Professor Thane Gustafson works on domestic politics and policymaking of Russia and the former Soviet Union, as well as the politics of energy and climate change. He is author to multiple books on Russian affairs.
As his new book Klimat: Russia in the Age of Climate Change is coming out, CERES had the privilege to interview him on his new book and have him share his perspectives on Russia’s future “in the age of climate change.”
Could you briefly introduce your new book? And then I will ask you some questions from me and my peers in the program.
Yes. Thank you very much for giving me an opportunity to say a few words about my new book. The book is called Klimat: Russia in the age of climate change. What this is about is an attempt to ask the following question — in a very long perspective, if you grab the premise that climate change is real and the world is responding to climate change, that we are headed for a peak of oil demand and decline thereafter, and that at some point, Europe in particular is going to turn away from natural gas and coal, then the question becomes: what becomes of Russia? In the long term perspective then, looking to mid-century, what alternatives does Russia have? The book is actually only about one-third about energy. It tells a story about Russian gas, oil, Russia’s dependence on the export of these commodities, agriculture, and so on. There is a chapter on coal, and the rest of the chapters are about the alternatives. These alternatives are very interesting because Russia in fact has these options. There is a chapter on agriculture. It is a major success story under Putin. There is a chapter on civilian nuclear power which has been revived under Putin. There is a chapter on renewables, but there is little to report because Russia has not really gotten into renewables yet. There is a chapter on metals which are a major source of export revenue. So you see, I go down the list of all the possible alternatives, and then I add them all up. What that comes to is a very startling finding, which is that if you grant these premises about peak oil, peak coal, and all that, the Russian income of energy drops by forty to fifty percent. Then the next question is: what does this do to the budget of the Russian government, where income from energy accounts for forty to fifty of the federal budget. All of a sudden, Russia is in trouble, and that is the headline of Klimat.
Europe has been Russian energy’s major buyer, but now we see in news headlines that Europe is really marching towards renewables. Here comes the question about Europe and Russia. Do you think their effort of reducing the use of hydrocarbon and natural gases is successful so far, and how will that affect Russia and the European-Russian energy market?
Definitely, the subject of Europe is fascinating and crucial for Russians, of course. I also address those issues in my previous book which came out last year, called The Bridge. What The Bridge is about is the whole natural gas story between Russia and Europe. It is a story with a long history because it really got under way in the 1960s, and it was just about the time the Soviet Union started to discover oil and gas resources north of the Arctic circle, in the Northern part of Tyumen province, and in the Yamal peninsula. And beginning with that, first of that, they did not have the capital, and at that time, they did not have the technology to supply their own pipe, so they turned to the Europeans for help, and the rest of history, the birth of the Russian export industry is primarily towards Europe over the very very long pipelines. It caused a great deal of anxiety in Washington. You can go back to the Reagan administration which attempted to stop the first pipeline and failed.
But the big story is, through the last two generations, Europe, the entire basis for the power and gas industries, and many other industries in europe has attempted to develop this single European market which is a whole regulatory structure and particularly applied to energy, to power and gas, creates a whole regulatory regime that is anti-monopoly and aims to promote competition. And moreover, thanks to technology, based on computerized trading hubs, that has completely transformed our sector in Europe and the gas sector in Europe. While Russia still sells gas to Europe on the basis of long-term contracts, they also sell a great deal of it on these hubs, on the stock market. And within those long-term contracts, a good deal of that gas is sold on the basis of the stock price as well. Now the Russians do not like this. They want what they are familiar with- long term contracts tied to the world price of oil, all of it is nice and dependable. The stock market is up and down and raises the risks for the suppliers. But this is the bottom line, and the bottom line of The Bridge book is that after two generations of reform, the EU has created a structure such that if the Russians want to sell the gases into Europe, they have to do it by the EU rules. Like I said, the Russians really do not like it, but they have no choice, so that is what happened. For most part, this story has been overlooked, and I thought this is a story that needed to be told. Europeans know that story. The energy companies know the story. The Russians know the story, but by large, it is not known to Americans, and Washington in particular.
Now the EU is levying more tax on carbon imports, so Russia is making less money from these exports of natural resources, and this is part of the contract that Russia has signed with the EU and really does not have a say in this. Can you talk to us about this and its impact?
Great question. This is a very recent and ongoing development. It is unfolding just as we speak. And I tell this story in the Klimat book. The EU has done a great job on the climate front. They have been very very innovative and enterprising or even aggressive, ambitious, and they really lead the world in climate policies. And one way that they have done that is attempting to apply market principles to carbon, and to create a carbon market. The way that works is that if you, say, are a steel producer in Europe, or a power generator in Europe, and you, say, generate power with coal or natural gas, you have to buy a pollution permit from the EU. This is called the emissions trading system. Now if you have more permits that you need, you can sell them. There is a market now for pollution permits.
And what about the limit of the permits? The EU set an upper limit each year, and that then sets the price, as supply meets the demand, and the beauty of that is that in theory, it is a market system, and for polluters, if it is cheaper for them to adopt green energy, or if it is cheaper for them to buy pollution permits, they will do that. So in theory, it is a beautiful system, and it is called the Emission Trading System, ETS. Now what if, however, you are importing Russian steel, the system applies to that industry, or importing cement, but let’s stick with steel as cement is more controversial. If you are importing Russian steel, which is melted and made with steel coal, and therefore it is highly polluting. So is it fair to allow Russians to move their dirty steel into Europe, when the European steel producers, such as the Swedes, face these carbon prices which make their steel more expensive? The solution that the Euorpeans came up with is that we are going to level the playing field by levying a tax, a carbon tax, on that Russian dirty steel coming into Europe. This is what they call the Carbon Border Adjustment Mechanism which is now becoming famous under the acronym CBAM. Well, CBAM does not yet really exist, except as a rising issue. It was proposed earlier this year and beginning last year, under a set of proposals called Fit for 55 which is the new next generation climate program for the EU. And when the Russians became aware of the possibility that they may have to pay a tax on their steel export and ect to Europe, they went ballistic.
This is the one thing that really forced climate change to be at the top of the political agenda in Moscow. In the last two years, the climate issue has finally become political in Moscow because of CBAM. And, let’s not say Russians do not care about climate change. I discussed the early politics in Klimat as well. Russian climate scientists are very distinguished and have been on the case since Soviet times. The climate science community is very mobilized. There is also a community of consultants and advisors now who are closely in touch with their Western counterparts, and they are fully up to speed as well. They have been trying to advise the Russian government what is coming down and you’d better get ready. But it is only because of the immediate prospect of CBAM, the top of the Russian government has finally reacted, and especially Putin.
Let’s talk about agriculture for a second as it is one of the topics that you discuss in your book. Will global warming bring Russia some new opportunities? Do you think Russia can expand its agricultural land into Siberia, since global warming is melting some of the permafrost land in Siberia and Northern Russia?
That is a crucial question, though it is a question for the second half of the 21st century and going into the next century. The outline of the answer goes like this. So first of all, 70 percent of Russia’s territory is covered by permafrost, which is a mixture of ice and sand, basically, and a little bit of soil. They discovered all kinds of things as the permafrost melts, but seriously, as it melts, there is a great speculation that you will have more land area no longer covered by permafrost and maybe available for agriculture. Russia has a tradition of soil science, and soil science has done surveys on what kind of surfaces will be exposed as a result of the melting permafrost, and they warn that the kind of soil that gets exposed has very very little organic content, in other words, it is not soil, it is basically sand and water, so it is very poorly suited for agriculture, even assuming the climate condition becomes right. The consensus among Russian soil scientists is that the fertile area of Russia is not going to expand all that much due to warming climate and melting permafrost; yes to the northern part of the agricultural band, but it will not be a game changer. That is one issue, and there is another problem, the problem of labor. We are talking about eastern and northeastern Russian, ⅔ of Russia, huge territory, and this is the territory that is losing population. So the issue is how to attract labor to this very wild region is the number one problem for Russia. And there are 1.5 billion Chinese who would love to go up to Siberia and cultivate the “virgin land,” but no, not likely, at least no evidence of that so far. So now if you add up the problem of soil and labor, you have got really a sharp limit of how much you can expand the cultivable area. Russians have made a lot of progress under Putin, and it is a really amazing story, but much of that comes from undoing the worst practices of the Soviet period by taking advantage of the Russian fertilizing area, the Russian South. Historically, Russia has been the biggest wheat export in the world. Thanks to a complete revolution in land holding.
As you mentioned China, China has been an important trade partner to Russia, and we have seen how Chinese actors replaced Western ones in Russia’s Arctic LNG projects. Will Chinese investments, technology, labor, and market demand be significant factors in the development of the Russian Far East and the Russian Northern Sea Route? Will the Chinese market be something to make up for what Russia is to lose in Europe?
It is right to ask the question about China because all environmental change questions go back to china. The paradox of China is that it was once the world’s largest emitter of CO2 and at the same time, the country is making the greatest progress in fighting CO2 emissions with a strongly developed policy of renewables. Now what are the big unknowns? The biggest single unknown is coal because over 60 percent of China’s electricity is still generated with coal. And there is a tremendous coal bureaucracy, particularly at province level, producers of coal, manufacturers of coal fired power plants, operators of coal fired power plants, and exporters of coal fired power plants, financial agencies that finance the constructions of the coal powered plants, both inside China and outside. Coal is the single most important question at the center of Chinese climate policy. At the same time, it is the biggest single question for everybody else, including and in particular, the Russians. Russian coal, too, has been a success story under Putin. The coal industry has been revived. And whereas it was entirely devoted to the domestic market and European exports, increasingly, the center of gravity of the Russian coal industry is switching to the Far East. They have the development of the coal resources in the Far East and the continued development of the biggest single source of coal in Russia — Kuzbass. Kuzbass is equally distant to the European market and the Chinese; it can swing either way. But in order to get to the Chinese market, it has to have railroads, and the railroad construction program is lagging. And this is driving Putin up the wall. He keeps pushing the railroad to invest more, and it is pending capacity. It is one of the national programs, and yet, they keep lagging behind. Constantly you get large amounts of coal piling up in the Kuzbass. These bottlenecks will ultimately get worked out, but where will the demand be ten years from now in a world that hopefully is moving away from coal. Are the Russians on the wrong path now? Are they investing in something that will be in low demand? That is one of the main questions of the Russian climate policy.
And one more thing about China. In the first part, I only talked about coal, but China is a player in Russia’s natural gas equation. It is also very interesting because at this moment, Russia is on the verge of competing with itself. On the one hand, there is a large pipeline, the so-called Power of Siberia which delivers gas to Northeastern China. And for the moment, it is largely confined to Northeastern China because China has yet to build the pipeline infrastructure to distribute the gas further South down the coast where Gazprom definitely likes to go. Meanwhile, Novatek, a Russian ING producer, is looking forward to stepping up its ING deliveries to China, but most of that gas will go to the regasification facilities, most of which are clustered on the Eastern and Southeastern coast of China. So that is ING territory, and that is where Novatek will go. And then as China expands their distribution system, that gas will start its way marching up the coast. So it is pretty entertaining. You can picture the Russian pipeline of gas marching its way down the coast and Russian ING marching its way up the coast. And they are going to meet, and it will be very interesting to see how Moscow handles that. Already Gazprom is very annoyed because it sees Novatek as competing with its pipeline gas in Europe, so there are bad feelings on both sides which Putin is trying to smooth over. It is an expanding gas market. If China cuts down on coal production and gas-fired power, then the future belongs to renewables, and for a time, to natural gas. And the question is what role will Russian natural gas play, as China goes for renewables.
Russia is not a dominant player in the climate change game; what are the changes that Russia can potentially make in different sectors to make up for their foreseeable loss in energy export? With their current economic structure, it does not seem easy to have any revolutionary changes in any sectors. What can they do or should they do right now to be more prepared for future changes?
The answer to the question is “not very much” because the model of reliance on natural resource exports and particularly hydrocarbon energy is really wired into the whole economic and political system, and moreover, for the next ten years or so, the global energy transition will not have built up more madems yet. By the early 2030s, it is really only by then, electric vehicles will have become even 50/50 dominant. It is only by the early 2030s, we will see renewables as the main source of power generation, etc. In the next ten years, Russia is going to be able to continue cruise mode: exporting what they export now. I think the temptation is to go to sleep, and that has been broadly the reaction of Russians until a year or two ago. And all of a sudden, this CBAM thing blew up from Europe, and suddenly the Russians woke up and had to take notice. What they will do with that is unknown now. And at the meantime, of course, the Russians’ temptation is to say up until now, until recently, climate change is no big deal and we see benefit from it- we have the Northern Sea Route; we have agriculture as it gets warmer our yields will go up, so far all good; and on top of that, we have our immense forest which cover 60 percent of Russian landmass… We should be getting more credit for that than what we do. No need to do anything. But, CBAM has suddenly put all that in doubt and made a segment of the Russian elites to sit up and say at least we need to pretend to do something.
What is the takeaway that you want people to have from your book?
You are going to make sense of these things and also make reasonable predictions about what is going to happen. You have to take the long view and put these issues in a long range of perspectives: the perspectives of the last several decades and the perspectives of the next several decades. And the reason for that to begin with is that the energy sector of the world moves fairly slowly, actually. You talk about the inertia of the immense structures, so things do not just happen overnight. A lot of these stories take their origin in the Soviet period, so we are seeing the long playing out of the post-Soviet transition. Climate change itself, we may perceive it to be happening fast, but in actual fact, these conversations about climate change have been going on for half a century now. So that, too, you have to take the long view. And that’s why in both books (Klimat and The Bridge), I have attempted to take a long look forward to the mid-century.
(The interview was edited for shorter length and clarity.)
Professor Gustafson will be teaching one graduate-level course and one undergraduate-level course in Spring 2022.
REES 530/GOV 516 The Future of Russia
M 12.30-3pm
GOVT 344 Energy and Coming World
TR 12.30-1.45pm