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The net-zero transition in the wake of the war in Ukraine: A detour, a derailment, or a different path?

May 21, 2022
Borderless Future

The Russian invasion of Ukraine has ushered in a humanitarian crisis of a scale not seen on European soil since the Second World War, a level of geopolitical tension not experienced since the Cuban Missile Crisis, and a set of rapidly evolving political, economic, and societal responses and counterresponses whose ramifications can scarcely be estimated at this point. Nor are there signs of an imminent resolution on the horizon.

As Russia is one of the world’s largest producers of oil, gas, and commodities, one can naturally expect that the massive and universal effort required to address the world’s looming climate crisis would also be swept up in the maelstrom. This raises the question of whether the war and its aftermath will prove to be a limited detour from the previous path of net-zero transition, or a true fork in the road and a far more consequential redirection.

It seems clear at this point the war will complicate the transition’s path in the short term. In the longer term, however, the logic of energy security and economics could converge to kick net-zero transition efforts into higher gear. Bold moves would be needed at unprecedented speed to boost energy-efficiency measures and adopt renewable-energy alternatives to fossil fuels. If adopted, such actions could drive net-zero technologies down their respective cost curves and build a pathway to faster decarbonization in other regions.

Such outcomes would not be surprising in light of history; conflict has often accelerated energy transitions. The 19th century’s naval wars accelerated a shift from wind- to coal-powered vessels. World War I brought about a shift from coal to oil. World War II introduced nuclear energy as a major power source. In each of these cases, wartime innovations flowed directly to the civilian economy and ushered in a new era. The war in Ukraine is different in that it is not prompting the energy innovation itself but making the need for it clearer. Still, the potential impact could be equally transformative.

In this article we attempt to offer a more granular view of what might be in store. We examine the possible effects of the war and its ramifications on the key requirements for a more orderly net-zero transition. We explore the war’s potential effect on key sectors and how shifts in energy and finance markets could play out in the aggregate, both globally and within major regional blocs. Finally, we suggest steps that stakeholders could take as they navigate this turbulent period while continuing to drive toward as orderly a transition as possible. To do so, we start by considering the net-zero context at the time the conflict began.

A precarious moment
The invasion of Ukraine came at a time already marked by insufficient progress toward the net-zero transition. Challenging economic conditions threatened its acceleration, and accumulating physical risks made its necessity even more evident.

Even before the invasion, despite the rising tide of public- and private-sector commitments made in 2021, the world was not on a path to achieve net-zero greenhouse-gas emissions by 2050. Indeed, if all existing commitments were achieved, the world would still fail to stabilize global warming temperatures at 1.5˚C.3 Moreover, most of these commitments were not yet backed by the required financial resources and execution plans.

As for the world economy, it was already suffering from several preexisting conditions. A once-in-a-century, multistage global pandemic has caused an estimated 25 million deaths,4 increased global public debt by 28 percent to 256 percent of GDP,5 shrunk global GDP by 3.3 percent,6 and given rise to rapidly increasing inflation across the globe.7 Supply chains were under significant strain, energy markets were already tight, and global commodity prices had risen to ten-year highs.8 The war in Ukraine has exacerbated all these trends, affecting lives and livelihoods both locally and globally and threatening the most vulnerable with the potential for a marked decline in energy and food security and affordability.

At the same time, the manifestations of climate change—among them unprecedented heat waves in India and worsening drought in the American West—continued to multiply. In that context, the Sixth assessment report,9 published by the United Nation’s Intergovernmental Panel on Climate Change, issued a few days after the invasion provided a stark warning that climate change was already exerting substantial effects on human and natural systems, that these effects would scale in nonlinear fashion in the face of continued warming, and that the window for avoiding the most catastrophic effects of climate change was fast closing. As we examine the potential impact of the current conflict on climate action, it may also be worth noting that the absence of climate action could well increase by itself the risks of future conflicts, within and across nations, as a result of contention over scarcer resources such as food and water.

The war’s impact on the key requirements for the net-zero transition
In earlier research we described the nine key requirements that we believe must be met to bring about the net-zero transition. These fall into three broad categories: necessary physical building blocks; economic and societal adjustments; and governance, institutions, and commitments, including public support for progress toward cutting greenhouse gases. Understanding the war’s potential impact on each of these could help leaders better assess the prospects for the net-zero transition.

In the near term, the availability of necessary physical building blocks could be reduced in the aggregate
The transition requires three main physical building blocks: technology innovation, the creation of the supply chains that enable the deployment of new technologies, and the availability of the key natural resources needed. These three factors are subject to developments such as the interruption of production centers in Ukraine, economic sanctions against Russia, and reduced economic cooperation between nations. In the near term, technological innovation would likely speed up as stakeholders affected by rising energy or commodity inputs look for more economical substitutes or further see the importance of compensating measures such as carbon capture and sequestration. Indeed, since the war began a substantial influx of capital into renewable energy funds has taken place, reversing a multimonth downward trend.10 On the other hand, while in the short-term desire to expand net-zero infrastructure may increase, its execution may be challenged by the logistical stresses of market reorganization (due to sanctions) and rising energy prices, which could stress the often complex, multinational (and therefore transport-intensive) supply chains for net-zero technology.

In our view, however, the dominant near-term impact on the physical building blocks would be negative and come from reduced access to key natural resources. For example, Russia’s strong position in natural resources, including key minerals such as copper, nickel, and silicon,11 has already delivered a significant supply-side shock (Exhibit 1). These materials are essential inputs to four of the most important net-zero technologies: onshore and offshore wind turbines, solar panels, electric vehicles, and battery storage. Shortages driven by the war in Ukraine would overlay an already stressed renewables supply chain, which drove long-term contracts for wind and solar generation up 19 and 12 percent, respectively, over the past year.

That said, the impact of shortages on the attractiveness of net-zero technologies is not straightforward. For example, renewable-generation assets require one-time capital expenditures but minimal operating costs. As a result, input cost increases may impact the power sector less than sustained increases in fossil-fuel prices. Resource supply shocks may be felt less in Europe (which is more susceptible to sustained fossil-fuel price increases) than in the United States, where energy prices would provide less of a counterbalance to input costs. Furthermore, some large net-zero technology-producing countries are not participating in sanctions against Russia and could retain access to supplies, potentially leading to uncertainty in cost impacts for their trading partners. Likewise, the prospect of the ongoing shortages is already spurring a wave of prospecting for alternative sources, which would likely have a positive impact in the medium term.

Finally, it is important to note the near-term impact on a critical but often overlooked natural resource for the net-zero transition: land. In addition to their role in exporting a wide range of minerals, Ukraine and Russia are important producers of key agricultural commodities. Shortages resulting from sanctions and destruction of Ukrainian production centers are likely to reduce the availability of key agricultural commodities including wheat and fertilizer. Additionally, climate forecasts for 2022 indicate it could be a below-average period for breadbaskets globally,13 resulting in an additional reduction in supply. Supply shortages and price increases in agricultural markets could lead to conversion of additional land to agricultural production across the globe, which would increase deforestation rates and agricultural emissions. READ MORE

By Hamid Samandari, Dickon Pinner, Harry Bowcott, and Olivia White

Source: McKinsey.com

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