Canada should (quickly) learn from Europe’s energy mess

Europe is suffering from an unprecedented energy crisis. Household gas and electricity bills have soared with some countries now urging limited use of heat and hot water. While Putin’s war has exacerbated the situation, Europeans can blame government policies for energy shortages and price spikes, which ironically has deepened the continent’s reliance on Russian natural gas and oil imports.

How did this happen?

For the past two decades, European climate policies have favoured wind and solar power at the expense of nuclear and fossil fuel. Renewables, however, were unable to match European power demand because these sources are not always available. The summer of 2021, for instance, experienced less sunshine and wind than expected, which meant increased demand for their backup power—natural gas. But European climate policies reduced domestic natural gas production and several EU countries including Ireland, Germany, and France banned fracking, which hurt the region’s ability to produce reliable and affordable energy.

Predictably, increased demand for natural gas coupled with lower domestic production led to price spikes. Europeans saw their electricity bills jump dramatically compared to 2020, with prices spiking around 200 per cent in Germany, the United Kingdom, Spain and France, and 470 per cent in Scandinavia—all before Russia’s invasion of Ukraine.

In early 2022, as sanctions on Russian crude and natural gas started amid the invasion, uncertainty grew. Once more, Europeans found themselves suffering from another significant price increase. For instance, the annual natural gas bill for the average German family more than doubled from around 1,184 euros in April 2021 to around 2,787 euros by the end of 2022.

Soaring carbon prices have also contributed to rising natural gas prices. The price of the European Union Allowance (i.e. the permit that gives the holder the right to emit one tonne of carbon dioxide) has increased by nearly 500 per cent in the last decade. A recent study published by the Fraser Institute estimated that every euro increase in the carbon price coincides with a direct increase in natural gas prices of almost 2 euros.

Europe’s aggressive climate policies were meant to increase prices for fossil fuels and incentivize the adoption of renewables to reduce greenhouse gas (GHG) emissions. However, as energy prices soared, Europe’s energy vulnerability deepened and forced the continent to restart old coal plants, a power source that emits 50 per cent more GHG than natural gas.

This is why Canada should be cautious before continuing to follow Europe’s lead. Ottawa’s carbon tax is set to increase to $170 per tonne by 2030 (the EU carbon price currently sits at around $110 per tonne). The Trudeau government has also capped oil and gas emissions and accelerated the adoption of renewable energy sources to achieve 90 per cent of electricity generation by 2030.

Energy investors have taken notice. Capital investment in Canada’s upstream oil and gas industry (essentially, exploration and production) plummeted from $51 billion in 2015 to $24 billion in 2021. Less investment could translate into less energy production at a time of growing demand.

Fossil fuel prices soared in Europe before the Russian invasion mainly due to poor policies. By limiting the production and importation of reliable and affordable energy, policymakers have threatened the continent’s energy security, made life more difficult for millions of Europeans and resulted in the reopening of coal-fired plants to meet energy needs, which actually worsens GHG emissions. Canadian policymakers should heed Europe’s cautionary tale.