Common energy policy in the EU: the moral hazard of the security of external supply

Abstract:

The European Commission has proposed a common energy policy conducted in a spirit of solidarity among Member States as an instrument to address the issue of energy security. The authors of this report, Chloé Le Coq and Elena Paltseva, highlight that such a common energy policy may entail biased economic incentives and thereby cause problems with so-called moral hazard. Moral hazard arises because the Member States do not bear the full cost of their own risky energy consumption. Therefore, the Member States may have a tendency to increase the consumption of risky energy, which could increase the risk exposure of the European Union.

The authors stress that there is a need to establish a strong regulatory energy agency to coordinate the energy decisions of the Union and to solve the problems that are related to a common energy policy. They also discuss the benefits of integrating all energy policy issues into one single agreement and achieving more equal allocation of decision power within the Union. In addition, they provide a set of new indexes that measure the risks associated with the external supply of gas, oil and coal for each Member State.