Publications

Will this energy crisis transform politics like in the 1970s (and is it climate commitments that will ultimately pay the price)?

Think Piece by Simon Reid-Henry

The last time a major energy crisis collided with social discontent and macro-economic upheaval was during the 1970s. On the back of widespread anti-war protests at the start of the decade, the rise of more radical political movements disrupting the long accepted post-1945 consensus on political moderation, and declining productivity growth (the amount of value that can be realised by one hour of labour) there was soon talk of a “crisis of democracy” gripping the Western world. When the OPEC-orchestrated oil embargo hit oil prices in 1973 and 1974 the industrialised economies ground to a halt. A combination of rising inflation and stagnating employment (“stagflation”) set in, forcing governments into a desperate search for new solutions and citizens out on the streets in protest.

Could we be looking at something similar today? French economist Jean-Pisani Ferry, drawing on the work of Nicholas Stern and Joseph Stiglitz, estimates that the green transition (by repricing of total carbon output in 2019) could impact the global economy to the tune of 3.7% of GDP – a greater magnitude than the oil shock of 1974 (which by repricing oil had an impact of 3.6% on global GDP).

At Counterpoint we’ve been saying for a while now that climate dissent will become a major issue as soon as government policies to address the climate emergency begin conflicting with other issues people care about.

The emergent European energy crisis appears to be bearing us out. In the 1970s governments could, to some extent, blame domestic discontent on external factors. But today, after a year and a half of lockdowns, it is citizens who are more likely to blame governments’ for the rising cost of living, while governments blame each other. The result could be to throw Europe’s grand climate agenda into doubt: pitting citizens, national governments, and the European Union against one another in unsettling and chaos-generating ways.

The political dynamics currently playing out in relation to the sky-high price of electricity offer a case in point. In Norway, electricity prices doubled from the first to the second quarter of this year, with large regional variations: some regions have been paying as much as ten times what others do. Meanwhile, Italy is looking at increases of 40% gross in the current quarter. Across the continent, governments are responding to rising prices by investing billions in subsidies. In Spain, the government has been forced to cut rocketing energy bills to mollify protestors. France is, of course, already familiar with this kind of dynamic ever since the Gilets Jaunes protests upset the first year of Macron’s presidency. This time around, President Macron and his PM have promised to act as a ‘shield against energy costs’. But with costs also rising for CO2 permits on the EU Carbon market (the primary tool the EU uses to regulate emissions) discontent could soon be affecting whole industries as well as consumers.

A possible outcome here that particularly catches our eye is whether such popular disgruntlement ends up forcing governments to backpedal on their climate commitments; just as in the 1970s they backpedalled on their social commitments. Might we be seeing the beginnings of a new and unpredictable energy-driven political crisis in the making here? The energy crisis of the 1970s was a transformative moment in western politics. It led to “panic at the pump” in the US, as drivers queued to secure limited supplies of costly gasoline with dramatic political consequences: from political splits in the democratic party to the rise of a strongly pro-market Republican right. In Europe it contributed to political discontent and widespread labour unrest.

Today, by contrast, the economic impact of the green transition will be spread over a longer time period and will affect some countries more than others (so our global comparisons above sound more dramatic than they are). Some of the consequences (technological innovation) will also be positive. But for Europe specifically the carbon transition will be intense either way. Moreover, some of the same drivers of discontent as were percolating in the 1970s are present again today, including a return to inflation in the economy more broadly. As former President of the ECB Otmar Issing recently speculated, the current rapid growth of money in the economy could itself be seeding the conditions for a 70s-era stagflation episode or some other “inflationary fiscal monetary shock”. The UK’s Bank of England has already predicted that inflation, as measured by the Retail Price Index, could be heading towards 5% by the end of 2021 (inflation in Europe having only exceeded 4 % once since the creation of the European Monetary Union in 1999, during the financial crisis).

At Counterpoint, we think the time is therefore right to be asking ourselves whether the present combination of inflation and rising energy prices could be setting the scene for a similar period of domestic political unrest today.

Witness the return of panic buying in the UK in recent few weeks: where the fact that petrol pump queues were driven primarily by Brexit-induced shortages may be of little consequence if public tempers continue to be frayed because of shortages and costs alike. A critical element that is different this time around, however, is the role of Europe itself. If energy unrest continues, it may be more than just national governments that people blame. They may blame Brussels for pushing up carbon taxes and emissions quotas and protest against the European Centre. This would be a climate-induced rather than sovereignty-induced political rejection of Europe. And the danger is that their governments may be inclined to support them.

If so, then popular discontent at rising energy prices could translate into public pressure on governments to reverse the European Union’s grand climate bargain, piling added pressure on the EU itself. The Spanish government has already taken steps in this direction, and the Italian and French governments (Macron is up for re-election next year) may follow. In other words, it could be that we are not so much back to where we started in the 1970s but confronting a rather differently volatile situation: in which national and continental politics create sparks off one another, and where the politics of climate change occupy the central stake in a struggle over national autonomy.

Two potential scenarios give a sense of how this present-day conjunction of energy prices and social discontent on the context of renewed climate commitments might play out:

In the first scenario, we see a complex set of national political struggles pitting pro-climate and cost-of-living protestors against one another. In France, for example, middle-class pro-nuclear lobbies might take to the streets against a resurgent Gilets Jaunes movement: both seeking class-based economic relief but disagreeing, vehemently, on the degree to which environmental policies should stand or fall in this. In Britain, where rising prices are being felt most acutely at present (again, in part because of post-Brexit logistics problems, but also because of the UK’s own ambitious emissions targets), the outcome might be a more militant version of something like Extinction Rebellion: intent on defending climate commitments when governments give in to middle-class demands for easing up on prices.

A second scenario pivots on the wider geopolitical dynamics being drawn in around the energy crisis. Here the spotlight falls on Germany, where the Nord Stream 2 pipeline is ready to be turned on, but where Russia – the largest supplier of gas to Europe – is refusing to turn on the taps until it feels that prices have peaked. In response, the US has already pointed a finger at “players [i.e. Russia] who may be manipulating the market”, suggesting that Europe’s energy woes are unlikely to remain an intra-continental dispute for long. The effects of a prolonged energy crisis in Europe on China’s economy should not be underestimated either. In this scenario, then, each of the US, Russia and China could all become embroiled in Europe’s energy instability, with this delicately poised situation itself primed for an upset by national governments breaking from the climate-driven European position under pressure of dissatisfied domestic consumers.

And, of course, both scenarios are themselves compounded by the recent introduction of very public commitments – strongly promoted by the European Community via its European Green Deal and Fit for 55 programme – which put a ceiling on carbon emissions and require renewable energy sources to come on tap: even where the latter are not ready yet to take up the slack.

Here is perhaps the one echo of the energy crisis of the 1970s that we are most likely to confront today. An important spur to the political turbulence of that decade was the realisation of the dependency of western liberal nations on imported oil. In the context of the Cold War this reshaped strategic alliances and punctured domestic political calm by undermining domestic guarantees of cheap energy and economic growth. Today the dependency is on fossil fuel energy writ large. And while some geopolitical actors, such as Russia, will seek to take advantage of that, we should also expect that domestic political groups will too as they realise that their governments are going to struggle to deliver on climate justice and social expectations alike.

 

Published by Counterpoint on 20 October 2021

Will this energy crisis transform politics like in the 1970s (and is it climate commitments that will ultimately pay the price)?

Author
Simon Reid-Henry

Published by
Counterpoint

Year
2021

< Previous