COP27: Energy security concerns collide with climate agenda
The convergence of energy security and the climate agenda is likely to be a focal point at COP27.
The Russia-Ukraine conflict has caused severe energy supply disruption in the EU and forced a near-term policy divergence between energy security and the climate agenda.
Amid historical inflationary pressures and higher fuel and food prices — driven in part by the conflict in Ukraine — governments face trade-offs between immediate energy security priorities and the longer-term energy transition agenda. The imperative to find immediate alternatives to Russian gas imports has prompted a temporary suspension or reversal of several key EU climate objectives, including the planned phase-out of coal, threatening the EU's global leadership on climate policy.
This problem is compounded by EU member states scrambling to restock gas reserves before winter by bidding for LNG, pricing out developing countries, such as Bangladesh, India, and Pakistan, and causing them to revert to or increase coal- and oil-based generation.
Over a three-year horizon and beyond, the supply shock experienced across the EU has the potential to accelerate energy diversification efforts and expand focus on deployment of renewables and green technology, with potential spill-over effects in developing countries.
A 'just transition'
African stakeholders at COP27 are likely to present a unified message focusing on a "just and equitable transition" for the region.
Several African leaders have expressed that reducing greenhouse gases (GHG) should not be done at the expense of the continent's development, especially since Africa's historical contribution to global GHG emissions is less than 4%. The pressing imperative for the region will be to secure all available forms of financing that allow it to bridge its access deficit — several estimates show that about half of the continent's population (600 million) do not have access to electricity — and industrialize while keeping its obligations under the Paris Agreement.
Addressing decarbonization and climate change is also a growing policy focus in India, which remains highly dependent on coal for its electricity generation. India is seeking to lead international negotiations on climate change with a focus on "just transition," a position it seeks to draw consensus around both for itself and for other emerging economies. India's argument is that developing economies, often with relatively fewer emissions per capita versus advanced economies, are being asked to compensate for carbon emitted historically by advanced economies.
The phasing-out of fuel subsidies is likely to be high on the COP27 agenda, although this would be difficult to implement as high fuel prices are already driving destabilizing unrest in multiple countries. The logic that governments should divert fuel subsidy funding to investment in renewables fails to consider the lack of renewable infrastructure and skills shortages in the sector. High reliance on fossil fuels will remain in place for domestic and public usage, and immediate alternative energy sources are still unavailable.
Capitalizing on demand
Gulf exporters are likely to continue to prioritize hydrocarbon development to capitalize on higher global prices and to maximize production capacity while there is still significant demand.
After the start of the Russia-Ukraine war, oil firm Saudi Aramco announced plans to raise investments by about 50% in 2022. Capital expenditure is projected to reach USD40 billion within its existing strategy to expand crude oil maximum production capacity to 13 million barrels a day by 2027 while investing in increased capacity to produce hydrogen exports and develop carbon capture and storage facilities.
No Gulf oil producers' net-zero plans involve a strategy for transition based on reducing oil production in the short to medium term.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.