An overview of the Zapolyarnoye gas field in the Yamalo-Nenets Autonomous Okrug, Russia. Photo: Russian Government, CC BY 3.0
- Europe is critically dependent on Russian gas and oil – but Ukraine is an important gas producer in its own right, and Russia’s capture of those resources would strengthen its hand.
- Vladimir Putin also draws much of the funds for the Russian state from Gazprom, the largest publicly listed gas company in the world, and the richest company in Russia.
- So as the war intensifies, there is an emotional drive to move away from oil and gas in Europe – to punish Putin and become less dependent on dictators who can use power derived from fossil fuels.
For a lot of analysts the Russian invasion of Ukraine is almost indivisible from the future of energy. Fossil fuels have been central to war since at least World War I. By the 1930s, it became a critical necessity. The attack on Pearl Harbour was, at least partially, a response to the US oil embargo imposed upon Japan after Japan invaded China. The centrality of oil to World War II cannot be overstated, as it was the world’s first great mechanised war, with the use of tanks and aeroplanes coming into their own, and a key ingredient of TNT, the main explosive used, being produced from oil.
Field-Marshall Karl Gerd Von Rundstedt of Germany considered it so important that he attributed the Allied success against Germany to, among other things, the plentiful and accessible supply of oil. It is little wonder, then, that oil became so central to geo-strategic interests.
It is worth noting that this was a two-way process. Oil was not just needed for war, but war also led it to become central to our lives. Ten percent of the Marshall Plan that helped Europe rebuild after the devastation of World War II came in the form of oil aid, and shifted Europe away from the use of coal for its power. The great boost to oil use, its centrality to the economy of developed countries, led to the “age of abundance” based on cheap oil. This led to oil becoming even more deeply embedded into the economies of both developed countries, but also in the newly decolonised countries as they struggled to catch up.
Of course, the ‘cheapness’ of the oil was, to some degree, illusory. We are seeing the costs of it in terms of climate change impacts.
The latest report by the Intergovernmental Panel on Climate Change was described by UN secretary-general Antonio Guterres as an “atlas of human suffering”. The age of abundance is swiftly transforming into the age of crisis.
The old joke is about an American saying, “How did our oil end up under their feet?”
The other issue with a fossil-fuel-driven economy was its impact on the countries where oil was abundant. When an essential resource is not owned by the most powerful actors, they have every incentive to subjugate the areas where that resource is found. Additionally, for rulers of countries where such a resource is found, there is a great incentive to sell it and buy credibility from the world, rather than investing in building up a well-functioning economy – what is often called “the oil curse”.
All of this seems to play a part in Vladimir Putin’s war, although the critical fossil fuel is natural gas, rather than oil. Europe – as Neha Kumar points out in the interview below – is critically dependent on Russian gas and oil. But Ukraine is an important gas producer in its own right, and Russia’s capture of those resources would strengthen its hand. Furthermore, Putin draws much of the funds for the Russian state from Gazprom, the largest publicly listed gas company in the world, and the richest company in Russia.
As the war intensifies, there is a deep emotional drive to move away from oil and gas in Europe – a desire to not only punish Putin, but also make people less dependent on dictators that can use power derived from fossil fuels.
In some senses, this could be the critical crisis that hardens global policy towards an energy transition.
Not everything is smooth sailing, though. Renewables are not yet as central to energy as oil had become in World War II. And every little bit of instability drives oil and gas prices higher, enriching the countries, often ruled by autocrats, where these fossil fuels sit. The other thing to ask is whether renewable energy is that much more liberating. The single biggest form of renewable energy in the world is large hydropower, and in many cases it has driven similar forms of corruption, financial traps and the marginalisation of indigenous communities. Large solar power farms also have similar issues. And this is largely because both these forms of large renewable projects are dependent on land acquisition – a fraught subject.
War often gives the illusion of moral clarity: it forces people to take sides. This war is no different, and while we should never be neutral in the face of injustice, we should be careful whether we rush too quickly into the arms of a “solution” without examining how it will play out. The world made that mistake after WWII, and we are still paying the costs.
Neha Kumar is the India Programme Manager for the Climate Bonds Initiative and is based in Delhi. She drives policy, strategy and partner programmes in the country to scale up the green bonds market and sustainable financial ecosystem. She is currently also on the Union finance ministry working group on sustainable finance taxonomy development.
Her current focus of work includes mobilising investments in resilient agriculture, diversifying green and other sustainable finance instruments to multiple sectors, and multiple issuers including the states. She has over 15 years of experience working on public policy, regulation and industry action in India on sustainability, responsible financing and environmental and political risks to national and international investments.
The questions are in bold.
What does the Ukraine war mean for EU investments in renewables?
In short, they are likely to increase. In the last 15 years, the EU has mobilised and deployed over $800 billion for green activities, dominated by investments in clean energy. As many as 14 European countries have issued sovereign green debt, five of them in 2021. The EU is the leading region for green investment.
The Ukraine war is a stark and a very unfortunate background against which we are evaluating the speed and scale of this shift and green investment. Even if the theatre remains geographically limited, the repercussions of a prolonged Ukraine turmoil will be felt worldwide. Financial markets will likely face continued volatility, economic sanctions on Russia will have ripple effects on oil and gas prices across the world – keeping them elevated, and affecting other commodities’ prices, inflationary pressures will increase, and the economic recovery from the pandemic will likely suffer.
At the same time, the war has made energy security inseparable from regional and national security, leading the EU and its constituent states to think about energy self-sufficiency with renewables as a potential shield against shocks, or to counter Russian power. Until now Europe has opted to diversify gas pipeline routes as a way to deal with the risk of shocks, not the suppliers or source of fuel itself. Since 2004, Russian gas suppliers have had greater access to EU markets because of the new transportation routes.
Russia provides 40% of gas and 25% of oil needs of the EU. Energy prices globally and in Europe had been spiking even before the Russian aggression. Natural gas prices in Europe and the UK saw the biggest price increases in 2021, jumping more than 200%. And now there are war tactics at play and a steeper upward pressure on energy prices. Earlier this week, crude prices had touched a high of $139 per barrel, the highest since 2008. Russia has threatened to cut off the supply and push the price of oil to $300 per barrel in retaliation for Germany blocking Nord Stream 2 plans, in which the Russian oil and gas major Gazprom is heavily invested.
Also read: Green or Grey? The Uncertain Quality of India’s New Hydrogen Policy
In the midst of this, renewables have emerged as a definitive part of the European strategy. A 100-billion-EUR bond programme on defence and renewables is on the anvil for this year and markets are already welcoming the development.
I think the war will again get us back to really pushing forth the “build back better” agenda. And the need to finance resilience measures. Local jobs, rehabilitation of refugees, housing are just some of the areas that will need more finance. Sustainable investment universe will grow, not shrink, in my view as it happened during the pandemic.
Are we transitioning, or burning more fossil fuels?
Things won’t be straight forward, though. In the short term, rising gas prices may mean that Europe may be burning more coal than gas, and spiking emissions further. Global emissions from coal rose by 6% in 2021 compared to 2020 on the back of pent-up energy demand as the world economy recovered from the COVID-19 crisis. This spike is likely to last longer. Remember 80% of global energy demand continues to be met by fossil fuels. But overall, these bumps and shocks are going to be a part and parcel of the transition and have to be seen as such.
Managing these shocks will remain an uneasy balance between energy security and energy transition.
A crisis like this may make the tightrope walk more tenuous but I am inclined to argue that it may hasten and embolden the efforts towards transition rather than away from it.
New investments in coal and gas are not going to take off the ground that easily, I think, as they wouldn’t do much to bring down the prices in the short term, plus there is much greater scrutiny around climate risks and emissions, especially in Europe.
The new policy measures unveiled by the EU on 8 March, called “REPowerEU,” to wean itself of the Russian gas dependence are bold. REPowerEU seeks to “diversify gas supplies, speed up the roll-out of renewables and replace gas in heating and power generation. It is supposed to reduce EU demand for Russian gas by two thirds before the end of the year. It will also present a legislative proposal requiring underground gas storage across the EU to be filled up to at least 90% of its capacity by 1 October each year” to deal with the winter months.
EU policymakers argue that with these measures in the REPowerEU plan, the EU could remove at least 155 bcm[footnote]billion cubic metres[/footnote] of fossil gas use, which is equivalent to the volume imported from Russia in 2021 and terminate the “dangerous overdependence” on Russia well before 2030. So, the EU is not ditching gas per se but is moving ahead with speed to ramp up biogas, renewable energy, hydrogen, energy efficiency (doubling the number of heat pumps) in European buildings.
Russia thinks that this will take a year to start bearing fruit while Europe is betting on a shorter time frame. It won’t be a painless period but one can expect European green investment to rise.
Prime Minister Narendra Modi said India needed $1 trillion for its transition at COP26. How will the war affect that?
We don’t have a clear sight on how long the turmoil will last. If an early diplomatic solution remains elusive, it spells further turmoil for global energy markets. Energy prices have been volatile since the last two years, and for India, which is a net importer of crude oil and natural gas, such fuel-price shocks will have a direct impact on energy and subsidy expenses, inflation, currency, etc. Basically, faster and scaled up clean energy investments that accelerate the transition are going to be a crucial hedge for India against future disruptions in global commodity markets. The argument couldn’t be stronger.
The question is: will the investment continue to flow to India, especially from Europe, where most of the green capital resides in face of the urgent and increased need of clean energy investments within Europe?
Prima facie there is no reason for such flows to get adversely affected. On the whole India as an renewable energy investment destination is well recognised by investors. We will have to showcase and tap new and investable opportunities in renewable energy storage, sustainable transport, and other high emitting sectors.
The budget announcement to issue green sovereign debt in the next financial year is a concrete step forward. The issuance will be INR denominated but it is expected to find traction with global investors, mainly European, interested in chasing green projects in emerging economies where they receive better returns. Even as many practicalities need to be worked out, a robust and credible debut green issuance will attract European investors. This is also an indication of the seriousness that India is willing to back up its ambitious targets for decarbonisation.
India’s cumulative issuance stands at $22.6 billion and most of it is offshore capital. Policy initiatives such as internationally aligned national taxonomy (due to be released soon) are a cue that India is readying itself to be a favoured destination for green investment.
Also read: 4,000+ Russian Scientists, Science Journalists Pen Open Letter Against Ukraine War
The current crisis makes it even more urgent that India embarks upon a comprehensive sustainable investment strategy that complements offshore demand with domestic demand for green investment.
Again, I couldn’t emphasise more the need for more adaptation and resilience financing through a mix of capital instruments, without which the impact of a mixture of exogenous shocks as the ones we are witnessing is only going to get worse.
Many people have criticised the EU’s inclusion of gas in its green calculations. Do you think the war will lead to a rethink?
The gas debate is an important one, but let us be clear about the details. The EU’s controversial proposal for inclusion of natural gas as transitional activity is awaiting a parliamentary nod. There may be a rethink on this.
The EU allows 100 g CO2e/kWh[footnote]read as ‘grams of carbon dioxide equivalent per kilowatt-hour’[/footnote] for electricity generation. This is in alignment with the Paris trajectory for 1.5º C of warming and Europe’s 2050 net zero target. Keeping the threshold at 100 g CO2e/kWh makes it technology/energy agnostic, and whether gas would be included would not matter – and in many cases gas could just not be part of it with this threshold.
But there are additional rather problematic provisions on gas, such as this one: “Direct GHG emissions of the activity are lower than 270 g CO2e/kWh of the output energy, or annual GHG emissions of the activity do not exceed an average of 550 kg CO2e/kWh of the output energy of the facility’s capacity over 20 years.” This is simply not consistent with the EU’s 2030 emissions reduction target.
We must remember, though, that taxonomies are not a statement of energy policy, they are simply a tool to identify sustainable investments and increase transparency in financial markets.
Russia has released a green taxonomy too and has adhered to the 100 g CO2e/kWh threshold for gas fired plants. But this is not going to change the fact that Russia’s act of aggression has not only invited harsh economic sanctions from countries but is making companies too, including many oil and gas companies like Shell, BP and Exxon Mobil sever their ties with it.
On the whole, I think the gas status in EU green calculations will mark a rethink as a result of the Russia-Ukraine war, leading perhaps to a suitable marriage between strategic priorities and decarbonisation.
Germany is rethinking nuclear power. Do you think this may mean other countries will too?
I think the question is whether nuclear falls clearly in the “green” category or not. Short answer, despite it being carbon emissions free, is that it doesn’t, if you factor in the high level of harmful radioactive wastes it generates. This is not to say that it can’t be part of the energy mix. It is whether green capital should flow to this energy source or not and whether this is a reliable source for energy transition.
What the EU taxonomy of sustainable finance proposes is this: investments in nuclear power plants would be labelled sustainable if there exists a plan and funds to safely manage and dispose of radioactive waste and decommission the plant. And the new projects must have received a construction permit by 2045.
There has been a huge opposition to its inclusion from environmental groups. But, I think the situation in Europe may further build an opinion in favour of its inclusion.
It seems that this discussion has just got a new lease and the jury is still out. The debate may centre upon old and new investment in nuclear power.
Germany’s rethink, strictly speaking, falls within the purview of what the EU proposal allows to be technically sustainable. Its plans to end all nuclear energy generation by 2023 from existing plants may well be justifiably delayed to counterbalance the recourse to coal and gas, in the current circumstances. Germany has also not been able to achieve the targets it set for GHG reduction for 2020.
Other countries will rethink, yes, and if they can remain within the allowed limit, by which I mean no new nuclear plants, this may work.
This article and interview were first published on Environment of India, Omair Ahmad’s newsletter about India’s environment through a multi-disciplinary lens. Subscribe here. They have been republished here with permission.