Cost of living crisis: mitigation measures needed

Cost of living crisis: mitigation measures needed

Sep 30, 2022, 8:00:00 PM UTC
The shocking increase in gas and oil prices and the consequential higher production costs) needs to be faced by EU authorities

Global inflation is at its highest level in over 30 years. The inflation is rising much faster than the average wages. The sharp increase of the cost of living that comes as a consequence will not have gone unnoticed. The rate at which energy bills go up each month is staggering. Groceries have become more expensive, as has the commute. What measures and policies should be installed to mitigate the increased cost of living? Volt Europa believes that any struggling household should receive immediate and direct support from the governments. Moreover, this moment must be seized to push forward with the energy transition, moving away from expensive gas and oil towards cheaply produced renewables.

Photo depicting the high cost of living

As a measure to curb inflation, the ECB very recently increased the interest rates. Even with the expected further interest hikes, however, this measure might not be sufficient. Moreover, the fundamental causes of the inflation are not tackled with interest increases. The real problem (think: the shocking increase in gas and oil prices and the consequential higher production costs) needs to be faced.

One of the steps taken by the Commission is the ‘Save Gas for a Safe Winter’ Plan, which legislation Volt Europa backs as an emergency measure. But much more needs to be done to help EU citizens.

A cap on Russian gas has been contemplated and is currently being demanded by at least 12 EU countries (as a sanction against Russia). While such a measure could have clear benefits for energy consumers, it would also have disadvantages, like distorting the market price (an indication of the scarcity of energy) and not creating incentives to save/reduce carbon emissions. We find the latter extremely important: this crisis is the right moment to collectively drive the energy transition and structurally improve the energy sector. We believe it is preferable to keep a certain price signal, while supporting households and businesses with direct rebates (transfers) that can be used by the energy consumers to help pay their bills, food, etc.

One further step was introduced during the SOTEU. To help lift the pressure of households, President Von Der Leyen proposed another emergency market intervention, including windfall taxes and revenue caps.

The revenue cap as proposed targets low-carbon producers, who produce cheaply because of their low variable costs. Although this measure seems counterintuitive in light of the hugely important green energy transition, we do believe that the proposal is fair and reasonable as long as possible adverse effects are properly monitored and mitigated. This includes evaluating how the cap will affect the incentive to invest in renewable energy.

Both the revenue cap and the windfall taxes will not (at least not directly) decrease the price of oil, gas and electricity. The redistribution of the revenues of these measures to households and businesses, however, will directly help them with the rising costs of bills. The Commission left the manner of redistribution up to the Member States, although the Proposal does (rightfully) focus on the necessity to reduce energy consumption and enhance investments in renewables. We believe direct transfers are most effective to help the energy consumers with their increased costs. The alternative, merely compensating part of the energy bill, will not incentivise consumers to save. The Proposal does not specifically outline who should be able to benefit, other than mentioning (vulnerable) households (including middle-income households) and SMEs who are particularly strongly affected by the high electricity prices. We agree that the focus should be on the hardship risk faced by each household, in addition to the energy poor and vulnerable.

What the Commission should do next, also for it to demonstrate strategic thinking and political relevance, is to devise a plan to strengthen supply chains and reduce food prices.