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Russian-war-spurred oil spend could kill Paris Agreement hopes: think tank

10 May 2022 Cristina Brooks

Russia's invasion of Ukraine has dimmed the outlook for achieving the Paris Agreement's goals despite global decarbonization efforts, according to research by a UK think tank.

On 9 May, Chatham House researchers presented their findings on how Russia's war in Ukraine will affect future climate finance and policy.

As the war breaks the world's countries into political coalitions, it not only breaks up supply chains for renewables, but also spurs demand for natural gas, coal, and oil, they said.

Countries around the world have hiked oil and gas investment since the invasion amid gas price spikes, potentially putting Paris Agreement targets out of reach, according to Chatham House Senior Research Fellow Daniel Quiggin.

Coal power is also required temporarily amid a shuffling of energy suppliers and sources, for example, as the EU pursues its proposed plan to decrease Russian gas dependency. Poland recently said that removing Russian gas as an energy source may increase its dependency on higher-carbon coal.

"I think that all of us on this seminar would be reading about how many countries—including China, as well as Italy and Germany—are doubling down on coal. That is clearly not great news at the moment, because this crisis, if it is not clear, has caused crises that have reinforced the need for fossil fuels in the short term," said Chatham House's Research Director, Futures, Bernice Lee.

Although many countries have turned to coal, investors do not see it as a long-term investment opportunity, said Lee.

Renewable energy is seen as a safer option that will gain strategic importance and "sensitivity" going forward, she said.

Other concerns for global greening relate to whether countries will cooperate on supplying goods to maintain the decline in renewable energy costs when trust is lacking.

"Coordination among geopolitical rivals is not unheard of," said Lee, citing the Cold War agreement on the Treaty on the Non-Proliferation of Nuclear Weapons, now signed by almost all the world's countries.

Reshoring and supply chains

Western sanctions against Russia since February have changed the geopolitics of supply chains, said Lee.

This implies the cost of renewable energy could rise. "In a world where scale and value chains are less and less necessary, we may be splitting again, when we talk of reshoring, offshoring, and inshoring, splitting the global economy perhaps into different parts. There are bigger questions about whether or not we would get to the scale of cost reduction that we will need to see in order to reach the goal of global decarbonization in the range, and the speed, and at the cost that would be beneficial," she said.

When it comes to decarbonization, countries should find ways to cooperate on technology and supply. "My suspicion is that, indeed, we need the scale of the global economy to help drive costs down," said Lee.

Supply chain costs are not the only financing hurdle. More ambition on climate finance is needed at the same time as finance is needed for the food price crisis that is likely to result from the war, said Lee.

New approaches and different types of ambitions than the existing emissions targets could be on the cards for June's G7 Summit in Germany, she said.

Oil spend too high, NDCs too low

Stronger national emissions goals are needed because at last autumn's COP26 Climate Summit more than 100 nations failed to make pledges that keep the world on track for Paris Agreement aims for warming.

"I think it's important to say that [Nationally Determined Contributions] are falling extremely short of where we need for a 1.5 [degrees Celsius] world with limited overshoot," said Quiggin.

Chatham House calculates that two zero-emissions years are needed before 2030 to maintain them, he said.

But since the invasion, several countries, notably Norway and the UK, have announced plans to allow oil and gas production increases amid higher prices as many Western countries look to replace Russian supplies.

"And we can see this in terms of Canada doubling its increased investment in oil sands and the UK looking to redevelop the North Sea," said Quiggin.

He also doubted that biofuels and hydrogen could replace the EU's Russian gas supplies as proposed under its RePowerEU policy. "I think the 35 billion cubic meters by 2030 that the EU has targeted is somewhat fanciful. Mainly because this [war] is going to increase land tension over food production and we're seeing food prices rising across the world. If we switch very heavily to biofuels, that land tension is likely to increase going forward," said Quiggin.

"My view is a slowing of decarbonization, and the additional lock-in of fossil fuel assets, very sadly leading to the 1.5 and 2 degrees [Celsius limit to global warming] potentially being completely locked out of reach," he said.

Lee was more sanguine, taking the "half-full and half-empty" view that greater climate or policy action may potentially be spurred by expected high oil prices, as in the 1970s energy crisis.

Major impacts on consumers

In six months to a year, if countries fail to secure non-Russian fossil fuel suppliers and electricity and energy prices rise, countries may look at ways to dampen consumer demand, Quiggin said. The advantage is this can forestall the impacts of high energy costs, but there's hardship along the way.

Unlike new energy investments, reducing consumer demand can relieve both price pressure and climate change impacts "overnight," he said. Governments should therefore focus on regulating the demand side rather than just the supply side.

"Then the inevitable outcome is that the governments across the West just have to support consumers, particularly the fuel poor. So, in a way, maybe they don't need to go down the demand reduction route: You get that through market dynamics because prices rise and consumers start reducing their consumption," said Quiggin.

Some are already pursuing the demand reduction tack. The EU executive's RePowerEU proposal to slash most Russian fossil fuel imports (66%) to the bloc in a year foresees asking consumers to use more heat pumps and turn down the thermostat for buildings' heating by 1 degree Celsius.

Likewise, the UK in April rolled out a strategy that uses energy efficiency alongside production of oil and gas and hydrogen to forestall price rises for consumers.

Posted 10 May 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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