To keep the EU united: instead of gas price break, economists suggest a savings bonus

The gas price crisis triggered by Russia's war of aggression against Ukraine is a crucial test for the EU: in order to provide relief to the population, national governments are putting the brakes on gas prices, but this only exacerbates the problem. The effect is that too little gas is saved and too little is brought onto the market, resulting in a conflict of distribution between countries with and without good import logistics. This dilemma, as well as the solution, is now described in an op-ed by four economists in the German weekly “Frankfurter Allgemeine Sonntagszeitung”. It was written with the participation of the Berlin-based climate research institute MCC (Mercator Research Institute on Global Commons and Climate Change) and is also freely accessible on MCC's Common Economics Blog.

The article promotes a U-turn in the gas price crisis. “Instead of subsidising domestic consumption, European gas savings should be rewarded and gas supply simultaneously increased” write the authors Ottmar Edenhofer and Matthias Kalkuhl of MCC, Axel Ockenfels of the University of Cologne, and Georg Zachmann of the think tank Bruegel in Brussels. They demonstrate how European countries harm each other: “If, for example, Germany were to save 5 percentage points less gas than planned compared to previous years, the European gas price would have to rise by 15 euros per megawatt hour as a result of increased German demand in order to keep enough gas customers in other member states from consuming.”

The costs increase rather than decrease, and mainly outside Germany: in Germany, the bill for gas and electricity increases by a total of 24 billion euros a year, elsewhere this increase is 53 billion euros. When compared to the additional gas consumption triggered in Germany, this would amount to “an enormous 1.70 euros per kilowatt hour, of which more than 1.20 euros per kilowatt hour would be borne by our neighbours”. This is how the team of authors quantifies the absurd consequence of the gas price brake.

As an economically sound alternative, they present the concept of a European savings bonus. “An agreement between the member states should provide that the countries agree to end the direct and indirect subsidy of their gas consumption, and exhaust all possibilities of increasing the supply. At the same time, a fund should be set up to pay a bonus to those countries that have managed to reduce gas consumption.” This fund should initially include countries such as Germany, the Netherlands, Poland, Austria, Denmark, and the Czech Republic, where the political pressure to subsidise costs is particularly strong due to poor gas import logistics.

The economists describe the cooperation-promoting function of such an incentive mechanism with the help of another rough calculation. If the fund were to pay out a bonus of 10 cents per kilowatt hour of gas saved for this group of countries, for a savings target of 20 percent of consumption, this would amount to 56 billion euros in one year. Germany would have to pay into the fund according to its economic output or its historical gas imports from Russia but would receive about the same amount back if the savings target was reached. These savings, together with the correspondingly more relaxed supply situation and the easing of price pressure, would ensure more lasting relief for the population than the gas price brake.

The potential harmful incentive effect is thus turned on its head. The conclusion reads: “Gas savings at home and in other countries are rewarded to domestic and European advantage.”

The cited article can be found here (in German):

• MCC Common Economics Blog:
  https://blog.mcc-berlin.net/post/article/so-kommt-europa-durch-den-winter.html
• “Frankfurter Allgemeine Sonntagszeitung” (€):
  https://zeitung.faz.net/fas/wirtschaft/2022-10-23/so-kommt-europa-durch-den-winter/817887.html