As Europeans debate whether and at what price they could do without Russian gas, little has been said about how to prepare for gas shortages if Russia takes it upon itself to turn off the taps. The inevitable and severe gas shortage would require a comprehensive political response, which should start now.
BERLIN – What effect can the interruption of Russian gas imports have on the economies of Europe? The question divides economists. Everyone agrees that there will be negative consequences, but how serious? Predictions range from a mild recession to economic disaster and mass unemployment.
Much intellectual energy was spent estimating the magnitude of possible GDP contractions, but not so much was said about how to prepare for a gas shortage, assuming Russia decides to turn off the tap on its own. It’s like calculating the severity of the damage a hurricane will cause, instead of making actual preparations for the storm.
But since Russia suspended gas deliveries to Poland and Bulgaria, European officials and analysts have no choice. They need to stop brooding over probabilities (which no one can accurately predict) and start thinking about how to contain the real consequences of a possible gas shortage. All of Europe’s gas suppliers – not only producers in the European Union, but also neighboring countries that ship gas by pipeline and exporters of liquefied natural gas from around the world – are already operating at full capacity. Russian gas, shipped mostly by pipeline, makes up 40% of the supply for the European Union (EU). If it were to be interrupted (and it may well happen), gas consumption would have to be reduced considerably.
In principle, there are three mechanisms that can facilitate this reduction: price increases, forced rationing and state action. In our opinion, the price mechanism alone will not be enough to deal with shortages. Gas prices are already at record levels in Europe, and gas savings are grossly insufficient. Further price increases will put pressure on inflation and will hit the poor first and foremost. And since forced rationing should be the last resort, we believe that more attention should be paid to the third option: the state initiative.
In a recent report for the German Institute for Economic Research, we call for a pan-European contingency plan for gas savings to be formulated. To anticipate populist questions from the right, it is necessary for the population to support any plan of this nature and consider it fair. Without broad participation of all stakeholders and solidarity at the level of the European Union, the most favored sectors will be much better off, which will aggravate the existing inequalities and sharpen the internal and inter-country divisions that already exist in Europe.
The EU already has some directives on infrastructure and electricity supply in emergencies, but none are suited to the magnitude of the shortage that could occur if there were a sudden stoppage of Russian gas delivery lasting several months. The mechanisms that already exist, for the most part, were designed for short interruptions caused by extreme weather events or technical problems, and in such a way as to protect residential consumers, imposing forced rationing on industrial users. But in the event of an outage lasting several months, shutting down Europe’s energy-intensive industrial sectors is not a viable option. It could have serious repercussions, including further strain on global supply chains and major spillovers to inflation levels and growth.
So any gas savings of a magnitude sufficient to offset shortages will need to include significant contributions from all user groups (residential and industrial consumers and services alike). This will require clear targets and a fair sharing of costs: between EU member states, between households, and between residential and industrial users. But to be politically acceptable and immediately enforceable, these targets must be negotiated in advance.
In addition, although it is still early, more thermal insulation must be installed in gas-heated buildings, an initiative that, due to its magnitude, will require an emergency investment plan. Additional savings can be achieved by recalibrating heating systems, but difficult behavioral responses will also be required. For example, for every degree Celsius they lower the temperature in their rooms, Europeans can reduce their use of gas for heating by about 10%; and even more so if they leave the unoccupied rooms unheated.
Asking people to save gas raises important legitimacy and distributional questions. To obtain support from the population, governments have to present a joint plan based on solid arguments, which includes fair ways of distributing the effort, support and advice for savings, measures that guarantee transparency and (if necessary) control mechanisms. The process will be easier and more efficient if EU governments decide on gas saving targets together and each member state agrees to make a fair contribution. If a shortage occurs without a contingency plan, a disorderly distribution of costs is likely, hurting the most vulnerable the most.
In view of the variety of stakeholders, negotiations for contingency plans must begin now. Any EU response to a supply disruption will necessarily revolve around gas saving targets and measures. These will be more credible if they are decided in conjunction with contingency plans for rationing and additional solidarity measures. The formulation of economic policy will have to adopt the logic of disaster preparedness, with special attention to justice, solidarity and legitimacy.
Shifting the emphasis from projecting economic consequences to disaster preparedness may be essential if Europe is to be able to bear the social, economic and political costs of a gas supply disruption. Authorities must formulate responses to shortages that are not based solely on prices, ensure that everyone contributes equitably, and contain the damage as much as possible.
Karsten Neuhoff
Professor at the Technical University of Berlin, he is director of the Department of Climate Policy at the German Institute for Economic Research (DIW Berlin).
Isabella M. Weber
Assistant Professor of Economics at the University of Massachusetts at Amherst, she is the author of How China Escaped Shock Therapy: The Market Reform Debate
Translation: Esteban Flamini
Copyright: Project Syndicate 1995 – 2022