The European Green Deal and EU-Russia relations

Marco Siddi
Senior Research Fellow
Finnish Institute of International Affairs
Finland

Montalcini Assistant Professor
University of Cagliari
Italy

The European Union (EU) has launched a Green Deal to promote the energy transition and a climate-friendly economic recovery after the Covid-19 pandemic. The European Green Deal is a comprehensive roadmap for policies that should lead the EU to climate neutrality (zero net greenhouse gas emissions) by the year 2050. For the year 2030, the EU’s plan is to reduce emissions by at least 55% (compared to 1990 levels), while simultaneously increasing renewable energy production and energy efficiency.

The decarbonisation of the European economy poses a major challenge to hydrocarbon producers that supply the large European market. This issue is particularly relevant to Russia. The trade of fossil fuels has been a crucial economic and strategic aspect of EU-Russia relations for decades. The EU has had access to competitively priced Russian fossil fuels, whereas Russia has made vast profits by selling its energy in the EU market. In Western Europe and large EU members in particular, this trade tends to be regarded as the cornerstone of EU-Russia economic interdependence.

In the current context of political crisis between Moscow and Brussels, energy trade is one of the few remaining areas of bilateral cooperation – and the most significant one from an economic standpoint. The prospective scaling down of this trade may further alienate the EU and Russia from each other and potentially aggravate political tensions. At the same time, the climate crisis requires prompt action from large polluters such as the EU and Russia in order to avert an environmental catastrophe.

The European Green Deal will have two main challenging consequences for Russia. The first one concerns Russia’s energy exports. European demand for Russian fossil fuels will decrease. This will initially affect coal demand, then oil and, after 2030, gas. While Russia is now increasing exports to Asia, Europe remains the largest purchasers of Russian oil, coal and gas. Moreover, Asian countries are also embarking on the energy transition – Korea and Japan aim to achieve climate neutrality by 2050, China by 2060. Hence, Asia’s demand for fossil fuels will also decline in the mid- and long-term.

The second main implication of the European Green Deal concerns Russia’s energy intensive exports to Europe (metals, chemicals, fertilisers). The EU is planning to introduce a carbon border adjustment mechanism, namely a tax related to the volume of emissions caused by the production of the imported goods. With the tax, the EU aims to prevent carbon leakage, namely the transfer of carbon-intensive production to countries with weaker environmental standards. It also intends to induce other countries to adopt similar standards. The tax will impact on the price of Russia’s metallurgical and chemical exports to Europe. The EU’s plan to introduce a carbon border tax has aroused criticism in Russia and in other trade partners of the EU, where many see the tax as “green protectionism”. Some Russian actors mentioned that the issue could be taken to the World Trade Organisation.

Nonetheless, the European Green Deal could also lead to new forms of cooperation between the EU and Russia. While the huge income from hydrocarbon exports have discouraged ambitious green policies and investments in Russia, official discourses on climate policy are beginning to change in Moscow too. In his state of the nation address of April 2021, President Vladimir Putin mentioned environmental and climate issues as a priority for Russia’s development for the first time. In July, he signed a law that mandates companies with significant emission levels to record them; the data will be used to monitor if emission targets are met. If Russia develops domestic carbon pricing, it may be able to collect carbon fees domestically instead of having its exports taxed at the EU’s border.

Against this background, Russia and the EU face the task of progressively transforming their energy relationship along more sustainable models. Important areas of potential EU-Russia green cooperation include the development of renewable energy, the trade of rare earths, hydrogen, and improvements in energy efficiency and connectivity.

Russia has huge potential for developing renewable energy. Some European companies have already invested in the Russian renewables sector. For instance, the Italian ENEL is building wind farms in the Murmansk, Stavropol and Azov regions. Renewable energy – for example wind power – can be produced and used locally to satisfy the demand of relatively small urban centers in the vast Russian North and East, which is more cost efficient than connecting them to a centralized power grid over long distances.

Russia is one of the largest producers of rare earths and minerals such as nickel and cobalt, which are essential for renewable energy technologies and are in high demand in the EU. It also has numerous resources that are capable of producing hydrogen, as well as a number of R&D activities in this area. Russia could produce hydrogen from hydrocarbons (for instance grey and blue hydrogen), renewable sources (green hydrogen) and nuclear power (purple hydrogen). Here, the different preferences of the EU and Russia would need to be reconciled – the EU clearly prefers green hydrogen, despite the generally higher cost of producing it now.

There is plenty of room for both the EU and Russia to increase their energy efficiency. As the lack of investments is a key issue in this area, Russia’s cooperation with the EU could compensate for the shortage of finance, especially if administrative and bureaucratic barriers are eased. Moreover, Russia and the EU could ensure their connectivity through infrastructure that allows electricity trade. Finally, the harmonization of regulatory aspects, such as green taxonomies, would greatly facilitate green cooperation and investments.

E-mail: Marco.Siddi@fiia.fi

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