Why is employment growth so slow in Europe? You could blame the weak economic recovery or the job destruction triggered by the digital technology and the rise of the robots. You could also blame soaring energy costs. Energy-intensive industries, like steel and chemicals, are not creating jobs in Europe. They're going to the United States and other bits of the planet where natural gas and electricity prices – the two are linked – are much cheaper.
On Wednesday, the European Commission will lay out its climate and energy policy for the European Union through 2030. According to various reports in the Financial Times and elsewhere, the landmark report will highlight the yawning gap between EU energy prices and those in other countries where manufacturing is a big employer. Industrial gas prices are three to four times higher in the EU than in the United States and Russia and some 12 per cent higher than in China.
The gap between American and European prices is bound to rise, making Europe ever less competitive. That's because of the American shale gas revolution, which is pushing down energy prices relentlessly. No surprise that big European companies, like Germany chemicals giant BASF, are plotting their expansions in the United States instead of on home soil.
In a comment piece in Tuesday's FT, Lakshmi Mittal, chairman and CEO of global steel producer AcelorMittal, said: "The EU says the manufacturing industry is a motor for growth. Unfortunately, EU energy and climate policy is punishing the steel sector and other energy-intensive industries... Compare this with the U.S., where shale gas and more industry-friendly policies have led to much lower costs for industrial energy users."
The European Commission's report, called The 2030 Energy and Climate Framework, has the potential to reshape the European energy and carbon markets. It will, among other things, set a more ambitious target for greenhouse gas reduction. The last target, for 2020, called for a 20-per-cent reduction in emissions and for renewables (solar, wind, biomass, hydro and other green sources) combined with a 20 per cent target for renewable energy within the overall energy mix. Emissions have dropped considerably, but the post-2008 recessions can take a lot of the credit for that. As the European economies recover, energy use will rise.
The 2030 emissions-reduction target may be as much as 40 per cent, though a somewhat smaller figure seems likely. Achieving that goal will not be easy. Germany is phasing out its nuclear reactors. The use of coal, the dirtiest hydrocarbon, is rising as a result. Austerity is crimping subsidies for renewable energy and European shale gas development is pretty much going nowhere. That will have to change. Natural gas is about half as carbon intensive as coal. If enough gas is produced – European shale gas reserves are potentially huge – energy prices will fall, preserving or even expanding the industrial sector.
To be sure, shale gas is no dream fuel, especially in Europe. Resistance to "fracking" – the injection of high-pressure water and chemicals into the shale layers to crack them open and release the gas – is intense for environmental reasons. In some European countries, notably France, fracking is banned for fear of "fugitive" methane leaks and contaminated aquifers, both legitimate concerns. Still, European industries and some European governments are lobbying hard for a home-grown shale revolution.
The British coalition government and Prime Minister David Cameron are leading the charge, arguing that shale gas would go a long way to preserve the competitiveness of British industry, create jobs and reduce the country's carbon footprint. The pitch may work – French energy company Total recently made a bet on British shale gas. If development takes place in Britain, other countries are bound to follow. There is no way that France would sit idle as British industrial energy costs drop.
The big flaw in the plan is that the financial incentives to open up your land to shale drilling in Europe are practically non existent. In much of the United States, the landowner own the mineral rights on his property, meaning he gets a royalty from production. In Britain and much of the rest of Europe, those mineral rights do not exist for landowners.
No wonder there are 150,000 shale gas wells in the U.S. and essentially none in Europe. Shale gas will happen in Europe, but so slowly that European industries are bound to face a competitive disadvantage for years, perhaps decades. You can't power steel factories with solar panels.