Hungary's Orbán would also disarm the EU's main climate weapon in order to keep overheads low

"As long as the war continues, all administrative regulations on prices should be suspended," Orbán said at his first international press conference after winning his fourth consecutive (and altogether fifth) term at the 3 April parliamentary election. He added that the sustainability of the cuts of overheads for households would depend on GDP growth and on the EU's decision on the three Hungarian proposals. He said the Hungarian side had already made its proposals on the three steps it considered necessary, which were:

1. The EU Emissions Trading System (ETS) should be suspended.
2. The regulation linking the price of electricity to the price of gas should be suspended.
3. The mandatory blending of bio-based components into fuel should be suspended.

The origins of these highly significant proposals in terms of their potential impact and the chances of their realisation are presented below:

The ETS should be suspended

The EU ETS carbon trading scheme, established in 2005, is one of the European Union's most, if not the most important tools in the fight against global warming. According to the European Commission, since its introduction in 2005, GHG emissions in all sectors concerned have fallen by more than 40% overall, although the system suffered for quite a long time from problems that should have been passing and, after a series of revisions, the price of allowances has only started to rise steadily over the last four years. The price increase has been particularly steep since the start of the economic recovery following the crisis caused by the coronavirus pandemic, placing an increasing extra cost burden on the European industries concerned and thus, indirectly, on consumers, whether they are businesses or residential energy consumers.

Critics of the emissions trading scheme have previously mainly complained about its impact on the competitiveness of the European economy. More recently it has been cited as a threat to energy security and a factor in energy poverty. Those that speak up for the ETS say that it is more the policy of slowing down the transformation of the climate-, environment- and health-damaging fossil fuel industry that is to blame for the current situation. Thus, while greens promoting even more radical climate actions call for further reform of the EU ETS to keep carbon prices high, energy-intensive industries and the states most dependent on coal would like to mitigate the rise in the exchange rate and push for a temporary suspension of the scheme.

This option was first raised by Poland back in 2021, supported by the Czech Republic, but it also appeared in remarks by experts in Germany, which is also heavily reliant on coal. The Polish position blaming the EU ETS for high energy prices has before been backed by Hungarian Prime Minister Viktor Orbán.

The Poles say that 60% of energy production costs are accounted for by the cost of the carbon quota. According to the European Commission and an other organisation dealing with this matter, the proportion is much lower, ranging between 10 and 23%. They say the main reason for the soaring electricity prices is the dramatic rise in natural gas prices, which has increased the share of coal in electricity generation significantly, which in turn has driven up the price of allowances, with speculators also playing a role.

It's no coincidence that the Polish government is the most vocal advocate of suspending the EU ETS, as the Polish power sector has by far the highest coal dependence in the EU, at around 70%. It is followed by the Czech Republic (39.9%) and Germany (29%), while 8.4% of electricity generated in Hungary comes from coal, less than the EU average.

So far, the proposal to suspend the EU ETS does not seem likely to gain significant support, but if the situation worsens in the future, it cannot be ruled out that the idea will gain traction. The EU's "Fit for 55" climate package, unveiled in summer 2021, would extend the scheme to buildings and road transport, which has been opposed by the Hungarian government among others.

Regulation linking electricity prices to gas prices should be suspended

Spain has been arguing for the separation of gas and electricity markets since the summer of 2020, but it is also backed by Portugal, Belgium, Italy, France and now Hungary.

Prices in the EU's liberalised and increasingly integrated electricity markets are closely linked to the price of natural gas, to the extent that although gas-based generation accounts for only around 20% of the EU average electricity mix (more than 33% in Hungary), it is the main driver of wholesale electricity prices.

According to the currently applied market model, electricity prices are determined by the price of the most expensive source, which is the flexible gas-fired power plants that play a key role in balancing demand, even if the size of the renewable and nuclear capacity that is much cheaper than gas-fired capacity is larger.

Several countries, most notably Germany, are strongly opposed to reforming the market pricing model, and would instead focus on mitigating the impact of high prices on residential consumers and businesses. This is broadly the view of the European Commission, which argues that the current model provides efficiency, transparency and incentives to keep costs as low as possible. Most EU member states were already using this model before it was included in EU legislation, and most electricity markets around the world are based on this mechanism, as the general consensus is that it is the most efficient model in liberalised electricity markets.

The Commission believes that the alternative would not provide lower prices and that the current model is better for consumers overall because it realistically reveals the true costs and encourages individuals to become energy efficient and prosumers.

The EU executive therefore does not foresee electricity and gas market unbundling as an option for the time being, according to a Commission statement released on 23 March this year. However, countries supporting the idea are likely to lobby hard to get other member states on board, as Italian Prime Minister Mario Draghi has previously indicated.

The European Commission will present further concrete proposals by mid-May, focusing on ending dependence on Russian gas, oil and coal by 2027, decarbonising the EU energy mix and optimising the EU's electricity market.

The mandatory mixing of bio-based components in fuel should be suspended

In fact, with his proposal Orbán is knocking on an open door, given that in its resolution of 23 March the European Commission itself said it "supports Member States in using possibilities to reduce the blendingproportion of biofuels", and another V4 country, the Czech Republic, suspended the blending of bio-components with fossil fuels on 11 March. However, while Prague's main aim was to curb fuel price rises, the EC hopes the move could "lead to a reduction of EU agricultural land used for production of biofuel feedstocks, thus easing pressure on the markets for food and feed commodities". For similar considerations, a number of green groups, such as Greenpeace, have over the last few weeks urged EU members to suspend biofuel production from food feedstocks.

Bioethanol and biodiesel blended into fuels were already more expensive to produce than their fossil counterparts even before the war, and the conflict has also increased the cost of producing biofuels. The war in Ukraine has clearly intensified the debate around biofuels, but this is not about gasoline and diesel prices, or the couple of tens of forints that biocomponents add to fuel prices, but rather about the 'fuel or food' dilemma, food safety and biofuels made from food feedstocks.

About a quarter of the global trade in wheat and barley, which are also used as feedstocks for bioethanol and biodiesel, comes from Ukraine and Russia, compared to 15% for maize and more than 60% for sunflower oil. The war has made the outlook for the market uncertain, contributing to global food price inflation, which has risen to multi-year highs largely due to the energy crisis. Ukraine also banned most of its food exports on 9 March and Russia also imposed a partial food export ban, leading markets to expect a significant drop in wheat and maize exports. Meanwhile, the increasing frequency of extreme weather due to climate change poses an increasing risk to the food supply of a growing global population.

As advocates of suspending the production of biofuels from food crops argue that the move would reduce the chances of a potential global food shock and crisis. According to a study, removing wheat from European biofuels would offset more than 20% of the collapsed Ukrainian wheat supplies to the global market. Europe turns 10,000 tonnes of wheat – the equivalent of 15 million loaves of bread – every day into ethanol for use in cars, the study shows.

The biofuels industry, however, is pointing out that domestically produced biocomponents are not only key to meeting climate targets, underpinned by an earlier report by the International Energy Agency, but also to help Europe overcome its dependence on Russian fossil oil imports. The industry would therefore prefer even to increase the amount of land in Europe available for biofuel production. However, as the aforementioned indicates, there is currently a much greater chance that the opposite trend will start.

Cover photo: Portfolio