The world is on the verge of a qualitative change in all economic parameters, according to the logic of the green transformation, writes Valdai Club Programme Director Oleg Barabanov. The mechanism of transition to new taxes and standards has been launched. You can refuse to accept it and fight it, but the green clock is ticking.
The virtual Leaders’ Climate Summit, initiated by the US President in late April, has returned the international response to climate change to the agenda. This emphasis on the need to accelerate green transformation, on a new “green normal,” can be considered, in fact, a direct consequence of the Covid pandemic. One of the significant changes in the focus of international political discourse after Covid was (at first glance oddly and paradoxically) not even a discussion of medical and social transformations in the future, but the prioritisation of climate change, an issue that seemed to be completely unrelated to the pandemic. The thesis that a crisis provides a unique opportunity, and that it was actually the crisis that could enable humanity to base its post-life recovery on new green principles, was launched in the public space in a number of environmental reports back in the spring of 2020. Since then, it has already become almost a mainstream agenda. The April virtual summit clearly confirmed this. Yes, it will be more expensive and more difficult, but the world will be more sustainable. All the same, countries and the world community need to make serious efforts to bring their economies out of the crisis, and therefore, right now, at the starting point, it is better to develop the necessary green regulation, so that its specific nature can be addressed later. Thus, the green transformation can serve as a grand global strategy to overcome the Covid crisis.
If it does not come down to talk and empty promises, then this strategy can be realised in the accelerated adoption of the main mechanisms of green regulation. There are three key ones (a carbon tax, the hydrogen economy and ESG standards). The first is the carbon tax, the introduction of which in the EU is increasingly talked about in relation to 2023. Then, or in parallel, other countries are likely to follow. This tax will logically create a financial incentive to drive the green transformation, due to its relatively painless implementation in Europe’s post-crisis economy. The main intrigue here is a socially acceptable price per tonne for CO2 emissions (and the implementation of this by the main economies). This price, in turn, will determine the carbon tax. A carbon footprint that exceeds this price will be taxed. Joe Biden, in one of his recent statements, set a “socially acceptable” price of about $50 per tonne of emissions. According to the proposed methods, this would lead to a tax of about $10 per barrel of oil. Which, we agree, is very serious.
It is clear that the problem here is precisely in the negotiations on the global harmonisation of these quantitative parameters for carbon taxation. But, since a consensus during such negotiations is unlikely to be reached quickly, nothing is preventing the European Union, which was the first to announce the practical implementation of this taxation, from introducing it unilaterally, with those parameters of a socially acceptable price that it itself considers necessary. The rest of the world would be presented with a fait accompli. In our opinion, this scenario is the most likely to be implemented, quite possibly in two-three years.
For Russia, there are two ways forward here. One is to be embedded to the process. Here, there are two key decisions: Moscow’s adoption of its own strategy to achieve carbon neutrality by 2050 and Russia’s introduction of its own internal carbon tax, in parallel with the EU members or even before them. Both may well lead to a reduction in the EU tax on the Russian carbon footprint, since domestic carbon regulation can quickly be taken into account in its calculation. The advantages of this aren’t limited to improving the green image of Russia: the money from the domestic Russian carbon tax will remain inside the country, rather than going to the EU budget. The cons include the obvious challenge this poses to the sustainability of the oil and gas sector of the economy.
Conversely, if Russia does not accept the new rules of the game and does not fit in, it may resist them and promote alternatives, including those related to the alternative assessment of the parameters of carbon regulation. One aspect here is lobbying for a provision on shared producer and consumer responsibility for a high carbon footprint. The logic here is that third-world “factory” countries and fuel-supplying countries create a high carbon footprint, not out of malice, but because consumers from the developed countries are interested in these products. Therefore, it is ethically unfair to impose a new tax on the producer, while not touching the consumer at all.
This is a valid argument. But, let us repeat, in our opinion, it is unlikely that a harmonious and satisfactory consensus on the parameters of the carbon tax will be reached, and the green transformation imperative requires action. Therefore, we most likely will see a “war of taxes”. An EU tax levied on producers with a high carbon footprint may be subject to a counter tax on EU products. In this counter-tax, according to one formula or another, the responsibility of EU consumers for the use of goods with a high carbon footprint, obtained from these countries, will be taken into consideration.
The second aspect of moving from words to deeds in the green transformation is the hydrogen economy. Let’s not forget that, according to mainstream forecasts, we don’t have long to go before peak oil in 2030-35, when world oil consumption will begin to decline (possibly sharply). It is projected be replaced by increasing volumes of hydrogen fuel. The key issue here is the consolidation of real “green hydrogen” regulation (rather than just concepts); that is, hydrogen produced only via green energy (renewable sources: wind-sun + small hydroelectric power plants). This would entail the creation of globally agreed-upon legal differentiation between green and other types of hydrogen (grey — with CO2 emissions during its production, blue — with carbon capture, purple — from nuclear power plants, etc.) This would create a tax-free base, a priority in the investment sense, only for green hydrogen. The establishment of the global hydrogen market would thus be based on green hydrogen alone. Everything else would be cut off, and subject to the carbon tax.
Here, the obvious key task of all gas producing countries (including Russia) would be to achieve consolidation in the future global regulation of expanded interpretations of green hydrogen, including technologies for its production from gas fields with appropriate clean technologies for the steam processing of methane, etc. Russia and other gas-producing countries have a lot of potential, but there is practically no green hydrogen in the narrow sense. All or most of the gas-producing countries would thus share an interest in establishing a coordinated strategy for the transition to a hydrogen economy (or, more precisely, for containing it), regardless of their geopolitical contradictions. But it seems that here, too, the parameters of the new global regulation on green hydrogen will be set unilaterally by the protagonists of the green transformation, as they will regarding the carbon tax.
The third topic is ESG (environment-social-governance) standards and their real consolidation, with respect to regulation and international investment. Here it is quite possible that soon, states and companies will attach the same importance to ESG ratings as they do financial ratings today. Accordingly, investment attractiveness, pricing and bank interest rate policy can be determined not only by financial indicators, but also by ideologically and value-based ESG standards. Here, the same sine qua non logic can work as applied to the green transformation in general. Accordingly, the category in which the state/corporation falls in terms of their use of clean energy and the level of emissions during production will determine its financial position. Here, by the way, is another mechanism for the priority financing of green transformation on a global scale. This is the environmental component of the ESG standards, which will work cumulatively with social (including gender, non-discriminatory, etc.) and management practices (including the fight against corruption). Thus, a fairly quick selection of states and companies for good and bad compliance with ESG standards can occur within the framework of a green transformation.
As a result, there is no need to mince words: the world is really on the verge of a qualitative change in all economic parameters, according to the logic of the green transformation. Whether this “green global economy 2.0” is sustainable in the long term, whether it provokes social risks and the impoverishment of large segments of the world’s population with the erosion of the middle class — is a separate question, and will be discussed later. In the meantime, the mechanism of transition to new taxes and standards has been launched. You can refuse to accept it and fight it, but the green clock is ticking.