Russia turns off the gas tap. The gas flows to Germany have not yet dried up completely, but President Vladimir Putin can stop them whenever he deems it convenient in the context of his warfare.
It is now clear that neither the existing contracts will prevent him, nor the objections of his security apparatus, nor economic losses.
Gas is urgently needed in Germany, for heating and hot water in every second apartment, but also, for example, in industrial production. It is processed into fertilizer, for example, which is currently a particularly sensitive commodity in view of the global food crisis.
It is used in the production of window glass that cannot be interrupted without irreparably damaging the manufacturing equipment. And it is also used in the food industry, for example to pasteurize milk: without gas, there would be no milk on the supermarket shelves.
The existing supply contracts with Russia must be canceled across Europe
Under such framework conditions, Germany must now drastically reduce gas consumption. It is no longer enough to draw up contingency plans in the event of a definitive supply disruption: we must save massive amounts of gas immediately in order to avoid a physical shortage towards the end of the heating season.
In a current study, we estimate that private households have reduced their gas consumption nationwide by six percent and industrial companies by eleven percent since the beginning of the war.
Calculated over a year, around 70 terawatt hours of natural gas would be saved. That’s far from enough, it’s far less than the impending delivery failure. Last year we obtained 430 terawatt hours of natural gas from Russia.
Measures must therefore now be taken in three key areas of action: We must redesign the contractual relationship with Russia, abolish energy subsidies for industry and consumers and ensure that vulnerable households are protected.
First of all, there needs to be a Europe-wide legal regulation that cancels the existing supply contracts with Russia. The EU should appoint a chief negotiator for subsequent direct talks with Gazprom.
As a result, they should strive for a fixed price of, for example, 50 euros per megawatt hour to prevent Gazprom from driving up the price further (currently the stock market price is 175 euros).
With the exception of Nord Stream 2, all available pipelines would have to be used for future deliveries in order to be able to quickly compensate for real and alleged technical failures. This would prevent Putin from dividing Europe at this point by turning off gas to many countries and continuing to supply others.
The EU would then resell the centrally purchased natural gas on the European gas market so that it can be delivered to companies and households. It could use the income generated by the difference in the retail price to compensate private households and companies for price increases.
Politicians should cut subsidies to create incentives to save energy
Even if it may sound surprising: It is quite conceivable that Putin will turn on the gas tap for Europe again as the Ukraine war progresses in order to ensure permanent uncertainty on the gas market through such back and forth.
The EU fixed price then puts a spoke in his wheel: the incentive to save energy remains, the risk premium for the economy to secure prices on the financial market remains low.
To ensure that potential savings in gas consumption are used as far as possible, politicians should also eliminate all subsidies that fuel it. The high gas prices are economically painful, but they also provide an incentive to use the fuel sparingly.
They are part of the solution rather than part of the problem. So it is counterproductive that most EU countries have tried to mitigate the consequences of the energy prices that Russia has pushed up in recent months with new subsidies: with cheaper gas for power plants in Spain, with the cancellation of VAT on gas in Poland or with the five billion Euro expensive program to curb energy costs for the German energy-intensive industry.
Such subsidies effectively make energy cheaper for consumers, thus driving consumption – which intensifies the price increase.
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No question: It is important not to leave companies alone in the energy crisis. As in the corona pandemic, politicians can help companies that are particularly affected by the crisis with emergency aid, for example in the form of financial injections. But it must not undermine the savings efforts.
The price mechanism must work – this is the only way to send the signal to the entire economy that cuts costs where they can be made most cost-effectively.
And it requires clear and consistent communication: Yes, heating will be significantly more expensive next winter, and saving energy is the only sensible way out.
A letter to all gas customers from their energy supplier with this clear reference, coupled with easy-to-implement advice on how to act, would be a conceivable means.
Low-income households need support
But it is also clear that the additional burdens on households must be cushioned. For a 100 square meter old building with gas heating, the monthly heating costs could increase from 100 euros to 350 euros or more.
Many low-income households cannot cope with such an increase. The federal government has already put together two relief packages, but in doing so it only partly subsidizes energy consumption, for example through the tank discount or the reduction in the EEG surcharge, and many measures are limited in time.
If gas prices continue to rise, this will not be enough to sufficiently relieve the burden on lower and middle incomes.
The federal government would be well advised to create the administrative prerequisites for regular, direct income transfers now so that it can react quickly if the situation deteriorates.
One possible channel would be family or health insurance. In the case of direct transfers, it is still worthwhile reducing gas consumption, for example by lowering the room temperature, airing the room frequently or using intelligent radiator thermostats. Those who save particularly well may end up doing even better.
Strongly rising gas prices mean a considerable social risk for Germany. Putin knows that. He must not take advantage of it.
And it must not be burned into the historical memory that rising prices for fossil resources are associated with social upheaval and with the threat to social cohesion.
Effective and fair compensation can prevent this and ensure Europe’s ability to act politically in this major geopolitical conflict.
The authors:
Ottmar Edenhofer is Professor of Economics of Climate Change at the Technical University of Berlin, Director of the Potsdam Institute for Climate Impact Research and the Mercator Research Institute on Global Commons and Climate Change.
Lion Hirth is Professor of Energy Policy at the Hertie School in Berlin and Managing Director of the consulting firm Neon Neue Energieökonomik.
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