For solutions to the energy crisis, look across the Channel

Britain and France are longstanding allies with remarkably similar economies. Yet both countries share a false perception that their own economic policy stands miles — or kilometres — apart from those on the other side of the Channel.

In the current energy crisis, however, the response of the French and UK governments could not have been more different. The government of arch globalist President Emmanuel Macron plumped for a populist strategy, while Boris Johnson reached for the economic textbook recommended by the IMF.

Both countries face the same shock — that of wholesale gas prices being roughly ten times normal levels. France is helped by a large nuclear sector, which normally provides 70 per cent of its electrical generation, but far less at the moment with half its reactors shut down. The UK has the advantage of its North Sea gas reserves, that provided around 40 per cent of consumption last year. Overall, net imports of gas in the UK are similar to that in France.

In Paris, the response to the energy crisis has been a concerted attempt to find a large carpet in the Élysée Palace and brush all problems under it. The so-called “tariff shield” policy of Macron’s government has capped electricity price increases at 4 per cent this year, and frozen domestic gas prices. Shielding consumers requires the public finances to bear the cost of rising wholesale prices.

In Downing Street, by contrast, the UK government has so far taken the grown up option of exposing the problem and tackling it transparently. Rises in wholesale energy costs are passed on to consumers, albeit with a lag, suppliers are not bailed out and every household has been given a huge incentive to conserve energy.

To help households, the government has put in place a £37bn package of targeted support for the elderly and the poorest with lump sum payments for all to enable payment of the higher costs of energy. Appropriately, a small part of this package has been funded by a windfall tax on companies making unexpectedly large profits from North Sea operations.

Although the UK package is complicated, messy and results in much higher inflation, it is pretty close to the IMF recommendation that countries should allow prices to rise and compensate vulnerable energy users for their losses. Overall, this is cheaper than a blanket tariff cap, as well as being transparent and providing the right incentives.

The problem is that while economists tend to love the UK solution, the public hates it. The government has got next to no credit for the support it has offered so far and the national conversation has centred on rising bills rather than the help on its way.

The truth is that both countries now need to learn from each other. Retail energy prices have already risen so far in the UK that households no longer need additional reasons to cut their use — energy conservations will happen anyway. Targeting households for support by income also has its limits because it provides far too much help for those in small energy efficient homes and too little for those in old, draughty houses (often through no fault of their own). Some sort of French-style publicly-funded discount for bills, temporary but sizeable, is now required.

In France, though, the public finances are far too exposed to wholesale energy prices. Too much of the burden is being loaded on to future generations rather than current consumers, who face little additional pressure to limit their gas and electricity use. Retail prices need to rise further with additional support offered for the vulnerable.

Both governments will find it difficult to climb down from their current positions to provide energy support. Difficult as it will be for Macron and the next UK prime minister to look across the waters and learn lessons, the solution to their energy woes lies partly on the other side of the Channel.

chris.giles@ft.com