How the war in the Ukraine will lead to an ‘Energy transition’ on steroids

Introduction

The war that Putin waged on the Ukraine about half a year ago has brought to light the importance of the ‘energy transition’ from a totally new perspective. The new dimension is the geopolitical and geostrategic importance of the ‘energy transition’. In the past, the ‘energy transition’ was mostly about avoiding climate change and to a lesser effect, having lower energy prices. Energy security and independence now seem to be just as important. Every country that depends on fossil fuel imports now understands that it will always be a captive of the energy market ups-and-downs at best, and at worst it might be subject to an energy war or economic blackmail, such as the war Russia is now waging on Europe.?

Why Putin started the war

Life in a dictatorship like Russia always seem to go from one crisis to another. For the regime to achieve its goal (which is mainly self-preservation), it must continuously distract its citizens from the fact that it is doing a poor job running the country. Poor health services (especially during the Corona Pandemic), unemployment, low wages and other problems are all swept aside in times of war and are replaced with patriotic support. In the graph below (source: https://www.statista.com/statistics/896181/putin-approval-rating-russia/), this phenomenon can be clearly seen. In 2014 Russia had serious economic issues due to the economic recession that followed the subprime crisis and the low price of oil (due to excess oil supply from fracking in the US). Putin’s approval rating was about ~65% but increased to about ~85% after Russia invaded and subsequently annexed the Crimean Peninsula. The current war in the Ukraine shows almost the exact same pattern: Putin’s approval rating was as low as ~65% due to the Corona crisis, but shot up to ~85% following Russia’s invasion of the Ukraine

Russia’s behavior can be described by what Fritz Fischer called (in German) ‘Primat Der Innenpolitik’ (Source: https://en.wikipedia.org/wiki/Fritz_Fischer). This saying can be simply translated as: ‘foreign policy governed by the primacy of domestic politics’.

How the invasion of Ukraine will speed up the ‘energy transition’

About 7-8 years ago I wrote an article in LinkedIn (which unfortunately I cannot retrace now) that warned about Europe’s dependency on Russian gas. I said that If there is a conflict between Europe and Russia, all Putin has to do in order to hurt Europe is close the gas pipes. Sun Tzu (the author of the ancient Chinese book ‘The Art of War’) said that the supreme excellence at war is not in making battles, but rather in breaking the enemy’s resistance without fighting. He would have been proud of Putin.

However, by using energy as a weapon, Putin has made it clear that Russia is not (and never will be) a reliable source for Europe’s energy needs. Europe was already a leader in the gradual change from fossil fuels to renewable energy resources, usually called ‘the energy transition’. This process was supposed to be gradual and take decades to complete. It now looks like Putin’s actions will lead to an ‘energy transition on steroids’ and that the big change towards renewables will take years instead of decades.

The fact that the invasion of Ukraine will spoil Russia’s energy trade with its biggest client (Europe) is clear even in Russia. Elvira Nabiullina, the head of Russia’s Central Bank, who is credited with steering the economy and the Russian ruble through the early, turbulent months of stringent international sanctions, called for the country to end its dependence on exporting raw materials such as oil and gas for income. (https://www.nytimes.com/2022/06/16/world/europe/russias-bank-chief-calls-for-economic-perestroika-away-from-raw-exports.html).

Climate change as a result of the ‘tragedy of the commons’

For the past 250 year, since the start of the industrial revolution in England, Humanity has been carelessly dumping CO2 and other greenhouse gases into earth’s atmosphere, basically treating it as one big trash can. This phenomenon is sometimes called ‘Tragedy of the commons’. Once a natural resource is free for all and has no specific owner, nobody has any interest in using it wisely. This phenomenon is one of the reasons that led to the collapse of the communist economic system. As an example, in Russia it has been proven that 4000m^2 of land cultivated privately produced 7 times the output per 1000m^2 as was produced from the collective land. However, there is only so much abuse that earth’s atmosphere can take, and all these greenhouse gases are now causing (not surprisingly) for temperatures around earth to rise and for the climate to change. In the past, most of the world was either in denial about ‘global warming’ or was unwilling to pay any price to stop it. However, it looks now that at least the period of ‘Denial’ is over. There appears to be a consensus that the earth is warming and that the cause is human. More and more it is getting clear that ‘climate change’ is not something we can leave for future generations to solve.?

The last COP: success or failure

The Last Climate Change Convention (COP 26) that was held in Glasgow in October/November 2021. The participating 197 countries agreed on a new deal, known as the Glasgow Climate Pact, aimed at staving off dangerous climate change. The pact "Reaffirms the Paris Agreement temperature goal of holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels" and "Recognizes that limiting global warming to 1.5°C requires rapid, deep and sustained reductions in global greenhouse gas emissions.

Climate campaigners and environmental activists have sharply criticized the organization of the COP26 climate summit. Swedish climate activist Greta Thunberg has called it a ‘Global North greenwash festival’. However, it is the opinion of the author of this post that the convention was doomed from the beginning since it can only produce a decision that is the lowest common denominator of 192 different countries with different interests and agendas. Furthermore, since this convention has no tools to enforce its decisions, all it can do is put out a statement representing the Zeitgeist.

The real hope for fighting climate change (Bill Mackibben)

Bill McKibben, the founder of 350.org and a non-stop climate activist, said, “It’s easy to feel pessimistic about the climate. But there is hope. “The faster we move towards true renewable energy, the more money we save, and the savings are measured in many trillions of dollars. An Oxford team released an analysis that concluded: ‘Compared to continuing with a fossil-fuel-based system, a rapid green energy transition will probably result in overall net savings of many trillions of dollars — even without accounting for climate damages or co-benefits of climate policy.’ That is, the faster we move towards true renewable energy, the more money we save.” Those savings will amount to trillions of dollars — enough to make policymakers around the world sit up and notice.

In short, Bill McKibben puts his faith in the economic imperative that lies at the heart of the capitalist system. Only a fool would pay more for the energy rather than less. The increasing productivity of wind and solar energy are driving down prices and making them more affordable than the fossil fuel alternative. The auto industry is also steadily moving towards electric vehicles. Countries who make the transition to green energy will have a tremendous economic advantage (lower energy costs and more stable energy supply). Ironically, the hope for a successful ‘energy transition’ and in saving the earth from global warming lays in ‘capitalism’, the same thing that is sometimes blamed as one of the causes of climate change.

Capitalism and Adam Smith

I sometimes look at my mobile phone, a device that like most people I use every day, and I am amazed by the process that allowed its creation. Literally thousands of people are involved directly and indirectly in the creation of the mobile phone. whether it is the dozens of programmers responsible to write the computer code that makes the phone work, or the hundreds of people responsible for the creation of the small piece of silicon with millions of transistors (the CPU) that is used as its computational engine, or the people in charge of making the lithium battery to supply it with energy, and not to mention the thousands of people in charge of mining the metals (copper, gold, cobalt, Lithium ), minerals and other materials (plastics) that make its composition. All of these people are working for their own self-interest, i.e., for their salaries or careers, but from my point of view they are actually all working for me (in order to provide me with a mobile phone).

This process, in which the market harnesses the self-interest of large amount of people to provide the needs and wants of other people was first described by ‘Adam Smit’ (probably the greatest economists of all times) in his book ‘The Wealth of Nations’. For Smith, it was the pursuit of self-interest through exchange that set man off from the animals and gave him his specifically human dignity. “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog, ” Smith wrote. “Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that is yours. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens. An economic system with an extensive division of labor, in which millions of individuals depend on the production of others to meet their needs, cannot be founded upon sentiments that are morally admirable but necessarily limited. Smith traced the superior material welfare of the common European to the fact that in a wealthy country like Britain or Holland, even the common laborer had thousands of people working to provide his needs.

It helps to think of capitalism as a tool to cause large amount of people to cooperate with each other despite having completely different goals and interests. It is the authors opinion that only Capitalism has the power to induce the large-scale cooperation between people and nations that is needed to advance the ‘energy transition’ as a tool against climate change.

Objection to capitalism is actually an objection to consumerism

Adam Smit was heavily criticized for his supposed promotion of ‘self-interest’, which is considered by most religions to be immoral. However, not a lot of people are aware that the second book of Smith (called ‘Theory of Moral Sentiments’) was completely about moral values. Furthermore, Smith appears to have conducted himself according to the dictates of benevolence that were described in his second book. He lived modestly, despite the considerable income from his pension from a duke, from his salary as commissioner of customs, and from royalties from his books. Upon his death in 1790 his estate was minimal, since Smith had given away most of his income in acts of charity, which he took care to conceal.

In fact, Smit did not intend to promote self-interest, but rather as a social scientist he tried to explain the logic of the mechanism that transformed the quest for self-interest into universal opulence. Most people that object to capitalism are not aware that they are actually objecting to ‘consumerism’. Consumerism is the propensity to consume and keep consuming. It is the drive to buy and own more stuff, and to define one's identity through what they own. Economists view consumerism as a positive for consumer spending and GDP growth. However, while people need to be consumers in order to live and obtain our needs and wants, excess consumerism is widely thought to be a negative for society. Consumerism leads to negative externalities like pollution and waste. Moreover, consumerism begins to define people by what they own.

The intension of this post is not to encourage capitalism (especially not the over-consumption which is something most people take for granted because they do not have to pay the attached environmental costs). The intension is just to point to a solution with a high probability of success:

o???It is easier to convince people to switch to electric cars than to convince them to abandon cars all together.

o??It is easier to convince countries to use renewable energy, if the alternative (gas, coal, oil) is more expensive.

In other words, it is easier to convince people and countries to advance the ‘energy transition’ if it is in their own self-interest to do so.

In his book ‘A Treatise on Probability’, John Maynard Keynes (a famous economist and the man credited with the invention of the branch of economics called ‘macroeconomics’) has written: ‘it is more rational for people—and society itself—to pursue small goods with a high probability of attainment than it is to strive for grand utopias with minute probabilities of attainment’. In the context of this post, we can try to convince society to consume less, stop using transportation and reduce their energy use, or we can try to convince society to consume responsibly and sustainably and shift the energy consumption to renewable energy with minimal impact on the quality of their life, and perhaps with some advantages. Following the advice from Keynes, we should choose the option that might not be perfect, but that has the highest chances (probabilities) of success.?

Future resource scarcity

The current crisis in the Ukraine and the inflation caused by fossil fuel reminds us also that the earth’s resources are limited and finite. Although the move to wind and solar energy and electric vehicles can solve our energy problems, we would still need enormous amounts of metals and minerals for these alternative technological solutions. China's approach to the issue of future mineral and resource scarcity is to stockpile large amounts of resources and buy into strategic mines overseas. Europe's approach is different. It’s called the 'circular economy'. In theory, if you recycle enough metals and minerals, then at some point there is no need for extra external resources. In reality, some external input is always required (since it is probably not possible to reach 100% recycling). The 'circular economy' is strategically smart since it reduces reliance on external resource suppliers. It is also a smart approach in the long run, since every kg of metal or mineral is used multiple times, instead of being used once and then discarded. Finally, it is also a good strategy to create local jobs (in recycling plants).

Conclusion

Al gore has recently said that ‘the world is at tipping point for climate action’. The combination of extreme weather events (floods in Pakistan, draught in China and Europe, heat waves, forest fires etc…), a new urgency for energy security due to the war in the Ukraine (and the not-so-subtle energy war between Russia and Europe) and the technologic maturity of renewable energy (solar+wind) which was made cost effective by the capitalistic system, is all causing an accelerated climate action, mostly through the ‘energy transition’. Al Gore: "There are signs absolutely everywhere around the world of the pace of change picking up”. That is good news for future generations.

Note:

The author of the post is expressing his own opinion. The views in the post are the sole responsibility of the author and do not reflect the views of any past or current employer (or their parent company or affiliates). A reference is made to all external data mentioned in the post. All external data mentioned in the post comes from public sources and does not violate Copyright law. Comments on this post are the sole responsibility of their writers and the writers will take full responsibility and liability.

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