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On 14 July, as part of its ‘Fit for 55’ package, the European Commission will propose a dozen climate policies, each with the ambition to curtail greenhouse gases, in line with the goals stated in the European green deal program. The idea behind the green deal is to change how energy is produced and consumed in the EU. Going by the targets set in the green deal the EU plans to cut greenhouse gas emissions by at least 50% compared to the 1990 levels by 2030 and become climate neutral by 2050. Such an ambitious program will no doubt impact EU’s relations with most energy-producing countries, most importantly, Russia.

According to the International Energy Agency report on EU’s Energy Policy Review 2020, renewables accounted an 18% share in the EU’s gross final consumption in 2018. This means that over three-quarters of energy consumed in the EU comes from fossil fuels. Oil dominates the energy mix with a 34.8% share, followed by natural gas and coal at 23.8 and 13.6%. With the implementation of the European Green Deal, the composition of the current energy mix will undergo serious change.

As per the projections by the European Commission, dependence on fossil fuels would be curtailed by half by the end of the decade. The use of coal will be reduced sharply by 2030 while the phasing out of oil and natural gas is planned between 2030 and 2050. By the middle of the century, the EU plans to phase out oil completely and limit the share of natural gas to about a tenth of the overall current energy mix. It is, therefore, the long-term phasing out of oil and natural gas that will have implications for both the political and economic relationship with Russia.

There are two important ways in which the European green deal concerns Russia. First, the future demand for Russian fossil fuels will shrink. As per the stated goals, the demand for coal will fall, followed by oil and natural gas. Oil and natural gas export form a major part of the Russian budget. According to the data published by the Russian Federal State Statistics Service, the share of oil and gas production in the Russian economy increased from 34.3% in 2010 to 38.9% in 2018. Nearly half of Russia’s fossil fuel exports go to the European markets, making it vulnerable to policy shocks and changes in consumption patterns. Russia can substantiate its loss for energy demand by diversifying its export product and market. Nevertheless, given the fact that Europe remains Russia’s largest purchaser of oil, coal and gas, the impact on its economy will be severe.

The second challenge for Russia is in the form of a carbon border adjustment mechanism that the EU plans to introduce. Simply put, the EU wants to introduce a tax related to the volume of emissions caused by the production of imported goods. The idea behind the tax mechanism is to prevent countries from shifting carbon-intensive production units to countries with weaker environmental laws and standards and to motivate them to adopted environmental standards similar to those of the EU.

The tax mechanism concerns goods that consume a significant amount of energy to produce and transport. In the case of Russian exports to European countries, these include metals, fertilizers and chemicals. With the introduction of the cross-border tax mechanism, 42% of all Russian exports to the EU are estimated to be impacted. Moreover, not only will the production cost of such goods increase, making them less competitive globally, but a precedent would be set wherein exports to European markets will become subject to the standards set by the EU.

The long-term risks associated with the European green deal put Russia at the crossroads. It can try to decrease its dependence on the European market by increasing exports to Asia, targeting countries like China, Japan and Korea. However, these countries themselves plan to achieve climate neutrality by 2050 and in China’s case by 2060. Moreover, simply shifting markets would not solve the problem for Russia if it is not paired with a green transformation of its energy production that would allow it to service the European market. In the next two decades, demand for Russian natural gas in Europe will increase due to the phasing out of coal and oil. Russia can use this period to prioritize technological restructuring of its economy by initiating energy transition policies that incentivize the growth of clean energy technologies. Not only will this allow Russia to retain a share of the future global market, but also keep its door open for trade with western European countries.

Russian companies have showcased their willingness to work with foreign players like BP, Shell and Total to transition to low and zero-carbon technologies. In October 2020, Russia adopted a roadmap for its hydrogen development strategy to replace fossil fuel, possibly hinting at a new kind of energy relationship with Europe. Amid the steadily worsening political relations with the West, cooperation in clean energy technologies, particularly in hydrogen production, can turn out to be one of the few promising areas of cooperation between Russia and Europe.

Trivun Sharma is a PhD Student in international relations, University of Warsaw, Poland.

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