Lessons from the without-Russian-gas miracle

The predicted large negative economic impacts of a ban on Russian gas did not occur. This fits in a pattern of overestimating the negative consequences of strict environmental policy measures, thus slowing down the green transition. Policy assessments need to be independent from business interests to remove this unjustified brake.

Before the Russian invasion of Ukraine in February 2022, the European Union imported half of its natural gas from Russia. Europe wanted to stop these imports to limit Russia’s gas revenues and to become less vulnerable for its ‘gas weapon’. Trade-unions, business associations and economists warned that closing the gas pipes from Russia would lead to an economic recession and severe job losses. However, these predictions turned out te be wrong. Europe reduced its gas imports from Russia by 85% with only a small economic penalty. What happened?

This has been studied for the German economy[1]. Mainstream forecasters predicted a collapse in GDP by 6 to 12%, in contrast to only a slight actual decrease. Interestingly, reality was at the lower end of the 1 to 3% output loss predicted by the researchers. They conclude that “market economies have a tremendous ability to adapt that was widely underestimated.” The great flexibility of the economy is not captured by most models and minds. This insight is crucial for energy and climate policies. Without the gloomy economic forecasts, a more ambitious policy to end Russian gas imports would likely have been agreed on.

Overestimating the costs and consequences of environmental policies is a recurring pattern. This has been shown for many cases, such as the ban on ‘ozone layer depleting substances’ (Montreal protocol), the US Clean Air Act and the cost of solar energy[2]. The gap between predicted and real costs is on average around a factor two to four, thus posing a large unjustified brake on the green transition. The likely causes of this systematic difference between predictions and reality, are strategic behaviour and lobby by affected industries, underestimating the flexibility of supply chains and underestimating innovations once companies know that change is unavoidable.

Strict and effective environmental policies mostly create positive surprises – lower costs – compared to mainstream predictions. The opposite is true for subsidies and attempts to change behaviour, which often have disappointing results. Efficiency improvements hardly reduce the use of natural resources and sometimes even result in an increase[3]. More efficient lightbulbs, for instance, reduce the price of lighting – the utility in lumen hours – thus creating more demand. As much as 90% of the increased energy efficiency during the last two decades in the Netherlands has been compensated by new forms of energy use[4]. Rain showers, terrace heating, larger cars and bigger refrigerators are only a few examples.

Realistic predictions of the costs of environmental measures are needed. Politicians and journalists should become more sceptical towards studies financed by big industries. This critical attitude is needed to speed up the green transition. Effective environmental policies inevitable result in higher prices for energy, transport, and some materials. These higher prices create positive surprises by increasing efficiency and shifting consumption in a more sustainable direction. However, higher prices are only acceptable when persons with low incomes are generously compensated through higher wages and social security benefits. They should not pay the price for the green transition, because they cannot afford it and because they pollute much less than wealthy people. The carbon footprint of the 10% Europeans with the highest income is six times larger than that of the 50% with the lowest income[5]. Wealthy people should start paying for what they get for free until now.

14 June 2023

[1] Benjamin Moll, Moritz Schularick and Georg Zachmann (2023), Not Even a Recession: The Great German Gas Debate in Retrospect, ECONtribute Policy Brief No. 048.

[2] Peter D Bailey, Gary Haq and Andy Gouldson (2002), Mind the gap! Comparing ex ante and ex post assessments of the costs of complying with environmental regulation, Environmental Policy and Governance, 12-6 p 245-256; Institute for Environmental Studies (2005), Literature review on ex-post assessment of costs to business of environmental policies and legislation, Free University Amsterdam; Robin Vanner and Paul Ekins (2006), Ex-post estimates of costs to business of EU environmental policies: A case study looking at Ozone Depleting Substances, Policy Studies Institute; Sharon Coone and Jesse Frederik (2023), In beeld: Hoe zonne-energie zó snel zó goedkoop werd, De Correspondent.

[3] John Polimeni, Kozo Mayumi, Mario Giampietro and Blake Alcott (2008), The Jevsons Paradox and the Myth of Resource Efficiency Improvements, Earthscan; Minghao Qiu, Yangqin Weng, Jing Cao, Noelle Selin and Valerie Karplus (2020), Improving Evaluation of Energy Policies with Multiple Goals: Comparing Ex Ante and Ex Post Approaches, Environmental Science and Technology, 2020, 54, 15584−15593.

[4] Data covering the period 2000-2019. Katharina Andrés, Martin Scheepers, Ruud van den Brink and Richard Smokers (2022), De energietransitie moet sneller, TNO.

[5] Lucas Chancel (Lead author), Thomas Piketty, Emmanuel Saez, Gabriel Zucman et al (2021), World Inequality Report 2022, World Inequality Lab.