EU decarbonisation policies have been highly effective at promoting renewable energy, reducing emissions from the power sector and increasing Europe’s resilience to fossil fuel price shocks. However, our latest analysis shows these EU energy policies have also contributed to higher power prices, which slows the progress of economy-wide electrification and puts pressure on the competitiveness of European industry.
A successful energy policy must balance climate goals with economic resilience. However, the current approach may be creating a damaging paradox.
Expensive gas + expensive power = headache for manufacturing
EU decarbonisation policies have used two tools – the Emissions Trading Scheme (ETS), which sets a carbon price; and national subsidies for renewable energy projects. Together, these have successfully boosted the share of renewables in the energy mix.
However, they have also inflated power prices for end-users. The carbon price raises the cost of fossil fuel-generated power, which often sets the wholesale market price. Furthermore, the high cost of green energy is frequently passed directly onto consumer bills. This has led to European manufacturing facing both high gas prices and some of the highest power prices globally, contributing to a selective de-industrialisation, particularly in energy-intensive sectors, which have struggled to recover since the 2022 energy crisis.
The electrification dilemma
Replacing fossil fuels with clean electricity is fundamental to decarbonisation, but this requires action far beyond the power sector. The bulk of emissions comes from end-use sectors such as transport and heating. Here, high power prices create a major barrier.
For example, the adoption of electric heat pumps, a mature and effective technology, has been slow in countries like Germany and the UK, where policy makes electricity expensive relative to natural gas. In contrast, nations like Sweden and France, with policy and infrastructure that support lower electricity costs, have seen much faster and wider adoption. By discouraging electrification in homes and businesses, current EU energy policies are holding back the energy transition in the very areas it needs to accelerate.
A better path for industry and climate
The burden of decarbonisation has so far fallen heavily on energy-intensive, internationally traded industries. A more targeted policy mix could rebalance this.
By focusing policy on cutting gas consumption in ‘easier-to-abate’ sectors, such as residential heating, Europe could achieve a powerful twofold victory. Firstly, it would allow climate targets to be met with less pressure on hard-to-abate heavy industries where decarbonisation technologies are often nascent and expensive. Secondly, a significant reduction in gas demand from homes and commercial buildings would lower overall gas prices, providing direct relief to industrial consumers.
Finding a better balance between EU decarbonisation policies and industrial competitiveness is essential. The current EU energy policy set has the unintended effect of targeting sectors where solutions are most difficult and economic costs are greatest. A strategic shift could allow Europe to meet its climate targets without sacrificing its industrial core.
For businesses seeking to understand how EU energy policy continues to affect the outlook for manufacturing and energy-intensive sectors, our Energy Transition and Decarbonisation service can help assess exposure, identify structural cost pressures and inform strategy as the energy transition continues. Request a demo here.
