The potential plan underscores the widespread sense of alarm across Europe as the fallout from the war continues to weigh on European economies. The European Central Bank raised interest rates on Thursday for the second time this year in a bid to calm inflation without plunging Europe into recession.
European Commission President Ursula von der Leyen outlined the measures just days after energy giant Gazprom halted the flow of gas through a key pipeline – a move initially blamed on technical issues until that the Kremlin intervened to say that these were in fact Western sanctions.
“We are facing an extraordinary situation, because Russia is an unreliable supplier and manipulates our energy markets,” von der Leyen said Wednesday. “Our unity and solidarity will ensure that we win.”
But despite all the rhetoric of solidarity, the EU remains divided on the details, with some countries expressing skepticism about windfall taxes and others worried about the idea of a gas price cap. Some would like to change the bloc’s electricity market, while others want an overhaul, including full decoupling of gas and electricity prices. “The devil is in the details,” said a senior EU diplomat, speaking on condition of anonymity to discuss behind-the-scenes talks.
As Europe searches for common ground in the days and weeks ahead, Russian President Vladimir Putin will seek to exploit differences in position, pitting countries with different levels of energy dependence against each other. to weaken the West’s response, said Simone Tagliapietra, an energy expert at Bruegel, a Brussels-based think tank. “For Russia, it’s about divide and conquer,” he said.
In the more than six months since Russia launched its full-scale invasion, the EU has attempted to weaken Russia’s energy leverage – with mixed results.
The Russian pipeline now accounts for 9% of EU gas imports, von der Leyen said on Wednesday, not the 40% it represented at the start of the war. Last week, the EU hit its target of bringing petrol reserves to 80% well before the clock turns in November. As Europe’s dependence on Russian fossil fuels declines, EU officials say, Putin is losing his grip.
For now, energy markets remain in crisis and EU countries are spending billions to subsidize electricity bills. Germany announced plans for a nearly $65 billion relief package on Sunday, with Chancellor Olaf Scholz pledging to crack down on energy suppliers who make “excessive profits”. The revenues from the exceptional taxes on these producers will be used to reduce the consumer prices of gas, oil and coal.
The commission, the EU’s executive body, would like to see similar measures at EU level, according to a document it unveiled ahead of the summit. Von der Leyen on Wednesday outlined plans for what she called a cap on revenues for companies producing electricity at relatively low costs but selling it at the high prices allowed by European market rules.
Wholesale electricity prices have skyrocketed because they are tied to the cost of natural gas, which has increased exponentially due to the Russian invasion of Ukraine. The system inflates the cost of several other types of energy, such as solar energy or electricity produced from waste-to-gas plants.
The commission aims to level out costs and bring some consistency to electricity prices across Europe. This would create a de facto windfall tax on power producers who have reaped record profits due to high natural gas prices, using the revenue to lower consumers’ energy bills.
The plan is bold, but it also carries significant risks. The underlying problem in Europe is that the demand for energy far exceeds the supply. Tackling this problem without significantly reducing demand or bringing more energy to Europe risks creating market distortions that could ultimately worsen shortages. The windfall tax, for example, could discourage companies from making new investments in desperately needed energy infrastructure. Price caps that lower the cost of energy may induce consumers to use more of it, thus aggravating the supply problem.
The plan addresses these issues by also including a provision that sets mandatory targets for reducing energy consumption during peak hours. But implementing such cuts is a heavy burden, which would require countries to pay subsidies to compensate for the losses incurred when companies are forced to cut production. The plan is vague on exactly how those cuts would be applied, leaving it to each country to “identify the best ways to reduce total consumption”.
Britain’s new prime minister, Liz Truss, has dismissed the idea of a one-off tax for her country, arguing it would scare off investors. On Thursday, she announced a plan to help households with energy costs, saying bills would be capped at $2,875 per household per year for the next two years. But she did not say how the government would pay for those costs, which could reach $150 billion.
The European Commission further calls on the bloc to cap the price of natural gas delivered to Europe from Russia. This would allow countries to continue buying Russian gas as long as the price does not exceed a certain threshold. The idea would be to set the price cap above production costs but below current prices, encouraging Russia to keep gas flowing but limiting profits.
“We need to cut the revenue from Russia that Putin is using to fund this atrocious war in Ukraine,” von der Leyen said Wednesday.
But some countries and analysts are skeptical of its effectiveness, given that Russia already has the upper hand in gas supplies and uses it as an economic weapon against Europe. Russia could use this measure to justify further disruptions or to cut off the flow of gas to Europe.
Putin, for his part, has made it clear that any new measures will not go unanswered. In a speech on Wednesday, he railed against the cap on Russian oil prices by the Group of Seven most industrialized countries and warned of further cuts to come.
“We won’t supply gas, oil, coal, fuel oil,” he said, “We won’t supply anything.”
Halper reported from Washington. Kate Brady in Berlin contributed to this report.
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