Energy crisis and changes in the EU policy framework

By Andreas Charalambous and Omiros Pissarides

 Humanity has made remarkable progress in dealing with the energy crisis caused by the war in Ukraine. However, a lot remains to be done. Emissions continue to rise, while recent United Nations’ reports confirm that the existing worldwide commitments/policies do not suffice to achieve the agreed goal of limiting the temperature rise to 1.5 degrees Celsius. As a result, extreme weather events and disasters are expected to increase further.

In this context, the recent proposal of the European Commission to reform the energy market is crucial. This initiative aims, above all, to strengthen Europe’s self-sufficiency in basic raw materials for energy production, as well as providing generous subsidies for long-term investments in renewable energy sources (RES).

Even more important is the recent decision of the European Parliament concerning the emissions trading system. A particular challenge for Cyprus and consumers is the adoption of stricter emission reduction targets, as well as the inclusion of the crucial sectors of construction and transport in the emissions trading system.

In actual terms, the decisions entail further increases in the prices for emissions, which will exert upward pressure on the prices of conventional forms of energy (oil, coal, natural gas), with adverse effects, especially for the construction and tourism sectors. The fines that Cyprus will be obliged to pay for pollutant emissions, which burden consumers and already exceed €200m per year, will inevitably increase significantly.

Immediate corrective action is, therefore, an urgent need. The following proposals are of indicative nature:

(a) upgrade of the electricity network, in order to enable further penetration of RES,

(b) abolition of the existing electricity consumption subsidy, through reduced VAT, which prevents the necessary energy savings and replacement with targeted measures, focusing on the vulnerable groups,

(c) restrict the, currently, uncontrolled development of the construction sector and adopt instead interventions in the housing sector aimed for the benefit of low-paid, young couples and rural residents and, in addition, adopt stricter environmental standards regarding new constructions,

(d) encourage the use of public transport between and within cities and, at the same time, promote international agreements to ensure air connectivity between Cyprus and the rest of the world, at reasonable prices.

Other measures include encouraging research in the field of energy storage to facilitate the penetration of RES, and the organisation of campaigns to inform, and gain acceptance by, the public regarding the necessity for energy transition.

A good practice applied in other EU countries relates to the establishment of an independent scientific committee to assess in detail the achievement of the agreed climate goals. In cases of detection of deviations, the adoption and implementation of corrective measures by the authorities is enforced by law.

In conclusion, the scope for development based on conventional forms of energy, including natural gas, is quickly depleting. The key to successful transition to RES appears to be the implementation of a strategic plan, which foresees the encouragement of private initiative and, in parallel, provides for targeted government interventions. The time for the necessary adjustments is running out.

Andreas Charalambous and Omiros Pissarides are economists.