To Deter Russia, Leverage the Green Transition

February 1, 2022

More evidence that informed opinion in Europe and the West view the Ukraine crisis as a potential turning point in linking western security to the green energy transition.

Nikos Tsafos (@ntsafos) is the James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies (CSIS).

Nikos Tsafos in Euractiv:

As tensions over Ukraine escalate, the United States and Europe need to deter Russian aggression. The energy sector is a logical target given its centrality to Russia, with the controversial Nord Stream 2 gas pipeline that links Russia and Germany has emerged as a likely avenue for pushing back.

That is unfortunate. Nord Stream 2 is a poor lever to pull on – and even if played well, it will offer a limited reprieve.

The United States and Europe need to think bigger: they should target Russia’s role in the new energy economy. Without long-term access to the European energy market, Russia is barely an economically viable country. This makes the new energy economy an ideal domain to combat Russian adventurism. And it is a strategy that delivers pain today and offers a framework for engaging with Russia for years, if not decades.

The logic for targeting the new energy economy, as opposed to hydrocarbons, is informed by history. The United States has tried to stop Europe from buying Russian hydrocarbons for sixty years. These efforts have failed because the commercial logic of this trade is too strong. The current moment is no different. Germany has said it might target the recently completed Nord Stream 2 pipeline if Russia invades Ukraine. On the face of it, that seems like a serious theat.

But delaying the start-up of Nord Stream 2 is a short-term fix. Delay approval for too long, and Russia might conclude that the pipeline is doomed regardless of its actions in Ukraine. The deterrent threat is lost. Nor is stopping Nord Stream 2 the prize it is often portrayed to be. Stopping the pipeline forces Russia to deal with Ukraine but does not change Russia’s dominant position in the European market. If Nord Stream 2 never operates, Russia will lose face, but this is a Pyrrhic win for the West.

Worse, if Nord Stream 2 starts operating, it will be nearly impossible to stop. No government will cease imports, and certainly not at times, like today when high prices. So Europe is in a conundrum: delay Nord Stream 2 long enough, and Russia writes off the pipeline; stop the pipeline and celebrate the victory without changing the geopolitical balance between Europe and Russia; or approve Nord Stream 2 and lose all leverage. None of these options is attractive, making Nord Stream 2 the wrong target.

The new energy economy, by contrast, offers new avenues for engaging with or punishing Russia. Over the next three decades, the European Union will overhaul its energy system. This is an existential issue for Russia: without access to the European market, Russia’s economy will wither. But unlike the hydrocarbon era, where trade routes followed geology, the low-carbon era will be driven by the ability to innovate, write and enforce rules, and govern complex networks of private industry, public institutions, and civil society. This is not a world where Russia has natural advantages– its role is precarious.

The West can shape Russia’s participation in the energy transition. Russian companies own or have access to refineries, gas storage facilities and gas stations across the Continent. These assets will need to evolve to compete in the new energy system. For example, Russia has said that Nord Stream 2 might one day carry hydrogen, part of Russia’s ambitions to become a global hydrogen player. How and whether these Russian assets retain their value in the energy transition will depend on European rules and policy. That gives Europe power.

Foreign firms also operate in Russia’s energy sector, and access to Western technology and finance remains important. Sanctions in 2014 targeted this collaboration and helped undermine Russia’s ambitions to develop oil in the Arctic (as did lower prices), even if they did not stop the country’s expansion in liquefied natural gas.

Restricting foreign investment will hamper Russia’s chance to participate and be competitive in industries like hydrogen, offshore wind, batteries, carbon capture and storage, and others. Without these technologies, Russia’s industrial might will atrophy.

Europe’s most potent weapon is the ability to write rules. European regulations on methane will affect Russia, as will Europe’s proposed carbon border adjustment mechanism, differentiating goods based on how much carbon was emitted in their production.

Europe will write rules on what is green and sustainable. Russia could be part of this new market, attracting foreign capital, investing in European industrial clusters, accessing cutting-edge technologies, and integrating its own industries – iron and steel to aluminium and fertilizers – in a low-carbon trading system. Or Europe could interpret rules narrowly and shut Russia out.

This is a multi-year strategy. Today, the West could restrict technology transfers and transactions in areas like hydrogen, ammonia, and carbon capture – where existing relationships are limited and easier to target. The United States and the European Union are negotiating a trade agreement on low-carbon steel and aluminium. Whether Russia sits at that table should depend on its behaviour.

Europe should also think strategically about rules governing what assets a country like Russia can own in Europe. These rules can give Europe discretion and leverage. The Continent should articulate how and where Russian interests will be curbed if its aggression persists.

The stakes are very high. Without a military counterweight to Russia, Europe should leverage its economic and regulatory might in partnership with the United States. The message should be clear: play by the rules and sit at the energy transition table. Break the rules and miss out on an energy transformation that could attract $4 trillion in annual investments by 2030.

If Russia is not a part of the new energy economy, no one will take it seriously on the world stage – the prize that most animates Vladimir Putin. This is how to hit Russia where it hurts.

9 Responses to “To Deter Russia, Leverage the Green Transition”

  1. Keith McClary Says:

    The US will have to do a lot of fracking to replace Russia’s gas exports to Europe (if that is what the article is proposing).

    • greenman3610 Says:

      the converse is that Russia’s pressure on Europe raises gas prices, and US exports to European and Asian markets also raises prices – thereby accelerating the transition to clean energy. At this point, the gas industry is in a death spiral as sure as the one coal went into about 15 years ago.
      The only way out is forward, as most Europeans and Americans depend on gas for home heating, as well as a major share of electrical production. A rising price is the only signal that will change their behavior – and no US congress has been able to even consider a tax on carbon, so it’s taking a global crisis and threat of world war to make it happen.
      On the plus side, the technology to replace gas has never been cheaper or more advanced, and will only get more so.
      Tragic and fucked up, but its where we are.

      • jfon Says:

        Natural gas prices in the Netherlands averaged over $30 MMBtu in Q4 2021, and are still over $20. Henry Hub price in the US now is $5.41 – and at that price, coal is starting to make a comeback. If Europe thinks its strong suit is writing rules, it’s got another think coming – one of the EU technical committees just determined that nuclear has about half the embodied emissions of wind, but their political consensus equates it with gas, 45X worse than wind even without considering the methane leaks.
        Russia will not be knocking on Europe’s door for its renewable expertise – they saw how desperate Europe got during the wind drought last year, and they can’t afford to run two complete grids, one unreliable, the other polluting, like Germany does. Instead they’re building a reactor every year, and exporting them to European countries like Finland and Hungary that also want dependable power. District heating from the coolant water is a bonus in cold countries.
        Ukraine gets about 60% of its power from Russian designed reactors (which it has switched to Western-made fuel) – that’s the highest proportion anywhere apart from France and Ontario. They’re building more, but will switch to a US design. Their power emissions per KWh at the moment are only 60% of Germany’s, even though the wind is blowing well. https://app.electricitymap.org/zone/UA


      • I would love to think you are right, Peter. But the history of these supply shocks is not encouraging in terms of their delivering the big durable change you’d like to see. One problem is that they create massive profits for exactly the wrong people: those who control the existing supply. So they have the resources to fight any durable change if they see it looming (and they fight with price, by selling lots of their product cheap).

        Another worrisome thing is the resurgence of coal use pointed out by jfon, as a consequence of a high natural gas price. Cheap fossil fuels are stubborn things.

        So, what about a price on carbon (carbon tax)? You mention that Congress has never been able to consider a carbon tax. That’s a bit of an over-generalization: the most popular piece of climate legislation since 2009 in the House is the Energy Innovation and Carbon Dividend Act, with 94 co-sponsors, all Democrats (see energyinnovationact.org). That’s 41.5% of Democrats in the House who support a carbon tax, with refunding of revenue to households. OK, one’s political sense may inform it’s still very far from passing. It’s also far ahead of what conventional wisdom would have thought possible a couple of years back.

        Just a reminder to be wary of generalizing about what is and isn’t possible politically. I think people tend to do this based on gut feeling, or at best picking and choosing observations. Why discourage things by asserting limits, especially when it causes division and resentment among people who all really want the right thing for climate – to stop burning fossil fuels?

        • rhymeswithgoalie Says:

          Cheap fossil fuels are stubborn things.

          Aye, that’s always been the problem: They’re cheap because the suppliers externalize the costs.
          😦

  2. John Kane Says:

    /it Without long-term access to the European energy market, Russia is barely an economically viable country.

    If this is the level of expert advice the US Gov’t is receiving, I think we should worry

    https://oilprice.com/Latest-Energy-News/World-News/Oil-Gas-Share-Of-Russias-GDP-Dropped-To-15-In-2020.html

    And how much oil and gas is exported to China by pipeline or to who-knows-where by ship?

    Europe needs to drastically reduce its dependency on natural gas but doing so is not going destroy Russia. Hurt it but not that badly and it might just mean that Gazprom starts targeting what are currently US LNG markets in, say, Asia.

  3. renewableguy Says:

    Russia having proven itself an unreliable business supplier has basically poo on its face. I would be highly annoyed to have to burn Russian gas. It is possible to speed up transition off of natural gas so that Europe is no longer a victim to Russian aggression.

  4. rhymeswithgoalie Says:

    Foreign firms also operate in Russia’s energy sector, and access to Western technology and finance remains important. “Western technology”?

    Has Tsafos heard of a country called China? They’ve learned how to innovate there, and will be looking for markets for their own wind turbines, solar panels and EVs.


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