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