EU scrambles to curb energy costs as Iran war hits markets

European Union energy ministers will meet to weigh up options to curb energy costs on Monday, as officials draft emergency plans to temper the impact of surging oil and gas prices triggered by the Iran war.

The European Commission is drafting emergency measures to shield consumers from rising energy bills, examining state support for industries, cuts to national taxes, and using an upcoming revision of the EU carbon market to ease CO2 permit supply, according to EU officials familiar with the discussions.

Commission President Ursula von der Leyen has said Brussels was also considering capping gas prices.

Ministers will hold closed-door talks on Monday to discuss possible measures to help alleviate price increases triggered by the closure of the Strait of Hormuz, which has upended LNG trade and caused unprecedented oil supply disruption.

Europe's reliance on imported oil and gas means it is highly exposed to global price swings and no quick fixes are expected.

"There are structural reasons why energy prices in Europe are high," said Joanna Pandera, president of Polish think-tank Forum Energii, adding that countries' different energy mixes and taxes mean prices vary significantly across the EU. "It’s really hard to find one solution which fits all."

PRESSURE ON GOVERNMENTS

European benchmark gas prices have increased by more than 50% since the Iran war began.

Some governments, including Italy, want a sweeping EU intervention - such as suspending the bloc's carbon market, to curb the influence of CO2-emitting gas plants on power prices.

Some governments expect Brussels to focus on national tax cuts, or domestic subsidies, “to pass the ball back to the member states for the major measures,” one EU diplomat said.

But leaning on national subsidies risks widening inequalities between wealthy and poorer EU members.

"Not everyone can afford state aid, that’s the problem. It’s fine for those that have deep pockets," a senior EU diplomat said.

Of the more than 500 billion euros ($571 billion) EU governments spent on support measures during the 2022 energy crisis, 158 billion euros came from Europe's biggest economy Germany, according to the think-tank Bruegel.

Von der Leyen will send EU leaders a shortlist of emergency options this week, ahead of their summit on Thursday.

Longer term, Brussels says scaling up locally-produced clean energy from renewables and nuclear will end Europe's exposure to volatile fossil fuel imports.

($1 = 0.8760 euros)

-Reporting by Kate Abnett; additional reporting by Susanna Twidale;Editing by Elaine Hardcastle/Reuters