russian oil more significantly?

The two specific things that we would say, one is to try to essentially provide some price support in the medium to long term for the – for the industry. The cleanest way to do this would be through the SPR, the strategic petroleum reserve. The recommendation that we have in our document says that the administration could commit to refill the SPR if prices go below 70 (dollars). Essentially, what we’re trying to solve or, again – remember, what we’re trying to solve for is industry isn’t investing because they’re scared that if they ever produce, they’re going to crash the price and lose money. So trying to offer some kind of visibility on demand support and price support could be incredibly helpful in unlocking these volumes.

And, by the way, as you all know, U.S. shale is ideally suited for this purpose because it declines very quickly, and so the commitments we make right now don’t lock us in in a 20 year sort of emissions – we don’t lock in, like, 20 years of emissions because within three to four years, you know, 70 to 80 percent of the production from these wells will have gone away, right? So it’s a great tool for responding to this moment.

If we are in a more wartime footing, you can imagine more direct ways to support the industry, akin to what we do for agriculture and other industries, right? Again, we’re trying to take out 8 million barrels, or as close to that as we can. We probably can’t get out all of it because some of it is going to China. But we’re trying to get out as much as we can, right? So we need a step change in our support system. The other recommendation is on the oil field services side, where we understand there’s a lot of bottlenecks in terms of the ability of the industry to respond, to hire crews, to get access to components, to trying to figure out other specific sort of lending systems that we can do for this industry to try to increase capacity to respond to the increased drilling that may come from the oil sector. So that’s the oil side. Again, I’m trying to summarize it relatively quickly.

On the gas side, you have two different problems. One is there’s – there’s a short-term problem and a long-term problem. The short-term problem is that if Europe decides to go buy an additional 50 billion cubic meters of gas, as it wants to do, form the liquified natural gas market, well, we didn’t have 50 million cubic meters sitting around waiting for Europe to come buy it. And so they have to sort of bid that gas from somewhere else. And I like to say that, you know, the combined consumption of Pakistan, Bangladesh, Malaysia, Indonesia, Singapore, and Thailand last year was 40 billion cubic meters. So if you want to import 50 billion cubic meters, that’s a lot of gas.

And, by the way, if you want to do it through 2030, you know, this year actually we have a lot of new supply coming online. That’s not the case in 2023, ’24, ’25. And, moreover, by the way, European gas production itself is declining at roughly 8 billion cubic meters a year. So within four or five years, you actually haven’t done anything if you import 50 billion cubic meters of LNG, right?

But the broad diagnosis here is, one, you’re adding a lot of consumption to a market that was already tight and so how do you manage that. Number two, you can’t really cut out Russia without doing anything that increases supply, right. So that’s the problem that we’re trying to solve.

So, in the short term, as Melanie said, there’s been a lot of effort from the U.S. government on the diplomatic front to try to sort of figure out a way to reallocate supplies so that more goes to Europe. We think that this is something that should be expanded and try to be more inclusive, try to bring in the major players and talk about how we’re going to manage the market.

You can’t really manage this market purely through price because price(s) have gone through the roof, right. So that kind of effort where you bring the EU, bring the U.S., you bring Australia, you bring Qatar, you bring Japan, Korea – if you can get China, even better, right – you try to bring people together and say, OK, how can we manage the system over the next few years where there’s enormous stress.

In the medium to long term, you know, we’re hearing a lot about additional U.S. LNG production. Here’s the problem. The market signal is a mess, right, because you look at the price today and no one believes this price is going to last. The EU is talking about LNG demand until 2030. Well, if it takes you four years to build the thing, like, no one is going to make money between 2027 and 2030. So the 2030 goal for the EU means nothing, right. And there is no clear sort of support system to enable something that wasn’t happening already, right. There’s no real public money, in part, because Western countries have decided not to support these kind of projects.

And so these are the constraints that we’re dealing with, right. So one of our suggestions is to say let’s try to come up with different, more creative structures where if you do give public support from the EU, you do this and you put in the financing terms, some very strict methane reporting and verification rules, you can have this gas go to Europe for a 10-year period while Europe diversifies away from Russian gas and then you can sign back-to-back contracts to sell this gas to Asia to displace coal in the sort of 2030s, 2040s so that Europe can see how its investment in LNG, actually, is part of a positive sort of climate story.

You can, again, depending on – again, this is war time, right so increasing levels of, like, intervention, right. We’re trying to solve for a big war. You know, you can come up with more aggressive structures where, essentially, you do public financing and a project has a 20-year operating life and then they have to shut down unless they can show that they can be consistent with a net-zero world, right? We do these kind of contracting structures for bridges, for airports, for all type of public-private partnerships. We can do it for LNG, right, where the assets revert back to the state or they lose the license to operate after a while if they’re not consistent with a net-zero world.

Again, these are all not simple but, relatively, straightforward concepts for trying to figure out how do you boost supply now without locking in emissions for the long term.

A final thing – the final idea on clean energy exports, this isn’t just about hydrocarbons. This isn’t just about oil and gas, although, obviously, being the largest oil and gas producer that’s where a lot of the focus is. This can encompass other technologies as well. We have, at the Department of Energy, a – and coming out of the infrastructure law a major initiative on hydrogen – hydrogen hubs. Everyone wants to be a hub. You know, welcome to the world of European energy where everyone wanted to be a hub. Now we can see the same party happening in the U.S.

Well, our question is, well, we’re in the process of designing hubs and conceptualizing hubs. How can we insert an export component to those hub concepts, right? How can we think about supplying hydrogen to Europe as it tries to lessen its demand for natural gas, right?

So we have an initiative that is, largely, now sort of domestically focused. Well, how can we put export into the concept from the beginning and try to figure out how can we deliver clean hydrogen to Europe over the next decade?

And, finally, this idea, again, can expand to other technologies as well. We had in discussion the 48(c) credit on manufacturing, right? So try to support clean-energy manufacturing. Europe is going to be scaling up its intake of a number of technologies. How can we be the ones to supply those technologies?

We even have more tailored initiatives, say, around solar – the Solar Energy Manufacturing Act – where we can be – again, if Europe is going to be accelerating its transition, the U.S. could be one of the suppliers so it’s not just China, China, China in terms of diversifying away from Russian gas by relying largely on Chinese manufacturers. How do you also diversify those supply chains?

So that’s the list, right? Our overarching goal again is respond to the moment, allow for greater sanctions, and doing so that when we look back in 10, 15 years at what we did, we can say, you know what, net emissions were roughly the same as what they were going to be, or even better, maybe a little bit less, but we also responded to the moment in an aggressive way that allowed us to make a material contribution to the war by enabling a much greater sanctioning of Russian energy exports.

So with that I’ll stop and I’ll invite my colleagues to come up here. (Applause.)

Ben Cahill: While we shift everything around, I just want to share that Sarah Ladislaw, who was supposed to be here for this panel, unfortunately couldn’t be here today. She’s not feeling well. So we wish her well. And I’m sure she’ll be back with us again at CSIS soon.

So my job is to run the panel discussion. My name is Ben Cahill. I’m a senior fellow here in the Energy Program.

And we’re very fortunate to have John Larsen with us. John Larsen is a partner at Rhodium Group. He’s also an affiliate of our program. Rhodium Group, many of you are familiar with them. They do a fantastic job modeling different climate policies. So it’s a real privilege to have John with us to talk about what some of these policy initiatives, especially around U.S. LNG, might do to climate outcomes and emissions.

And we also have Nikos with us to maybe expand on some of the ideas that we just talked about. Nikos did a fantastic job presenting those ideas; tour de force.

So we don’t have that much time. We’re running a little bit behind schedule. So I’m going to turn the floor over to John. And I know that John wants to talk about the U.S. LNG industry and exports and the idea of squaring more export capacity with the idea of reducing emissions over the medium to long term.

So John, over to you for a couple of minutes.

John Larsen: Thanks, Ben. And it’s great to be back at CSIS. This is my first in-person event in a couple of years, so sorry if I’m a little shaky. (Laughter.) But it’s really great to have that first opportunity to be here.

And, you know, I’m going to speak a little bit maybe in a bit more detail to some of the comments that we heard from Melanie and from others around the LNG situation here in the United States vis-à-vis Europe.

You know, depending on how you count it, U.S. LNG is as much as 50 percent better, on a lifecycle perspective, than Russian pipeline gas. So already this pivot away from Russian pipeline gas to U.S. LNG or other LNG now is a net incremental gain for the climate. But that has way more to do with leaky Soviet steel infrastructure going across multiple continents than it does with any superior environmental performance of the U.S. oil-and-gas industry.

And what that means is there’s lots of room for improvement. And we heard it from the questioners, we heard it from Melanie, that that certainly is the case. But the industry is not going to do it without a policy framework that it can work with that’s predictable, that’s long term, that allows that environmental performance to get enhanced and to make U.S. LNG more attractive and marketable, not just in Europe today, but in any decarbonizing energy system across the globe over the long run.

And so really it’s playing on what Melanie said. There’s a few different opportunities here to set up that framework. One, first and foremost, is the executive branch has authorities that it can use to reduce oil-and-gas methane from exploration, production, and transmission. The Department of Transportation also has authorities. There’s lots of different space there.

The U.S. EPA’s proposed rules on oil-and-gas methane on the table right now could cut methane emission from natural-gas systems by roughly two thirds over the next few years. Methane is probably the most important near-term opportunity for emission reductions from the supply chain. It is worth noting that it’s not the only gas associated with lifecycle emissions of LNG.

Carbon dioxide is a real issue, both in produced CO2 that comes out from the wells, but then also all along the transportation chain, you combust fossil fuels to move fossil fuels. And so emissions at the lease sites, at natural-gas processing plants, at LNG liquefaction plants, are all major sources of CO2 associated with lifecycle emissions of gas. And that’s where I think a lot of the additional policy measures could be focused.

So, for example, Melanie mentioned the carbon-capture tax credit, 45Q. The version that passed in the House Build Back Better Act would extend the deadlines and enhance the value of the credit to a degree that we at Rhodium feel could be quite attractive, not just for gas processing plants but for LNG facilities and would dramatically cut the CO2 footprint of the supply chain for LNG cargos. And then on top of that, the Methane Reduction Program that was also part of that act, which had, like, a carrot/stick approach to reducing methane, could definitely complement the EPA regulations and maybe get at some emissions that the regulations can’t. And all of that is going to send expanded and predictable signals.

And again, I’ll say, long term like, this is – the tax credits contemplated in what was Build Back Better and potentially in any new package that might emerge – one of the huge benefits of that is not just that the tax credits exist, it’s that they’re available for the full decade through the 2020s. And that allows a lot more deployment of all these technologies over time, in particular when we’re talking about the timeframes that Nikos is talking about, with LNG terminals. We’re really talking about the new capacity coming online in the later part of the decade is what – is a big part of this. And all of those things together could make U.S. LNG not just better than Russian pipeline gas, but perhaps the best, cleanest LNG production in the world should the industry have a framework to work with and it takes full advantage of that framework.

And so we – you know, we need EPA to follow through on its regulations, but we also need Congress to act to set up that framework so that people can start really putting the multibillion dollar investments on the table to make this stuff work. That is probably – gets U.S. LNG performance to a level that, you know, could be impactful through the 2030s. It is not the same as net zero. And so the last thing I’ll say on this is, you know, the industry and the U.S. should be really thinking about, and Europe is already thinking about, how LNG can work in a net zero world.

And that could mean hydrogen blending. It could mean using more bio-based sources of methane instead of fossil. It could also mean offsetting those emissions with rigorous direct-air capture or carbon removal of which there are substantial incentives also in what was Build Back Better that could be expanded and taken advantage of here and could leverage all these existing CO2 infrastructure – or the new CO2 infrastructure you’d be building around those LNG terminals anyway. So there’s a lot in the long run to contemplate, but so much to do in the short term, should that framework get put in place.

And so, you know, I think it’s time for folks to really get serious. We’re going to have any kind of action this year on this, to really kind of push this stuff into the next level and really accelerate clean energy deployment in the LNG sector.

Mr. Cahill: Thanks, John. That’s great.

Let me start with a question specific to U.S. LNG, and then I’d like to get your views on some broader climate policies that might be possible at this time, with this changed environment. So there are a lot of critics of funding any fossil fuel projects at this point. You know, many people make the argument that if you fund fossil fuel infrastructure, you’re locking in carbon use and, you know, fossil fuel dependence. How do you respond to that? Do you think it’s the best use of public funds and public energy, government efforts, to support more U.S. LNG capacity? How do you square that with the idea of, you know, achieving longer-term climate goals?

Mr. Larsen: Well, I think the framework that you folks have put together in your commentary around, you know, making sure cumulative emissions aren’t compromised is the right one here. And, you know, that can mean a lot of things. That can mean over time any increase in emissions from oil and gas and LNG exports because of the current activity is reduced through some of the measures I just talked about, right? That wouldn’t have happened otherwise. It could also mean if emissions go up in one sector you do more in a different sector to make up that difference.

And I think, you know, should you have additional policy investments beyond just the LNG package I talked about, say in the electric power sector or in the transportation sector, you could easily, I think, get into a space where the U.S. is making much bigger gains on net greenhouse gas emissions across the energy system without compromising long-term fossil lock in. I also would just say that, you know, any one infrastructure project is not going to make or break climate change. And that – you know, the cumulative effect of, like, lots and lots of projects? Sure. But, like, we’re talking about the margin and we’re talking about a wartime situation. And being able to steadily shift to the clean side over this decade, again with a policy framework to do so, I think should be able to mitigate any of those downside risks.

Mr. Cahill: Maybe a slightly broader question. So Rhodium Group, as I mentioned, does a lot of great work modeling, you know, the impact of various climate policies. We’re in a changed environment. A lot of things may be possible now. There’s a new sense of urgency to try to get something done in the coming months on climate. Maybe share some thoughts on what you see as, you know, the biggest potential wins that are feasible in this kind of policy climate, right? When you think about the kind of Venn diagram of, you know, impact and feasibility, where can we get the biggest bang for the buck? What do you think is achievable that would really, you know, maximize in emissions impact? We’ve talked about U.S. LNG and reducing emissions from the industry, but what other things is Rhodium thinking about?

Mr. Larsen: Yeah. We’ve been looking at this now for a year and a half, you know, as there was an – you know, a new opportunity on the table to move legislation. And I’d say, if I had to pick one area just to highlight, it’s the electric power, clean-energy tax credits. And not just from a clean-energy deployment and emission-reduction perspective, but also from an energy-security perspective. Again, the long-term nature of the credits gives the industry the kind of running room to scale that it’s never had before. It’s always been up and down – will they/won’t they extend these credits? And instead, having 10 years of full value and flexible tax credits where solar or any technology can take either the investment or production tax credits we found is – really, really enhances the overall value of those tax credits. Coupling that with the nuclear retention tax credit, you can – our estimates are, first of all, you could probably get U.S. electric power CO2 emissions down to about 70 percent before ’05 levels by 2030 just with the tax credits. That’s before you talk about any new public-health or GHG regulations in the sector. And you free up a volume of natural gas that would have otherwise been burned in the electric-power sector equal to the amount of total U.S. LNG exports today.

So that’s a lot of gas, to quote somebody I know next to me here. (Laughter.) And you know, I think that – you know, putting that into the context of energy security, that’s a lot of natural gas that could easily be used to help our allies get off of more volatile, insecure sources without any serious price repercussions back here at home, because you’re – what you’re doing is you’re just replacing reduced demand with exports, right, as opposed to having to find new sources of gas to fill in both spaces. So I think that – if I had to pick one category, that’s it. I mean, this expands to transmission and battery storage and all that other stuff that you need to support all that clean-energy deployment, but I would say that’s a really critical part of this.

Mr. Cahill: Thanks, John.

Nikos, let me turn to you. You were in Europe recently. You talk with European policymakers a lot. I wonder if you could just comment broadly on some of the big differences in the policy response between the U.S. and Europe to all this – Russia-Ukraine market implications. I mean, obviously, the U.S. is in a different position because we’re a huge producer of oil and natural gas, but maybe talk about how the U.S. versus Europe are kind of setting out the medium- versus long-term response to this, and how things have changed from the European policymaker’s perspective and how they’re looking at it differently compared with here in Washington.

Mr. Tsafos: Yeah. Well, you know, I think there’s a couple of things.

One, you know, I’ve been doing this for a while now, and if you were to tell me that Russian gas would be cut off to Europe but it would be the Europeans that did it – (laughter) – like, that would have been a surprise, right? So I think no one should underestimate the extent to which the European discourse on this topic has fundamentally shifted, right? And it has shifted in ways that I don’t think, like, if the war would stop tomorrow – which it won’t – it’s going to change, right? I think there’s a stickiness to it, right? So I think that’s one.

The only question is: How soon? How soon could we do it, right? So, obviously, the U.S., you know – you know, we banned oil, gas, and coal. We didn’t really import gas. I’m not quite sure on the coal, but it probably doesn’t matter. On the oil side, there were some imports. You know, Europe is just in a fundamentally different position. And I think what you’re seeing right now is sort of multiple conversations happening, right? One is, obviously, countries have very different historical experiences with Russia, and so their willingness to take strong stands differs depending on where you are on the continent. Countries have very different exposures to Russia and also responses. Are they on the water? Can they access LNG? Are their – are their oil supplies coming from pipelines or through the water? How much coal do they import from Russia? So all these things are coming together.

But I think you’re also having a sense of, you know, how much is this really going to matter, right, in the war effort, right? I mean, if we’re going to be reducing Russian gas supplies but the price of gas is going up and the Russians are making just as much money as before, are we really accomplishing anything, right?

So I think what you’re seeing now is a – is a couple of conversations. One is, you know, we did see the EU put sanctions on coal from Russia, which, you know, if I have to be analytically honest it’s like – it doesn’t really hurt them that much because they don’t make that much from coal, but it hurts you because you import a lot of coal. So it shows, I think, the public pressure sometimes overtaking sort of the strategic reasoning. And I think what you’re now getting to is on the oil and on the gas side – the oil is, you know, how can we do something that’s more phased? Is it a tax? Is it a phaseout? You know, countries are putting out their own targets about how quickly they want to get out of Russian oil. And so what you see now is trying to scramble to figure out a way that is more coordinated. Everyone can sort of agree on the 2027, because it’s far enough that you hope things are going to happen, right? (Laughter.) But frankly, the pathway from here to 2027 is not particularly compelling, in my view, right? On the oil side there’s almost nothing. On the gas side, you know, there is some of the things I talked about already, right?

So, you know, I think what you’re trying to get at is higher levels of confidence. Can we do this? How much impact is it going to be? My view is that some of the numbers coming out of Europe right now about the impact of, like, one, two, three percentage points of GDP are a gross underestimate of the damage, right? We’re talking about gas providing one-third of building energy, one-third of industrial energy. And we’re not talking about higher prices. We’re talking about just not having physical supply because you can’t get the gas into Europe, right? So this is very hard to model, because you kind of have to think about what it means to shut down a bunch of industry.

So that’s what you’re seeing. So what I expect will happen at the same time, though, is we began this war without wanting to sanction Russian energy. This is becoming politically untenable, for all the reasons that Joseph outlined at the beginning, the images that we’re seeing out of Russia. We have to do more. And so my thinking, as I speak to policymakers is, how can you do more in a way that hurts them more than they hurt you, right? And that have a plausible sort of way to fill the gap created by Russian energy.

So that’s the conversation. I expect we might see some movement on oil before gas. But again, on both oil and gas, I think it’s going to be a phase out rather than a total cut off. That’s my, at least, estimation. You know, there’s – you know, where we – at least in terms of what the EU will do. What will Russia do? We’ll see. But from the EU side, I think that’s where the discussion is right now.

And let me just say a final thing, you know, it’s not just – especially in this town we like to do this. It’s, like, all the EU versus Germany. It’s not that, right? I mean, this is – this is a very difficult topic for a lot of countries. It’s not just like everyone wants to sanction Russia and Germany is saying no. This is a far more diverse conversation, and a much more evenly split group in terms of their views about when, how quickly, oil or gas, or how. And so it’s not about, like, oh, let’s just convince the Germans, right? It’s a much broader and more difficult conversation than that.

Mr. Cahill: Yeah. Maybe just a quick one, if you could give a one-minute answer to this. Let’s talk about the commercial realities of adding U.S. LNG export capacity in the U.S. So is it possible to finance a U.S. LNG project with 10-year contracts? Or do people still need that kind of long-term security of demand, 20-year contracts? Can we get over this hump, and can we build LNG export facilities faster, with the way of – you know, the market has changed, and modular terminals, and the ability to kind of get things done faster?

Mr. Tsafos: Yeah. So in the one-minute answer, so I think what you have is in some ways the maturity of the market is such that you should, in my view, be able to finance something without a long-term contract, but then you bring net zero and that’s, like, a big headache, right? So from the maturity of the market, yes, like, the idea that you need a contract right now is kind of silly. But if you’re trying to bring something online in 2026-27, and you’re saying I’m going to make my money back until the early 2040s, you know, that starts getting a little bit tough.

So in my view, I think public money can help bridge that gap, and essentially shorten the time horizon that you need to pay back – I mean, essentially, you know, Europe is going to spend, like, 60-70 billion euros just to refill storage until October, right? I mean, you could spend that same amount of money and, like, you know, almost double our U.S. LNG capacity, right? So think about where do you want to be spending your money and for what energy security benefit.

Mr. Cahill: Got it.

Well, we are unfortunately just about at time. The time flew by. But we do want to end on schedule. I really want to thank Melanie Nakagawa, John, Nikos, all of you for joining us here in person at CSIS, and everyone who joined online as well. This conversation will continue. It’s a really challenging, but also exciting, time for energy and climate policy here. Let’s hope we can get something done in the next couple months. We look forward to collaboration and exchange of ideas and hope to see you back here soon. Thanks so much for joining us. (Applause.)

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• AEA Papers and Proceedings

The Economics of the Global Energy Challenge

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The Energy Security Gains from Strengthening Europe’s Climate Action

Author/Editor:

Geoffroy Dolphin ; Romain A Duval ; Hugo Rojas-Romagosa ; Galen Sher

Publication Date:

May 28, 2024

Electronic Access:

Free Download . Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: The views expressed herein are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Following the 2022 energy crisis, this paper investigates whether Europe’s ongoing efforts to cut greenhouse gas emissions can also enhance its energy security. The global computational general equilibrium model analysis finds that individual policy tools, including carbon pricing, energy efficiency standards, and accelerated permitting procedures for renewables, tend to improve energy security. Compared to carbon pricing, sector-specific regulations deliver larger energy security gains and spread those more evenly across countries, benefitting also some fossil-fuel-intensive economies in Central and Eastern Europe. This finding strengthens the case for a broad climate policy package, which can both achieve Europe’s emissions-reduction goals and deliver sizeable energy security co-benefits. An illustrative package, which would cut emissions in the EU, UK, and EFTA by 55 percent with respect to 1990 levels by 2030, is estimated to improve the two energy security metrics used in this paper by close to 8 percent already by 2030. Beyond the policies analyzed in the model, the paper also discusses the technology, market design, and supply chain reforms that Europe needs for an energy-secure green transition.

Departmental Paper No 2024/005

Climate policy Environment Imports International organization International trade Non-renewable resources Political economy

9798400265655/2616-5333

DPEA2024SEEGT

Please address any questions about this title to [email protected]

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Democrats are learning ‘demographics aren’t destiny’, how eu gaza policies shape europe-israel ties, another scam in the making, lying on tables not allowed, ch ashiq elected as chairman of apnsf, traffic comes to standstill in lahore as car drives in opposite…, fathers and sons, president xi meets egyptian president, calls for building china-egypt community with…, mainland sends out strong warning to ‘taiwan independence,’ vowing strong countermeasures, int’l consensus withers as russia hints at recognising taliban, new delhi records highest-ever temperature of 52.3 celsius, over 400 loudspeakers removed from mosques in madhya pradesh, shaheen afridi jumps up in latest icc t20i rankings, gautam gambhir likely to be indian squad’s new head coach: report, third t20 match between pakistan and england washed out, cristiano ronaldo in trouble, faces anti-doping committee, rain might interrupt another pakistan-england t20i, navigating the energy crisis amid global warming.

Pakistan's carbon dilemma

In the global discourse on climate change, Pakistan often finds itself at the crossroads. Situated in a region already grappling with environmental challenges, the nation’s role in carbon emissions cannot be overlooked. With a burgeoning population and an energy sector in crisis, Pakistan stands at a critical juncture where its decisions will significantly impact not only its own future but also the global fight against climate change.

Pakistan’s carbon emissions may be minimal, but its environmental struggles loom large. The country’s connection to the Himalayan glaciers underscores this dilemma as they steadily dwindle from warming temperatures. Climate change is not a distant threat; it’s here, reshaping our world.

The energy sector in Pakistan is beset with challenges, ranging from outdated infrastructure to inefficient governance. Power shortages are a common occurrence, leading to widespread discontent among citizens and hindering economic growth. The crisis is further compounded by the burden of circular debt, which has plagued the sector for years, impeding investment in renewable energy alternatives. As a result, Pakistan finds itself caught in a vicious cycle where the pursuit of short-term energy solutions perpetuates long-term environmental harm.

The connection between Pakistan’s energy sector crisis and global warming is unmistakable. By perpetuating reliance on fossil fuels, Pakistan not only exacerbates its own environmental challenges but also contributes to the broader issue of climate change. The impacts of global warming are already being felt across the country, from more frequent and severe heat waves to erratic monsoon patterns, posing existential threats to vulnerable communities.

However, amidst these challenges lies an opportunity for Pakistan to chart a more sustainable path forward. The country possesses immense potential for renewable energy development, particularly in solar and wind power. With abundant sunlight and wind resources, investing in renewable energy infrastructure could not only reduce Pakistan’s carbon emissions but also create new avenues for economic growth and job creation.

Furthermore, international cooperation and support are crucial in this endeavour. Pakistan alone cannot address the complex challenges of climate change and energy transition. Collaboration with global partners, including technology transfer and financial assistance, can accelerate the adoption of clean energy solutions and help Pakistan meet its climate commitments under the Paris Agreement.

Pakistan faces a critical juncture where its decisions on carbon emissions, energy crisis, and climate change will shape its future profoundly. Urgent action is needed to address these challenges, with a focus on investing in renewable energy, improving governance in the energy sector, and enhancing resilience to climate impacts. The stakes are high, but by seizing opportunities for sustainable development and international collaboration, Pakistan can pave the way for a brighter, greener future for its people and the planet.

Moreover, addressing the energy sector crisis requires a comprehensive approach that tackles systemic issues such as governance, transparency, and accountability. Reforms aimed at improving efficiency, reducing wastage, and promoting renewable energy investments are imperative to break the cycle of circular debt and ensure a sustainable energy future for Pakistan.

The consequences of carbon emissions, rapid melting of Himalayan glaciers, and global warming pose severe threats to Pakistan, with far-reaching implications for its environment, economy, and society.

First and foremost, the rapid melting of Himalayan glaciers poses a direct existential threat to Pakistan. These glaciers serve as a crucial source of freshwater for millions of people, providing irrigation for agriculture, drinking water, and hydroelectric power generation. However, as temperatures rise and glaciers retreat at an alarming rate, Pakistan faces the spectre of water scarcity and heightened risk of floods and glacial lake outburst floods (GLOFs). The loss of glacier-fed rivers could disrupt agricultural productivity, exacerbate food insecurity, and fuel social unrest in already vulnerable regions.

Furthermore, the impacts of global warming are exacerbating existing environmental challenges in Pakistan. Erratic weather patterns, including more frequent and intense heat waves, droughts, and floods, are becoming increasingly common, disrupting ecosystems, threatening biodiversity, and compromising food and water security. Coastal areas are particularly vulnerable to rising sea levels, posing risks to infrastructure, settlements, and livelihoods.

Economically, the consequences of climate change are profound. Agriculture, a cornerstone of Pakistan’s economy, is highly susceptible to climate variability and extreme weather events. Reduced crop yields, livestock losses, and water scarcity could undermine rural livelihoods, exacerbate poverty, and deepen inequality. Moreover, the energy sector, already under strain from the crisis of circular debt and inefficiency, faces heightened vulnerability to climate-related disruptions, further hampering economic growth and development.

In addition to environmental and economic impacts, climate change poses significant challenges to Pakistan’s social fabric and human security. Displacement due to extreme weather events, water scarcity, and resource conflicts could exacerbate social tensions, internal displacement, and migration. Vulnerable populations, including women, children, and marginalized communities, are disproportionately affected, facing heightened risks of food insecurity, malnutrition, and health problems.

Moreover, the interplay between climate change and security dynamics adds another layer of complexity to Pakistan’s challenges. Competition over dwindling water resources, environmental degradation, and climate-induced migration could exacerbate regional tensions, fuel conflicts, and undermine stability. Addressing climate change, therefore, is not only a matter of environmental stewardship but also a crucial component of national and regional security.

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Following the 2022 energy crisis, this paper investigates whether Europe’s ongoing efforts to cut greenhouse gas emissions can also enhance its energy security. The global computational general equilibrium model analysis finds that individual policy tools, including carbon pricing, energy efficiency standards, and accelerated permitting procedures for renewables, tend to improve energy security. Compared to carbon pricing, sector-specific regulations deliver larger energy security gains and spread those more evenly across countries, benefitting also some fossil-fuel-intensive economies in Central and Eastern Europe. This finding strengthens the case for a broad climate policy package, which can both achieve Europe’s emissions-reduction goals and deliver sizeable energy security co-benefits. An illustrative package, which would cut emissions in the EU, UK, and EFTA by 55 percent with respect to 1990 levels by 2030, is estimated to improve the two energy security metrics used in this paper by close to 8 percent already by 2030. Beyond the policies analyzed in the model, the paper also discusses the technology, market design, and supply chain reforms that Europe needs for an energy-secure green transition.

• Executive Summary

Russia’s invasion of Ukraine in 2022 sparked an energy crisis in Europe. As shown in this paper, this crisis came on the back of a broad-based deterioration in energy security in previous decades, as the continent came to rely increasingly on imported energy from ever fewer suppliers. Following the war, policymakers have taken an impressive array of individual and collective actions to strengthen energy security. The main question this paper addresses is whether strengthening efforts to mitigate climate change will also support Europe’s energy security in the medium term. It examines two dimensions of energy security: security of supply, which improves as dependence on energy imports falls and/or imports become more diversified, and economic resilience to energy shocks, which is enhanced when the overall weight of energy spending in GDP declines.

The global general equilibrium model-based analysis in this paper finds that Europe’s climate change mitigation and energy security goals are largely complementary. Greenhouse gas emissions reduction policies tend to lower the risk of foreign supply disruptions by reducing reliance on imported energy and diversifying the remaining imports among non-European suppliers. They also tend to improve European economies’ resilience to energy shocks. This holds true particularly for those policies that directly curtail energy demand, such as sector-specific emissions and energy efficiency standards for cars and buildings. But even carbon pricing, which by its very nature raises energy prices, ends up lowering the amount spent on energy in most of Europe because energy demand is relatively elastic over the medium term.

However, Europe’s energy security gains from climate change mitigation vary across policy tools and countries. If used as a standalone tool, carbon pricing cuts emissions at least economic cost but can weaken energy security for a while in some energy- and emissions-intensive economies in Eastern Europe, partly due to accelerated phasing out of domestic coal. Sector-specific regulations deliver larger energy security benefits and spread those more evenly across countries. Public investment in heat pumps enhances security of supply by reducing fossil fuel imports, but it needs to be combined with an expansion of carbon-neutral power generation as it could otherwise raise electricity and gas prices and thereby the weight of energy spending in GDP.

These findings strengthen the case for a broad climate policy package, which can both achieve Europe’s emissions reduction goals at a low economic cost and yield sizable energy security co-benefits. Carbon pricing should remain at the forefront of this effort given its economic efficiency benefits, while sector-specific regulations and accelerated permitting procedures for green infrastructure will amplify the package’s energy security benefits and spread them more evenly across different European countries. An illustrative package that would cut emissions in the European Union, the United Kingdom, and countries of the European Free Trade Association by 55 percent with respect to 1990 levels by 2030 could improve the continent’s two energy security metrics studied in this paper by close to 8 percent by the same horizon.

The simulations also support the case for strong multilateral cooperation within Europe, given that countries differ in their degree of emissions or energy intensity, potential for renewable power generation, and financing costs. In particular, expanding common financial capacity for green investment at the EU level could accelerate the green transition by ensuring that its energy security co-benefits are more evenly shared across countries.

Further policies are needed. To boost investment in renewables and address their intermittency, European countries need to further improve electricity market design and support the deployment of technologies like batteries, green hydrogen, and those that enable demand-side flexibility. To avoid carbon lock-in, Europe needs to guard against overinvestment in fossil fuel infrastructure. Finally, deeper cooperation with other regions of the world can help secure supplies of minerals critical for the green transition.

• 1. Introduction

In 2022, Europe 1 suffered its worst energy crisis since the 1970s, triggered by Russia’s war against Ukraine. Pipeline gas flows from Russia to Europe began dropping in the second half of 2021 and flows to many countries were suspended in 2022 ( Di Bella and others 2022 ; Lan, Sher, and Zhou 2022 ). Prices of natural gas traded on the Dutch Title Transfer Facility increased over 20-fold between 2019 and August 2022, sending electricity prices up from €45 to €598 per megawatt hour in August 2022. Governments responded decisively, buying gas, providing financing to energy firms, requiring operators to fill gas storage facilities, leasing foating gas import terminals, and activating standby electricity generation capacity. Nevertheless, the energy crisis had first-order adverse economic impacts. Higher energy prices and calls for voluntary energy savings reduced consumption of gas by 15 to 20 percent, and that of electricity and coal by 5 to 10 percent ( Figure 1 , panel 1). Large industrial consumers bore most of the burden of gas demand reduction ( IMF 2023a ; Ruhnau and others 2023 ), which weighed on industrial production ( Chiacchio and others 2023 ). The war and its associated trade restrictions led the IMF to revise down its forecasts for GDP growth by over 1 percent in 2022 and 2023, and ½ percent in 2024 ( Figure 1 , panel 2). These downward revisions were even larger for energy-insecure European economies.

Despite the impressive array of measures taken in response to the war, Europe’s energy insecurity remains high, calling for further action. Indeed, markets expect energy prices in Europe to remain about 60 percent above prewar levels. 2 As the analysis in this paper shows, even before the war, Europe’s energy security had deteriorated over several decades along two dimensions: (1) the continent became more exposed to foreign energy supply disruptions, as imports accounted for a growing share of overall energy consumption, and those imports became increasingly concentrated among fewer foreign suppliers; and (2) the European economy became slightly more sensitive to energy shocks in general, as the ratio of energy expenditures to GDP rose. Further, the projections presented in the following show that the war itself is likely to have ambiguous effects on Europe’s energy security; on the one hand, it could reduce Europe’s exposure to foreign energy supply disruptions, but on the other hand, it could make European economies more sensitive to any such disruptions due to the persistent rise in energy prices from the war.

The key question this paper addresses is whether, and if so to what extent, greenhouse gas (GHG) emissions reduction policies could enhance Europe’s energy security, over and above contributing to Europe’s ambitious climate change mitigation agenda. The European Union’s REPowerEU package, for example, proposed raising the European Union’s 2030 renewable energy target from 32 to 45 percent and its energy efficiency target from 9 to 13 percent. 3 Most importantly, both the European Union and the United Kingdom have legally binding emission reduction targets, which involve cutting GHG emissions by 55 and 68 percent of 1990 levels by 2030, respectively, before reaching climate neutrality by 2050. At the EU level, the so-called Fit for 55 package of policy proposals shows which policy actions could be taken to achieve the 2030 targets. Fit for 55 includes carbon pricing, sector-specific regulations on energy efficiency, legal measures to speed up the deployment of renewable power generation, and financial support. There remains little comprehensive evidence regarding the energy security implications of Europe’s emissions reduction policies, both individually and as a package; this paper aims to fill this gap.

Europe’s Energy Crisis Severely Affected Energy Consumption and the Economy

Citation: Departmental Papers 2024, 005; 10.5089/9798400265655.087.A001

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The impact of climate change mitigation policies on energy security is not straightforward a priori and likely to vary across European countries, calling for a quantitative assessment. On the one hand, promoting the deployment of renewable energy, which tends to be produced domestically, could reduce Europe’s dependence on energy imports, including imports from unreliable suppliers ( Jewell, Charp, and Riahi 2014 ; Kim, Panton, and Schwerhof 2024 ). Likewise, enhancing energy efficiency (for cars and buildings, for example) should help energy security by reducing energy demand for a given level of domestic supply. On the other hand, various mitigation policies, especially carbon pricing, increase the cost of energy; thus, if energy demand is not responsive enough-more specifically, if its price elasticity is less than one, the overall weight of energy spending in GDP may rise, increasing the economy’s exposure to energy shocks. Furthermore, higher carbon prices would be expected to speed up the phasing out of coal, a highly polluting yet rather safe source of energy for those European countries that still produce it. A related concern could be that many pathways to climate neutrality will rely for a while on natural gas, global production of which is concentrated in fewer global suppliers than other fuels (I EA 2007; Kim, Panton, and Schwerhof 2024 ); there are also more infrastructure constraints associated with natural gas.

This paper assesses the impact of climate change mitigation policy actions on European countries’ energy security by means of a global multicountry, multisector general equilibrium model. The model describes energy trade, consumption, and production patterns for each country over the medium term and how they relate to GHG emissions. The model is used here to simulate the impact of individual policy tools, such as higher carbon prices, tighter emission and performance standards for road transport and buildings, faster permitting procedures for renewables or public investment in heat pumps, as well as climate policy packages such as one that resembles the European Union’s Fit for 55 agenda. Energy (in)security is analyzed here along the two dimensions mentioned earlier: (1) the risk of foreign energy supply disruptions and (2) the exposure of economic activity to any energy supply disruption.

The key findings from the simulations are the following:

▪ Climate change mitigation policies are expected to help Europe’s energy security in the medium term. Higher carbon prices, tighter sector-specific energy efficiency regulations, and accelerated permitting would all improve Europe’s energy security along the two dimensions considered in this paper.

▪ The energy security gains from climate change mitigation policies vary across policy tools and countries. If used as a standalone tool, carbon pricing cuts emissions at least cost but can weaken energy security for a while in some energy- and emission-intensive economies in Central and Eastern Europe, partly due to accelerated phasing out of domestically produced coal. Sector-specific energy efficiency regulations, while economically costlier than carbon pricing, deliver larger energy security co-benefits and spread those more evenly across countries. This is primarily because such regulations lower both the price and the consumption of energy, while carbon pricing only reduces the latter. Public investment in heat pumps enhances security of supply by reducing fossil fuel import dependence, but it needs to be combined with policies to decarbonize the power sector as it could otherwise raise gas and electricity prices and thereby the weight of energy spending in GDP.

▪ A broad package of measures can deliver sizable energy security gains for Europe. Such a package would combine both the economic efficiency of carbon pricing and the larger and more evenly shared energy security benefits of sector-specific regulations. Specifically, a package (1) lowers dependence on imported energy, because renewable energy is produced domestically while Europe’s fossil fuel consumption tends to be imported; (2) diversifies energy imports away from non-European suppliers, as Norway’s share rises while top non-European energy producers reallocate their exports away from Europe as its energy demand falls; (3) lowers energy expenditures, as energy efficiency investments reduce energy demand and accelerated renewables deployment raises energy supply, both of which help lower energy prices; and (iv) by decarbonizing the power sector, ensures that public investment in heat pumps—which could otherwise raise gas demand—enhances energy security.

▪ An illustrative package that would cut emissions by 55 percent vis-à-vis 1990 levels by 2030, and would be close in spirit to the envisaged climate policy mixes in the European Union, the United Kingdom, or countries of the European Free Trade Association (EFTA), is estimated to improve the two energy security metrics by close to 8 percent by 2030. This would reverse 13 years of deterioration in the European Union’s economic resilience, and 8 years of deterioration in the European Union’s security of supply.

The remainder of this paper proceeds as follows. The next section presents the energy security metrics used in this paper and shows their evolution for Europe before the war. The following section provides a brief overview of the model and discusses the calibration and results of baseline scenarios that investigate the effects of the war. The two subsequent sections present the simulation results for individual climate policy actions and a broad climate policy package, respectively. They are followed by a discussion of the policy implications from these model simulations. The annex goes beyond the policies analyzed in the model to explore, qualitatively, further policy actions Europe could take to achieve both its climate change mitigation and energy security goals. These include supporting technologies to address intermittency of renew-ables, making markets more efficient and attractive for renewables deployment, and securing the supply of minerals that are critical to the energy transition.

• 2. Europe’s Deteriorating Energy Security Before the War

Energy security is a multifaceted concept that can be measured in many possible ways. For example, Sovacool and Mukherjee (2011) list 320 indicators of energy security along five broad dimensions. To keep things focused, this paper measures energy security along two main dimensions: 4

• ▪ Security of supply , which is defined here in terms of the risk of foreign supply disruptions. The main metric used to capture this dimension is the composite energy supply insecurity index proposed by Cohen, Joutz, and Loungani (2011) , defined for each country as Σ sup p l i e r   c o u n t r y   i ( ( n e t   p o s i t i v e   e n e r g y   i m p o r t s ) e n e r g y   c o n s u m p t i o n ) 2

where the sum runs across all non-European supplier countries. Whereas Cohen, Joutz, and Loungani (2011) assign countries risk weights based on a political risk score, this paper takes a more agnostic approach and treats all non-European countries identically. European energy suppliers like Norway effectively get a risk weight of zero, which reflects that they are deeply integrated democracies that are less likely to restrict energy exports to each other. 5 This metric summarizes both energy import dependence (that is, the ratio of net energy imports to consumption) and the geographic concentration of energy imports (that is, Herfindahl index with European countries getting zero weight), which are two other commonly used metrics in the literature. Annex 1 shows that the composite index is approximately equal to a weighted average of the two. This dimension of energy security captures the reliability of foreign energy supply.

▪ Economic resilience , which is defined here in terms of the sensitivity of economic activity to any energy shock. It is measured as the ratio of energy consumption expenditures of firms and households to GDP, both expressed in current prices. This ratio is closely related to the well-known ratio in economics called the Domar weight ( Hulten 1978 ; Baqaee and Farhi 2019 ). It is also intuitive that economies with a high energy expenditure share be more vulnerable, all else equal. For example, upon impact, a 10 percent increase in energy prices would increase energy expenditures by 2 percentage points of GDP in an economy that starts out with an energy expenditure share of 20 percent of GDP, but only by 0.5 percentage point in an economy with an initial energy expenditure share of 5 percent. 6

Along these two dimensions, Europe’s energy security had deteriorated in the decades before Russia’s invasion of Ukraine. 7 In the European Union, the composite energy supply insecurity index increased fivefold between 1990 and 2019 ( Figure 2 , panel 1), while energy expenditures increased slightly from 5.5 percent of GDP in 1970 to 6.6 percent in 2019 ( Figure 2 , panel 2). These increases were broad-based: the composite insecurity index increased between 1990 and 2019 for 25 of the 29 European countries, and the energy expenditure shares increased in 17 out of 22 countries for which data are available. The large swings in energy expenditures were mostly driven by the evolution of international oil prices. The long-term downward trend in the United Kingdom reflects a 50 percent reduction in the economy’s energy intensity (measured as the ratio of real energy consumption to real GDP) since 1990 ( Figure 2 , panel 3).

Europe’s Energy Security Deteriorated in the Decades before Russia’s War in Ukraine

The main reason behind the deterioration of Europe’s security of supply since 1990 is that the continent came to rely more on imported energy to meet its consumption needs and its energy imports became more geographically concentrated ( Figure 3 ). The European Union’s energy import dependence increased from about 56 percent in 1990 to 76 percent in 2021, pushed up by gas, oil, and coal imports from Russia. Further, the (weighted) geographic concentration of its energy imports doubled over that same period. The opening of Nord Stream 1 played an important role for Germany, as the replacement of Norwegian gas with Russian gas between 2010 and 2015 contributed toward a 20 percent increase in the geographic concentration of its overall energy imports, which reversed improvements made in the prior decade. Most European countries (including notably Germany, Italy, and the United Kingdom) increased the (weighted) geographic concentration of their energy imports between 1990 and 2015. In France, the geographic concentration of energy imports remained stable over this period as energy imports from Russia substituted those from Saudi Arabia.

Europe Came to Rely More on Imported Energy from Fewer Suppliers—Primarily Russia

European Union: Contributions to Higher Concentration of Energy Imports in the Last Two Decades

(Percentage point change in Herfindahl index, 1999–2021)

The upward trend in the geographic concentration of energy imports in the European Union since 1999 is due to increasing concentrations of coal and oil imports ( Figure 4 ). This finding emerges from a simple shift-share analysis, which decomposes the increase in concentration into the contributions of (1) changes in the import concentration of each energy source and (2) changes in the energy import mix. In contrast to coal and oil, imports of other energy sources, like gas, did not become more concentrated over this period for the European Union as a whole—with a few such important exceptions as Germany. Meanwhile, changes in the energy mix contributed negligibly to the increase in concentration due to offsetting forces: the energy import mix shifted toward natural gas, whose import sources are highly concentrated among few foreign producers, but it also shifted away from coal and oil, whose import sources also tend to be fairly concentrated. In Italy, by contrast, changes in the energy mix played a more decisive role, as the shift into natural gas drove up geographic concentrations of energy imports, and hence the insecurity of supply index, between 1999 and 2021.

These indicators capture the two most important dimensions of energy security, but they ignore potential amplification effects from physical infrastructure constraints and price instability. They treat the geographic concentration of and expenditure on imported pipeline gas and oil symmetrically to seaborne imports, even though pipeline imports can be harder to substitute in the event of a disruption in a specific trading partner. The modeling in the following attempts to capture such infrastructure constraints by calibrating so-called iceberg trade costs. Energy price instability in Europe had also been a concern, rising in the two decades before the pandemic ( Figure 2 , panel 4). However, the price stability dimension of energy security cannot be captured in the analysis of this paper due to the model’s deterministic structure. Therefore, Annex 3 looks beyond the model, into the specific technologies (for example, hydrogen, batteries, and demand-side flexibility) Europe will need to maintain price stability as it adopts renewable energy, the supply of which varies intermittently with the weather.

• 3. The Mixed Effects of the War on Europe’s Medium-Term Energy Security

The impact of the war on Europe’s future energy security is not straightforward a priori. On the one hand, reduced energy dependence on Russia should help to reduce risks of potential future energy supply shocks. After the start of the war, the European Union phased out Russian coal and imposed sanctions on seaborne oil, which reduced its imports of Russian oil by 90 percent ( European Commission 2023b ). Russia’s share in EU gas imports also fell dramatically from 41 percent in 2021 to 15 percent in the first 10 months of 2023 ( European Commission 2023a ). Further, the European Union committed to phasing out all remaining Russian fossil fuel imports before 2030. 8 On the other hand, the war could persistently increase energy prices in Europe, which would weaken energy security by raising the energy spending share in GDP and thereby making economic activity more sensitive to any energy disruptions, all else equal.

To simulate the effects of the Ukraine war and various climate mitigation policies on European energy security, this paper uses a global multicountry, multisector general equilibrium model (called “ENVISAGE”), developed by the World Bank and adapted at the IMF. 9 This recursive dynamic computational general equilibrium model describes economic activity, energy trade and use, and GHG emissions for 31 countries or country groups, including 10 in Europe. 10 The model captures production, consumption, and trade in 28 commodities, including crude oil, oil products, gas, and coal. It also describes electricity generation from each fossil fuel, renewable (wind, solar, hydro), and nuclear source. The model is yearly, but this paper focuses on results for the year 2030 (the “medium term”), for which the model is the most reliable.

The effects of the war are estimated by comparing energy security metrics under prewar and postwar baseline scenarios:

▪ The prewar baseline (Baseline 1) is calibrated using estimates of energy trade from the International Energy Agency and projections of the electricity mix, GHG emissions, and economic activity from the EU Reference Scenario 2020 and the IMF’s January 2022 World Economic Outlook ( IMF 2022a ). The electricity mix in each country is calibrated by adjusting the productivities of each generation technology. The geographic concentration of Europe’s energy imports in the model is about 12 percent in 2021 and its energy expenditures are 6 percent in 2019, similar to those for the European Union in Figure 3 , panel 2, and Figure 2 , panel 2, respectively. However, due to differences in definitions, the model’s import dependence ratio is only about 54 percent in 2021, 22 percentage points below its level in the data. 11 This difference is taken into account when commenting on the results in the following.

▪ In the postwar baseline (Baseline 3), bilateral energy trade is adjusted to reflect the shutoff of Russian gas flows as observed in monthly data from Eurostat. For example, these data show that Germany reoriented its gas imports from 2021, when 65 percent of gas came from Russia, toward Norway, whose share of German gas imports increased from 19 percent to 60 percent, and such other countries as Belgium and The Netherlands. Other countries that saw a decline of more than 15 percent in Russian gas imports include Croatia, Estonia, Finland, Latvia, The Netherlands, Poland, Portugal, and Sweden. In the postwar baseline, Europe is assumed to phase out all remaining Russian fossil fuels by 2030. Economic activity is assumed to follow the April 2023 World Economic Outlook ( IMF 2023d ), while emissions and the electricity mix are allowed to respond endogenously.

▪ Finally, a hypothetical intermediate scenario (Baseline 2-labeled as such because it falls between Baselines 1 and 3) is used to disentangle the impact of the gas shutoffs from that of the European Union’s sanctions on Russia (and any other energy security effects of the war). In Baseline 2, gas imports are not adjusted, but European countries are assumed to continue phasing out Russian oil and coal.

The simulations suggest that Russia’s war in Ukraine and the associated trade restrictions will have mixed effects on Europe’s energy security in the medium term. The war is projected to cause Europe to import more of its energy from the United States ( Figure 5 , panel 1). France and Italy are projected to import more from Africa, while Germany, the Czech Republic/Slovak Republic/Hungary bloc, and Poland are projected to import more from Norway. The net effect is to reduce the geographic concentration of Europe’s energy imports among non-European suppliers by about two-thirds ( Annex Figure 2.1 , panel 2). Europe is projected to respond to the war-induced increase in energy prices by producing more energy, which reduces its energy import dependence ratio by 1.2 percentage points ( Annex Figure 2.1 , panel 1). This reduction in import dependence is also found in Rojas-Romagosa (forthcoming) . The decline in geographic concentration and import dependence together drive down the projected 2030 composite index of energy insecurity by some 8 percent in Europe as a whole ( Figure 5 , panel 2). However, despite rising European energy supply, energy prices remain higher in the postwar world (Baseline 3) than they would have been in a counterfactual no-war scenario (Baseline 1). As a result, and despite some reduction in energy consumption, European countries’ energy expenditures are projected to rise by about 0.2 percent of GDP overall ( Figure 5 , panel 3). 12

Effects of the War on Europe’s Energy Trade and Security in the Medium Term (2030)

Looking into the drivers of Europe’s enhanced security of supply, oil and coal sanctions on Russia appear to play a bigger role than the shutoffs of Russian gas, although both factors contribute positively. This can be inferred from the fact that the composite energy security index drops for most of Europe between Baseline 1 and Baseline 2, but does not change as much between Baseline 2 and Baseline 3. The model simulations suggest that oil and coal sanctions on Russia ultimately diversify Europe’s energy imports more across non-European suppliers than shutoffs of Russian gas do.

4. The Energy Security Effects of Different Climate Policy Tools

• A. Calibration of Individual Instrument Scenarios

Having established that enhancing Europe’s energy security will remain a key priority following Russia’s war in Ukraine, this paper turns next to the question of whether climate policy tools could help enhance it. To this end, the following five illustrative individual policies are simulated one at a time, and their impacts on security of energy supply and economic resilience to energy shocks against the postwar baseline scenario (Baseline 3) are analyzed:

▪ Higher carbon prices in the EU and UK emissions trading systems (ETS) . These prices are assumed to rise more steeply over time, to end at €110 per ton in 2030 in the European Union instead of €33 as in the EU Reference Scenario (and these prices reach €118 in the United Kingdom). These higher prices reduce emissions by about 4 percent in 2030, compared to baseline. Further details on the calibration of each scenario are provided in Annex 3.

▪ Tighter emissions and energy performance standards for road transport and buildings . Energy efficiency in Europe’s transport services sector is increased so that its consumption is reduced by 13 percent compared to the baseline. To capture tighter regulations on buildings, energy efficiency improves in the “other services” sector (which includes real estate activity, the main economic sector that operates buildings) to reduce its energy consumption by 5 percent. Households, which contribute to both transport and buildings emissions, adjust their preferences to reduce their energy consumption by 8 percent. These reductions in energy demand are sufficient to reduce overall emissions by 4 percent in 2030, which matches the emissions reduction achieved by higher carbon prices, in order to facilitate comparisons.

▪ Accelerated renewables permitting processes . These would increase total factor productivity of wind and solar power, which encourages investment and leads to 10 percent more such generation compared to baseline by 2030. This 10 percent improvement is consistent with a 40 percent improvement in the speed of renewables deployment, as would arise if the median European country’s permitting times could match those of the country at the top quartile.

▪ Public investment in heat pumps in residential buildings . To simulate this policy, European households’ preferences are shifted away from energy, reducing their overall demand by 6 percent in both the EU and EFTA region and the United Kingdom, while within energy, households’ preferences shift away from coal and gas and toward electricity. These reductions in energy demand are sufficient to reduce emissions by 4 percent in 2030, which matches the emissions reduction achieved in the first two simulations listed above.

▪ Removing fossil fuel subsidies . Subsidies on fossil fuel production and consumption are phased out in this simulation, to varying degrees across countries and fuels depending on prewar estimates, drawing on data from Rademaekers and others (2020) . By calibrating 2030 subsidies according to prewar data, this analysis assumes that the temporary energy subsidies introduced during the energy crisis will be fully phased out before 2030. Although fossil fuel subsidies are small relative to GDP in most of Europe, they can be large relative to the consumption of specific fuels. Subsidies for coal production in Germany, for example, make up only 0.1 percent of GDP (or €3.6 billion) but 1.3 euros per gigajoule of domestic coal use, which is about 25 percent of the retail price ( Annex Figure 2.5 , panels 1 and 2).

One feature should be borne in mind when comparing the individual policy simulation results. The carbon pricing, road and building regulations, and heat pumps scenarios reduce emissions by similar amounts, meaning that their energy security effects can be readily compared. However, accelerated permitting and a removal of fossil fuel subsidies can only be expected to reduce emissions by smaller amounts. For renew-ables, this is because of the limit on how much accelerated permitting could speed up deployment. For fossil fuel subsidies, this is because they are expected to be too small in the medium term—after returning to their prewar levels—for their removal to have a large impact on Europe’s emissions.

In addition, the model simulations do not investigate two important related aspects of energy security. First, they do not explore the implications of the European Union’s Carbon Border Adjustment Mechanism for energy security. The Carbon Border Adjustment Mechanism’s direct effects are unlikely to be material, because the only energy products it covers are electricity, very little of which is imported, 13 and hydrogen, which is not included in the model due to uncertainty around how much of the energy mix it will contribute to in the future. Indeed, Makarov and others (2021) find negligible effects of the Carbon Border Adjustment Mechanism on the European Union’s fossil fuel imports. Second, the model simulations do not investigate the potential energy security implications of supply chain risks associated with the green transition. These could potentially affect the flow, albeit much less the stock, of renewables. Specifically, while imports of solar panels or wind turbines could expose importers to supply chain disruptions originating abroad, these would not be expected to have acute implications for energy consumption because installed solar and wind plants could continue operating. Policies to address critical mineral dependencies are explored in Annex 3.

• B. Effects of Individual Instrument Scenarios

Climate change mitigation policies tend to enhance energy security in Europe along both the energy supply security and economic resilience dimensions. Figure 6 shows the effects of each policy instrument on the composite energy supply insecurity index (panel 1) and the energy expenditure share of GDP (panel 2). More detailed results on import dependence and geographic concentration are shown in Annex Figure 2.2 . Specifically:

▪ Higher carbon prices tend to make supplies more secure and economies more resilient to energy disruptions, except for a few energy- and emissions-intensive economies in Central and Eastern Europe. Carbon pricing causes substitution away from dirtier toward cleaner energy sources, and since Europe’s domestic energy production tends to be cleaner than its imported energy, its energy import dependence falls. In support of this intuition, economies where energy imports are dirtier than domestic production experience the largest reduction in import dependence in response to higher carbon prices ( Annex Figure 2.3 , panel 1). Poland and Czech Republic/Slovak Republic/Hungary as a group (which is a single bloc in the model) are the exceptions, where domestic energy production is more fossil-fuel-intensive than imports. At the same time, higher carbon prices reduce the geographic concentration of energy imports, mainly driven by lower shares of energy imports from the United States (and Africa, in the case of Italian imports), while the share of imports from Norway rises. Europe’s energy suppliers, such as the United States and African countries, have relatively geographically diversified energy exports, meaning that they can easily reallocate these toward other destinations when Europe reduces its demand. 14 Overall, higher carbon pricing tends to improve the composite energy insecurity index in most of Europe ( Figure 6 , panel 1). Similarly, higher carbon prices tend to reduce the ratio of energy expenditures to GDP, because energy demand over the medium term is relatively responsive to prices, especially in Western Europe. Exceptions are again found mostly in the energy-intensive economies of Central and Eastern Europe ( Annex Figure 2.3 , panel 3). In Poland, energy expenditures rise relative to GDP because the coal-intensive electricity mix is rather rigid in the model, although in reality, it might prove more responsive to higher carbon prices.

▪ Tighter regulations on energy efficiency in road transport and buildings cause larger improvements in energy security compared to higher carbon prices, and they share them more evenly across European regions. As demand for natural gas for heating purposes falls for given domestic natural gas production, and as demand for (mostly imported) oil falls with more fuel-efficient road transport services, the dependence of energy consumption on imports falls. In this scenario, Europe also reduces the geographic concentration of its imports, including as imports from the United States fall. Because of this reduction in import dependence and geographic concentration, tighter regulations improve the composite energy supply insecurity index in all European regions ( Figure 6 , panel 1). Furthermore, lower energy demand means less energy spending, as less energy is used and energy prices fall ( Figure 6 , panel 2). By reducing both energy consumption and energy prices, tighter energy efficiency regulations reduce energy expenditures even more than do carbon prices.

▪ Accelerated permitting for renewables also improves energy security in all European regions, even though its effects are smaller. By increasing the supply of domestically produced energy, it brings down energy prices and expands economic activity, thereby improving economies’ resilience to energy shocks ( Figure 6 , panel 2). Moreover, faster permitting reduces the risk of a disruption to foreign energy supplies, for two reasons. First, European energy importers replace their imports with domestically produced energy, particularly so in countries with greater wind and solar capacity to begin with ( Annex Figure 2.4 , panel 2). Second, faster permitting reduces the geographic concentration of energy imports, especially natural gas imports from the United States. Therefore, the composite energy supply insecurity index shows an improvement for all of Europe ( Figure 6 , panel 1).

▪ Public investment in heat pumps makes energy supply more secure but can raise energy costs if implemented in isolation. It leads to an expansion of electricity production, which replaces imported fossil fuels and hence reduces import dependency ratios. Demand for natural gas falls, especially from the United States, which tends to diversify energy imports in most of Europe. The latter effect is especially strong in the United Kingdom, because the United Kingdom is projected in 2030 both to import a high share of its energy from the United States and to have a high share of its gas consumption accounted for by households (44 percent). Therefore, the composite energy supply insecurity index improves for most European regions ( Figure 6 , panel 1). However, without a decarbonization of the power sector, energy expenditures rise relative to GDP ( Figure 6 , panel 2). This is because heat pumps increase demand for electricity, which in many countries drives up demand for gas from power plants. Since gas supply is rather inelastic, as evidenced by the challenges that Europe faced in increasing gas production during the 2022 energy crisis, this demand pushes up gas prices, and hence electricity prices. Rising energy costs are most noticeable in Poland, where the energy mix shifts from cheap gas (before heat pump investment) to more expensive electricity, and the Bulgaria/Croatia/Romania region, where the economy is relatively electricity-intensive and therefore energy expenditures are more sensitive to rising electricity prices.

▪ Removing fossil fuel subsidies has a negligible effect on energy security in most of Europe, given their small expected size by 2030, once the recent energy support measures taken in response to the war are fully phased out. The only two countries where they have a material impact are Germany and the United Kingdom, which tend to have the largest subsidies on fossil fuels relative to consumer expenditure thereon, reaching a tenth of the gas price in the United Kingdom and a quarter of the coal price in Germany ( Annex Figure 2.5 , panel 2). One important feature of European fossil fuel subsidies is that they tend to target production (50 percent of subsidies in the European Union) rather than consumption (35 percent), with the remainder targeting energy efficiency and research and development. As a result, while their removal slightly reduces GHG emissions (by 0.3 percent in the simulation) and benefits the economy, it causes domestic energy production to fall and energy import dependency to rise in Germany and the United Kingdom. 15 In addition, regardless of whether they are targeted at production or consumption, European fossil fuel subsidies tend to be skewed toward fuels that are produced domestically, like coal in Germany or gas in the United Kingdom. This means that, in the specific case of European economies, removing fossil fuel subsidies—even those to consumption—tends to raise the taxation of domestically produced energy even more than that of imported energy. Indeed, those European economies where fossil fuel subsidies are more skewed toward domestically produced energy products tend to experience a larger increase in import dependency when fossil fuel subsidies are removed ( Annex Figure 2.5 , panel 3).

Effects of Illustrative Individual Climate Policy Instruments on Energy Security

5. A Broad Policy Package

The varying emission reduction, economic efficiency, and energy security effects of different climate policy instruments strengthen the case for broad policy packages such as those currently being rolled out across Europe, including at the EU level. Carbon pricing is the economically efficient, least-cost way to meet ambitious GHG emission reduction goals. Sector-specific regulations, such as tighter emissions and energy efficiency standards for road transport and buildings, are not as cost-effective emission reduction tools, but they yield larger energy security gains that are also more widespread across countries. In particular, they also benefit energy- and emissions-intensive economies in Central and Eastern Europe. Finally, for investment in heat pumps to improve both dimensions of energy security, concomitant measures need to be taken to decarbonize the power sector, including accelerating permitting procedures for renewable power generation. Therefore, combining all these tools can simultaneously deliver on emission reduction, economic efficiency, and energy security objectives.

• A. Calibrating a Broad Policy Package

To quantify the energy security effects of a broad set of climate change mitigation policies, an illustrative package is simulated. It is designed to capture the key features of climate change mitigation policies in the European Union, the United Kingdom, and EFTA, and targets an emissions reduction for Europe as a whole of 55 percent of 1990 levels by 2030. This level is in line with the emissions reduction targets in the European Union and Norway, but below the target in the United Kingdom and above that in Switzerland. The simulated package includes the following policies, which are in line with those examined in the preceding section, but typically set more ambitiously (see Annex 2 for details):

▪ Higher carbon prices in electricity and manufacturing sectors . Europe already has plans to increase its carbon prices over time, whether through the EU ETS, which also covers Norway and is linked to the Swiss ETS, or through the UK ETS, which covers similar sectors. Therefore, this component of the illustrative policy package assumes a steepening of these price paths. Carbon prices in the EU ETS, for example, are assumed to rise to €185 per ton in 2030 (rather than €33 in Baseline 1 and the EU Reference Scenario).

▪ Tighter energy and emissions efficiency standards in road transport and buildings . This element of the package captures Europe’s tighter fuel-efficiency standards for new cars, vans, buildings, and heating systems, as well as target shares of electric vehicles, which vary across countries. These are calibrated to reduce energy demand in 2030, compared to baseline, by 13 percent in the transport services sector, 8 percent in the “other private services” sector (which includes real estate services), and 15 percent in households. It is assumed that firms improve their energy efficiency while households prefer less energy.

▪ Accelerated permitting procedures for renewables . This element of the package reflects efforts by many European countries to address this key bottleneck to the deployment of renewables. It is calibrated to result in 10 percent more wind and solar power generation in 2030 than in the baseline, as in the preceding section on individual policy scenarios.

▪ Public investments in technologies like heat pumps that electrify households’ energy consumption and enhance their energy efficiency . Most national governments offer public support (for example, grants, tax rebates, or loans) for the purchase and installation of heat pumps and other renovations of residential buildings to enhance their energy efficiency. The European Union provides funding for residential building renovation too, in the form of coherence funds and the Recovery and Resilience Facility. The simulations approximate these policies through a further reduction in households’ energy demand by 11 percent and an increase in their electricity demand.

• B. Climate and Energy Security Impacts

The simulation results confirm that (1) the package would enhance energy security by reducing by at least 8 percent the risk of a disruption to Europe’s foreign energy supply and the sensitivity of European economic activity to any energy disruptions, and (2) those gains would be widespread—even benefiting energy- and emission-intensive economies in Central and Eastern Europe, including the Bulgaria/Croatia/Romania and Czech Republic/Slovak Republic/Hungary regions. Specifically:

▪ Security of supply . The broad climate policy package reduces the composite energy supply insecurity index substantially for all European countries, except Poland, by 2030 ( Figure 7 , blue bars). The overall index for Europe drops by about 8 percent by 2030, reflecting underlying reductions in both import dependence and geographic concentration. As fossil fuel imports decline, dependence on imported energy falls in most of Europe, and by 0.6 percentage point overall ( Annex Figure 2.6 ). The only exceptions are Poland and the Czech Republic/Slovak Republic/Hungary region, which substitute imports for their domestic production of fossil fuel–intensive oil products (covered by the EU ETS) and coal, respectively. Europe also reduces the share of its imports coming from the United States and increases that coming from Norway, which reduces energy import concentration by some 7 percent overall and by as much as 25 percent in Germany ( Annex Figure 2.6 ). Italy lowers its concentration through reduced reliance on Africa, while the Czech Republic/ Slovak Republic/Hungary group lowers it through cuts in imports coming from Eurasian and Middle Eastern regions.

▪ Economic resilience . The broad climate policy package reduces Europe’s ratio of energy expenditures to GDP by 10 percent of its baseline level (or by 0.4 percentage point, from 4.7 to 4.3 percent), with all European energy importers benefiting ( Figure 7 ). The latter include energy-and emissions-intensive economies in Central and Eastern Europe, which gain from the energy efficiency investments driven by tighter road transport and buildings standards. In Norway, energy expenditures fall in nominal terms, but they rise relative to GDP because the economy becomes smaller as less energy needs to be produced domestically to export to the rest of Europe.

Poland stands out as the one country where the energy security benefits of a broad climate policy package are ambiguous: its energy spending share of GDP falls by 7 percent of its baseline level, but its composite energy supply insecurity index deteriorates by 5 percent. The latter reflects an increase in import dependence as domestically produced coal is phased out, with this effect outweighing the reduction in energy imports’ geographic concentration in the Cohen-Joutz-Loungani index. 16 This deterioration would be modest, especially considering that Poland starts from a strong third place in Europe along this (security of supply) dimension in the postwar baseline and would remain a solid fourth under the broad policy package. Nonetheless, these results emphasize the importance of ramping up domestic electricity generation as coal is phased out. For example, the government’s plan to increase the supply of renewables and/ or nuclear energy could be helpful in this regard, as it would help replace domestically produced coal without increasing import dependence ( IMF 2023c ; Krogulski 2023 ). Poland’s energy security could also be enhanced by expanding electricity interconnections with neighboring countries, which would increase imports of renewable electricity from safe European suppliers and thereby reduce risks from import dependence (European countries receive zero weight under the Cohen-Joutz-Loungani index used in this paper, unlike non-European countries; see Annex 1). For example, Poland could raise its 2030 interconnection target to 15 percent of electricity production, in line with the European Union’s target. More broadly, deeper integration of electricity markets would improve energy security throughout Europe, as suggested by further model simulations ( Box 1 ).

A Broad Climate Policy Package Would Enhance Energy Security

(Percent deviation from postwar baseline, unless indicated otherwise)

These simulation results complement those of Kim, Panton, and Schwerhof (2024) , who find that the world could enhance its energy security by raising carbon prices. In their analysis, higher global—rather than just European—carbon prices could increase the geographic concentration of energy exports and imports by lowering global fossil fuel prices and thereby driving high-cost producers out of the market, but this effect would be dominated by reduced reliance on imported energy (an effect also found in Jewell, Charp, and Riahi 2014 ). The broad European policy package simulated here does not affect global fossil fuel demand enough to affect materially global fossil fuel prices, implying that high-cost suppliers are not driven out of the market and thereby amplifying the energy security gains from Europe’s climate action.

• C. Overinvestment in Fossil Fuels

As it ramps up its climate policy action, Europe must guard against persistent overinvestment in public fossil fuel infrastructure along the green transition path—a material risk, according to the analysis in this paper. For example, simulations of the climate policy package in this paper suggest that Europe is broadly on track regarding its investments in climate-neutral power generation but is overinvesting in fossil fuels. Specifically, Europe’s fossil fuel capital stock in 2030 is projected to be almost 20 percent larger than implied by the broad climate policy scenario that achieves a 55 percent emission cut. This cumulative overinvestment even reaches almost 40 percent for fossil fuel power generation (versus 15 percent in fossil fuel extraction). New investments in natural gas infrastructure can help maintain adequate supply of a bridging source of energy that will be phased out gradually by 2050 and provides a buffer against unforeseen disruptions. However, the 20 percent overinvestment figure coming out of the simulations points to the need for reexamining some of these projects.

To alleviate such risks of “carbon lock-in,” Europe needs to exercise close regulatory oversight of fossil fuel investment plans, which are developed by industry associations with an informational advantage and an incentive to overstate investment needs. To date, this oversight seems inadequate—for example, most countries’ national energy plans as of 2023 did not assess whether there could be overinvestment in oil infrastructure ( European Commission 2023a ). It is thus welcome that the Agency for the Cooperation of Energy Regulators (2023a) noted that the European Network of Transmission System Operators for Gas’ proposed investments in gas infrastructure, at €110 billion in its plans from 2022, were “likely to exceed reasonable needs for such infrastructure, considering the expected reduction in gas demand in Europe from 2030.” To combat overinvestment in natural gas infrastructure, policymakers could require that new gas infrastructure be “hydrogen-ready” (as in Germany) and provide appropriate definitions and regulations that govern the certification of this term. It is also essential to ensure that any government tax incentives for investment in coal or oil production or distribution be rapidly phased out.

Simulating a Closer Energy Union through Electricity Market Integration

Deeper integration of electricity markets in Europe, captured in the model by reduced trade costs, would increase electricity trade between European countries. The illustrative simulations, under which cross-border electricity trade increases by 50 percent, suggest that this integration would improve energy security along the two dimensions (security of supply and economic resilience) considered in this paper:

▪ Security of supply . Even though more electricity trade would increase import dependence, it would reduce the geographic concentration of energy imports among non-European suppliers. The net effect would be to reduce exposure to foreign supply disruptions in most of Europe, as measured by the composite energy supply insecurity index ( Box Figure 1.1 , panel 1).

▪ Economic resilience . Economies become less sensitive to energy supply disruptions because energy prices and hence energy expenditures fall ( Box Figure 1.1 , panel 1). The fall in electricity prices tends to be greater in economies that have higher electricity prices in the baseline (Italy, United Kingdom), because these have the most to gain from cheaper electricity imports as electricity market integration equalizes electricity prices across Europe ( Box Figure 1.1 , panel 2).

While a closer energy union enhances Europe’s energy security, the simulations suggest that it has negligible effects on its greenhouse gas emissions, as would be expected. With electricity production shifting to more competitive economies like Germany and the Belgium/The Netherlands region, where electricity prices are lower in the baseline, emissions increase there by 0.3 percent, but fall symmetrically in other economies such as Italy (by 0.4 percent).

The Energy Security Impacts of Deeper Electricity Market Integration

(Deviation from baseline, percent unless indicated otherwise)

• 6. Conclusions and Policy Implications

The green transition requires a transformation of Europe’s energy system. As this paper shows, this transition also provides a unique opportunity to enhance Europe’s energy security after the recent energy crisis and decades of neglect. Ambitious climate policy action across Europe mitigates two fundamental sources of energy insecurity: the risk of foreign supply disruptions, by reducing reliance on imported energy and by diversifying energy supplies geographically among non-European suppliers; and the overall weight of energy expenditures in the economy, by curtailing energy demand. A broad policy package that would cut emissions by 55 percent vis-à-vis 1990 levels at the 2030 horizon by combining multiple instruments, including carbon pricing and sector-specific regulations, could enhance Europe’s energy security along these two metrics by some 8 percent. It would also spread those gains widely across the continent.

In combining different instruments to meet their emission reduction objectives, European policymakers will face some partial trade-of between minimizing the economic costs and maximizing the energy security gains from their climate policy packages. In some cases, the choice will be straightforward; for example, the very small energy security gains from some fossil fuel subsidies cannot justify their adverse emission, economic, and distributive effects, all of which call for their removal. But in general, for a given reduction in GHG emissions, policymakers who put more weight on economic efficiency would make heavier use of carbon pricing, while those who are relatively more concerned about energy security would rely comparatively more on sector-specific emission and energy efficiency regulations. Such a trade-of also provides a rationale for the coexistence of multiple instruments and targets, over and above an overall emission reduction objective. For example, the European Union’s 2030 renewables and energy efficiency targets, and any future revisions of these as new emission reduction goals are set for 2040, can help the European Union achieve its preferred combination of economic efficiency and energy security along its decarbonization path. 17

The heterogenous energy security gains from climate action across countries also highlights the need for greater multilateral cooperation on energy in Europe. In particular, deeper integration of European electricity markets would improve energy security across the continent by diversifying energy imports from non-European suppliers and reducing energy prices ( Box 1 ). In the European Union, this means pursuing the Energy Union. The European Union has achieved some successes in electricity market integration, especially in the coupling of the day-ahead electricity markets—by allowing prices in every market and cross-border trades to be simultaneously determined, it ensures that more interconnection capacity is used to send electricity from low- to high-price zones, reducing cross-country differentials in wholesale electricity prices. However, further progress is needed to connect electricity grids between EU member states. For example, seven of them do not yet meet the European Union’s target of having sufficient cross-border capacity to export 15 percent of their electricity production to neighboring countries ( European Commission 2023b ).

More broadly, energy policies, which remain a predominantly national rather than EU-level competency, could be better coordinated. Most member states, for example, still need to set targets to measure progress toward the European Union’s energy import diversification objectives. Furthermore, power capacity mechanisms—which provide financial compensation for power plants to be available for generating electricity when needed—differ from country to country ( Roques 2021 ). Steps toward harmonizing and integrating these mechanisms across countries would help minimize the associated market distortions. Such steps could include standardizing the reliability criteria—which gauge the ability of the power system to deliver as needed through foreseeable and unforeseeable events—across countries, developing common methodologies for “resource adequacy assessments,” and establishing rules for dealing with electricity shortages in two neighboring countries.

Multilateral cooperation could also be strengthened through joint financing arrangements, which could abate European emissions at minimum cost while spreading the economic and energy security gains from climate policy action more evenly. An EU-level fund for energy security and climate could help fund projects to decarbonize private capital, like buildings, and develop new technology, both of which are key yet might otherwise remain underfunded due to low domestic returns or allocated inefficiently across member states. Such a fund has been proposed, for example, by Arnold and others (2022) and Abraham, O’Connell, and Arruga Oleaga (2023) . The model simulations in this paper suggest that energy- and emissions-intensive economies in Central and Eastern Europe enjoy smaller energy security co-benefits from climate change mitigation action, and also happen to have lower marginal abatement costs of GHG emissions in many cases. By supporting investments in these economies, an EU-level fund could enhance their energy security and economic gains from climate action while accelerating Europe’s green transition at low cost, thereby also benefiting the Western European countries that might be net contributors to such a fund.

• Annex 1. The Composite Energy Insecurity Index

This annex shows that the composite energy insecurity index of Cohen, Joutz, and Loungani (2011) is approximately equal to the weighted average of two other commonly used energy insecurity indicators: energy import dependence and the geographic concentration of energy imports.

The composite energy insecurity index is defined for a given importing country in a given year as

where the summation runs across each non-European energy supplier i , and net positive energy imports denotes imports net of exports if these are positive, otherwise zero. This definition is equivalent to that proposed in Cohen, Joutz, and Loungani (2011) , except that, while those authors use a political risk index taken from the International Country Risk Guide, the definition here assigns zero risk to European countries and equal (unit) risk weight to all non-European supplier countries. The rationale for this choice of weighting scheme is explained in the main text.

The reason that this index can be considered as a combination of import dependence and geographic concentration is that it can be written equivalently as

where total net positive energy imports is defined as the sum (across non-European supplier countries i ) of net positive energy imports. The first ratio within the round brackets is similar to import dependence (although imports from European countries get zero weight), which is then squared, and the term in square brackets is similar to the (risk-weighted) Herfindahl index of geographic import concentration (assigning European countries zero risk and non-European countries an equal unit risk weight). One key distinction should be highlighted here: the first term in round brackets gives zero weight to imports from European countries, whereas the rest of this paper shows the standard import dependence ratio, which does not differentiate between European and non-European imports.

In other words, the composite index is approximately equal to

(import dependence) 2 [geographic import concentration].

Therefore, the cube root of the composite index is approximately equal to

(import dependence) 2/3 [geographic import concentration] 1/3 ,

which shows that the (cube root of the) composite index is approximately equal to a weighted (geometric) average of import dependence and geographic import concentration, with a weight of two-thirds placed on import dependence and one-third on geographic import concentration.

The approximation will be better for countries that are net energy importers (because then net positive energy imports are similar to net energy imports), especially those who are net energy importers with respect to each trading partner. Conversely, the approximation might be worse for energy exporters or for countries that are heavily engaged in energy re-export activity (that is, importing energy from one supplier country and then re-exporting it to other consumer countries).

Annex 2. Further Calibration Details and Simulation Results

This annex provides further details on the calibration of each scenario and their simulated energy security impacts. To save space, it is not self-contained and should be read jointly with the main text.

• A. Calibrating the Effects of the War

Three baseline scenarios are used in this analysis, as defined in the main text. Energy intensity and productivity of power generation technologies are the same in all baseline scenarios. All electricity and non-energy trade in the prewar baseline (Baseline 1) is calibrated to match the Global Trade Analysis Project database version 11. All historical and projected economic variables have been averaged to the regional country groupings in the model using purchasing-power-parity GDP-weighted averages. The economy is assumed to be on a steady state growth path after 2027, meaning that GDP continues growing at its 2027 rate and current account balances are maintained at 2027 levels. The second baseline scenario (Baseline 2) assumes no change to natural gas trade, but European countries phase out Russian oil and coal by 2030. Economic variables follow their projections in the IMF’s April 2022 World Economic Outlook ( IMF 2022b ), which reflect the impact of the war and European sanctions on Russia but do not assume any shutoff of Russian gas supplies to Europe.

The postwar baseline scenario (Baseline 3) adds the Russian gas shutoff to Europe to Baseline 2, which therefore accounts for all developments so far associated with the war. Given that Eurostat’s annual bilateral energy trade data for 2022 and 2023 were not yet available at the time of this analysis, the geographic distribution of natural gas imports (that is, “import shares”) after the Russian gas shutoffs had to be estimated using the available monthly bilateral gas trade data up to June 2023. The annual gas import shares in 2022 were assumed to match those in 2021 for most countries, except for those where the available monthly data show a significant change in Russian gas imports. A significant change was defined here to be a 15 percent reduction in Russian gas imports between 2022:Q4 and the average for the fourth quarters of 2017–21. According to this definition, the following countries saw material declines in their Russian gas imports in the monthly data: Croatia, Estonia, Finland, Germany, Latvia, The Netherlands, North Macedonia, Poland, Portugal, and Sweden, as well as the European Union as a whole. For these affected countries, the immediate postwar gas imports from Russia are estimated by adjusting down the imports from 2021 (from the annual data) by the percentage change in the bilateral gas imports from Russia between 2022:Q4 and the average for the fourth quarters of 2017–21. In Baseline 3, economic variables follow their projections in the IMF’s April 2023 World Economic Outlook ( IMF 2023d ), which account for Russian gas shutoffs. Furthermore, GHG emissions and electricity mix in Baseline 3 are allowed to vary endogenously in response to the shocks of the war, which means that they are not calibrated and therefore differ from those assumed in Baseline 1.

The evolution of energy security under these different baseline scenarios is discussed in the main text. Annex Figure 2.1 shows the model’s simulated effects of the war on energy import dependence and geographic import energy import concentration under the three baseline scenarios in 2030. The war leads to a reduction of energy import dependence in all of Europe, compared to the prewar baseline, whereas it reduces the geographic concentration for all European regions except Italy and France.

The War Tended to Reduce the Risk from Abroad of Disruptions to Europe’s Energy Supply in the Medium Term

B. Calibrating Different Climate Policies

This subsection provides further calibration details and impacts on energy import dependence and geographic energy import concentration of the individual climate policy scenarios.

• Higher Carbon Prices on Current ETS Sectors

This scenario simulates the impact of higher carbon prices on power generation and industry, which are the main sectors currently included in the EU and UK ETS. Carbon prices are raised so that the EU/EFTA region and the United Kingdom each achieve emissions reductions of 4 percent. Carbon pricing revenue is assumed to be returned to households in the form of labor tax reductions, so the carbon pricing schemes are fiscally neutral.

The results of this scenario simulation are discussed in the main text, but Annex Figure 2.2 shows the impacts on import dependence and geographic concentration. Energy import dependence tends to fall because Europe’s domestic energy production tends to be cleaner than its imported energy, meaning that higher carbon prices cause substitution toward domestic energy sources. These effects are stronger in countries with dirtier energy imports relative to domestic energy production ( Annex Figure 2.3 , panel 1). At the same time, higher carbon prices diversify Europe’s energy imports geographically across non-European suppliers ( Annex Figure 2.2 , panel 2), mainly driven by lower shares of energy imports from the United States (and Africa, in the case of Italian imports). These diversification effects are stronger for countries whose suppliers are less locked in to supplying Europe ( Annex Figure 2.3 , panel 2).

• Tightened Energy and Emissions Efficiency Standards for Road Transport and Buildings

Emission reductions resulting from tighter standards are modeled as a technological improvement in energy efficiency, which is associated with an annual cost in the form of forced investment that does not add to the production potential of the economy. To calibrate the overall cost, which ends up being 2.8 percent of gross fixed investment per year between 2023 and 2030, the key assumption is that transport emissions fall by 8 percent relative to baseline and buildings emissions fall by 5 percent, in both the EU/EFTA region and the United Kingdom. (Together, these are sufficient to add up to a 4 percent reduction of overall emissions in both the EU/EFTA region and the United Kingdom.) In turn, these emissions reductions are calibrated to cost 0.6 percent of gross fixed investment in the case of road transport and 2.2 percent in the case of buildings, which add up to the 2.8 percent total cost. The costs for each sector are estimated as follows:

Effects of Individual Climate Policy Instruments on Europe’s Security of Supply

Determinants of the Effect of Carbon Pricing on Energy Security

▪ Road transport energy efficiency investments that reduce the sector’s emissions by 8 percent are assumed to cost about 0.6 percent of European fixed investment . Tighter regulations on road transport, which produce emissions reductions of 4 to 11 percent, would cost vehicle manufacturers €400 to €2,700 per vehicle ( European Commission 2017a ). Averaging across these ranges suggests that an emissions reduction of around 8 percent corresponds to an average cost to manufacturers of €1,550 per vehicle. This cost estimate is multiplied by an estimate of the number of newly registered vehicles in the European Union, the United Kingdom, and EFTA countries between 2023 and 2030. There were 14.5 million newly registered vehicles (12.7 million cars and 1.9 million trucks) in 2021, at which rate there would be 116 million newly registered vehicles between 2023 and 2030, yielding a cumulative cost of €180 billion, or 0.6 percent of the €3.5 trillion in gross fixed investment per year. The costs to consumers are assumed to be zero as the higher cost of more fuel-efficient vehicles is offset by the lower running costs associated with fuel efficiency.

▪ Buildings energy efficiency investments that reduce the sector’s emissions by 5 percent are assumed to cost about 2.2 percent of European fixed investment . Energy renovation projects in the European Union and United Kingdom between 2012 and 2016 reduced annual buildings emissions by 12 percent at a cumulative cost of €1,365 billion ( European Commission 2019 ). Therefore, scaling these numbers down linearly, a reduction of buildings emissions by 5 percent would require cumulative energy renovation investments (over the 2023–30 period) of about €570 billion in the European Union and United Kingdom, or about €610 billion in the European Union, the United Kingdom, and EFTA combined (scaling up by GDP), which is 2.2 percent of fixed investment per year. The large cost estimate here reflects the implicit assumption that no energy renovations would have taken place in the absence of a need for decarbonization, which is required due to a lack of data on counterfactual buildings investments. Therefore, the GDP impacts of this scenario are likely to be lower than simulated here.

To meet these emissions reduction goals, it is assumed that energy demand falls in road transport and buildings by 8 and 5 percent, respectively, relative to baseline, thus matching one-for-one the percentage decline in emissions. This one-for-one response of energy demand is supported by the simulations for vehicles in European Commission (2017b) . Furthermore, it is assumed that the “other private services” sector accounts for buildings emissions in the model, which means that this sector is calibrated to reduce its emissions and energy demand by 5 percent. (This assumption is supported by the fact that the services sector, including real estate services, owns the vast majority of the building capital stock, according to Organisation for Economic Co-operation and Development [OECD] data.) In the model, road transport emissions are generated by both the transport services sector and by households. In turn, it is assumed that energy demand and emissions fall by 13 percent relative to baseline in the transport services sector and by 8 percent in households. These reductions in energy demand are assumed in both the EU/EFTA region and the United Kingdom.

The simulation results suggest that tighter energy and emissions efficiency standards produce energy security co-benefits that are more evenly shared across European regions than in the case of carbon pricing. Specifically, as demand for natural gas for heating purposes falls, with no reduction in natural gas production, the dependence of energy consumption on imports falls ( Annex Figure 2.2 , panel 1). Geographic concentration of energy imports falls, driven by lower European energy imports from the United States ( Annex Figure 2.2 , panel 2).

Permitting Procedures Duration and Effects of Accelerating Them

• Accelerated Permitting Procedures

This scenario assumes that permitting procedures for renewables are sped up by 40 percent in Europe, which means that the baseline path of development of renewable power generation capacity is achieved 40 percent sooner. The 40 percent potential speed-up is calculated as the average, across different renewable energy technologies (onshore wind, ground-mounted solar, and unspecified solar), of the percentage difference between the average European permitting duration and that of the country at the fastest 25th percentile of the sample, as shown in Annex Figure 2.4 , panel 1. For onshore wind for example, the average European country takes 5.6 years to process permitting applications, whereas Spain, the country at the fastest 25th percentile of the sample, takes just 3.4 years, which is 39 percent faster.

The simulations indicate that faster permitting reduces the risk of a disruption to foreign energy supplies, for two reasons. First, European energy importers replace their imports with domestically produced energy ( Annex Figure 2.2 , panel 1), with stronger effects in countries with more wind and solar capacity to begin with ( Annex Figure 2.4 , panel 2). Second, faster permitting reduces the geographic concentration of energy imports among non-European suppliers ( Annex Figure 2.2 , panel 2), driven especially by lower natural gas imports from the United States.

• Public Investment in Residential Heat Pumps

This policy assumes that about 22 million heat pumps are installed in residential buildings in Europe. These heat pumps are calibrated to reduce households’ energy demand by 6 percent overall. This 6 percent reduction comes from assuming that about 8 percent of residential dwellings receive a heat pump, which cuts their gas consumption to zero and increases their electricity consumption by 20 percent of the energy that they were previously using in the form of gas. To achieve this 6 percent energy demand reduction, EU and EFTA households reduce their demand for coal and gas by 50 percent and increase their electricity demand by 15 percent, while UK households reduce their demand for coal and gas by 16 percent and increase their electricity demand by 7 percent. The cost for the whole of Europe is calibrated at €126 billion, or 0.4 percent of gross fixed investment per year between 2023 and 2030. This implies a cost per heat pump of €5,645. In turn, this number is the product of the average cost of space and water heating heat pumps from the EU Reference Scenario Technology Assumptions ( De Vita and others 2021 ), €784 per kilowatt, and the average capacity of a heat pump, 3.6 kilowatts, and then doubled to reflect the labor costs of installation.

The simulation results suggest that investment in heat pumps reduces the risk of a disruption to foreign energy supplies. To meet the higher demand for electricity, Europe expands its electricity production, which replaces imported fossil fuels and reduces import dependency ratios ( Annex Figure 2.2 , panel 1). Geographic concentrations of energy imports fall in most of Europe ( Annex Figure 2.2 , panel 2), driven by lower imports from the United States. The one exception here is the Czech Republic/Slovak Republic/ Hungary region, where household income gains cause oil imports to increase, and these imports are highly geographically concentrated (in other Eurasian countries).

• Removal of Fossil Fuel Subsidies

One challenge faced by this study was the lack of timely and comprehensive data on fossil fuel subsidies (including tax exemptions) by European countries. The approach taken here was to calibrate fossil fuel subsidies for each country and fuel, and to distinguish between production and consumption subsidies, according to the data in Rademaekers and others (2020) , and for the United Kingdom, using data published by the OECD. The fossil fuel subsidies data apply to the year 2018, which means that this study assumes that these 2018-level subsidies are maintained in the baseline until 2030.

The OECD fossil fuel subsidies for France, Germany, and Italy do not differ systematically from the European Commission data. For example, the OECD data show higher fossil fuel subsidies than the European Commission data for Italy, but lower subsidies for Germany and France. This pattern suggests that the OECD data for the United Kingdom are sufficiently comparable with the European Commission data for other European countries.

These data provide nominal fossil fuel subsidies (that is, subsidies in euros) according to two different classifications. The first is by fossil fuel, breaking down subsidies into those directed at oil, gas, and coal. The second breakdown is by beneficiary, breaking down subsidies into those targeting energy consumption and those targeting energy production. Since the data do not provide a joint breakdown along these two dimensions, the two distributions are assumed to be independent of each other.

To express these subsidies in percent of each country’s retail price, which are needed for the model, the value of each category of subsidy (in euros) is divided by the consumption (in joules) of that fossil fuel, where consumption data are taken from the IMF’s Climate Policy Assessment Tool. Then, the resulting subsidy (in euros per joule) is divided by the retail price of that fuel, also taken from the Climate Policy Assessment Tool (in euros per joule). Finally, the resulting subsidies in percent of the retail price are split into consumption and production subsidies in proportion to the split in the data for energy subsidies (in euros). The resulting subsidies are shown in Annex Figure 2.5 , panels 1 and 2.

For example, following this method, the United Kingdom’s subsidies for gas consumption were about €4.5 billion (0.2 percent of GDP) in 2018. This amounts to some 1.7 euros per gigajoule of domestic gas use, or 13 percent of the retail price.

• C. Calibrating a Broad Policy Package

This section provides further detail on the calibration of the broad climate policy package scenario, which is described in the main text. This package includes four of the individual policies presented earlier: higher carbon prices in ETS sectors, tighter emissions and energy efficiency standards for road transport and buildings, accelerated permitting procedures for renewables, and public investment in residential heat pumps. These policies are combined to form a policy package that captures the key features of climate change mitigation policies in the European Union, the United Kingdom, and EFTA, and targets an emissions reduction for Europe as a whole of 55 percent of 1990 levels by 2030.

Fossil Fuel Subsidy Levels and Effects of Removing Them

The individual policy instruments in the package are calibrated with reference to the magnitudes in the Fit for 55 proposals, which tend to be larger than the individual policy scenarios discussed previously. The key magnitudes are provided in the main text; this section provides further detail.

▪ Carbon prices in the ETS are 1.5 times higher than in the individual policy scenario (€185 versus €110 in the European Union). This reflects that the impact assessment for the European Union’s ETS Directive ( European Commission 2021 ) found EU-wide emissions reductions of about 7 percent, which are about 1.7 times higher than the (4 percent) emissions reductions in the individual policy carbon pricing scenario discussed earlier.

▪ Energy and emissions efficiency regulations on road transport and buildings are calibrated to reduce energy demand by about 1.8 times as much as in the individual policy scenario for road transport and buildings (that is, by 15 percent versus 8 percent for households and by 8 percent versus 5 percent in the “other services” sector). The impact assessment for the European Union’s ETS Directive ( European Commission 2021 ) found that when the European Union extends its carbon pricing to road transport and buildings, it would achieve an EU-wide emissions reduction of 10 percent relative to the EU Reference Scenario; 10 percent is about 2.5 times the (4 percent) emissions reduction in the individual policy scenario for road transport and buildings regulations discussed earlier. In the simulations here, a factor of only 1.8, rather than 2.5, is needed to achieve the overall 55 percent emissions reduction objective. The cost of the sector-specific regulations is calibrated to be 5.8 percent of gross annual fixed investment, which is about 1.8 times the cost in the individual policy scenario for road transport and buildings regulations.

▪ Public investment in residential energy efficiency programs is calibrated to reduce household energy demand by 11 percent, which would be broadly similar to the 11.7 percent energy saving objective in the European Union’s Energy Efficiency Directive. This 11 percent energy savings is approximately 1.5 times the energy savings in the individual policy heat pumps scenario. Similarly, costs are assumed to be 1.5 times higher than in the individual policy heat pumps scenario, or 0.6 percent of gross annual fixed investment.

A Broad Climate Policy Package Improves Europe’s Security of Energy Supply

(Percent deviation from baseline)

The simulation results suggest that this broad policy package reduces the dependence on imported energy in most of Europe ( Annex Figure 2.6 , blue bars), given that emissions-producing fossil fuels tend to be imported. Europe’s imports fall by 0.6 percentage point of consumption, from 51.8 to 51.2 percent. Europe tends to reduce its US energy imports and partially replace them with Norwegian imports, which greatly reduces geographic concentrations of imports among non-European suppliers ( Annex Figure 2.6 , yellow bars). Europe’s energy imports become 7 percent less concentrated, with the weighted Herfindahl index falling from 0.042 to 0.039.

Annex 3. Wider Policy Needs for the Green Transition

For both climate change mitigation and energy security purposes, Europe needs a broader set of policies than examined in the previous modeling exercises. At a broad conceptual level, the case for further government intervention rests upon the need to address various unpriced externalities (not only with respect to climate and energy security, but also network effects in electricity, learning-by-doing in renewables) and market imperfections (information asymmetries regarding the energy efficiency gains from certain investments; financial constraints to massive green infrastructure scaling-up; weak market competition in electricity, transport, and some critical minerals for the green transition; imperfect credibility of future climate policy). In practice, key issues for policymakers include how to encourage the vast quantities of private investment needed to transform energy systems and how to address the intermittency of renew-ables. To address these challenges, policies will have to support the adoption of new technologies like green hydrogen, design markets that encourage appropriate private sector investment, and enhance the security of critical mineral supplies. This annex briefly reviews key challenges and suggests specific reforms in each of these three areas.

• A. Supporting Technologies to Address Intermittency

To achieve its goals of climate neutrality, Europe will need to electrify much of its energy consumption and meet its baseload electricity demand with renewables and nuclear. However, electricity demand at peak times will increase even as fossil-fuel-powered electricity plants are phased out. This means that Europe will need to find large quantities of “flexibility” in the form of zero carbon dispatchable power or demand-reduction measures. The following technologies are expected to be critical for energy security and climate change mitigation:

▪ Batteries . Grid-scale battery storage will be needed to manage intraday and daily balancing, due for example to the intermittency of renewable electricity production. In Europe, 41 gigawatts of new battery capacity are estimated to be needed by 2040, in addition to the 126 gigawatts estimated to be installed by 2030 ( ENTSO-E 2023a ). Support mechanisms for pumped hydro and battery storage, like capacity auctions, could provide the revenue predictability needed to expand investment ( IEA 2023b ). Regulatory frameworks should improve incentives for investment in batteries by ensuring a level playing field between batteries and power producers. For example, they can be allowed to offer ancillary services 18 (like maintaining stable voltage levels) and, like power producers, they can have taxes or fees (like network fees) levied only once when electricity is supplied to the grid instead of levying them also when the batteries are drawing electricity from the grid. In March 2023, the European Commission adopted these recommendations for action by member states ( European Commission 2023d ).

▪ Hydrogen . Green hydrogen will be needed to store energy between seasons (for example, to provide electricity in winter when heating demand is higher), to import energy by sea from faraway countries, and for hard-to-electrify production activities like steelmaking or aviation transport. Some 4–5 terawatts of hydrogen might need to be produced in the world annually by 2050, with Africa, the Americas, the Middle East, and Oceania having the highest potential of becoming exporters, and Europe and Asia becoming likely importers ( IRENA 2022 ). The European Commission (2024) estimates the European Union’s annual production of some 2,150 terawatt-hours of hydrogen by 2050. European governments have actively supported investments in hydrogen-related infrastructure and issued regulations to support the certification of producers of green hydrogen (that is, hydrogen produced with renewables). As was the case in the past with solar power, government intervention can help create a market, bring down costs through learning-by-doing, and facilitate the emergence of the best technological options, for example the best chemical form in which to transport hydrogen. Europe’s publicly funded intermediation mechanism (H2Global), which auctions long-term contracts to purchase green hydrogen in the world market and then re-sells the hydrogen to the highest bidder in the European Union, can help accelerate the development of this market in a cost-efficient way. Such mechanisms could be expanded by, for example, having more countries participate in their funding ( Federal Ministry for Economic Affairs and Climate Action 2022 ).

▪ Demand-side technologies . In addition to supply-side curtailment (that is, turning of wind and solar power plants) and electricity storage, it would help to balance electricity markets if electricity demand could be more responsive to prevailing electricity market conditions. This could be achieved by requiring electricity suppliers to offer customers the option of a contract with flexible prices, as in California, for example. On its own, the market may underprovide this option, because utilities do not fully internalize the network benefits of such contracts ( IEA 2023c ). Public programs could also auction demand-side response contracts (as in France and the United Kingdom) that pay large end-users to reduce their consumption at peak times, because of the large social gain from avoiding blackouts. Similarly, the Agency for the Cooperation of Energy Regulators has recommended that the European Union introduce a regulation to remove barriers to consumers’ participation in wholesale electricity markets ( ACER 2022 ). National authorities could devote more attention to demand-side policies in their long-term planning ( European Commission 2023a ).

• B. Making Markets More Efficient and Attractive for Renewables Deployment

Market design could also provide stronger incentives for investment in renewables. Investment would benefit from more predictability in future prices at which electricity will be sold. In principle, such hedges could be purchased on forward electricity markets, but in practice these are illiquid in Europe beyond three years’ maturity ( ACER 2023b ). Therefore, the reforms agreed between the European Parliament and Council in December 2023, which allow governments to offer two-way contracts for difference to zero emission power producers and make it easier to enter into power purchase agreements, are a welcome step toward greater predictability.

Further technical improvements to market design would also enhance incentives to invest in renewables and reduce the impact on the network of their intermittency. For example, renewables could be allowed to compete in balancing markets, which they can do by offering to curtail power production when there is a short-term oversupply ( IEA 2023a ). Finally, electricity market settlement periods need to be shortened (for example, from 60 minutes to 15 minutes, as Germany did with its intraday market in 2011) and electricity trading needs to be allowed closer to the time of physical delivery (for example, from 60 minutes in the intraday market in most of Europe to 30 minutes as tested on the Estonian-Finnish border or even 5 minutes as in parts of Austria, Belgium, and Germany/Luxembourg) ( IRENA 2019 ; IEA 2023b ).

• C. Securing Critical Minerals

Europe will also need to secure its supply chain of critical minerals for the green transition, including aluminum, cobalt, copper, graphite, lithium, nickel, and rare earths. These minerals are used in electric vehicles, batteries, and wiring, as well as in renewable electricity technologies such as solar panels and wind turbines. Importing these minerals can expose Europe to geographic concentration risks, given that, for most of them, around 70 percent of global production is concentrated in the three largest producing countries ( IMF 2023b ). This concentration is higher than in fossil fuel commodity markets, in which the top three producers account for about 50 percent of global production, and private agents might not internalize the systemic risk arising from such collective dependence on similar suppliers.

The most effective approach would involve reducing barriers to trade and production of critical minerals. Yet trade restrictions on these materials have proliferated, with export restrictions in particular growing fivefold between 2009 and 2020 ( Kowalski and Legendre 2023 ). Instead, new trade agreements could be struck to prevent other countries from restricting exports to Europe, which they might otherwise consider in response to supply shortages. Similarly, strategic partnerships could reduce barriers to cross-border investments in extraction and refining projects. Since 2021, the European Union has signed strategic partnership agreements with nine countries (Argentina, Canada, Chile, Democratic Republic of the Congo, Greenland, Kazakhstan, Namibia, Ukraine, Zambia). Finally, faster permitting for European extraction, refining, and recycling projects would encourage domestic production.

The European Commission’s March 2023 proposal ( European Commission 2023c ) of a regulation on critical raw materials includes these elements but could be further improved. It would also helpfully coordinate strategic stocks of critical raw materials between member states and enhance the assessment of security of critical minerals supply by requiring stress tests. However, the impacts of domestic content benchmarks (10 percent of consumption for extraction activity, 40 percent for processing, and 15 percent for recycling) should be carefully assessed, given their potential to impose economic costs and delay the green transition. In particular, the target for processing is relatively high and could trigger responses by source countries.

Abraham , Laurent , Marguerite O’Connell , and Iñigo Arruga Oleaga . 2023 . “ The Legal and Institutional Feasibility of an EU Climate and Energy Security Fund .” ECB Occasional Paper 2023/313 , European Central Bank , Frankfurt .

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In this paper, Europe means the European Union, the United Kingdom, and the European Free Trade Association. All areas have ambitious climate targets for 2030 that make them particularly suitable for analysis in this paper.

Calculated based on the change in a simple average of oil, gas, and electricity (futures) prices between 2019 and 2028 (2026 for electricity).

In 2023, the European Union ultimately revised up its renewable energy target to 42.5 percent and its energy efficiency target to 11.7 percent.

This paper does not try to combine these two indicators into one energy security index, as in Le Coq and Paltseva (2009) , because there are many possible ways of doing so, and any such effort would raise questions about the robustness of the results to the choice of index. Keeping the two indicators separate helps to emphasize that energy security is inherently an open concept.

This definition also helps with consistency between country-level and Europe-level results, because Europe’s imports cannot come from European countries.

It is also worth noting that, in a competitive economy where firms produce according to a Cobb-Douglas production function with energy as one of the inputs, the energy expenditure share of GDP represents the elasticity of aggregate output to energy, that is, the percent change in GDP in response to a 1 percent change in the physical quantity of energy input. Therefore, it is the nominal energy expenditure share of GDP, rather than the physical energy intensity of GDP (that is, the ratio of real energy consumption to real GDP), that determines the sensitivity of the economy to changes in energy inputs. Unlike physical energy intensity, the ratio of nominal expenditures to nominal GDP depends on the relative price of energy, which determines how much energy firms use and hence the real marginal product of energy.

This paper considers energy in the aggregate, effectively combining gas, oil, solid fuels (coal and coal products), biofuels, electricity, and heat in common units (joules). Similar patterns emerge for individual fuel types.

The commitment to phaseout appears in the Versailles Declaration of March 10–11, while the deadline of 2030 appears in the European Commission’s press release of March 8.

The ENVISAGE model is described in van der Mensbrugghe (2024) . A model of comparable structure, called “IMF-ENV,” was used recently by the IMF to examine the effects of the war on Europe’s GDP and emissions in Rojas-Romagosa (forthcoming) , which was written alongside this paper.

The model features France, Germany, Italy, Norway, Poland, and the United Kingdom as individual countries, while other countries are grouped as follows: Bulgaria, Croatia, and Romania; Belgium and The Netherlands; Czech Republic, Hungary, and Slovakia; and rest of Europe, which includes the remaining EU and European Free Trade Association countries.

About half of this discrepancy is due to a difference in the definition of energy consumption, which in the model double counts energy used in electricity generation. The other half is likely due to trade costs, which reduce imports in the model by creating a wedge between energy imports and exports.

Norway is the exception, where a boom in economic activity (associated with higher energy exports) reduces its share of GDP spent on domestic energy use.

Over 99 percent of the European Union’s electricity consumption is met through EU production.

Indeed, countries whose energy suppliers are the least “locked in” to supplying Europe (in the sense of Europe accounting for a smaller share of their energy exports) experience the greatest improvement in geographic diversification of energy imports in response to higher carbon prices ( Annex Figure 2.3 , panel 2).

For a broader discussion of fossil fuel subsidies and the emission, GDP, and welfare benefits of their removal, see, for example, Burniaux and Chateau (2014) and Coady and others (2017) . It is worth noting that removing fossil fuel subsidies has a different impact on import dependency from that of carbon taxation, for two reasons: (1) these subsidies are not equivalent to a negative carbon tax, because they are typically not based on the carbon content of each fuel; and (2) the peculiar design of key European economies’ subsidies is such that they primarily benefit domestically produced fossil fuels. Indeed, import dependency ratios fall throughout Europe in a simple illustrative simulation under which countries impose a fat fossil fuel consumption tax (of 3 percent of the price of each fossil fuel), for example.

It is worth noting here that alternative weighting schemes, which would assign greater weight to the geographic concentration component, could deliver a net improvement in Poland’s security of supply.

The finding that multiple policy instruments are needed to achieve multiple policy objectives—here, energy security, emissions reduction, and economic efficiency—echoes a general principle in economics called the Tinbergen Rule.

The European Union defines ancillary services in Directive (EU) 2019/944 to include balancing power supply and demand, steady state voltage control, fast reactive current injections, inertia for local grid stability, short-circuit current, black start capability, and island operation capability.

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Edwards’ latest studies shed light on climate-tech needs

May was a big month for Assistant Professor Morgan Edwards , as she published two important climate technology studies. These new papers could provide timely insights into the development of technologies that must scale rapidly to meet the needs of the warming planet and the 2015 Paris Agreement established to limit global temperature increases.

Assessing direct air capture with carbon storage technology

On May 6, a study co-led by Edwards and PhD student Zachary Thomas debuted in the  Proceedings of the National Academy of Sciences . The research found that direct air capture with carbon storage (DACCS) could help remove nearly five gigatonnes of carbon dioxide (CO 2 ) by midcentury if the emerging technology, which uses chemicals to capture the heat-trapping gas directly from the air, develops at a rate similar to other technologies that grew quickly in the past.

“Countries around the world and many other actors – from local governments to corporations to universities – are setting net zero targets,” Edwards says. “We know we will need to rapidly reduce CO 2 emissions at the source, but technologies like DACCS that can remove CO 2 directly from the atmosphere could also play an important role.”

The international team of researchers working on Edwards’ project also included La Follette Professor Gregory Nemet and La Follette alum Jenna Greene (MPA ’22), now a PhD student with the Nelson Institute for Environmental Studies.

Read more about this study

Corporate investments boost climate-tech startups

On May 15, a  new study  co-authored by Edwards was published in Nature Energy . This research, led by Assistant Research Professor Kathleen Kennedy of the Center for Global Sustainability in the University of Maryland’s School of Public Policy, found that corporate investments into climate-tech start-ups coupled with public and other private funding can expedite the deployment of new technologies. Edwards and her co-authors hope that this research can help policymakers develop more effective strategies for incentivizing the innovation needed to address the climate crisis.

“This analysis addresses a critical knowledge gap on the effects of growing corporate investments on the success of climate-tech,” Edwards says. “We find that corporate investment is consistently associated with higher rates of exits, and in recent years corporate investment is not correlated with failure, indicating that corporations may have learned from earlier losses and could play a larger role in supporting climate-tech moving forward.”

Next up, Edwards, Nemet, and other study coauthors will share additional insights on climate-tech innovation when they release the second edition of the  State of Carbon Dioxide Removal  report on June 4, 2024.

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DeSantis signs bill scrubbing ‘climate change’ from Florida law

Climate advocates said the bill is a bid for national attention from a Republican governor eager to use global warming as a culture war issue

Key takeaways

Summary is AI-generated, newsroom-reviewed.

• Legislation de-prioritizes climate change in energy policy despite environmental threats to state.
• Offshore wind turbines banned, natural gas pipeline regulations weakened.
• Climate advocates call move evidence of governor using global warming as culture war issue.

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Florida will eliminate climate change as a priority in making energy policy decisions, despite the threats it faces from powerful hurricanes, extreme heat and worsening toxic algae blooms.

On Wednesday, the state’s governor, Ron DeSantis , signed the legislation, which is set to go into effect on July 1. The measure also removes most references to climate change in state law, bans offshore wind turbines in state waters and weakens regulations on natural gas pipelines.

“The legislation I signed today [will] keep windmills off our beaches, gas in our tanks, and China out of our state,” the governor said, according to the DeSantis - friendly outlet Florida’s Voice , which was the first to report that he had signed the bill. “We’re restoring sanity in our approach to energy and rejecting the agenda of the radical green zealots.”

Supporters say the new law helps the state prioritize a concern of Floridians — energy affordability, which they say is threatened by excessive regulation. But some climate advocates said the measure is largely symbolic and would have little effect on Florida’s shift toward renewable energy. Solar power is booming in the state and, despite Republican lawmakers’ desire to curb construction of wind turbines, Florida isn’t windy enough to have piqued the wind industry’s interest.

Rather, environmentalists said the new law is the latest example of DeSantis’s eagerness to use climate change as a culture war issue such as abortion and transgender rights to bring national attention to himself and hit the right notes with right-wing voters.

Earlier this month, he signed a bill banning lab-grown meat from the state, though the product isn’t commercially available. In a post on X accompanying the announcement, the governor said the law would protect Florida from “global elites” at the World Economic Forum, falsely claiming that the annual gathering of political leaders in Davos harbors plans to force the world “to eat fake meat and bugs.”

Greg Knecht, director of The Nature Conservancy in Florida, said the new measure removing most mentions of climate change “is very much out of line with public opinion.”

The latest survey by Florida Atlantic University found that 90 percent of Floridians accept that climate change is happening and 69 percent support state action to address it. Many of the survey’s respondents also reported negative experiences with flooding and high winds from tornadoes and hurricanes, which may explain why Floridians report being more concerned than Americans nationally.

To Knecht, the new law highlights a growing disconnect in the state.

Republican lawmakers, who control the state’s Legislature, have voted for major spending to address the effects of climate change, including pouring millions of dollars into flood control projects and efforts to fortify drinking water and wastewater infrastructure threatened by rising sea levels . Last year, the governor gave the state’s Department of Environmental Protection more than $28 million to update flooding vulnerability studies for each county.

At the same time, DeSantis and other Republicans have portrayed climate solutions like reducing carbon pollution as radical and part of a left-wing agenda.

“On one hand, we recognize that we’re seeing flooding and we’re seeing property damage and we’re seeing hurricanes, and we’re conveying to the public that we can build our way out of these problems,” Knecht said. “And then on the other hand, we’re turning around and saying, ‘Yeah, but climate change isn’t really real, and we don’t need to do anything about it.’”

In addition to removing the term climate change, the new law would make affordability and reliability the focus of the state’s energy policy — an echo of conservative talking points that seek to portray renewable power as too expensive and untrustworthy.

“It feels like we’ve taken a major step backward and are no longer recognizing the dangers of greenhouse gases," said Raymer Maguire, director of campaigns and policy for the Miami-based CLEO Institute, a climate activism nonprofit that supports clean energy.

The measure also removes language giving state officials the authority to set goals for increasing renewable energy in Florida. It ends requirements that government agencies consult a “climate-friendly” products list before making purchases, hold meetings in hotels that meet the state’s “green lodging” requirements or that agencies prioritize fuel efficiency when buying new vehicles.

Florida remains heavily dependent on natural gas for power generation, and the science is clear that burning more of it will contribute to climate change, potentially worsening the state’s flooding and heat problems. Overheating ocean waters are fueling stronger hurricanes, and when they hit, rising sea levels make storm surge more destructive. The state’s summers have always been sizzling, but it’s now experiencing more days of extreme heat. Miami had a 34-day run of 90-degree weather last year — its fourth-longest on record .

DeSantis has responded to these challenges by dismissing their causes .

“I’m not in the pews of the church of the global warming leftists. I’m just not,” he said on the 2018 campaign trail. As a presidential candidate , his economic plan called for weakening permitting requirements and ending emissions regulations to speed up oil and gas production. He staged the announcement at an oil rig site in Texas where he described the Biden administration’s climate policies as “part of an agenda to control you and to control our behavior.”

He has also taken aim at local efforts to protect people from the effects of climate, signing a law last month that bars cities and counties from writing regulations to protect outdoor workers from extreme heat. This is a growing problem in a state where construction and agriculture are huge industries.

Addressing climate change wasn’t always a polarizing issue in Florida.

Former governor Charlie Crist, who was elected in 2006 as a Republican, used his first State of the State address to call climate change “one of the most important issues that we will face this century.” He helped persuade the Legislature to pass a popular energy and climate bill that allowed the state to create a cap-and-trade program to limit greenhouse gas emissions from power companies.

But much of what Crist put in place didn’t survive the administration of Florida’s next governor, and now U.S. senator, Rick Scott. According to reporting by the Miami Herald , under Scott, state officials in charge of environmental protection were barred from using the terms “climate change” or “global warming” in official communication.

The Trump administration borrowed this tactic in 2017, when it took down much of the U.S. Environmental Protection Agency’s online material explaining global warming and why it is worth fighting. Biden reversed the move four years later.