Climate change is rightly near the top of the global agenda, but diverging views on the pace of decarbonisation are moving further apart – and for one good reason. Russia’s invasion of Ukraine has reignited the energy security vs. energy transition dilemma for a whole swathe of countries, including those that were previously committed to slashing emissions. With renewables not yet ready to make up for the severe disruption to oil and gas markets due to the crisis, concerns over energy supplies are spiking. In March 2022, the International Energy Agency re-introduced energy security as a policy priority alongside its long-standing energy transition agenda, making them twin goals for the global energy system. A stance that is now mirrored across the world.
Against this backdrop, we have identified key trends that are shaping climate politics and the new economic interdependencies of green energy. First, the global division on climate politics is expanding. Second, the fossil fuel supply chain is shifting towards Asia. Third, the region’s rising dominance of green energy markets is well underway. The implications of these trends are far-reaching for companies sourcing from the region and investors. These factors not only provide traditional oil and gas producers breathing room among ever louder calls for divestment from fossil fuels, but they also allow China to continue to utilise the strength of its market for geopolitical advantage.
The North-South divided over climate politics
The Russia-Ukraine crisis has deepened the global division on climate action. While energy insecurity has sped up the energy transition in Europe, it has also pushed some Asian countries to rely more on fossil fuels to ensure basic supplies. Although opportunities in Asia for renewables remain robust, major emitters have doubled down on coal to ensure basic energy supplies. For example, the People’s Bank of China has increased special loans for clean and efficient use of coal to RMB300 billion (USD45 billion), almost four times more than the financial support for renewables.
Figure 1 shows that lower income countries, those with weaker scores on our Poverty Index, are less likely to adopt a stringent carbon policy. Despite carbon neutrality pledges, these countries have prioritised domestic development agendas, such as poverty eradication, economic growth and energy security. Their economies are more sensitive to the social impact of a robust carbon policy, such as unemployment caused by less investment in fossil fuels. Therefore, developing countries, especially China and India, will likely take a much slower transition path than developed countries, such as the US and EU.
The global division on emissions has brought many developing countries together in terms of their climate politics. Most notably, despite their ongoing border tensions, China and India jointly led a last-minute intervention to weaken the language on fossil fuels in the Glasgow Climate Pact at COP26. Their negotiating position calling for “climate justice” benefits from the support of many cash-strapped economies. We expect these developing countries to stand together as a bloc negotiator and press rich countries for more support in climate finance, mitigation and adaptation.
Global gas supply chain shifting eastward
The global call for the phasing-out of fossil fuels will spawn new patterns of trade interdependence and shift bilateral relations. Major fossil fuel producers, such as Saudi Arabia and a sanctioned Russia, have faced significant fiscal challenges from declining oil revenues amid stakeholder pressure for divestment from carbon-intensive projects. Deteriorating economic conditions have undermined their efforts to address social and economic inequities that in turn fuel political instability. Their national expenditures on building up the security forces to address domestic unrest, regional instability and geopolitical competition are also sensitive to changes in oil prices.
Global division on climate action has also become a silver lining for major oil and gas producers. Figure 2 shows that while both Asian and European economies are exposed to high and extreme risks to their energy security, they have distinct environmental regulatory frameworks for their energy transition. Renewable energy is considered a core part of the EU’s energy security formula, but it is not yet an immediate solution for most Asian developing countries. Over the next decade, Asia will continue to rely on fossil fuels, especially natural gas which is considered a transition option to balance decarbonisation goals and development needs. It becomes an opportunity for gas producers to explore new markets in Asia when demand for natural gas decreases in developed countries with stringent environmental regulations.
The trend for gas producers pivoting to Asia allows resourceful producers, such as Saudi Arabia, to build a business cycle that uses revenue from gas to support decarbonisation while maintaining their geopolitical influence. It even provides Russia a little breathing space to accelerate the shift of resource exports eastwards to partially buffer its losses in Western markets due to sanctions. In particular, we expect the burgeoning gas trade between Russia and China to reinforce closer political and strategic cooperation in the face of more unified Western alliances.
Clean energy becoming geopolitical lever
In the global competition for dominance of the green tech space, China has already secured significant control over the global supply chain of materials that are indispensable inputs for clean energy development. China’s solar manufacturing accounts for over 70% of the world’s total capacity. The country is also the source of 60% of the world’s rare earth minerals and a key refiner for lithium and cobalt, accounting for over 60% and 70% of the global share respectively. And China is rapidly building up its manufacturing capacity for EV battery components and green hydrogen electrolysers to cater to increasing orders from overseas.
We expect China’s high levels of manufacturing capacity for clean technology to return as soon as lockdowns ease. Figure 3 uses a fivepillar framework to assess the ability of a country to bounce back from the pandemic disruption. It shows that China’s overall performance is marginally better than that of many other Asian developing countries with similar labour costs. Despite its poor performance on compounding factors, such as exposure to civil unrest and regional conflicts, China remains a relatively competitive manufacturing hub due to its robust economic dynamics. In response to its dominance, some strategic competitors of China have begun to diversify the supply chain of strategic materials to other Asian countries via government-led initiations such as the Quad Critical Minerals Partnership Act, but any relocation could take years.
Strategic competition over green energy has made the global supply chain highly vulnerable to geopolitical risks via cycles of retaliatory measures. For example, the US solar industry has to rework its supply chains after the Biden administration banned Chinese solar modules that are not free of forced labour. Although China is unlikely to bluntly ban its exports in the near future, a series of protective measures, including the Export-Control Law (2020), indicate Beijing’s intention to tighten its control over the supply chain of strategic commodities, including critical materials. It is not immediately clear if these supply chain disruptions will affect the pace of the global energy transition but we expect them to increase the compliance and due diligence cost of international companies sourcing from China.
Energy dilemma hindering climate policy actions
The fractious geopolitics of green energy is not set to ease any time soon amid a widening global division on energy transition and supply insecurity driven by the Ukraine crisis. It will remain a key obstacle to greater climate policy ambition, especially in developing markets.
The collective effort of Asian countries in climate negotiations, the eastward shift of gas producers, and China’s dominance of the clean energy supply chain will combine to have significant impacts on the trade in global commodities and the geopolitical landscape.