INDUSTRY INSIGHTThought Leadership

Energy security, climate, and the low-carbon transition

By Paul McConnell, Executive Director, S&P Global Commodity Insights

By the end of 2021, over 150 countries worldwide had committed to achieving net-zero greenhouse gas (GHG) emissions by mid-century. Two further countries – China and Saudi Arabia – had committed to net-zero by 2060, with India choosing 2070 as the point at which its economy would become completely decarbonized. Taken collectively, net-zero commitments now cover over 90% of global GHG emissions and the vast majority of global GDP.

Many countries have also committed to nearer-term decarbonization goals through the Paris Agreement of 2015. Parties to this UN-driven multilateral framework submit Nationally Determined Contributions (NDCs) which outline plans to reduce or reverse emissions growth in the years to 2030. Paris Agreement NDCs are diverse, and feature a broad range of ambition. Many emerging markets have established targets that allow GHG emissions to grow over time (though less slowly than under business-as-usual forecasts), in order to allow room for their economies to expand and for their citizens’ incomes to rise. Developed markets have typically adopted targets to drive down emissions in absolute terms. While the broad trend of falling emissions has been underway in developed markets for some time, Paris Agreement NDCs for the United States, the EU, the UK and others are ambitious, and would require a step-change relative to the historic rate of decarbonization, in order for their 2030 targets to be met.

Early in 2022, as policymakers debated how to achieve decarbonization goals, a new variable fundamentally altered the calculus of global geopolitical strategy. The Ukraine conflict has upended decades-long assumptions about reliance on energy imports from Russia, and prompted a wider debate around security of supply. A curtailment of oil, gas and coal exports from Russia suddenly looks entirely plausible. Even the threat of curtailed supply has been enough to prompt historic volatility across commodity markets. Security of supply now sits alongside decarbonization as a driver of countries’ energy strategies. But can these two drivers co-exist? Our analysis indicates that for some countries, the two drivers may be antagonistic; elsewhere they may act in concert.

The EU is the region most exposed to Russian energy exports, but it also has an extremely ambitious Paris Agreement target: to reduce emissions to 55% below 1990 levels by 2030. The EU’s response to the Ukraine crisis has been to accelerate efforts to deploy clean energy, and by doing so advance decarbonization goals while also reducing reliance on energy imported from Russia. In Europe, the twin drivers are acting in concert.

The United States has a similarly challenging Paris Agreement goal (to reduce emissions by 50-52% below 2005 levels by 2030) but unlike Europe, the country is a net energy exporter, rather than an importer. Here, the two drivers of security and decarbonization are to some degree antagonistic. In order to reduce its own emissions, the United States must reduce consumption of fossil fuels. But this may lead to reduced production, and ultimately to a reduction in energy exports. Many other energy exporters face these conflicting priorities, but for emerging market producers whose economies are dependent on exports of fossil fuels, the issue is particularly acute.

A third group of countries – characterized by China and India, as well as other fast-growing emerging markets – are net importers of energy, but have adopted climate goals which allow emissions to grow in absolute terms over time. In many cases, these targets are loose enough that they are expected to be met with room to spare under most base case forecasts. If threatened, energy security could be reinforced by a renewed reliance on domestic energy sources over imports (e.g., coal in favor of gas) even if the outcome is a slowing of attempts to decarbonize economies.

Assessing the balance between the twin drivers of energy security and decarbonization allows a better understanding of how countries’ energy strategies may evolve. But the actual evolution of energy demand and of the pace of decarbonization will depend not only on strategy but implementation of technology, on the relative prices of energy commodities – and on the evolution of the Ukraine conflict itself.