An Energy Shock Is Coming. How Should Europe Respond?

Since Israel and the United States launched their war on Iran in February 2026, global energy prices have skyrocketed, with crude oil reaching nearly USD 115 per barrel in early May and still growing. While this shock has hit low-income countries the hardest, it also places significant strain on high-income Europe.

The current price shock makes the political and economic case for the green transition and renewable energies stronger than ever, as Daniel Gros, director of the Institute for European Policymaking at Bocconi University, argues in his analytical article. His brief was published by Project Syndicate, an international non-profit organization that publishes commentary and analysis on international relations, economics, finance, and global development.

As noted by the author, many countries’ governments fear the short-term political impact of consumer anger over higher energy prices. So, rather than capitalizing on this moment to accelerate progress, they are scrambling to keep consumers’ costs low by cutting fuel taxes.

For example, the German government has sought to get petrol prices back below EUR 2 per liter – a psychological threshold beyond which a political backlash might become more likely. Other European countries have enacted or are contemplating similar measures.

The Spanish authorities are pursuing lower taxes on electricity generation. This is similarly counterproductive, as it encourages more energy use. Since renewables still have a limited capacity, this will lead to yet more fossil fuel imports and greenhouse gas emissions, while doing little to limit inflation.

As a result, the same governments continue subsidizing renewables and electric vehicle (EV) adoption, while sacrificing revenues in order to buffer the market forces that would naturally make such technologies more attractive. For example, Germany has simultaneously budgeted EUR 3 billion for EV subsidies this year and EUR 1.6 billion in fuel-tax reductions that directly reduce the incentive to purchase EVs.

Subsidies also undermine resilience by weakening public finances. While high public debt might appear sustainable during good times, it makes responding to shocks very difficult. Because crises increase risk aversion, refinancing costs rise sharply, forcing governments to rein in spending exactly when it is needed most.

A better strategy would focus on reinforcing the European Emissions Trading System (ETS), which remains the most efficient instrument for limiting harmful emissions. Unlike regressive and expensive subsidies, the ETS effectively costs governments nothing and yields revenues that can be used to compensate poorer households for higher fuel costs. In other words, the ETS can both accelerate the energy transition and make it more equitable, without draining government coffers.

To sum up, European governments’ response to the Iran energy shock has missed the mark. Rather than subsidizing energy consumption – whether by reducing fuel taxes or through direct allocations, – they should be pushing forward with a system that discourages emissions, incentivizes the adoption of renewables, and generates public revenues. Sadly enough, few understand it for now. This means that the vicious circle of the energy crisis can hardly be broken in a near future.

Source: https://www.project-syndicate.org/commentary/europe-should-strengthen-ets-instead-of-lowering-fuel-taxes-by-daniel-gros-2026-05