Belcher: Heed the Harsh Lessons from Europe’s Net-Zero Perils

Jack Belcher is principal at Cornerstone Government Affairs 

The ongoing economic decline in Europe is well-documented. There has been a slew of bad economic news from across the continent.

German automaker Volkswagen announced the closing of three of its 10 plants, the shedding of tens of thousands of jobs and across-the-board pay cuts of 10%. Volkswagen’s woes are the result of poor sales in China and other markets, but they are also emblematic of a broader problem for manufacturing in Germany and most of Europe—they are not competitive because their energy costs are too high and, thus, their products are too expensive.

Europe is undergoing a process of deindustrialization. Germany was a manufacturing marvel for over a century. It was a world leader in steel production, machinery, electronics, automobiles, chemicals and pharmaceuticals. Much of its success came from its highly educated workforce, well-managed and efficient infrastructure, and state support and finance. But even with all of that history and its built-in advantages, German manufacturing, and manufacturing throughout Europe, cannot overcome the competitive disadvantage it faces due to high energy costs and energy scarcity.

While Europe has long had its challenges regarding energy supply, its current energy and manufacturing crisis was preventable and self-inflicted. The EU has taken a very aggressive approach to climate change through punitive measures to reduce greenhouse gas (GHG) emissions.

In 2005, the EU established the European Emissions Trading System (ETS) which had success in reducing GHG emissions, including CO2, nitrous oxide and perfluorocarbons, through a cap-and-trade market that targets emissions from electricity and heat generation, industrial manufacturing (including petroleum refining and chemicals manufacturing), aviation and maritime transport. These targeted sources amount to about 40% of the EU’s GHG emissions.

The result of the EU ETS program has been a significant reduction in GHG emissions, but it has also damaged the European economy, especially its manufacturing sector. Its ETS program makes the cost of electricity more expensive, thus making manufacturing more costly and uncompetitive with the rest of the world. It has resulted in significant closures in manufacturing facilities across Europe, including steel, aluminum, ferro and magnesium production, all of which are critical to manufacturing. It has caused factory closures, massive layoffs and economic uncertainty. But the EU didn’t stop there. In 2010, it launched the European Green Deal with a promise of no net emissions of GHG by 2050 and climate, energy, transport and taxation policies to reduce net GHG emissions by at least 55% by 2030.

Regulations aplenty

More recently, following the lead that the U.S. took with the clean energy incentives in the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA), the EU launched a series of less punitive, more incentive-based measures. The Net-Zero Industry Act (NZIA) is an EU initiative designed to increase the manufacturing of clean technologies in the EU. The Critical Raw Material Act (CRMA) is designed to strengthen the European critical raw materials value chain. REPowerEU is a plan for the EU to phase-out Russian fossil fuel imports by conserving energy, diversifying energy supplies and producing clean energy. Finally, the Carbon Border Adjustment Mechanism (CBAM) places carbon intensity limits on imports into the EU and provides import fees for products that miss those targets.

The EU is also enacting the EU Methane Regulation, which requires the European natural gas, oil and coal industries to measure, monitor, report and verify their emissions to the highest global standards and take steps to reduce emissions.

This regulation is especially important to the U.S. LNG industry and to U.S. gas producers whose gas is delivered to Europe as LNG. If successfully enacted, it would require U.S. producers to rigorously monitor and reduce their methane emissions.

U.S. natural gas and LNG producers are not happy with this new layer or regulation and compliance. When Europe was cut off from Russian gas, the U.S. jumped in to help supply its needs. But in the future, Europe’s regulations might push U.S. LNG producers to send more supply to Asia.

Europe’s energy options are limited. The continent has very little oil and gas production, outside of the declining North Sea, despite having promising prospects both onshore and offshore. U.S. LNG imports have become increasingly critical to Europe’s energy situation with the reduction in Russian gas imports following Russia’s invasion of Ukraine, and the destruction of the Nord Stream 2 pipeline.

RELATED

Shell, Equinor JV to Create UK’s Largest Independent Oil, Gas E&P

Germany has banned nuclear energy production, closing its last three nuclear facilities in April 2023. The European grid is facing issues similar to that of the U.S. During periods of extreme cold or heat, reliable sources of generation are challenged, and prices are through the roof.

The combination of self-inflicted higher electricity prices, increased reliance on LNG imports and limited reliable energy production is destroying Europe’s manufacturing sector, its economy and its security. The world can no longer afford its products. In short, Europe has gone from being one of the world’s leading manufacturers of goods to being the world’s largest producer of regulations.

Bad news for U.S.

Europe’s malaise is bad news for the U.S. for a number of reasons. A strong Europe helps the U.S. because transatlantic trade is critically important to the overall economy. As a strategic security partner, a weakened Europe emboldens Russia, China and other adversaries of the West. A weakened Europe strengthens the position of the BRICS nations in their efforts to move the world away from the U.S. dollar as the reserve currency.

For the past seven decades, the relationship between the U.S. and Europe has been critical to building a democratic, peaceful and secure world. Starting with the Bretton Woods agreement in 1944, it has been essential to establishing global peace and order through multilateral agreements such as the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), the International Monetary Fund (IMF), the World Bank Group, the International Court of Justice (World Court) and other global institutions and agreements that promote the rule of law, free and fair trade, human rights, environmental protection and sustainability and prosperity. Without a strong European economy, buoyed by a manufacturing sector, these global pursuits and tenets will be under threat.

Europe’s manufacturing and economic crisis is not just a threat to global institutions and prosperity but also a potential harbinger of things to come to the U.S. It is a reminder of the damage that can be done when noble pursuits pursued with the best intentions aren’t properly weighed against the potential outcomes.

Europe’s climate goals were not meant to wreck its manufacturing economy, but they have made energy prices too expensive and European manufacturing uncompetitive. Europe can still turn things around, perhaps through a populist wave that reverses policies, but it would have to move fast as it is hemorrhaging factories and industries.

The U.S. is blessed with abundant energy supplies, but it could still wreck its manufacturing sector if it moves too fast and takes a similar course to that of Europe.