This fall Europe has been surprised by a dramatic increase in gas prices. Prices have doubled, tripled, quadrupled, and simply continued to rise. Commentators struggle to explain this sudden price explosion, and they fail to see the one true cause. The European Union wishes to be ‘green‘. This desire to reduce CO2 emissions is what is driving up gas prices. But how?

The Nord Stream and Nord Stream 2 pipelines from Russia to Germany

Carbon Credits

The EU uses a system of ‘carbon credits’. Companies need to purchase a ‘credit’ for every tonne of CO2 that they produce. This is supposed to be a financial incentive for companies to become cleaner, but reality is somewhat different. The easiest way for a coal power plant to reduce CO2, is to swap the coal for gas. Gas requires about half the amount of carbon credits for the same amount of energy produced as does coal. It’s an easy win. Other companies tend to simply pay for the credits, making minimal changes.

Policy Pushes the Price

The EU noticed that the incentive was not sufficient, so in 2018 they began to reduce the amount of carbon credits available. The consequence was obvious, prices of carbon credits went up. They went up tenfold, from around 5 euro to more than 50 euro. This price increase then triggered a strong reduction in the usage of coal in power plants. Those power plants started using gas.

Changing from Coal to Gas

From coal to gas. European energy demand increased, and the only way to now quickly fill this gap is to use more gas. Coal has been practically eliminated. Coal, however, is something Europe has loads of. For gas, they are primarily dependent on imports. It doesn’t help that the Netherlands decided to stop pumping up gas. They stopped because the gas extraction had been causing minor earthquakes, leading to some cracked walls. A rather dubious decision. Now, the EU relies on gas imports from Norway and Russia.

Russian Dependence

Germany, meanwhile, is blocking the use of the new pipeline from Russia to Germany. The ‘Nord Stream 2’ could provide Europe with a lot more gas, but Germany is delaying putting the pipeline to use. They may be worried about relying too much on Russia, but that reliance is a direct effect of EU policies. If the EU wants to be independent from Russia, it needs to either use coal or build nuclear plants. Coal may be bad for the climate, but nuclear energy is not. Quite the opposite, it produces even less CO2 than natural gas.

The United States and China

The EU isn’t the only entity using carbon credits. The United States has a similar system, though less advanced. Even China is entering the field and has halted plans to build additional coal power plants. This could be great for the climate, but it creates additional pressure on natural gas prices. International shipments now head to China, who is willing to pay.

Times of Plenty are over

The world has lived in perceived abundance for decades. Now, the world is showing us that there are constraints to resources. Yet, our governments create policies that ignore these constraints. There is only so much natural gas produced every year, it is not infinite. This is where wishful-thinking meets reality.

Blackouts

The true effects of this policy are yet to be seen. Rising gas prices have consequences. People will not be able to afford to turn up the heating, or to take a hot shower. Especially for the elderly, the cold can kill. In the worst case scenario, Europe won’t be able to provide energy to its citizens. Europe will then face policy-made blackouts. The German government has already produced an advertisement to prepare people for this bleak and cold future.

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