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Abstract:
- The energy sector plays a key role in climate change.
- Due to expected or ongoing sanctions, energy sector supplies are being affected by the crisis in Ukraine.
- In the short term, diversifying supplies and using stocks are the preferred means of ensuring continuity of production and household consumption.
- This crisis highlights the urgent need to implement long-term measures to limit climate change, such as reducing CO2 emissions from energy production through the development of solar and wind energy.
Usefulness of the article : The energy sector is on the front line of the international crisis caused by Russia’s invasion of Ukraine, as well as the climate crisis. This article examines the dependence of the French and European energy mixes on Russia on the one hand, and the structural needs for adaptation of the energy sector to combat climate change on the other. This results in strong interactions between these two crises, and various solutions for tackling both problems simultaneously are presented.
International climate agreements require a rapid transition to a climate-neutral energy system. The energy sector is at the heart of this debate. This urgency overlaps with the current war in Ukraine, which has affected energy production supply chains in Europe and other countries due to the interconnections linked to globalization.
While projections made to anticipate climate change call for a shift in the current energy mix, recent events may call into question the very use of fossil fuels. How do these two crises interact? What are the short- and long-term solutions?
This article attempts to answer, or at least reflect on, these questions. The first part introduces current projections in terms of emission patterns, emphasizing that those for the energy sector should be adapted to mitigate climate change. The second part shows the interdependence of the energy sector between Russia, Europe, and France. The third part discusses the actions currently being taken and debated in the wake of the energy crisis and the expected consequences for producers and consumers. Finally, the last part is devoted to long-term initiatives that could be implemented to combat climate change but also to respond to a future energy crisis.
1. Energy and climate change: A look at future projections
The fight against climate change is one of the most important challenges of the current and coming decades. The latest report from the Intergovernmental Panel on Climate Change (IPCC) emphasizes that limiting global warming to +1.5°C above pre-industrial levels (1850-1900), in line with the Paris Agreement (2015), by the end of the century is still possible but requires radical changes. For example, to achieve net-zero emissions by around 2050, global net anthropogenic CO2 emissions must decrease by about 45% from 2010 levels by 2030 (UNFCCC, 2021).
The alternative pathways proposed range from modernizing the energy and agriculture sectors to a policy of intentionally reducing GDP and greenhouse gas (GHG) emissions[1]. Other measures are also proposed, such as developing renewable energies, switching fuels, and improving energy efficiency. The energy sector certainly has a key role to play in achieving CO2 emission reduction targets and combating climate change.
According to the International Energy Agency (IEA), electricity generation is one of the most polluting sectors, especially since the share of electricity in global final energy consumption has continued to increase over the last few decades and now stands at 20% (IEA, 2021). As shown in Figure 1, a significant proportion of CO2 emissions come from electricity generation, followed by industry, transport, construction, etc.
Figure 1: Global CO2 emissions projections related to energy production and industrial processes by sector, considering current policies in place (in Gt CO2)[2]
Source: IEA, 2021
In order to achieve the net-zero emissions target by 2050[3], IEA projections suggest that the electricity generation sector should be decarbonized and the share of renewable energies should increase significantly, particularly for solar and wind power (Figure 2). In this scenario, renewable energy and nuclear power would replace most fossil fuel use (particularly coal and oil), reducing the share of fossil fuels from 80% in 2020 to around 20% in 2050.
Figure 2: Energy supply in the net-zero emissions scenario in 2050
Source: IEA, 2021
Given the urgency of responding to climate change, a transformation of the energy sector and international cooperation are desirable. The current situation in Ukraine has drawn attention to trade links with Russia concerning natural gas and oil. How dependent is the EU, and France in particular, on Russian oil and gas, and what are the potential effects of the sanctions? How is this likely to affect the fight against climate change?
2. Trade with Russia in the energy sector
Although the EU reduced its consumption of solid fossil fuels threefold between 1990 and 2020, gas and oil (particularly Russian) continue to be used as the main sources of energy, with notable differences between European countries. Following the outbreak of war in Ukraine, many countries imposed a set of coordinated economic sanctions on Russia, directly and indirectly affecting supply chains, including those in the energy sector. However, trade links in terms of energy make France and the European Union partly dependent on Russian gas and oil, two energy sources that the goal of decarbonizing the economy requires us to do without in the medium term. A few figures are useful for understanding trade links with Russia in terms of gas and oil.
Russia is the world’s largest oil exporter, accounting for around 8% of global supply. The European Union (EU) is the largest buyer of Russian oil. This fuel accounts for 36% of the EU’s energy mix, with 27% of crude oil imports coming from Russia. The situation is similar for natural gas. According to the Bruegel Institute, 38% of EU imports came from Russia, with Germany and Italy as the main importers in 2021.
Dependence on Russian oil and gas is not necessarily as strong in all European countries. Figure 3 shows that in 2021, primary energy consumption in France was mainly based on nuclear power (40%), followed by oil (28%) and natural gas (16%).[5] Furthermore, Russia only accounts for around 20% of French natural gas consumption.[6] Other countries are in a similar situation: in Spain, most of the gas imported comes from Algeria, the United States, and Qatar, while the United Kingdom still benefits from significant domestic production capacity thanks to the North Sea fields, and most of its imports come from Norway and the United States.
Figure 3: Energy mix in France in 2020
Source: Ministry for Ecological Transition
The current situation is forcing us to quickly find ways to replace, diversify, or modify certain modes of energy production. Furthermore, it reinforces the credibility of the immediate measures called for by several scientific committees in order to alter the current trajectory of global warming.
However, the short- and long-term consequences of diversifying energy sources differ. While in the long term the crisis may provide additional impetus to accelerate the ecological and energy transition by reducing dependence on fossil fuels, in the short term, finding alternatives to gas and oil may come at the expense of the fight against global warming.
3. Short-term difficulties…
Although in France the transition to low-carbon energy production has been achieved through the use of nuclear power over the last few decades, in several European countries (Germany and Italy, for example) it is the use of gas in the energy mix—in addition to renewable energies—that has fulfilled this role. This is because electricity generation from natural gas emits less CO2 than coal or oil and offers a flexibility that renewable energies, which are intermittent by nature as they depend on weather conditions, do not have.
In the short term, therefore, the current crisis is making it easier to move away from oil due to rising prices and divestment in the sector (through economic sanctions). However, it raises the question of gas supplies, which have so far been used by some countries to replace oil. Countries that are heavily dependent on Russian gas may, in the short term, consider postponing the decommissioning of their coal and oil-fired power plants, which was already planned, or even reopening those that have already been closed. The strategy of decarbonizing the electricity sector is being undermined in many countries.
To avoid this situation, diversification of supplies is necessary. The EU, for example, aims to attract as much liquefied natural gas (LNG) destined for Asia as possible to Europe by entering into negotiations with the main LNG-producing countries such as Norway, the United States, Qatar, and Algeria. The United States plans to deliver at least 15 billion cubic meters of LNG to Europe. In the short term, prices are likely to rise sharply, as demand currently exceeds supply. Aligning with the US domestic market reference price, which is lower than world prices, could be part of the negotiations. That said, the IEA estimates that in the short term, liquefied natural gas (LNG) could only compensate for between 10 and 15% of Russian natural gas imports to Europe. Furthermore, Europe still lacks LNG infrastructure, and what does exist is unevenly distributed (seven terminals in Spain, none in Germany). One solution being considered in France as a quick response is the installation of floating LNG terminals, which are essentially huge ships capable of converting liquid gas back into its gaseous state and injecting it into the network.
Beyond the simple signal sent by the sharp rise in prices in recent weeks, there is the question of introducing additional taxes and an EU-wide embargo on gas and oil from Russia. On VoxEU, economists Chaney, Gollier, Philippon, and Portes propose, among other things, completely stopping imports of Russian oil and imposing a tax on Russian gas imports. Admittedly, this would require finding other oil suppliers or close substitutes, but this is an easier task than diversifying gas supplies. The head of European diplomacy, Josep Borrell, has stated that although there is no final proposal for an oil and gas embargo on the table, EU member states are considering a gradual reduction in gas and oil imports. On May 4, the President of the European Commission announced proposals for a sixth package of sanctions against Russia. The measures are not yet in force and will be subject to approval by member states.
Beqaa et al. (2022) simulate the economic effects of an embargo on energy imports (gas and oil) and the effects of a 40% tax and find that the latter would reduce economic losses compared to an embargo, particularly for countries most dependent on Russian supplies (Lithuania, Bulgaria, etc.). The impact of an embargo on the French economy would be low, with a decline of around 0.15 to 0.3% in gross national income (GNI), and more significant for Germany, which would lose between 0.3% and 3% of its GNI in the most pessimistic scenarios. The results are fairly similar in the rest of the EU, with considerable heterogeneity. The overall low short-term impact is due to the fact that economic agents can substitute, even very partially, energy sources, intermediate goods, and final goods for others. Studies show that this possibility of substitution does exist in the case of energy resources from Russia (Langot and Tripier, 2022, Bachmann et al. 2022a, 2022b).
Fuel or natural gas shortages and price increases are two anticipated consequences of these policies for both producers and consumers, which could prevent their implementation. General equilibrium projections by the WTO show that the direct effects of the crisis and related sanctions could reduce global GDP growth by up to 0.7 percentage points (p.p.) in 2022. They could even reach 1.3 p.p. when inflation is taken into account[10].
In addition, the effects of rising oil, gas, and therefore electricity prices are proportionally greater for low-income households and those heavily dependent on private cars for transportation. According to Gollier et al. (2022), maintaining the price signal and the resulting reduction in demand without increasing social inequalities requires temporary fiscal transfers to low-income households. Several measures have been put in place in Europe to limit the effects of rising commodity prices: a reduction in VAT in Italy and gasoline subsidies in France. One alternative proposed by the US government would be to create a cartel of oil and natural gas consumers to better negotiate purchase prices. This would help limit the rise in global prices and consumer prices while allowing supplies to be sourced from countries other than Russia.
4. …which leads to a long-term opportunity for the climate
Significantly reducing Russian fossil fuel imports appears to be a double-edged sword. On the one hand, relying heavily on energy supplies from a single supplier is risky; diversifying supply is desirable, even if it comes at a higher cost to consumers and the environment. On the other hand, the imperative to decarbonize European economies requires a significant reduction in dependence on fossil fuels for electricity generation and as an energy source in industry.
By tightening the constraints on the use of gas and oil, this crisis is in fact an opportunity to accelerate the energy transition. For example, prompted by the current context, the European Union has launched a new energy strategy, REPowerEU. The goal is to reduce EU gas imports from Russia by nearly two-thirds by the end of 2022 and to make Europe independent of all Russian fossil fuels well before 2030, which could pave the way for cleaner energy[11].
To respond to the current crisis with Russian gas and oil, the IEA suggests several measures. In the long term, the use of solar energy and wind turbines is one of the main avenues being explored for decarbonizing the energy sector. That said, as indicated by Astier et al. (2021), who provide data for France, significant storage capacity for these energies would be required, which would necessitate new investments in this area.
Energy abstinence could help to cope with an energy crisis, but this type of strategy risks promoting social inequalities and political instability (Paillard, 2011). In addition, the effects of global warming will increase temperatures in warmer areas, which will lead to higher electricity consumption in the coming years, as shown by Mansur et al. (2007) for the United States by 2050.
According to the IMF, higher-than-expected prices due to the war may encourage households and businesses to adjust their consumption behavior. In the short term, however, demand for oil and oil products such as gasoline and diesel is price inelastic (Dahl 2012). This means that demand is unlikely to fall significantly without a much larger increase in prices. However, most government policies to date have consisted of tax cuts and fuel subsidies, particularly for gasoline (IEA 2022). Such measures may actually increase demand for crude oil and other petroleum products, contributing to the acceleration of climate change. There is therefore a conflict between social and environmental objectives.
In the European context, in the medium and long term, doing without Russian gas could have a modest cost to the economy, leading to substantial environmental co-benefits through reduced CO2 and air pollutant emissions. According to Chepeliev et al. (2022), these mitigation costs are comparable to—and probably lower than—further increases in carbon pricing under the European Emissions Trading System (ETS). Ultimately, the fight against climate change is not a regional cause, but a global one, and the European response could inspire emulation in the rest of the world.
Conclusion
The current crisis in Ukraine is a major shock to the energy sector. In the short term, countries seem to be opting for diversification of suppliers as far as possible, as well as energy products. That said, this would result in higher energy prices. There is therefore a trade-off to be made between a social crisis that encourages the subsidization of fossil fuels and a climate crisis caused by the subsidization of polluting energy sources. If consumers were willing to cooperate in changing their behavior regarding the use of fossil fuels, these two crises could be resolved through a common solution. Despite short-term difficulties, this crisis appears to be an opportunity in the fight against climate change, as it provides increased incentives for European countries to diversify their energy mix in the medium and long term.
The latest IPCC report proposes the implementation of effective adaptation options, combined with supportive public policies, which can reduce climate risks.Oil and gas exports have not yet been significantly affected by sanctions, but the crisis could accelerate the global transition to greener energy sources, provided that the potentially harmful short-term effects are properly measured and taken into account in government policies. The time is therefore right to complement long-term policies with immediate action.
References
Astier, N., Rajagopal, R., & Wolak, F. A. (2021). What Kinds of Distributed Generation Technologies Defer Network Expansions? Evidence from France (No. w28822). National Bureau of Economic Research.
Bachmann, R, D Baqaee, C Bayer, M Kuhn, A Löschel, B Moll, A Peichl, K Pittel and M Schularick (2022a), “What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia”, ECONtribute Policy Brief 28/2022.
Bachmann, R, D Baqaee, C Bayer, M Kuhn, A Löschel, B Moll, A Peichl, K Pittel and M Schularick (2022b),“What if Germany is cut off from Russian energy?”, VoxEU.org, March 25.
Chepeliev, M., Hertel, T. W., & van der Mensbrugghe, D. (2022). Cutting Russia’s fossil fuel exports: Short-term pain for long-term gain. Available at SSRN.
Dahl, C. 2012. “Measuring Global Gasoline and Diesel Elasticities.” Energy Policy, 41 (C): 2-13.
EA (International Energy Agency). 2022c. “A 10- Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas.” International Energy Agency, Paris.
European Commission (2020),“Energy prices and costs in Europe, Part II: Energy Costs for the economy, households and industry”, Commission Staff Working Document, COM(2020) 951 final.
François Langot & Fabien Tripier, “The cost of an embargo on Russian energy for European economies,” CEPREMAP Macro Observatory, No. 2022-2, April 2022
The dangerous double game of the French nuclear industry – Greenpeace France
IEA (2021), World Energy Model, IEA, Paris https://www.iea.org/reports/world-energy-model
IEA, Renewable power generation by technology, historic and in the Net Zero Scenario, 2000-2030, IEA, Paris https://www.iea.org/data-and-statistics/charts/renewable-power-generation-by-technology-historic-and-in-the-net-zero-scenario-2000-2030
Russia’s war on Ukraine: A sanctions timeline | PIIE
Mansur, E. T., Mendelsohn, R., & Morrison, W. (2008). Climate change adaptation: A study of fuel choice and consumption in the US energy sector. Journal of Environmental Economics and Management, 55(2), 175-193.
McWilliams, B, G Sgaravatti, S Tagliapietra and G Zachmann (2022), “Can Europe manage if Russian oil and coal are cut off?”, Bruegel, March 17.
Paillard, C. A. (2011). Energy challenges and strategic issues in the 21st century. Global Security, (1), 49-60.
What sanctions are being imposed on Russia over Ukraine invasion? – BBC News
[1]To this end, the IPCC encourages the development of negative emission technologies such as bioenergy carbon capture and storage, soil carbon sequestration, (re)forestation and construction, and wetland restoration.
[2]The IEA’s scenario of existing or announced policies (known as STEPS) projects CO2 emissions levels taking into account only specific policies that are in place or have already been announced by governments.
[3]The IEA’s net-zero emissions scenario corresponds to net-zero CO2 emissions from the energy sector, in order to keep global warming to 1.5 degrees (Paris Agreement).
[4]See Peterson Institute (PIIE) and Chad Bown (2022) for more information on the sanctions imposed: Russia’s war on Ukraine: A sanctions timeline | PIIE
[5]This energy mix includes all energy used by consumers and businesses, including electricity generation, fuel consumption in the transport sector, and gas consumption for heating.
[6]However, the French nuclear industry also depends on fuel supply chains, particularly with Kazakhstan (Greenpeace).
[7]Read What is our war aim? (eurointelligence.com)for more details on this point.
[9]But the operation is not simple: major work would be needed in the port of Le Havre to accommodate the 300-meter-long behemoth. At the same time, France intends to boost the production capacity of the four other onshore LNG terminals.
[10]For further information: WTO | 2022 News items – WTO Secretariat note examines impact of conflict in Ukraine on global trade and development
[11]More recently, the EU announced the possibility of halting gas imports from Russia.
[12]The measures suggested include diversifying suppliers, introducing minimum gas storage requirements, accelerating the deployment of new wind and solar projects, maximizing electricity production from bioenergy and nuclear power, accelerating energy efficiency improvements in buildings and industry, and redoubling efforts to diversify and decarbonize sources of flexibility in the electricity system.
