Carbon Neutrality 2060: Without Forests and Sanctions

As the authors of the CENEF XXI report note, Russia’s Ministry of Economic Development has not published a single long-term forecast over the past year, which may mean there is no official vision of how the “special military operation” and subsequent sanctions could affect the country’s economic future.

The six chapters of the CENEF study analyze the state of the Russian economy before the start of the “special operation” and its dynamics over the past year. The impact of global energy transition processes, prospects for economic development and fulfillment of the country’s climate commitments are assessed. The CENEF-XXI study is currently the only document that assesses the achievability of Russia’s declared goal of carbon neutrality by 2060.

A blow to the “superpower”

The CENEF document calls Russia’s fossil sector the “superpower of the Russian economy”. It presents data demonstrating that the short-term effects of sanctions on the oil and gas sector have not been as devastating as initially expected: until March 2023, the Russian sector has shown considerable resilience, and oil and gas revenues continue to be the main driver of the economy.

Despite the sanctions, last year, oil export revenues increased: monthly payments to the EU for Russian gas at the end of 2022 were much higher than in 2021. According to Rosstat data, in 2022, additional revenues from oil and gas exports exceeded $100 bln, and federal budget revenues were 10% above the 2021 level. Russian liquefied gas exports were also not affected by the sanctions and grew by 8% last year.

Experts attribute the high level of income of the Russian energy sector to the revitalization of the global economy after the COVID-19 pandemic, the energy crisis caused by the “special military operation”, and wartimeization of the economy. According to experts, these are the factors that temporarily created additional demand for energy resources. But analysts do not see bright prospects for fossil fuels: coal exports are declining rapidly, and the oil and gas sector is also falling. In addition to closing foreign markets for Russian fuel in the coming years, this has undermined global long-term prospects for fuel consumption and international trade.

Scenarios from the IEA, OPEC and other analytical sources warn of declining demand for natural gas. Russia’s gas exports will never return to their previous high levels,” analysts say, and attempts to soften the blow from sanctions by reorienting export flows to East Asian markets, despite expectations, cannot compensate for the losses.

Experts assume that all of the above will have a negative impact on the Russian economy. According to the authors of the report, the problems are likely to worsen by 2025. Despite the fact that the losses do not look large-scale yet, the impact of sanctions in the near future may hit the entire Russian energy sector hard.

Figure 3.5 Russia’s monthly revenue from fossil fuel exports to 34 major countries (US$ billion)

Vulnerable energy

Even if Russia is able to maintain oil production at the highest possible level in 2023, producers will face insurmountable problems in setting up alternative supply chains from abroad.

According to the authors of the study, long-term sanctions may hinder the fuel and energy sector’s access to technology and will not fully compensate for the decline in the oil, gas and coal mining industries. According to the Russian Ministry of Energy, the country’s dependence on imported equipment for the oil and gas industry in 2014 amounted to 60%, and for a number of items there are no Russian analogs at all. The dependence of the Russian coal industry on imported equipment is even higher than that of the oil and gas industry,” experts say.

The gas sector is also vulnerable. In 2020, the share of domestic equipment for gas production averaged 55%. However, Russia’s dependence on imports exceeds 90% for certain components, for example, gas turbine components. Although, according to experts, “there has been some progress in developing its own technologies, it may take a quarter of a century to achieve absolute self-sufficiency”.  

The most vulnerable to sanctions was local production of equipment and electronics. Experts believe that the effect of the export ban will manifest itself in the medium term (lack of spare parts) or long term (lack of equipment for the realization of new investment projects).

Obviously, both the fossil fuel sector and the renewable energy sector, which is just beginning to develop, will suffer in this regard. For example, due to sanctions, most Western companies have completely curtailed the production of components and refused to fulfill their obligations to maintain and build wind turbines in Russia.

In the whole economy, according to the results of 2022, only 38% of companies were able to replace sub-sanctioned equipment with domestic analogs, 66% use Chinese analogs. Dependence on a number of Western countries is now being replaced by dependence on the only Eastern country - China, and experts call this dependence a negative trend for the domestic economy.

 “The economics of shagreen skin”

According to the authors of the report, due to the abundant inflow of petrodollars, the last 20 years in Russia were lost in terms of economic diversification and import substitution. The factors of economic growth were exhausted long before 2022, and the economy should have been switched to “new rails” already “yesterday”, but the opportunities were not seized then.

If the sanctions continue, their effect will be added to the effect of Russia’s weak integration into the process of global decarbonization, which will lead first to stagnation and then to a decline in economic activity in the coming decades - the “non-oil and gas” sector will not be able to compensate for the reduction of the oil and gas “shagreen skin”.

Negative demographic changes will aggravate the situation: according to forecasts, by 2060, Russia will lose from one fifth to one third of its able-bodied population. By that time, Russia’s gross domestic product (GDP) per capita will be close to that of Ghana and Ethiopia.  If Russia continues on this trajectory, analysts say it may lose its status as an industrialized country.

Figure 5.7 Forecast of Russian crude oil and petroleum product exports taking into account sanctions and decarbonization effects (mln tons of oil equivalent)

Changing agenda

In 2020-21, Russia’s greenhouse gas emissions “closely followed GDP dynamics”. Extensive economic growth in 2021, with Russia’s low decarbonization activity and a marked weakening of attention to energy efficiency policies, resulted in an increase in both total net emissions and emissions from energy, the highest on record since 1990.

Meanwhile, low-carbon trend continues to reshape development, the global economy and the energy landscape. Most UNFCCC member countries (including Russia) have adopted nationally determined emission reduction targets (NDCs). Additional emission reduction commitments have been adopted by Russia’s main trading partners - China, Canada, the EU, the US and the UK.

Figure 5.4 Emission trajectories implied by the ONUA and zero emission targets of G20 members

Russia’s military actions have only accelerated the process of global decarbonization. To ensure energy security, more and more states rely on local sources of energy.

Betting on the energy transition

The authors of the study cite data: in 2022, for the first time in history, global investment in energy transition will equal the amount invested in energy production ($1.1 trillion), despite the war-induced energy crisis, and in 2030-2050, annual investment in energy transition will be twice the current volume of international trade in fossil fuels. 

Analysts consider the loss of access for Russian goods to this emerging trillion-dollar market for energy transition products (materials and new fuels) as a missed opportunity. At the same time, foreign markets will be systematically closed not only for Russian fuels, but also for all other types of the country’s goods.

Experts estimate the sanctions-induced loss of revenue from Russian exports of only goods for the implementation of the Border Carbon Adjustment Mechanism (BCAM) to European EU countries at $4.1-5.4 billion. This damage far exceeds any other losses from the implementation of the BCAM mechanism for Russian industries.

Access to the global market of machinery and equipment is very important for Russia. In 2021, a segment of the global economy was three times the size of fossil fuel exports. This difference will increase as we move towards decarbonization, analysts believe.

Carbon neutrality: scenario 4D

According to the authors of the CENEF-XXI study, in the long term, the goal of achieving carbon neutrality by 2060 is still achievable for Russia, but only in the 4D scenario - “Development Driven by Decarbonization and Democratization”, which opens the door to a return to the global economy. And it is impossible in the 4S scenario - “Stagnation, Sanctions, Self-Sufficiency”.

Experts remind that the goal of carbon neutrality for Russia as it exists now can only be achieved by taking into account the absorption capacity of forests and decarbonization measures. Failure of the 4D scenario will lead to the fact that energy-related emissions by 2060 will be 80 Mt of CO2 above the required level. To compensate, this is the amount of uptake that will be required from the land use and forestry (LULUCF) sector.

At the same time, according to experts, there is no reason to rely on forests: in 2021, the absorption capacity of the sector has deteriorated, and “hopes for this sector as a panacea are becoming more and more shaky”.

Because of sanctions, some decarbonization measures in Russia are limited, especially in the areas of energy efficiency, renewable energy and hydrogen use - all of which rely heavily on imported technologies. Therefore, “it is better to launch support measures for the localization of low-carbon technologies sooner rather than later.”

Analysts see the prospects for Russia in a fundamental shift in policy priorities with regard to technology, foreign trade, business climate and decarbonization. In their opinion, it is necessary to maintain a balance in the structure of foreign trade within the framework of global trends and approaches. For example, the deficit of the foreign trade balance can be overcome by increasing non-fuel exports, increasing the level of product localization and import substitution. However, this is possible only through a return to global supply chains.

In addition, experts emphasize the close connection between the processes of democratization and competition and the decreasing role of the oil and gas and state sectors; they write that “reliance on broader political and social forces will become a key factor of social stability and stimulation of business activity”.