Sustainability
early 2023. The G7 is also exploring placing a price cap on Russian oil. Russia has responded by saying that it would not export oil to any country that imposes a cap. Thus, oil price volatility is likely to return. Within the EU, there is division over how best to constrain gas prices, with many member states, along with the UK, spending huge sums on subsidising the cost for consumers. Oil and gas companies, and potentially some power companies, are being targeted with windfall taxes on their profits generated by high prices. Europe has done well to secure additional supplies of liquefied natural gas (LNG) to fill gas storage ahead of the winter heating season. Storage is now 95 per cent full, but, without significant Russian pipeline flows, Europe will still need additional LNG in the coming months. The current situation has been aided by the fact that China’s LNG demand this year is down over 20 per cent, but, when the Chinese economy starts to recover from its zero-COVID policy, demand
is likely to return, increasing competition for LNG, with limited new production becoming available in the next few years. More generally, there has been a return to coal, even though prices are also high, as it is perceived as more secure, and many countries have their own reserves. In their latest World Energy Outlook, the IEA declared the ‘golden age of gas’ is over. Its claim to be available, affordable and acceptable has been trashed by current events. How do we avoid long term regrets on climate change? The current plethora of plans to reduce Europe’s reliance on Russia and oil and gas imports is likely to promote a short term surge in emissions as production from existing non-Russian oil and gas fields accelerates. The UK has announced a new licensing round for oil and gas exploration in the North Sea, but the Sunak government has rolled back a short- lived decision to lift the moratorium on fracking for shale gas onshore.
Even in Europe, those that can still burn more coal will. It may be costly, but far less so than gas (Russia also provides 32 per cent of OECD Europe’s coal imports). At the same time, the search for more LNG imports increases the carbon intensity of Europe’s gas supply, as they are likely more carbon intensive than Russia pipeline gas, although this is an area that requires further investigation. As the gas price crisis last autumn demonstrated, markets were tight before the war in Ukraine and there was little spare LNG. Consequently, Europe must outbid other consumers, effectively offshoring its energy insecurity. It is also important to recall the conclusions of the IEA’s 2021 net zero study, which were that investing in new oil and gas exploration and production is not compatible with the Paris Agreement. However, recently, President Biden threatened oil and gas companies with a windfall tax if they failed to invest more in production – something they have been reluctant to
do due to financial and environmental pressures. It is one thing to make the most of existing fields and even invest in short-cycle production, like US tight oil and shale gas, but it is quite another to invest large amounts in new large-scale, long term projects and infrastructure developments. Not only are they not a solution to the current crisis, but they could also result in ‘carbon lock-in’ or end up as ‘stranded assets’. For the long term, the ‘no regrets’ solution is not more fossil fuel production, although continued
fuel consumption. The sad reality is that war in Ukraine may serve to fracture the world further. Europe may be embarking on a quest for greater energy security, but climate change action is a global challenge. All the scenarios, that deliver significant climate progress require a high level of international co-operation. The current energy crisis may stiffen the resolve of many emerging economies to stick with coal, believing it to be more secure. Equally, as noted by the IEA, the current high cost and precarity of LNG, which
investment is needed to sustain production in the medium term. This is a delicate balancing act that is putting the oil and gas industry in a difficult situation. Ideally, the solution is a reduction in fossil fuel consumption through efficiency, demand reduction, and an increase in production from clean energy sources. However, it is unclear how fast this can be achieved – simply increasing targets in a ‘paper transition’ is unlikely to deliver results, but security concerns should help to accelerate the pace of change. In the short term, emissions are going to be higher than they would have been had Russia not invaded Ukraine. The caveat here is that the triple crisis of energy prices, food prices and a cost-of-living crisis may trigger a global recession that will reduce energy demand. In the longer term, there is a chance that emissions may be lower if Europe succeeds in delivering its REPowerEU plan to reduce its reliance on fossil fuels in absolute terms, not just Russian oil and gas. However, we should avoid slogans such as ‘energy independence’.
The transformation to a clean energy future comes with its own security challenges, hence the growing concerns about critical materials and clean technology supply chains. Equally, electricity grid interconnection, like pipelines, is dependent on large-scale, immovable infrastructures and is vulnerable to political manipulation. Witness the French Government threatening to cut off the electricity supply to the Channel Islands in a conflict over access to the fishing rights with the UK. Achieving net zero in a zero-sum world The recent IPCC reports on climate change have made clear the need for urgent climate action, yet discussions at COP26 revealed the diversity of views on both the urgency of the climate crisis and the pathways to a low-carbon future. These differences and divisions are likely to be even more apparent at COP27, particularly given the actions of Europe in the face of the current crisis – bringing back coal and subsidising fossil
has become a zero-sum market, may lead to a rethink on the role of natural gas. Many developing economies may now avoid it, aiming to leapfrog from coal to clean at some future date. But that will require the developed world to provide significant levels of climate finance to the Global South. Finally, even before Russia’s invasion, the pandemic had already set back the progress of achieving universal energy access by 2030, Sustainable Development Goal 7. The United Nations Development Programme’s Human Development Index went backwards in 2020 and 2021 and will likely do so again in 2022, and millions are falling out of energy access in Sub-Saharan Africa. All this reflects the fact that Russia’s war on Ukraine truly has planetary consequences and there will be no winners.
Find out more about our research on Sustainability at Warwick Business School
Sustainable Development Goals (SDGs)
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