In the Energy Transition, You Cannot Have Your Cake and Eat It, Too

(Bloomberg Opinion) -- Only three months ago, the U.K. helped convince the world at the COP26 climate change summit to give up “inefficient fossil fuel subsidies.” For the green movement, it was a longed-for victory. Not just because subsidies support coal, oil and gas consumption, but also because — for the first time at a United Nations climate summit — the communique actually mentioned the elephant in the room by name: fossil fuels.

On Thursday, the British government decided to have its cake and eat it, too. In an effort to cushion a 54% hike in retail gas and electricity prices from April onward, it rolled out what, in all but name, are energy subsidies. Rishi Sunak, the Chancellor of the Exchequer, carefully dressed up a package — worth 9 billion pounds ($12 billion) in between direct aid and zero-interest loans backed by the government — as a “discount” and a “tax rebate.” Technically, he may be right on the labels, but the result is undeniable: the U.K. is supporting demand of fossil fuels.

“Energy bills are rising because it is more expensive for the companies who supply our energy to buy oil, coal, and gas,” Sunak told parliament. “But what we can do is take the sting out of a significant price shock for millions of families by making sure the increase in prices is smaller initially and spread over a longer period.”

The policy U-turn is a reflection of the political and economic reality of the energy transition. For a long time, the U.K. government has painted a rosy picture of the shift toward green energy: painless, calm and, above all, cheap. It won't be like that. Experience suggests that energy transitions are complicated, turbulent and, often, expensive. A good example is the 1970s: The world went headlong into oil consumption and suffered two consecutive energy crises.

For all the green energy promises and plans, the current energy transition is in its infancy. The world still depends heavily on fossil fuels. It's an addiction built up over two-and-a-half centuries, and it runs deep. It will be some time before British households give up their dependence on gas, oil and even coal-fired power stations.

The policy question is how to fight climate change and transition toward greener sources of energy while at the same time insulating the global economy — or, in this case, British families — from extreme price shocks. One-size-fits-all subsidies aren't the way. They send the wrong signal to emerging economies that reluctantly signed on to the COP26 communique. If the U.K. feels it is politically impossible to stomach big price increases, so would governments in China, India, Bangladesh and Mexico. Rolling out subsidies three months after the end of COP26 only makes the job of the next big climate summit, COP27 in Egypt, harder.

Britain isn't alone. European governments from Norway to France are rushing out tax cuts, direct subsidies and other handouts to help consumers weather gas and electricity price increases. The developing world is taking notice. The deadly riots in Kazakhstan last month started after the government removed some subsidies on fuel; they were quickly re-introduced. Against that backdrop, few governments would dare to phase out any subsidies for now.

True, the U.K. cannot ignore the risk that the current spike in energy prices could push one-in-10 Britons into energy poverty. But it can focus precisely on families in dire need, rather than everyone else, including upper middle-class households. That's the difference between “efficient” and “inefficient” subsidies. Taxpayer money would be better spent in reducing demand than on sustaining fossil fuel consumption at ever higher prices.

One of the biggest challenges the U.K. faces is a stock of old homes. The Victorian-style terraced houses of England are a delight to the eye but a pain in the wallet. Poor insulation allows carbon-based energy to escape as if it were free and painless to use. Today, power is neither cheap nor harmless. If Sunak wants to support families, he should allocate money to curb demand for fossil fuels — not to sustain it.

More From This Writer and Others at Bloomberg Opinion:

Two Ways a War in Ukraine Affects Europe's Gas: Javier Blas
Don't Panic, Europe. That's Not Inflation. It's Just Gas: Marcus Ashworth
How to Make Sure Climate War Doesn't Become Class Warfare: Lionel Laurent

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of "The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources."