Sustainability transitions, for example major shifts in economies and societies toward more sustainable modes of production and consumption, are one of the key answers to this violent war. The past few weeks have shown that for Europe to rely for critical inputs on countries that do not share its democratic values and commitment to upholding human rights is a source of vulnerability in the face of such countries. This undermines Europe’s capacity to fully raise its voice both on the political and economic front.
A ‘positive’ outcome of this terrible war could be that it speeds up the necessary sustainability transitions – energy, resources, and food - needed to combat climate change, nature degradation, and generally to avoid the negative effects related to production and consumption. Also, the social element of transitions, creating thriving communities, is now more than ever important in the light of getting buy-in of voters for change, getting everyone along and taking care of refugees that come to Western Europe.
Economic disruptions happen during and after wartimes
Exogenous shocks to the economy, such as wars, often result in dramatic changes in the economic structure. Such transformations have taken place in the past. Coincidentally, both the First and Second World War have been catalytic in transforming Europe into a heavily oil-using economy. Wars saw the rapid development of the technological, infrastructural, logistical, scientific, and institutional conditions underpinning oil-intense societies of the post-war economic ‘golden age’. Two conclusions can be drawn from this. First, wars seem to lead to carbon-intense and environmentally damaging energy transitions. That means that remilitarisation of Europe and more defence spending is probably no good news for a sustainability transition. Second, wars are in general (literally) times of rebuilding societies and opportunities for change. Although there is nothing creative about war destruction, it helps to rethink processes and economic connections critically and creatively, partly pushed by changed relations with countries.
The war in Ukraine gives extra impetus to an energy transition that is already under way. There is no need to again stress the need of an energy transition if you take the IPCC report seriously. Fossil fuels are one of the biggest sources of greenhouse gas emissions. Shifting to renewables and reducing energy use is essential to combat climate change.
Thinking about resilience and reducing dependencies is most obvious when looking at Europe’s energy and resource dependencies on Russia. Given that the European Union’s energy supply depends for a large part on Russia (45% gas, 27% oil, and 46% coal), it should be no surprise that especially reducing this energy dependency has been high on the political agenda since the outbreak of the war. This has already resulted in the outline of the RepowerEU plan, which can be read as a speeding up of the existing ambitious Fit for-55 plan to make Europe front runner in sustainability.
The recently launched REPowerEU plan consists of different elements, which together must ensure that the EU dependency on Russian gas is cut by two-thirds by the end of this year and reduced to zero “well before 2030”. It includes fast-tracked deployment of solar energy and renewable hydrogen, the quick implementation of far-reaching energy-efficiency measures, and the production of 35 billion cubic meters of biogas per year by 2030. European citizens will be called upon, too: They are already being asked to turn down thermostats by at least 1 degree, which could shave about 7% off Europe’s gas consumption. In addition to all that, it also allows state support to combat energy poverty. Several countries have already taken such measures, ranging from subsidizing households to lower taxes on energy bills.
These are all necessary responses to the most immediate effects of the Russian invasion in Ukraine, and to avoid further subsidising of Russia’s war machine. The current high energy prices make substitutes more attractive, and therefore speed up the transition.
Currently, more than 100 billion tons of resources are used in the world economy every year, yet only 8.6% are recycled and used again. Our choice of materials also directly impacts a variety of environmental, social, and economic risks associated with producing goods, from labour conditions and trade flows to pollution, climate change and land use. And although there is an ambitious agenda, it will be more difficult to step up the speed and become less dependent on Russia. This is essential, however, as many critical materials are also supplied by Russia. Russia (and Ukraine) are major suppliers of critical raw materials. Russia controls as much as 44% of global palladium supplies, for example, which is a key element in pollution control devices in cars and the aerospace industry, while Ukraine produces some 50% of the global supply of neon used for semiconductor manufacturing. EU fuel cell and hydrogen technology development require a host of Russian supplied materials, such as platinum (13%), titanium (23%), and vanadium (34%). The mix of minerals from Russia used in Europe’s 3D printing technology, for example, amounts to some 12%; for EU robotics technology development around 9%. Russia is also the world’s third largest supplier of nickel used for electric vehicle batteries, but also in the production of stainless steel, a basic commodity in countless industries. Long-term contracts and sometimes an advanced production base of leading Russian suppliers further tighten the supply bottleneck.
Disruptions in the flow of these raw materials not only threaten consumers and industry through price explosions. Severe supply shortages in the months to come also constitute a strategic threat to EU economic security: the EU’s capacity to deliver on its transformative green and digital ambition. China – which controls many more raw material supply bottlenecks – could even use any disruption to try and cement its supply dominance, an outcome which would further amplify EU dependence and vulnerability.
While the energy dependency could be solved, this is far more difficult for the materials dependency. Apart from the fact that the number of alternative suppliers is limited, the energy transition will increase our demand for rare metals and minerals. Recycling would be a solution here, but the recycling rates of most of these metals and minerals are currently not higher than 60%. For minerals such as lithium, the current recycling rate is even only 10%. Other circular strategies - from repair to refurbish and reuse - are less or even not applicable here. The current high prices may therefore be a blessing, as they make alternatives more viable and extra research into substitutes for those resources might help to some extent in both resource efficiency and finding substitutes. Nevertheless, transforming the European economy from a linear to a (more) circular system will be a huge project.
Our food system is the largest sectoral contributor to environmental degradation, largely due to the large-scale application of destructive agricultural practices. Agriculture now occupies roughly half of the earth’s habitable surface, uses 69% of extracted fresh water, and together with the rest of the food system, is responsible for 25% – 30% of global GHG emissions.
The invasion of Ukraine has created two principal problems that will likely drive food prices up. It is disrupting production and trade in Russian and Ukrainian cereals and vegetable oils, which make up a significant share of the global market—about 30% of world wheat and barley exports, for example. The war has also interrupted fertilizer exports from Russia and Belarus, which together account for a major share of global production. Although countries such as Egypt, which strongly depends on imports from wheat, will suffer the most, also in Europe the price effects can be large. Just as with energy, increased resilience of the global food system by reducing the dependency on a few countries and a few companies for the bulk of agricultural commodities and food production is necessary. This means diversifying, strengthening, and improving the way agriculture and food markets function, making them less concentrated, and curtailing excessive market power. The ‘Farm to fork’ strategy' from the European Commission intends to create a more sustainable and resilient food system in Europe, but has no answer to the war disruption, since it does not help to reduce dependencies on food system dependencies with Russia. Speeding up the transition and setting more ambitious sustainability targets is required.
No easy road
Changing the structure of the economy – as we are trying now - is never a zero-sum game. There was and is a reason why so many resources come from Russia: they are relatively cheap and readily available compared to alternatives. Looking at it from the other side: energy and resource independence comes at a cost, as transitions never come for free. In a transition phase, prices will certainly rise. And although a more sustainable system may ultimately be more efficient and cheaper, it might take decades to get there.
Hence, unexpected rebounds and macroeconomic effects may occur that can curb a transition. Politics may prevent a successful transition. If prices go up during the process - as they are likely to do - the challenge will be how to distribute the pain. No matter how necessary the transition is, ill-designed policies can hurt its speed or even its outcome. This is already happening with the energy transition. Subsidising fossil fuels, as is happening now in various European countries to undo the huge price increases because of the war, reduces the incentive to search for alternatives or to invest in energy efficiency. In the food transition, too, policy mistakes may prevent success: rationing or sanctioning free trade do not automatically help to create a more sustainable food system.
It is important that everybody is taken along to create a thriving community. But it would, for instance, be far better to compensate lower incomes in general to prevent energy poverty, than lowering prices for everybody. The latter cost much more and disincentivizes people to save energy. It is also important to give people a perspective that relates to their personal wellbeing: a more carbon-free economy is healthier, and energy will become less expensive.
Another outcome of the war and the urgency to diminish our dependency on Russian oil and gas could be that we choose to increase the use of coal, shale oil and LNG as alternatives, and/or decide to keep nuclear power plants longer open, instead of making a full transition to renewable energy. And it may also turn out that we trade one dependency for another. It is, of course, highly questionable if that would help bolster the resilience of the European economy, especially if it concerns another autocracy.
Crossing the bridge
We have now more than ever the opportunity to transform the European economy. The sustainability arguments to do so were already enough in my opinion, but if geopolitical arguments and price effects help to convince more people of the necessity, that is what it is.
To get this done requires a combined effort in the years to come. Long-term commitment of policy makers is needed to shape the environment for businesses to take new risks and for the financial sector to finance and invest in those businesses. What is most important is to create a attractive level playing field in Europe for investors to cross the bridge towards a regenerative European economy. We will explore this in a separate article. The faster that is achieved, the less public funding is needed to transform the economy.
This could be the outcome for Europe of the war in Ukraine. And the only thing that we could thank Mr. Putin for.
War in Ukraine
Read more about the impact of the war in Ukraine on financial markets and the macroeconomic implications.