The European Union has officially declared its goal to have net-zero greenhouse gas emissions by 2050. In the next few years it will implement a large-scale programme under which companies that use green technology will be entitled to billions in subsidies whereas those that do not comply with toughening environmental demands will have to sustain both financial and market losses. The second part of the Valdai Club’s project “Climate and Politics” will discuss the impact of the green agenda on businesses.
In 2007-2008, America’s political lexicon acquired a new term – the Green New Deal. Like the New Deal of President Franklin D. Roosevelt reanimated the US economy after the Great Depression, the Green New Deal was supposed to respond to the challenges that faced the world due to climate change. The discussion of this resumed with renewed force a decade later when the Green Wing began to take shape in the Democratic Party. In February 2019, a draft resolution on the Green New Deal was sent to the US Senate. It suggested bringing greenhouse emissions in the US to zero within a decade. The main ideas aimed at reaching this goal were renunciation of fossil fuels and an increase in resource efficiency. Even though the ideas in the bill enjoyed support from a number of prominent Democrats, the Senate vote was a heavy defeat for its initiators. It became obvious that America was not yet ready for the Green New Deal, even at the declaration level.
Meanwhile, the positions of Green parties were growing stronger in Europe. In May 2019, they achieved impressive success in the European Parliament (EP) elections. Ursula von der Leyen, who was elected President of the European Commission in July, made the climate agenda a priority. The document, The European Green Deal, was published on December 11, ten days after she assumed office. The stated goal is to make the EU climate neutral with net-zero greenhouse gas emissions by 2050. The EU will move towards this goal by shifting to renewable energy sources for electricity generation, increasing housing energy efficiency and creating “smart infrastructure.” The price tag for the programme is a trillion euros in the first decade. The symbolic significance is as follows: the EU declares itself a global leader in promoting the climate agenda and sets new standards for cooperation between the state, business and society in countering climate change.
Коnstantin Simonov, Director General of the National Energy Security Fund
“The new ‘green wave’ in Europe is based on fairly pragmatic reasoning,” says Valdai Club expert and Director General of the National Energy Security Fund (NESF) Коnstantin Simonov. “The struggle against global warming justifies huge subsidies for a new energy transition. Moreover, it’s a rationale for the introduction of a climate tax on EU energy imports. Alas, everything seems simple and cynical. Companies that are lobbying for this energy programme, are hoping for state or other subsidies within the framework of this mega-project,” he explains.
Simonov’s colleague Alexei Grivach adds: “The EU’s policy of decarbonisation is an attempt to protect its competitiveness amid the depletion of traditional energy resources in Europe, and prevent the growth of its dependence on imports. But hydrocarbon suppliers believe this is an instrument for artificially limiting the competition because green technology receives enormous subsidies, in part, by taxing traditional energy sources.”
The green agenda has long been part of doing business and for this reason the declaration of the Green Deal has not caught European companies unawares. Active introduction of green technology is determined both by the toughening requirements of regulators and banks that start reducing or even suspending the funding of companies that are not green enough, and a change in the mentality of consumers. Companies are fighting for new niches in the market by improving their images and promoting new products that are oriented towards consumers that are willing to pay “a green premium,” Grivach explains. The issues of sustainable development and protection of the environment are moving to the fore for the new generation and simply cannot be ignored.
In addition to the obvious threat of losing a share of the market, the companies that do not transition to green technology are in for many other difficulties.
“This limited number of companies will have to pay additional ‘hydrocarbon taxes’ and process stacks of environmental certificates,” says Danila Bochkarev, senior fellow at the EastWest Institute. “Many countries can also introduce different types of fiscal stimulation to promote the environmental compatibility of production; so their companies will have to change their business model.”
It may even come to “climate sanctions.” “Attempts to introduce sanctions will be made both at the national level (up to and including proposals to seal in a Constitution responsibility for ‘crimes against the environment’) and at the global level, through the legal foundation of the Paris Agreement,” Grivach says.
So, what awaits Russian companies in the not so distant future? Bochkarev believes coal and oil suppliers will face the biggest challenges. As for gas, this industry is most likely to adapt to the new reality.
“Natural gas may become a major element in Europe’s energy transition both as a replacement for coal and as a raw material for hydrogen, the ecologically pure fuel of the 21st century,” the analyst notes.
Hydrogen is attractive as an energy source because of zero emissions: converting hydrogen to electricity produces nothing but water. Hydrogen can be used as a fuel for transport, electricity generation or heating. Various estimates suggest that hydrogen will meet from between 18 percent and 24 percent of the end demand for energy by 2050.This will require a $20-25 billion investment in the sector through 2030. This forecast was published by experts of the Hydrogen Council international group in 2017.
Two conceptual documents on the future of the European energy industry were published at the same time on June 10, 2020 – The National Hydrogen Strategy of Germany and the Energy Strategy of the Russian Federation. The German document assigns hydrogen the main role in decarbonising the economy. Under the plan, all public transport, metal and petrochemical industry will be gradually transferred to hydrogen power. In implementing this strategy, Germany will introduce advanced hydrogen technology with a view to becoming the leading exporter of the technology in the future. However, the document admits that Germany will not be able to meet its own demand for hydrogen energy and will have to import it, at least at the initial stage.
The Energy Strategy of the Russian Federation
The Energy Strategy of the Russian Federation is the main document on strategic energy planning. It lays out the areas and priorities of the energy policy, goals, tasks, key measures and indicators in the energy industry for the long term.
Russia’s strategy is aimed at making the country a world leader in hydrogen production and exports through intensive development. Theoretically, Russia could produce up to 3.5 million tonnes of hydrogen per year, which is about 15 percent of the global market. Russia intends to stimulate domestic demand for hydrogen- and natural gas-based fuel cells in Russian transport and for the use of hydrogen and hydrogen-based energy mixtures as energy storage and transformers to increase the efficiency of central energy supply systems.
In 2019, almost all of the hydrogen in the world produced for industry (from methane) was classified as “grey hydrogen.” Its production is accompanied by carbon dioxide emissions. Meanwhile, the EU intends to use climate neutral hydrogen alone. It could be produced either with gas from renewable sources or by capturing greenhouse emissions during the production of hydrogen from hydrocarbons. Russia plans to launch the production of “pure hydrogen.” This is specified in the Energy Ministry’s roadmap, which, as the RBC agency reported, was submitted to the Government in July 2020.
Hydrogen energy production is still in its early days all over the world and its development will require enormous investment. Analysing the impetuses for developing a hydrogen economy in Russia, Yury Melnikov, senior analyst of the Energy Centre at the Moscow School of Management Skolkovo wrote in Nezavisimaya Gazeta in April 2020 that the main impetus – decarbonisation – is not working: “CО2 emissions are not costing Russian companies anything so far. The ‘carbon footprint’ in products is almost irrelevant to suppliers. The basic scenario of the draft Low-Carbon Development Strategy to 2050, published by the Russian Ministry of Economic Development in March 2020, does not envisage the introduction of price regulation of CO2 emissions. In this context, ‘zero-carbon’ hydrogen as an energy source is not an important factor on the Russian market. It competes with other sources only in terms of price and this leaves little chance for success in competition with other energy sources, primarily natural gas.”
Low-Carbon Development Strategy to 2050
The Low Carbon Development Strategy in Russia is aimed at transitioning to diversified economic development through low greenhouse gas emissions. The strategy provides for two main scenarios for low-carbon development: the base strategy that has been adopted as a foundation and an intensive one.
According to Melnikov, improving the urban environment, which is part of Russia’s mainstream energy policy, is one of the strongest domestic impetuses for developing the hydrogen power industry. However, efforts in this area may not exceed “demonstration projects in large cities with polluted air.” Does this mean that the restrictions introduced by our foreign partners as part of decarbonisation, will be the main driver in this respect? We will receive an answer to this question in the next few years.
Experts are particularly concerned about the potential appearance of cross-border carbon taxes. However, as Danila Bochkarev says, this is unlikely in the near future. This is primarily because of the United States’ negative attitude. Trump administration officials have already promised to respond if a carbon tax is essentially a protectionist measure like digital taxation. However, this instrument could be used in mid-term perspective.
Konstantin Simonov believes that “a carbon tax” will be conducive to abuse. “Few entities will honestly calculate the carbon footprint from the manufacture of all goods,” he said. “Have you ever seen carbon footprint
estimates from electric vehicles, including the entire cycle of manufacturing, from the production of metals for batteries? And what about the carbon footprint from the production of a solar battery all the way through to its disposal after service life? How is honest competition possible in this respect?”
In July 2020, the KPMG auditors presented three scenarios on the introduction of a European climate tax on Russian exports. Under the base scenario, which implies the introduction of this tax in 2025, Russian exporters will have to pay 33.3 billion euros in 2025-2030. In the negative scenario, if the tax enters into force as early as in 2022 and applies to both direct and indirect emissions (that is, emissions produced both by the exporter and related companies) this tax will increase to 50.6 billion euros.
There is also an optimistic scenario under which the EU will introduce the tax in 2028 and will apply it to the difference between de facto CO2 emissions from the production of goods and the EU benchmark. “In this case, Russian producers would have to pay 6 billion euros over three years (2028-2030),” the RBC news agency reports. “Gas, nickel and copper processors would be the hardest hit: their carbon intensive production exceeds the European benchmark by two to three times. Oil, petrochemicals, potassium fertiliser and other exports fully meet the European benchmark.”
Russian businesses are likely aware of the importance of impending changes in the market. This is clear, for instance, from a letter by Chairman of the Board of Directors of URALCHEM Dmitry Mazepin to First Deputy Prime Minister Andrei Belousov on January 31, 2020. In his letter, Mazepin suggested including business representatives in a working group “on the issues of adapting to climate change.”
Vedomosti, February 10, 2020
However, the willingness of Russian companies to accept these kinds of new terms is different and depends on the industry and the business, Danila Bochkarev says.
Bochkarev elaborates: “Fosagro, one of the leading world and Russian fertiliser producers, joined the Carbon Disclosure Project (international initiative on disclosing environmental impact). In turn, Gazprom is developing technology to produce hydrogen from natural gas and a methane-hydrogen mixture with a low carbon footprint. The company is also implementing a number of initiatives on converting electricity generating from coal to gas and using natural gas for transport.”
The difficulties involved in the introduction of green technology are obvious.
According to Konstantin Simonov, the main problem is the price of entry. “New equipment will result in the desired effect in the future but it is expensive initially. Not every company has the resources. But there is also the problem of creating climate neutrality standards. For instance, in the EU, what matters is not whether you have switched to green technology or not. The main point is whether you have been allowed to be considered green or not,” Simonov noted.
“It is important to agree at the international level on a common methodology and certification of the carbon footprint and stimulate the consumption and import of low-carbon products, for example, by reducing customs duties to zero on these commodities and introducing clearly marked labelling,” notes Adviser to the RUSAL CEO Sergei Chestnoi. Finally, it is not clear how these measures that are designed to protect European markets from cheap imports from countries with less rigid environmental standards are compatible with WTO rules.
The current situation in the energy market is paradoxical because the initiatives on economic decarbonisation are being adopted against the backdrop of low oil prices over the past several months. This creates risks for the markets of both renewable energy sources (RES) and the oil and gas industry.
“On the one hand, a drop in prices on traditional energy sources (not just on oil but also on natural gas and, previously, coal) will be a strong factor in maintaining their competitive ability,” Alexei Grivach says. “Consumers will gain a lot more by buying oil at $40 per barrel or gas at $2-4 for a million BTUs. So, the subsidies that were allocated to develop renewable energy sources when oil cost $100 and even $70 per barrel, will be markedly insufficient. On the other hand, such low prices undermine the investment appeal of the oil-and-gas and coal industries, which, combined with restrictions (up to a ban on investing in hydrocarbons by some financial institutions), will create additional risks for the development of these businesses.”
Danila Bochkarev predicts growth in the consumption of natural gas in Asia, as a cheap and eco-friendly alternative to coal and fuel oil. “Importantly, RES subsidies could be reduced because of economic problems, and RES will have to compete with cheap gas,” Bochkarev says.
A different situation is taking shape in Europe. “On the one hand, Chancellor Angela Merkel and the top executives of the European Commission placed their bets (including financial ones) on RES and the energy transition as the main instruments for overcoming the crisis in Europe,” the analyst says. “Nevertheless, even before the crisis, the public was unhappy about high energy prices. This trend could get worse during the crisis and lead to the jobs-vs-climate change trade-off. It is no secret that RES development and decarbonisation enjoy substantial government support — either through tariff regulation or non-market impetuses that are designed to accelerate the transition to a green power industry. During the crisis, the price for this energy transition could trigger serious discontent and even protests,” Bochkarev says.
It should be recalled that the Green Deal caused serious debate in the EU. Some countries in Central and Eastern Europe said they were not prepared for complete decarbonisation and demanded special terms. The hydrogen energy industry that raises so many hopes in the context of the energy transition is fraught with insufficiently explored risks linked, in part, with hydrogen leaks during large-scale fuel production and the potential impact on the climate. Finally, there is a global development problem.
“Obviously, humanity’s impact on the climate can be reduced not so much by new technology, as by a large-scale reduction in consumption,” Konstantin Simonov said. “However, with this approach the idea of economic growth will go down the drain. The question is simple: How are you going to combat global poverty in this situation? If several billion underprivileged people are not a problem, all right, let’s build a world without consumption,” the expert says.
Igor Makarov, Head of the Department of World Economy and of the Laboratory for Economics of Climate Change at the Moscow-based Higher School of Economics.
Indeed, in resolving some problems, humanity is great at creating others. There are grounds to hope that the processes launched by such initiatives as the Green Deal will eventually have a favourable impact on the climate. However, it is already clear that the price that economies and societies will have to pay for it will be very high. Climate regulation could, and likely will, be used for unfair competition. Billions in subsidies for developing green technology will be the focus of a fierce struggle. But transitioning the economy to a green track is a reality that everyone will have to deal with, from businesses and governments all the way down to consumers.
During the coronavirus pandemic in 2020, humanity received an opportunity to assess life in a world where economic growth is not all important. “The fact that the leading countries agreed to slow their economies for several months for the sake of saving human lives is a very important precedent,” says Igor Makarov, Head of the Department of World Economy and of the Laboratory for Economics of Climate Change at the Moscow-based Higher School of Economics. “Every year, environmental problems kill many more lives than the coronavirus but the efforts to counter them have never followed a similar logic. I think the pandemic will make it possible to launch a new round of debates on the correlation between the economy and the environment and the essence of sustainable development,” he adds.
The researcher recalls that the “green wave” that swept the world economy in the 2010s was launched during the 2008-2009 crisis, when the leading countries adopted green anti-crisis packages.
“The current crisis is much deeper and, hence, the scale of potential change is much greater,” Makarov points out. Europe with its Green Deal is the first example of such an ambitious decarbonisation programme in the name of preserving the environment. There is no doubt that this will be followed by other similar projects. Like the European programme, these projects will be aimed not only at preserving the climate but also at enhancing competitive advantages for their economies.
“This model of environmental policy is not always supported by the rest of the world,” the expert noted. “However, the problem is not that the Western countries are suggesting misguided concepts but it’s the lack of alternatives in the collective ‘non-West.’ The leading developing countries (for instance, the BRICS states) should not remain aloof in dealing with environmental issues. Nor should they necessarily copy Western approaches. On the contrary, it is time for them to assume responsibility for resolving environmental issues and formulate their own view on how to do it,” Makarov says.