Among the devastating effects of the Russia-Ukraine war is the potential to derail the world from its path toward net-zero which was already a difficult journey, is the potential impact and implications of the war on the world’s carbon emissions and decarbonization efforts to reach net-zero emissions by 2050.
There is perhaps a near-term increase in global greenhouse emissions for the countries to replace Russian energy supplies. There is a hard limit to total aggregate emissions beyond which we hurtle toward a hotter and difficult to live planet. A “bump” in emissions today means either exceeding that limit or having to cut emissions faster and more sharply tomorrow to stay within the budget.
Exceeding the carbon budget would mean higher costs for future generations from physical risks such as extreme weather, while staying within the budget would require higher transition costs borne mostly by the current generation.
The least costly path, in aggregate, would be to remain as close as possible to European climate policy from before the Ukraine-Russia war. However, achieving this would likely require mobilization of all available options, including politically contentious ones such as accelerated financing of renewables, restarting nuclear plants and constraining energy consumption.
Investors have a key role to play in determining the path forward. As shareholders, they can influence where windfall profits of energy companies are reinvested. If fully reinvested in clean energy, it could nearly double the recent rate of renewable investments and tip the balance decisively away from prolonged fossil-fuel dependence. Without a purposeful plan for reinvestment, governments may step in to tax the windfall profits to finance renewables and provide financial relief for households suffering from higher energy costs.
Finding the right levers in the energy system to help reduce emissions
Faced with these choices, what levers in the energy system exist to minimize the short-term rise in emissions that increases the likelihood of ending up in a more costly scenario? And what levers exist to help make up for this rise in the long term?
Three recent reports from the International Energy Agency (IEA), published jointly with the European Commission, focused on what Europe and other advanced economies can do to reduce reliance on Russian gas and fossil fuels more generally
In the short term, to minimize the bump in emissions, the IEA and the European Commission note that there are supply-side levers at Europe’s disposal, such as increased renewable-power generation and increased nuclear or bioenergy power. And there are demand-side levers, as well, such as increasing adoption of electric vehicles, turning down thermostats for heating and switching to heat pumps instead of gas-fired furnaces.
Unfortunately, according to the IEA, even if every EU citizen were to adopt these measures, they would save only about 220 million barrels of oil and 17 billion cubic meters of gas per year, roughly equivalent to avoiding 0.13 gigatons of GHG
Making up for a short-term increase in emissions down the road may prove costly for the global economy, with negative impacts on the current generation. Policymakers may find it politically expedient to eventually allow for an increase in their long-term temperature targets and to blame the war in Ukraine as the culprit for derailing their promised net-zero trajectory. However, this purely financial calculation ignores the tremendous social cost of climate change for future generations that cannot be adequately measured in today’s financial terms.
Investors can wield their influence
Shareholders may have leverage to pressure energy companies to distribute windfall gains in the form of higher dividends, given the energy sector’s many years of underperformance compared to the broad market. In fact, U.S. oil and gas producers Chevron Corp., ConocoPhillips and Pioneer Natural Resources, for example, raised their dividends this year or last. Investors could commit to reinvest dividends only into renewable-energy solutions as part of their net-zero investment strategy.
Alternatively, energy companies themselves could directly reinvest windfall profits into renewable energy, substantially accelerating the development of low-carbon power while advancing the transition of their own businesses. Here too, shareholders might need to exercise leverage, as active owners, to urge companies in this direction. Recent cases of shareholder activism, especially at Exxon Mobil Corp., present blueprints for how such pressure can be exercised to steer capital allocation.
