The impact of war in Ukraine should power the push for net zero

Original Content: AXA IM

Released mere months after COP26 concluded, the latest report from the Intergovernmental Panel on Climate Change (IPCC) makes for a sobering read. The United Nations body has warned the world faces "unavoidable multiple climate hazards over the next two decades", even if global warming is successfully limited to +1.5°C.1

It said that even temporarily exceeding this warming level will result in “additional severe impacts, some of which will be irreversible. Risks for society will increase, including to infrastructure and low-lying coastal settlements”.

The analysis is a timely reminder of the urgency behind the push to net zero, at a time when first the coronavirus pandemic, and now the Ukraine crisis, have upended geopolitical and monetary policy priorities.

For while the IPCC highlights how heatwaves, droughts and floods are already driving mass mortalities in species and exposing millions of people to acute food and water insecurity, the discussion right now is focused on how to sustain a post-COVID-19 recovery while addressing the impact of the Russian invasion of Ukraine.

Energy prices were already rising as economies restarted, driving inflation to heights not seen in decades, which has encouraged a major tightening of interest rate expectations in Europe and the US. But war has sparked new fears around energy security and supply, sending countries scrambling to reassess domestic fossil fuel capacity as prices rise further.

New challenges

The escalation of political tensions into military conflict triggered a sell-off in global stock markets and sent the price of oil above $100 a barrel for the first time in seven years. This act of aggression has already seen a terrible human cost, leading to sanctions from the West on the Russian leadership, as well as certain banks and wealthy individuals. The full economic impact, however, will be felt far more widely.

Central to this is Russia’s role as a major supplier of energy. As things stand, the European Union (EU) imports 90% of its gas consumption, with Russia providing around 45% of that. Russia also accounts for around 25% of oil imports and 45% of coal imports.2

Meanwhile, investment in fossil fuel-based power generation has declined as capital is allocated to more sustainable energy models. There is an argument that this constrains the energy sector’s ability to meet sudden increased demand, with renewable energy not yet at the capacity to cover a potential shortfall and with technologies like wind and solar not able to rapidly scale up production.

The International Energy Association (IEA) has asserted that Europe needs to act quickly; that it needs to be prepared to face significant uncertainty over Russian gas supplies next winter.3 European Commission President Ursula von der Leyen has taken a similar tone, urging that the bloc must become independent from Russian oil, coal and gas, that it cannot rely on a supplier who explicitly threatens it.4

Transition on the edge

The actions of President Vladimir Putin have put the world on a precipice in terms of the energy transition. Voluntary or forced reductions in the consumption of energy from Russia will shift demand to other energy suppliers and sources, further underpinning high prices in the near term. And this desire to find the most flexible response to higher prices and shortages looks likely to drive the use of coal, oil and non-Russian gas to a level that is not compatible with a declining emissions curve and the pursuit of net zero.

Building capacity in renewables or alternatives like nuclear takes time and will not address today’s pricing crisis. Many politicians are already calling for the reignition of decommissioned coals plants in a bid to stave off the EU’s reliance on Russia for its energy supplies. In the United Kingdom, there have been calls for the resumption of fracking to boost production and ease fuel prices.5

This sense of urgency is understandable, perhaps even necessary in extremis, but quite simply it could be disastrous for the environment if Russia’s actions were to drag fossil fuel plants back online, endangering the pace and quality of our shift to a sustainable global economy. We believe the case for the energy transition has never been greater – and that each individual proposal which serves to delay the decline of fossil fuels should be subject to the most exacting scrutiny.

Our view should be squarely on the future, and we should learn lessons from the past. Notably one study from the UK has shown that energy bills at the start of this year were nearly £2.5bn higher than they would have been if a raft of climate-friendly policies had not been scrapped over the past decade.6 Shortcuts shouldn’t cut it. The moment when our reliance on fossil fuels looks its most costly and dangerous is not the moment to embed it still further.

And so Europe must wean itself off Russian fossil fuels. Von der Leyen has called for urgent action to mitigate the impact of rising energy prices, diversify gas supplies and accelerate the clean energy transition.7

The European Commission has put forward a plan that attempts to do that, planning to make Europe independent from Russian fossil fuels well before 2030. Dubbed REPowerEU, the strategy will seek to diversify gas supplies, accelerate the introduction of renewable gases and replace gas in heating and power generation. The EU believes it can reduce EU demand for Russian gas by two thirds before the end of the year.8

The next move

This moment could be an opportunity to accelerate the transition in a way that could help protect countries – and investors – from similar stress points in the years ahead. The world remains too reliant on fossil fuels to achieve a meaningful reduction in carbon dioxide (CO2) emissions in the near term. High prices today for carbon-intensive energy sources should further strengthen the shift towards renewables at a time when they are benefitting from a technology-driven decline in the long-term cost curve. We must acknowledge, though, that recent events will bring short-term consequences.

CO2 emissions will likely be higher than projected a year or two ago as given the current backdrop the transition to renewables looks set to be bumpier. This would push out the peak in the emissions curve which should in turn drive an acceleration of public and private investment in green energy and related technologies to counter it. The ultimate goal would be a markedly steeper decline in the emissions curve, with the benefit of more robust energy security. Hydrogen and nuclear may well benefit alongside solar and wind, as well as efforts to improve energy efficiency.

A sustained energy shock, supercharged by war in Ukraine, has brought home the urgency and social implications of energy security – fossil fuels have led to enormous political problems over the years and Europe’s energy reliance on an aggressive Russia won’t be the last. Climate change too is a fundamental geopolitical threat with effects that put at risk our way of life. We cannot tackle the former without our eyes firmly on the latter. If we aren’t successful in transitioning to a low carbon economy, we won’t have sustainable economic growth, and that means we can’t have a sustainable and prosperous future.

[1] Press release | Climate Change 2022: Impacts, Adaptation and Vulnerability (ipcc.ch)

[2] Joint European action for more affordable, secure energy (europa.eu)

[3] How Europe can cut natural gas imports from Russia significantly within a year - News - IEA

[4] Joint European action for more affordable, secure energy (europa.eu)

[5] The Observer view on Ukraine and the climate emergency | Observer editorial | The Guardian

[6] Analysis: Cutting the ‘green crap’ has added £2.5bn to UK energy bills - Carbon Brief

[7] Joint European action for more affordable, secure energy (europa.eu)

[8] Joint European action for more affordable, secure energy (europa.eu)

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