causing european gas prices to surge even higher. chart 5 cuts in russian gas supplies to the eu ( in millions of cubic metres per day ) sources : bloomberg and ecb staff calculations. notes : lng includes deliveries from russia. the latest observation is for 24 october 2022. the economic, inflationary and political tensions caused by this supply strategy probably had twin aims : break europe ’ s unity and weaken its support for sanctions in view of russia ’ s ( planned ) invasion of ukraine, which began in february 2022. these aims were not achieved. instead, large shocks like this one should reinforce the eu ’ s determination to speed up the green transition – rather than slow it down – and to rapidly eliminate its dependence on russian fossil fuels. the considerable progress made on energy intensity after the oil shocks in the early 1970s gives us cause to be optimistic that similar progress can be achieved in response to the current shock. policy implications : seeking a divine coincidence to achieve a “ divine coincidence ” whereby reducing the dependence on fossil fuels does not come at the expense of higher energy prices, public policies will need to succeed in reducing energy intensity, protecting energy security and financing the transition. first, policies will need to provide incentives to lower fossil fuel demand for a given after - tax price. [ 41 ] this would limit upward pressures on energy prices during the green transition, and – importantly – would help reduce greenhouse gas emissions. in the eu, the fit for 55 package and the repowereu plan have raised targets for energy efficiency and include concrete measures to achieve them. in the short term, eu ministers have agreed on voluntary and mandatory reductions in electricity demand in response to the current crisis. initial results are encouraging. second, policies need to protect energy security to contain the likelihood of significant shocks to inflation linked to spikes in the price of fossil fuels. this is best coordinated or delivered at european level as national measures to secure energy supplies and shelter businesses from the impact of price increases could turn into beggar - thy - neighbour policies. recent eu initiatives are moving in the right direction. for example, the eu council has agreed to collect solidarity payments from fossil fuel companies to support households and businesses. the european commission has proposed joint gas purchases to strengthen the eu ’ s bargaining power when securing supplies for all member states. it has also proposed solidarity rules in the event of gas shortages and is working on a revision of its state aid framework. lastly, ministers have agreed that fiscal support to cushion the impact of higher energy prices should

set up in which transition risk shocks are identified through the text - based proxy and a combination of sign and narrative restrictions. as always, the modelling approach is subject to caveats and uncertainties. 35. see, for example, peersman. g, and van robays, i ( 2009 ), “ oil and the euro area economy ”, economic policy, volume 24, pp. 603 - 651 ; and baumeister, c. and hamilton, j. d. ( 2019 ), “ structural interpretation of vector autoregressions with incomplete identification : revisiting the role of oil supply and demand shocks ”, american economic review, volume 109, issue 5, pp. 1873 - 1910. 36. the cost of market capital for funding investment projects is higher for oil and gas companies, which mainly reflects the increasing wedge in the cost of equity. research has shown that equity market investors are more concerned about climate - related risks compared with investors in debt markets and tend to push carbon intensive industries towards using greener technologies. de haas, r. and popov, a. ( 2019 ), " finance and carbon emissions, " working paper series, no 2318, ecb, september. despite the higher profitability of the fossil fuel energy sector at the current juncture, the iea notes that high levels of policy uncertainty, difficulties to secure financing and a general reluctance to commit large amounts of capital limit the responsiveness of fossil fuel investment to higher prices. see the iea ’ s “ world energy investment 2022 ” report for more details. 37. there is mixed evidence on the effect of the green transition on fossil fuel investment. while the iea argues that net zero pledges so far have not been correlated with fossil fuel spending ( see the iea ’ s world energy outlook 2022 ), the imf has found a significant impact of the green transition on investment of oil and gas companies, although the impact following the paris agreement is still less important than the effect from lower oil prices in the same period ( see the imf ’ s world economic outlook 2022 ). 38. in response to the pandemic, opec + lowered production to support oil prices and after gradually restoring the oil supply to pre - pandemic levels, cut it again more recently. russia ’ s invasion of ukraine has aggravated supply shortages. 39. while in the short term european countries have sought to make up for the loss of russian gas with other fossil fuels