16 November 2022

ECB's Panetta: Greener and cheaper: could the transition away from fossil fuels generate a divine coincidence?

The energy mix needs to change drastically to reach carbon neutrality by 2050

The EU economy^[1] is highly dependent on fossil fuels^[2], which represent close to three-quarters of its total energy consumption. Most of this fossil fuel energy is imported: while the EU accounts for 8 per cent of global fossil fuel demand, it accounts for only 0.5 per cent of global oil production and 1 per cent of global gas production.

A major cost of this dependence – which we are reminded of daily – is that energy-producing countries can use their fossil fuel exports to pressure or even threaten energy importers, creating geopolitical tension in the process. Historically, the price of crude oil has often spiked in the context of war, as is the case today. This underlines the need to reduce our dependence on fossil fuels.

Another huge cost of our reliance on fossil fuels is climate change. The earth is warming rapidly, with massive risks to ecosystems and humans, and urgent action is needed to reduce our consumption of fossil fuels and shift to green sources of energy.^[3]

At the global level, energy generated from oil, coal and natural gas makes up more than 80 per cent of primary energy consumption. According to the Network for Greening the Financial System (NGFS), this share will have to be reduced to around 30 per cent to reach net-zero emissions by 2050. For the EU, the reduction will have to be even greater.^[4] This will require wide-ranging structural changes in energy production, but we still have a long way to go (Chart 1).^[5]

These changes will have profound implications for our daily lives and economic system.

The price of energy affects the cost of virtually everything we consume and produce. As a result, the cost-push shock from an increase in energy prices is felt throughout the economy. Given that the ECB’s primary mandate is to preserve price stability, understanding the relationship between the transition to a greener economy and the price of energy is crucial.

To start with, let me be clear: we cannot blame today’s high oil and gas prices on the green transition. The culprit is clearly Russia’s manipulation of the energy supply^[6], which has resulted in higher and more volatile energy prices in an already tight market.^[7] Reduced supply has exacerbated the effects of the strong post-pandemic recovery in fossil fuel demand, resulting in the high energy prices we are seeing today.^[8]

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