An Environmental Arms Race Might Further Encourage an Actual Arms Race

What if the 10 countries that grow 69% of the world’s wheat collaborated to impose floors and ceilings on this vital cereal? As the climate warms, the lessons of sanctions and economic warfare are (therefore) critical for building a more sustainable, equitable and peaceful global economy.

By Nicholas Mulder in Noema: The Inflation Reduction Act (IRA) marks a new phase in U.S. environmental politics and is a cause for some optimism: $369 billion will be made available over the next decade to expand renewable energy, electric vehicles, carbon capture, clean fuels and other climate measures. The United States, long a laggard in climate change mitigation, now seems on its way toward meeting the emissions reduction target of 50% from 2005 levels by the end of this decade.

But the IRA’s potential to reinvigorate international climate politics is circumscribed by two serious global crises, one economic and the other geopolitical: rapidly rising energy prices and the turmoil caused by Russia’s invasion of Ukraine. The conflict has been particularly destabilizing because of the economic warfare that ensued: an international array of financial, commercial and technological sanctions imposed against the Russian economy, and Russian blockades of Ukrainian ports and reductions in gas deliveries to Europe. 

Like climate policy, sanctions are an economic attempt to force behavioral change. The big question is whether they currently impede or accelerate the goal of decarbonization.

Does the ongoing Western attempt to reduce exports of Russian hydrocarbons merely boost hydrocarbon production in other countries, leaving the climate as badly off as it was before? Or can an improvised international sanctions policy offer a glimpse of how we might coordinate a broader international effort away from oil and gas?

The sanctions against Russia, the world’s third-largest producer of oil and second-largest producer of natural gas, aim in part to cripple its fossil fuel exports. Russia is now facing a future of declining energy production; its oil output is expected to fall between 25% and 50% by the end of the decade. On the demand side, Europe is scrambling to reduce its dependence on Russian energy by cobbling together imports from a variety of sources — oil from Norway and Iraq, for example, and natural gas from the U.S. and Qatar. 

Renewable energy investment in wind, solar and nuclear will play a role in making up the shortfall as well. Europe’s overarching goal of achieving carbon neutrality by 2050 remains unchanged. Optimists argue that ending reliance on Russian fossil fuels in the short term will ultimately help to end reliance on fossil fuels in general.

Yet climate impact has never really been a prime concern for sanctions policymakers. Indeed, economic coercion has often stimulated pollution and extractive industries. For much of the 20th century, countries that came under external economic pressure tended to increase rather than reduce their reliance on fossil fuels. From Nazi Germany to apartheid South Africa, regimes threatened with oil blockades resorted to ultra-carbon-intensive chemical processes to obtain petroleum from coal.  Decades of sanctions against Iran have encouraged land use patterns that depleted its lakes and rivers. The U.S. embargo against Venezuelan oil has led the Nicolás Maduro regime to massively ramp up illegal mining and logging in the Amazon rainforest, a desperate rush for gold, diamonds and timber that is destroying one of the planet’s most precious carbon sinks. 

Economic coercion affects the prospects for decarbonization not just through resource use but through price levels. Here the effects of US sanctions have begun to accumulate. Washington’s lengthy effort to constrain Iran and Venezuela’s oil exports during the 2010s reduced the available supply on the international oil market. This gave the Biden administration less room to work with when it began to impose major sanctions against Russia in February. But the resulting energy price shock of 2022 has exposed a much larger problem: that the dominant view of how the world economy will make a smooth transition to a low-carbon future is illusory. 

For a long time, it has been assumed that the global switch to renewable energy would benefit from continuous gentle energy price inflation. Underlying this was a neo-classical view of carbon pricing: If the price of fossil fuels rose steadily, up to the point where consumer demand for carbon assets — and with it corporate investment — would start being diverted into renewables, then decarbonization would happen smoothly. Price signals in a free market would suffice to render human civilization greener. 

Sensible though this theory seemed to many, it is now evident that broad price spikes are very damaging to the low-carbon transition. This is not just because they can trigger recessions that destroy demand and leave unused precious resources that could accelerate the green transition. Renewables also depend on supply chains bringing together raw materials — lithium, copper, steel, rare-earth metals — whose price is co-determined by energy prices. By raising the cost of transport and industrial production, energy crises cause shortages of all sorts of components needed for the green transition.

What the world economy needs is an energy price level that both encourages investment in green technology and simultaneously keeps such capital expenditures profitable and sustainable. Ideally, this would be delivered if policymakers can guarantee a prolonged period in which demand growth is steady but price volatility is low. This would allow governments to channel resources into large-scale projects and from rich to poor countries. In such a scenario, renewable investment would accumulate up to the point where the price structure and capital allocation of the world economy ultimately pivot decisively toward green energy. 

This sounds like a pleasant trajectory. But to anyone who has observed the last two years of pervasive chaos in financial and commodity markets, and concomitant recession and inflation fears, it should be clear that the chances of our world economy making such a smooth transition to a green future are vanishingly small.

This year has exposed the Goldilocks scenario of price stability during the energy transition for the fantasy it is. Consumer confidence and investor sentiment are highly volatile and brittle. Instead of paving the way to the low-carbon transition, today’s elevated oil and gas prices are shifting the relative balance of power between fossil capital and green capital back toward the former. This has consequences beyond enriching a few unproductive asset managers. Petro-states too are seeing their economic model experience a new lease on life. Even under sanctions, Russian energy revenues rose to $167 billion in the first six months of this year. According to the IMF, Middle Eastern hydrocarbon exporters stand to gain an additional $1.3 trillion in revenues in the next four years.

The adverse effect of price movements on the international system has spawned some creative thinking, too. The most innovative idea yet is to cap prices on Russian oil exports. In theory, this would financially weaken Russia while macro-economically benefiting the world economy. In June, G7 policymakers began to explore the idea, including potentially using the threat of sanctions against private insurance companies that cover oil cargoes sold above the agreed price ceiling. 

But implementing such a policy would be rife with problems. For one thing, it is not yet clear whether major importers of Russian oil such as India and China would be fully on board. For another, it could be skirted by transporting oil in state-owned vessels that enjoy sovereign insurance.

Nonetheless, the price cap scheme’s innovative nature is a step forward. It is the first coordinated attempt to impose international energy price controls in the 21st century. Even if it does not come to fruition, its example is instructive for possible future applications. Other commodities important to the energy transition might lend themselves more easily to coordinated management. Sudden spikes in food prices caused by the low-carbon transition could erode support for it. But what if the 10 countries that grow 69% of the world’s wheat collaborated to impose floors and ceilings on this vital cereal? More here.

Honorary contributors to Adil Khan, Ajaz Ahmed, Anwar Abbas, Arif Mirza, Aziz Ahmed, Bawar Tawfik, Dr. Razzak Ladha, Dr. Syed M. Ali, G. R. Baloch, Haseeb Warsi, Hasham Saddique, Jamil Usman, Javed Abbasi, Jawed Ahmed, Ishaq Saqi, Khalid Sharif, Majid Ahmed, Masroor Ali, Md. Ahmed, Md. Najibullah, Mushtaq Siddiqui,, Mustafa Jivanjee, Nusrat Jamshed, Shahbaz Ali, Shahid Hamza, Shahid Nayeem, Shareer Alam, Syed Ali Ammaar Jafrey, Syed Hamza Gilani, Shaheer Alam, Syed Hasan Javed, Syed M. Ali, Tahir Sohail, Talha Alam, Tariq Chaudhry, Usman Nazir, Yasir Raza