23.11.22 Review

COP27 Summary: the war in Ukraine has aggravated disputes over energy transition strategies, but Russia will be able to take minimal advantage of its stretched scenario

The energy crisis has exacerbated the contradictions between developed and developing countries in addressing climate change issues, as the COP27 forum that ended last week in Egypt has shown. New commitments were not made, and old ones were called into question. In contrast to the International Energy Agency's predictions, the skeptical voices at COP27 have prevailed, believing that the crisis will slow down the energy transition and that investment in fossil fuel extraction will have to be increased. The final document of the forum does not mention the gradual phase-out of fossil fuels and includes an added paragraph calling for the accelerated development of low-carbon energy sources instead. The scenario of a more extended energy transition looks quite desirable for Russia, but the war and sanctions have minimized its benefits for the Russian economy.
Last week Egypt hosted another COP27 conference, an annual meeting of countries that have ratified the 1992 UN Framework Convention on Climate Change. Climate change mitigation and greenhouse gas reduction strategies, as well as financial support for poorer countries in the energy transition, are traditionally discussed here. The most successful is considered the 2015 Paris COP21, where an agreement which set a goal to keep the global average temperature rise "well below" 2 degrees and "make an effort" to limit the temperature rise to 1.5 degrees was signed.

Year after year, two fundamental conflicts of interest emerge at the forum preventing the adoption of an effective plan of action to combat climate change. The first one reflects the different positions of the rich countries and the poorer, developing countries. Developed countries, burned large quantities of fossil fuels during the industrial revolution, primarily coal, causing a critical mass of greenhouse gases to accumulate in the atmosphere. Developing countries consider it unfair to be obliged to give up cheap traditional sources of energy, which can provide them with rapid GDP growth, and insist on offsetting the costs of switching to clean energy sources. The second conflict is related to the economic rivalry between the United States and China, the two largest economies in the world and responsible for 45% of all CO2 emissions into the atmosphere. This competition prevents either side from making additional commitments out of fear that it will create a competitive advantage for the other. 

A very important outcome of COP27 is an agreement to create a compensation fund for poor countries (the U.S. and the EU have agreed to include a discussion of this issue in the conference agenda this year). However, the skeptics believe it is still early to talk about a breakthrough. In Egypt, only a working group to prepare proposals to COP28 for the creation of a compensation fund has been established so far. However, there are many open questions about its structure and operating principles.

Reaching a framework agreement on the fund creation is considered particularly important because other than that, the forum has shown an escalation of controversy on the critical issue of the transition speed and the necessary commitments of countries and governments for this. The global energy crisis and the redistribution of energy markets caused by the Russian invasion of Ukraine have brought new challenges to many countries. As a result, no new commitments were discussed at the forum; on the contrary, many delegations questioned the feasibility of those that had already been made. The war-induced energy crisis has forced many countries, including developed ones, to increase their consumption of coal. For example, according to the American New Lines Institute for Strategy and Policy, coal use for electricity generation in the EU between February and November 2022 rose by 8%. 

So the crisis associated with the loss of a large portion of Russia's gas supply has strengthened the position of fossil fuel producers. The shortage of gas on the global market will be felt for several years, and the oil and gas sector representatives had convincing arguments for increased investment in fossil fuel production at COP27. It is the over-optimism about the energy transition and the associated lack of upstream investment that has given the current energy crisis such scale and urgency, according to energy skeptics. The promise made by the United States and 19 other developed countries to stop the expansion of fossil fuel extraction in developing countries at the last COP26 was premature.

Unlike the International Energy Agency, which published an ultra-optimistic report in October suggesting that the energy crisis would accelerate the transition to new energy, COP27 was driven by pessimists. That is why the lines calling for a phase-out of fossil fuels were removed from the final document. In their place, a paragraph calling for the accelerated development of energy systems with low greenhouse gas emissions was added. A commentary on the forum published in Nature magazine argues that this version of the final document will allow oil and gas companies to increase the production of natural gas, which is considered the cleanest of all fossil fuels. During the conference, Germany signed a new LNG contract with Egypt. Other governments and international companies were studying projects in Senegal, Tanzania, and Algeria.

As a result, COP27 got an extremely skeptical assessment by the world press. The Guardian estimates that the oil lobby's delegation at the meeting in Egypt was the largest, with 636 representatives, which is 25% more than the previous year. ABC News quotes Annalena Berbock, the head of the German Foreign Ministry from the Green Party, who accused those who make money from mineral resources — a coalition that includes Saudi Arabia, China, Iraq, Iran, and Russia — of sabotaging the fight against warming. 

For Russia, the world's fourth-largest emitter of CO2 and the third-largest supplier of oil, the scenario of slowing the energy transition and the call for the development of low-carbon energy sources look quite positive, even despite the loss of European fuel premium markets. However, whether the energy transition will be faster, as the IEA believes, or slower, in any case, it will be a period of coexistence of old and new types of energy. At the same time, Russia's position in traditional energy markets has been significantly undermined by the war in Ukraine, and sanctions will not allow it to occupy those niches in the new markets in which it has a competitive advantage and through which it could mitigate the effects of the energy transition on its economy.