A Western break from Russian oil and gas could also mean a break from fossil fuels altogether – but there are challenges
The question of the impact of climate change on geopolitical risk has been circulating in research circles for a while. But, until now, few have turned the question around and asked: “How do armed conflicts affect the fight against climate change?”
While international focus is understandably on the humanitarian crisis in Ukraine, the energy crisis unfolding in the UK, across Europe and to some extent in the US is putting the livelihoods of people at risk and exacerbating already existing inflationary pressures. There are many underlying issues (supply chain problems in the post-COVID recovery, the massive quantitative easing Western governments have implemented in the last two years, a cold winter, and low natural-gas storage in Europe), but geopolitical tensions and the conflict in Ukraine have broken the proverbial camel’s back.
Notably, the supply of Russian gas to Europe has not, as of writing, been interrupted, but the tensions between Russia and the West, and the anticipation of sanctions and possible embargo, are being priced in by the market. As a result, rising energy bills and the increase in fuel costs will have a widespread impact on people, economies, and government finances.
The corporate profits from consumers’ pain are being frowned upon
There have been many calls for a ban on Russian oil and gas (including from British Prime Minister Boris Johnson and almost 100 Members of the European Parliament). But Russian-sourced gas is not easy to substitute on such short notice, leading to high costs across Europe due to countries’ heavy reliance on Russian fossil fuels. The UK’s Chancellor of the Exchequer, Rishi Sunak, warned such a ban would cost the UK alone £70 billion and would tip Europe into a recession, a concern also shared by the German Chancellor, Olaf Scholz. That would have profound consequences across the globe.
How could all this affect the fight against climate change? Moving away from Russian fossil fuels could also be an opportunity to move away from fossil fuels altogether.
There are three major areas of concern, and how they are addressed will have long-lasting consequences.
1. Short/long-term dilemma
The energy trilemma between security, climate and cost presents difficult choices for policymakers and governments. The short-term and long-term provision of reliable, affordable and renewable energy cannot be achieved overnight. But actions taken in the short term will have a significant impact over the longer term.
In the short term, Europe will continue to rely on natural gas (or potentially coal), and there is no quick and easy solution to the problem of dependency on fossil fuels. Economies are built on such infrastructure, and infrastructure takes time to change. In pursuit of energy security, any investment in fossil fuels exploration, production or infrastructure can lead to either the locking in of fossil fuels for much longer than necessary, or to stranded assets.
The recent volatility in commodities also changes the economics of low-carbon technologies such as electric vehicles. This in turn will have an impact on which path to the net zero targets is optimal, as well as the cost thereof.
2. Inflation, recession and stimulus
Any recession presents a challenge for a fundamental economic change: the rise in energy costs creates an incentive to transition towards renewables sooner, but the recession itself can be a serious threat to achieving climate targets. While the operating costs of the fossil fuel infrastructure are more expensive, it might be politically challenging to spend loads on the capital expenditure required for decarbonisation, even if it saves money in the future.
The ways governments choose to soften the inflation and cost of living blow to their populations could have long-lasting dislocations; any subsidies on energy bills or fuel costs to alleviate the pain of rising prices may distort incentives. Instead, the policymakers and elected representatives need to think of how to use the price signal from the current situation to incentivise climate-positive behaviour while providing support to the vulnerable. Such support should not mask the true cost and comparative economics of various sources of energy.
The anticipation of sanctions and possible embargo are being priced in by the market
Imposing additional carbon taxes designed to reflect the true cost of burning oil and gas at consumer level can be met with fierce resistance by politicians and populations alike. But putting a price on emissions is extremely important to achieving the Paris goals; diverting the proceeds to the public via carbon dividends could be a healthy environmental and economic strategy.
Windfall taxes on oil, gas and renewable electricity producers alike are growing in popularity on the back of increased prices paid by the consumers – the corporate profits from consumers’ pain are being frowned upon. Such an intervention, however, would distort the market and not be favourable to shareholders. Instead, shareholders should demand those profits are used to advance the climate agenda and decarbonisation, are spent on capital expenditure for low-carbon technologies, and accelerate the journey towards net zero.
3. Cooperation and government spending
In response to the situation in Ukraine and the increased risk of prolonged and widespread military conflict, many governments coordinated their response and announced new programmes to expand their military might and, therefore, spending.
While the armed conflict in Europe and any possible spillovers represent a serious and imminent danger to the West, the physical impacts of climate change can have consequences for all just as devastating but over a longer period. The tragedy of the horizon should not be ignored. Governments around the world should treat the climate threat with utmost importance and prioritise cooperation and financing for climate action even when other challenges arise.
There is an opportunity in every crisis. The conflict between Russia and Ukraine can derail the climate agenda or be the decisive turn towards a more sustainable and cleaner future. Let’s make sure we don’t lose sight of our common goal of stabilising the planet’s atmosphere and making it liveable for all people around the globe for many generations to come.