23 Jun 2022
EVA CAIRNS, HEAD OF SUSTAINABILITY INSIGHTS & CLIMATE STRATEGY
AND JEREMY LAWSON, CHIEF ECONOMIST AND HEAD OF RESEARCH INSTITUTE
Russia’s invasion of Ukraine coincides with a crucial period in the fight against climate change. The latest Intergovernmental Panel on Climate Change (IPCC) report warns us that carbon emissions must peak within the next three years or we will have no chance of restricting temperature rises to 1.5°C above pre-industrial levels.
Missing this target would cause tremendous damage to the environment, people’s livelihoods and their quality of life. Only a radical acceleration in efforts by governments and businesses will achieve this goal.
How can war affect the energy transition?
Russia is the world’s second-largest gas producer after the US, accounting for some 17% of global output. Around 70% of the country’s gas exports go to Europe. Chart 1 shows different European countries’ reliance on Russian fossil fuels.
Chart 1: Reliance on Russian oil and gas, % of total energy needs
Source: Eurostat, DW, BNP Paribas, May 2022
Sanctions-driven price increases and supply disruptions to fossil fuels will encourage some substitution away from Russian fossil fuels towards alternative energy sources, such as low-carbon renewables and nuclear energy.
However, amidst a cost-of-living crisis in many western countries, government decision making is primarily being driven by the need to secure energy supplies at more affordable prices. This could mean replacing Russian fossil fuels with fossil fuels from alternative countries – no help to efforts in reducing carbon emission.
Polarised response
A highly politicised debate is raging over decarbonisation. In some countries where strong, bipartisan climate commitments exist, the crisis is seen as an opportunity to accelerate investment in clean energy deployment and energy efficiency improvements. This delivers the double benefit of closing the gap on Paris Agreement climate goals and strengthening national energy security.
For example, gaining fossil-fuel independence from Russia is now critical for Europe, which sources 40% of its gas from its giant neighbour.
The European Union (EU) has responded by introducing the REPowerEU proposal, which aims to reduce reliance on Russian gas by some two-thirds this year, before going cold turkey by 2030. However, the EU is responsible for only 10% of the world’s emissions – a number that is falling.
Elsewhere, some countries are still approving new investments in fossil fuels. The response of the world’s largest emitters – the US, China and India – will be more important in determining if the war in Ukraine has a significant impact on the global energy transition.
Here, we’re getting mixed messages. China and India are both increasing their energy ties with Russia, while there are few signs that US policy is set to become more climate friendly.
Uphill battle
There’s little evidence of countries increasing their decarbonisation commitments ahead of the United Nations’ COP27 climate conference in November.
Even in Europe, despite its ambitious goal to eliminate reliance on Russian fossil fuels by 2030, there has been no move to tighten the carbon budget – the individual quotas – in the trading scheme that heavily shapes the region’s emissions.
The war has not altered our long-term view that the world is most likely to overshoot the Paris Agreement temperature targets.
There’s still a lot of uncertainty around the outlook and to what degree Russian fossil fuel assets will be left ‘stranded’ and substituted with low-carbon sources. We’re watching policy signals closely for signs of more fundamental, credible change ahead of COP27 due to be held in Egypt.
What this means for investors
Read the full research note here
RISK WARNING
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.
