The war’s profound effects on global energy markets have mixed implications for the green transition.
Beyond its immediate impact on the battlefield and in the cities of Ukraine, the war is affecting global energy politics in ways that will likely reverberate for decades. The war has served as a ‘clarifying moment’ that has exposed the downsides of global interdependencies, particularly for countries like Germany whose economic model relied on low-cost sources of Russian gas. Indeed, it has made the Russian energy resources that much of Europe depended on not only unreliable but unwelcome.
Global prices were high before the invasion due to a mismatch of supply and demand, but the actions of Russia made a difficult situation worse. In 2021, Russia was responsible for about 12 per cent of global energy production. It was a major exporter of fossil fuels, accounting (by volume) for around 5.5 per cent of global coal production, 11 per cent of global oil production and 17 per cent of the global gas supply in 2021. The European Union (EU) was particularly dependent on Russian piped gas.
The onset of war resulted in a steep short-term jump in energy prices: in nominal terms, crude oil prices increased by 350 per cent from April 2020 to April 2022 – the largest increase for any equivalent two-year period since the 1970s. Coal and gas prices all reached historic highs. Higher gas prices, particularly in Europe, increased the cost of electricity for consumers, with the average household prices across the EU rising from €23.5 per 100 kilowatt hours (kWh) in the second half of 2021 to €28.4 per 100 kWh in the same period of 2022.
However, a combination of supply diversification (particularly via the import of liquefied natural gas – LNG – from the US and other countries), an active demand-reduction and energy efficiency campaign, and a milder winter led to greater confidence and increased availability of gas in the spring of 2023, allowing for stable and, in some cases, lower gas and electricity prices in Europe.
Higher energy prices during 2022 and at the start of 2023 strained national finances at the same time as inflation was diluting consumers’ buying power. Many countries introduced price support measures to blunt the impact on their consumers. International Energy Agency data suggest that more than $500 billion in extra spending was committed to reduce energy bills in 2022, mainly in advanced economies. These measures may have helped individuals in the short term, but they came at a long-term cost in terms of mounting debt and fewer resources to invest in priorities such as adaptation to climate change. Despite efforts by governments to insulate consumers from global price rises, the first year of the war nearly doubled household energy costs around the world.
This is mixed news for the green transition. On the one hand, the invasion could accelerate a global shift to green energy and greater energy efficiency.
Many politicians are realizing that ambitious climate action is necessary for energy security, and that energy security is a precondition for political security. Russia’s invasion of Ukraine has demonstrated to many countries exactly why they must reduce their reliance on fossil fuels from unreliable partners. Investing in renewable energy and energy efficiency has become almost a patriotic act. Following the invasion in February 2022, people in Poland were reported to be installing solar panels and heat pumps to free themselves from reliance on Russian-supplied energy.
Meanwhile, the high and volatile energy prices are shifting calculations about the payback period of renewable energies, adding economic weight to the political and environmental arguments for their installation. Institutional incentives are also emerging. Under its REPowerEU plan, the EU plans to increase of the share of renewable energy in its supply to 42.5–45 per cent of the total by 2030, up from the 40 per cent target agreed at the end of 2021. Germany raised its renewable energy target from 65 per cent to 80 per cent of the power mix by 2030. In the US, meanwhile, the Inflation Reduction Act (IRA) directs nearly $400 billion in federal funding for clean energy, to be delivered via a mix of tax incentives, grants and loan guarantees.
These incentives are already having an impact: within three months of the IRA being enacted, commitments to investing in US electric vehicle battery supply chains totalled $13.5 billion, compared with $7.5 billion in the previous three-month period. Analysis suggests that the IRA will result in over $91 billion being invested in the US battery industry over the next 10 years.
On the other hand, some of the actions being taken in response to the energy crisis risk locking in higher emissions far into the future.
The goal of decarbonizing energy systems, frequently mentioned in policy circles before the war, has been superseded by ‘energy security’ and ‘energy affordability’. The focus is now on ‘energy independence’, where the aim is to secure, like the US, sufficient domestic sources of energy to not rely on imports, regardless of how carbon-intensive those sources may be. This has caused the phasing-out of less clean forms of energy to stall. Indeed, any mention of phasing out fossil fuels was struck from the COP27 agreement at the very last moment.
Across the world, countries are building or reopening dirty power stations at home, while investing in coal, oil and gas development abroad. Within five days of the invasion, German chancellor Olaf Scholz announced that Germany would use any power source, including nuclear energy, to ensure its energy security. This statement was all the more remarkable given that the government had vowed to close all of Germany’s nuclear stations in the aftermath of the 2011 meltdown at the Fukushima nuclear plant in Japan. Indeed, while Germany has closed its last nuclear power plants, it has since taken the previously unthinkable decision to approve the use of more coal-fired power plants. At the end of July 2023, the UK government announced plans to permit hundreds of new oil and gas licences in the North Sea, in the name of ‘energy independence’ – indicative of a steady drift away from the UK’s once firmly held climate commitments.
With supplies of Russian gas faltering, in mid-2022 Europe turned to imported LNG to refill its gas storage facilities in advance of winter. However, the nature of LNG – which is processed, shipped and cooled – means that, in normal circumstances, its climate footprint is far higher than that of piped natural gas. Increased reliance on LNG will therefore expand the carbon footprint of European gas supplies as a whole (including piped gas and LNG): by September 2022, total carbon emissions from gas had grown from just over 30 kg of carbon dioxide (CO2) per barrel of oil equivalent (boe) to almost 40 kg of CO2 per boe.
The war has also prompted an urgent search for new strategic partners to replace Russian energy, including in Africa and the Middle East. This is opening new fossil fuel energy supply chains across the world, at a time when the imperative of the globally agreed target of no more than 1.5°C of warming means that governments should be forbidding new fossil fuel developments and phasing down existing ones. Writing in the Financial Times in October 2022, climate activist Mohamed Adow warned:
The dramatic push by European countries and others to compensate for lost Russian supplies of gas may end up creating a massive oversupply in gas infrastructure. New analysis released just before the COP27 UN climate conference in November 2022 pointed out that, if each of the new gas projects announced to deal with the supply crunch came to fruition, there would be a global oversupply of about 500 megatonnes of LNG by the end of the decade. This amount is equivalent to five times as much gas as the EU imported from Russia in 2021 and double Russia’s total gas exports that year.
In other words, while political leaders repeat the mantra of reducing dependence on imports of fossil fuels, their actions may have the opposite effect.
