The World

One Major Way the Ukraine Crisis Could Change Europe

Long lines of cars
Motorists drive and queue in their vehicles at a toll station on the A7 motorway between Lyon and Vienne in on July 10. Philippe Desmazes/AFP via Getty Images

Why have energy resources been such a big talking point during the Ukraine crisis, seeing as they’re not the impetus for Russia’s invasion? Much of it stems from concerns that the nations imposing retaliatory sanctions on Russia are also dependent on the federation for ample oil and natural gas resources. If countries, especially from the European Union, rush to cut Russia out, that could further raise the high gas prices that have plagued the Eurozone for months. As a result, both the EU and United States are acting cautiously with economic policy right now, choosing not to punish existing Russian energy sources too strongly, and stocking up on fossil fuel supplies.

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Activists and scientists concerned about climate change are unhappy with this state of affairs and are pointing to various factors that have made Europe more dependent on Russian energy. Some decry Germany’s decision to phase out nuclear power after Fukushima, and other countries’ hesitancy to build more nuclear sources; others blame fossil fuel subsidies. Meanwhile, there are still more officials proclaiming that Europe needs to get more and more gas in order to be “energy-independent,” especially from Russia.

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Noah J. Gordon, an adviser at the Berlin-based, climate-focused think tank Adelphi, thinks there’s an opening here for Europe to take a different route—to pursue more energy self-sufficiency not by building out gas reserves, but by expanding its renewable energy sources at a faster pace. I recently interviewed Gordon about where he thinks the issues with Europe’s energy market actually lie, what actions the EU should take in response to energy shocks, and how Europe can wean itself off Russian gas and prepare for climate challenges down the line.

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Our conversation has been edited and condensed for clarity.

Nitish Pahwa: What are some of most common misconceptions about the European Union’s relationship with Russian gas, and what it should be doing going forward?

Noah Gordon: I see people say this crisis reveals the folly of Germany’s nuclear phaseout. Look, I also wish Germany hadn’t shut down a functioning source of clean energy, but we shouldn’t pretend that there wouldn’t be a gas crisis if Germany hadn’t done that. France has mostly nuclear power in its electricity mix, and it’s paying high gas and power prices too. It’s important to realize that only about 15 percent of Germany’s huge gas consumption—almost all imports—is used in power production, and only 15 percent of German power is generated from gas. Most of that gas from Russia or elsewhere is used for heating buildings and in industry. Another important thing is that export earnings from oil are much more important to Russia than gas earnings. We really focus on the gas and things like Nord Stream 2, but there’s not such a clear line between Germany shutting down nuclear plants and using gas to heat buildings.

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What do you think is the right way for European countries to prepare for the current gas crisis and whatever other energy shocks may be yet to come?

I think this crisis has really changed the terms of debate. There’s a lot of talk today on massive European mobilization to build heat pumps so that Germany and the rest of Europe could heat their buildings with electricity instead of gas, and to renovate buildings for energy efficiency. This is a thing called the EU Renovation Wave, which is a buzzword that can now really get going.

More broadly, Germany can’t totally replace Russian fossil fuels. Climate and Economy Minister Robert Habeck is saying the country could do most of it today, but admits it would come at a really high price. Germany gets about 55 percent of its gas from Russia. The EU gets almost 40 percent from Russia. Stopping Nord Stream 2 sent a really important signal geopolitically, but there was no gas in the pipeline. And Europeans have actually been buying more gas from Russia than usual since the invasion. It’s cheaper to buy the Russian gas on long-term contracts, so they’re buying as much as they can.

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Gas is where Germany and Europe have the biggest problems. It could still get colder before this mild winter ends. The second-biggest import source, Norway, has little spare capacity. The EU is already importing about as much liquefied national gas as it can this winter. It doesn’t have that many import terminals, and you’d have to pay huge prices on the global market to get that LNG [liquid natural gas] ahead of other buyers. Coal’s actually an important import from Russia, too, especially for Germany—not the brown coal that Germany mines itself, but the hard coal that it uses in industries like steelmaking. That’s a bit easier to replace than the gas, because it doesn’t have to go through a pipeline or be liquified for transport.

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If things get really hairy, Germany and the EU might do some non-sustainable things in the short term, like possibly keeping some coal or nuclear plants open longer than planned. The prime minister of the German state of Brandenburg did call today to slow down the coal phaseout, given all these problems. But the answer is to reduce fossil fuel use as much as we can. There might not be a wartime mobilization to build weapons for this conflict, but there could be to build heat pumps and to renovate buildings. That’s really the way out of this, and to get the clean energy to back it up.

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In your thread, you talked about the Energy Charter Treaty and what role that plays right now with the possible legal challenges to what’s happening with Nord Stream 2. Could you explain what the ECT is, and what role it plays, to someone who may not be familiar?

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The Energy Charter Treaty is part of the system of investor-state dispute settlement. It was designed in the 1990s to enable multilateral cooperation in the energy sector and to stop arbitrary government moves from interfering with important long-term energy operations and projects. But in the decades since the signing, it’s become the most-used treaty in investor-state arbitration. It’s led to record-breaking awards of compensation from governments to energy companies that I think add up to $57 billion in total. If you pass a regulation that will hurt an energy company’s investment, the threat of these claims can prevent governments from taking ambitious climate action. One reason Germany’s coal phaseout costs so much, and why they paid almost $5 billion to companies in compensation, was fear of ECT costs.

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There have been some efforts to modernize the treaty now that countries realize that it’s holding back climate action. Some EU countries are trying to align it with the Paris Agreement, but that’s a really heavy lift to get the support. There are a lot of fossil fuel–reliant countries like Azerbaijan who are signatories. There’s some talk of EU countries doing a coordinated withdrawal in a way that would get them out of the sunset clause. There’s even a provision in this treaty that’s supposed to make it apply for 20 years to existing investments, even after a country withdraws.

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Wintershall, one of the German companies involved in Nord Stream 2, has said that it does expect compensation from the German government for the big loan it put up for this project that now might lead to nothing. I think there’ll probably be a high-profile fight over Nord Stream 2 compensation. The German government’s saying that the way it paused the pipeline—probably permanently—is watertight legally, but Gazprom’s Swiss-based subsidiary will see things differently. They’ve already sued the EU and Germany over supposedly discriminatory regulations before. If Europeans have to pay money to Gazprom after this invasion, you can imagine that changing the terms of the debate and maybe leading to reform of the Energy Charter Treaty, or at least to countries taking a different approach to investor-state disputes more broadly.

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An example that shows the type of stuff this treaty can do is that two German energy companies, RWE and Uniper, are suing the Dutch government now for damages, because the Dutch government tried to phase out coal without paying them compensation. You can see how this can really interfere with climate action when these fossil fuel companies feel that they have a right to profits, no matter the negative externalities.

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There has been a decent bit of reporting about how fossil fuel companies are looking at this moment. There was a piece in the New Republic just yesterday morning about different companies celebrating possible gas revenues. With the price of oil having shot up, do you think that this crisis is going to empower a lot of these fossil fuel manufacturers?

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Of course, they’re going to try to take advantage of it and say, “We need to do fracking.” There’s talk in the U.K. right now amid this crisis, “Why did we ban fracking? We should be doing it.” The U.S. producers are still talking about their “molecules of freedom” and trying to help the EU. The thing is, that doesn’t happen overnight. These new gas projects are not going to come in to save the day this winter. It takes some time. Gas goes to the global market anyway, so you couldn’t just direct it to the EU. You would increase the global supply of gas, but the EU would still have to buy it.

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There’s two ways to turn in this crisis. There’s the green way I talked about: with energy efficiency and clean energy and the electrification of buildings, the heat pumps. But you can also see a call for, “Hold on, if gas is so expensive, we need to slow down on getting rid of coal, and we need subsidies for oil and gas.”

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I’ve heard this argument from other energy experts, too, that new gas and oil projects will take a while to set up, and that’s not going to do much to alleviate any actual supply shocks in the short-term. However, some would counter that new renewables will also take a while to implement, whether in approving new turbines or actually installing heat pumps and getting them hooked up to the grid. What would you say in response to that?

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I would say that they’re right. Building a heat pump today isn’t going to cut emissions on its own, and you need clean electricity to power the heat pumps, or you haven’t made that much progress. But at least with heat pumps and efficiency, you’re not locking in future fossil fuel use. Once you build new pipelines and start new projects, it’s tempting to keep burning fossil fuels. Neither new green nor dirty projects will make a difference this winter to Europe or anywhere else, but we have to be thinking about the long term. Energy efficiency is always good, because you’re using less of everything. We’re thinking about the medium term, and also the short term.

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What did you think of the U.S.’s decision to have its sanctions mostly not target the oil and gas flows from Russia? Do you think its justification, which is not to try to further roil and disturb energy markets at this time, is justified, or do you think they should have gone about this a different way?

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It’s important to point out that Europe also has concerns about targeting oil and gas flows. There’s a big debate right now about whether to kick Russia out of the SWIFT payments system, except that would seriously complicate processing payments for Russian fossil fuels. There are some sanctions that target Gazprom. Short-term loans and export controls could make it harder for the Russian fossil fuel firms to get their technology. Adam Tooze had a great post on the U.S. sanctions: They’re meant to lock out these big Russian banks like Sberbank out of the Russian financial system, but there’s this energy exemption so U.S. and EU firms can process payments for Russian energy through non-sanctioned EU banks.

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The State Department energy security envoy, Amos Hochstein, said that hitting Russia’s energy sector would mean a price spike. He said Putin could sell half his product, but at double the price, so he would not suffer the consequences, while the U.S. and our allies would. Russia’s big. It’s bigger than Venezuela and Iran. It’s a really big step to try to shut down all of its fossil fuel exports. I think a bigger step, if they wanted to really stop buying Russian fossil fuels, would be to get rid of that energy exemption in the current U.S. sanctions that are supposed to lock out the Russian banks.

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What do you see this invasion doing in terms of Ukraine’s resilience to climate effects and global economics?

Well, will it hurt global climate cooperation generally? I think almost certainly, when we’ve already seen some climate backsliding since COP26 with record coal consumption, emissions rising again, the oil and gas subsidies I mentioned before, and just taking attention away. Who’s going to talk about COP at a time like this? On the other hand, you could get a paradigm shift after this, like we did after 1973 and the Arab oil embargo with a greater focus on alternative energy, such as nuclear, and an energy efficiency drive back then in the EU and Japan and even the U.S. in terms of car fuel economy standards. There are two ways it could go, but certainly, the food security effects globally will be terrible, in addition to the environmental damage and, of course, the human suffering in Ukraine.

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