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Foreign Affairs

Green Upheaval

The New Geopolitics of Energy

By  Jason Bordoff and Meghan L. O’Sullivan

January/February 2022

It is not hard to understand why people dream of a future defined by clean energy. As greenhouse gas emissions continue to grow and as extreme weather events become more frequent and harmful, the current efforts to move beyond fossil fuels appear woefully inadequate. Adding to the frustration, the geopolitics of oil and gas are alive and well—and as fraught as ever. Europe is in the throes of a full-fledged energy crisis, with staggering electricity prices forcing businesses across the continent to shutter and energy firms to declare bankruptcy, positioning Russian President Vladimir Putin to take advantage of his neighbors’ struggles by leveraging his country’s natural gas reserves. In September, blackouts reportedly led Chinese Vice Premier Han Zheng to instruct his country’s state-owned energy companies to secure supplies for winter at any cost. And as oil prices surge above $80 per barrel, the United States and other energy-hungry countries are pleading with major producers, including Saudi Arabia, to ramp up their output, giving Riyadh more clout in a newly tense relationship and suggesting the limits of Washington’s energy “independence.”

Proponents of clean energy hope (and sometimes promise) that in addition to mitigating climate change, the energy transition will help make tensions over energy resources a thing of the past. It is true that clean energy will transform geopolitics—just not necessarily in the ways many of its champions expect. The transition will reconfigure many elements of international politics that have shaped the global system since at least World War II, significantly affecting the sources of national power, the process of globalization, relations among the great powers, and the ongoing economic convergence of developed countries and developing ones. The process will be messy at best. And far from fostering comity and cooperation, it will likely produce new forms of competition and confrontation long before a new, more copacetic geopolitics takes shape.

Talk of a smooth transition to clean energy is fanciful: there is no way that the world can avoid major upheavals as it remakes the entire energy system, which is the lifeblood of the global economy and underpins the geopolitical order. Moreover, the conventional wisdom about who will gain and who will lose is frequently off base. The so-called petrostates, for example, may enjoy feasts before they suffer famines, because dependence on the dominant suppliers of fossil fuels, such as Russia and Saudi Arabia, will most likely rise before it falls. And the poorest parts of the world will need to use vast quantities of energy—far more than in the past—to prosper even as they also face the worst consequences of climate change. Meanwhile, clean energy will come to represent a new source of national power but will itself introduce new risks and uncertainties.

These are not arguments to slow or abandon the energy transition. On the contrary, countries around the world must accelerate efforts to combat climate change. But these are arguments to encourage policymakers to look beyond the challenges of climate change itself and to appreciate the risks and dangers that will result from the jagged transition to clean energy. More consequential right now than the long-term geopolitical implications of a distant net-zero world are the sometimes counterintuitive short-term perils that will arrive in the next few decades, as the new geopolitics of clean energy combines with the old geopolitics of oil and gas. A failure to appreciate the unintended consequences of various efforts to reach net zero will not only have security and economic implications; it will also undermine the energy transition itself. If people come to believe that ambitious plans to tackle climate change endanger energy reliability or affordability or the security of energy supplies, the transition will slow. Fossil fuels might eventually fade. The politics—and geopolitics—of energy will not.

PERSISTENT PETROSTATES

World War I transformed oil into a strategic commodity. In 1918, the British statesman Lord Curzon famously said that the Allied cause had “floated to victory upon a wave of oil.” From that point forward, British security depended far more on oil from Persia than it did on coal from Newcastle, as energy became a source of national power and its absence a strategic vulnerability. In the century that followed, countries blessed with oil and gas resources developed their societies and wielded outsize power in the international system, and countries where the demand for oil outpaced its production contorted their foreign policies to ensure continued access to it.

A move away from oil and gas will reconfigure the world just as dramatically. But discussions about the shape of a clean energy future too often skip over some important details. For one thing, even when the world achieves net-zero emissions, it will hardly mean the end of  fossil fuels. A landmark report published in 2021 by the International Energy Agency (IEA) projected that if the world reached net zero by 2050—as the UN Intergovernmental Panel on Climate Change has warned is necessary to avoid raising average global temperatures by more than 1.5 degrees Celsius above preindustrial levels and thus prevent the worst impacts of climate change—it would still be using nearly half as much natural gas as today and about one-quarter as much oil. A recent analysis carried out by a team of researchers at Princeton University similarly found that if the United States reached net zero by 2050, it would still be using a total of one-quarter to one-half as much gas and oil as it does today. That would be a vast reduction. But oil and gas producers would continue to enjoy decades of leverage from their geologic troves.

There is no way to avoid major upheavals while remaking the entire energy system.

Traditional suppliers will benefit from the volatility in fossil fuel prices that will inevitably result from a rocky energy transition. The combination of pressure on investors to divest from fossil fuels and uncertainty about the future of oil is already raising concerns that investment levels may plummet in the coming years, leading oil supplies to decline faster than demand falls—or to decline even as demand continues to rise, as it is doing today. That outcome would produce periodic shortages and hence higher and more volatile oil prices. This situation would boost the power of the petrostates by increasing their revenue and giving extra clout to OPEC, whose members, including Saudi Arabia, control most of the world’s spare capacity and can ramp global oil production up or down in short order.

In addition, the transition to clean energy will wind up augmenting the influence of some oil and gas exporters by concentrating global production in fewer hands. Eventually, the demand for oil will  decline significantly, but it will remain substantial for decades to come. Many high-cost producers, such as those in Canada and Russia’s Arctic territory, could be priced out of the market as demand (and, presumably, the price of oil) falls. Other oil-producing countries that seek to be leaders when it comes to climate change—such as Norway, the United Kingdom, and the United States—could in the future constrain their domestic output in response to rising public pressure and to hasten the transition away from fossil fuels. As a result, oil producers such as the Gulf states—which have very cheap, low-carbon oil, are less dependent on the financial institutions now shying away from oil, and will face little pressure to limit production—could see their market shares increase. Providing more or nearly all of the oil the world consumes would imbue them with outsize geopolitical clout, at least until oil use declines more markedly. Other countries whose oil industries might endure are those whose resources can be brought online quickly—such as Argentina and the United States, which boast large deposits of shale oil—and that can thereby attract investors who seek faster payback periods and may shy away from longer-cycle oil investments given the uncertainties about oil’s long-term outlook.

An even more intense version of this dynamic will play out in natural gas markets. As the world starts to use less natural gas, the market shares of the small number of players that can produce it most cheaply and most cleanly will rise, particularly if countries taking strong climate action decide to curb their own output. For Europe, this will mean increased dependence on Russian gas, especially with the advent of the Nord Stream 2 pipeline connecting Russia to Germany. Today’s calls from European lawmakers for Russia to increase its gas output to avoid an energy crisis this winter are a reminder that Moscow’s importance to Europe’s energy security will rise before it declines.

POWER FROM POWER

In order to understand the geopolitics of a world moving away from fossil fuels, it is critical to grasp which elements of being a clean energy superpower will actually yield  geopolitical influence. Here, too, reality differs from the conventional wisdom, and the transition process will look very different from the end state. In the long run, innovation and cheap capital will determine who wins the clean energy revolution. Countries with both those attributes will dominate in at least four ways.

One source of dominance—the power to set standards for clean energy—will be more subtle than the geopolitical power that came with oil resources but just as enduring. Internationally, a country or company that sets global standards for equipment specifications or norms of engagement maintains a competitive advantage over others. For example, Australia, Chile, Japan, and Saudi Arabia have emerged as early adopters in trading low-carbon hydrogen and ammonia across borders and thus may be able to set infrastructure standards and certification norms for those fuel sources, giving their favored technologies and equipment an edge. And for technologies that involve vast quantities of data, such as digital tools that optimize electric grids or manage consumer demand, whoever defines the standards not only will be able to export compatible domestic systems but also may be able to mine data from them.

Standard setting will be particularly important when it comes to nuclear energy. According to the IEA, global nuclear energy generation will need to double between now and 2050 for the world to achieve net-zero emissions. As of 2018, of the 72 nuclear reactors planned or under construction outside Russia’s borders, more than 50 percent were being built by Russian companies and around 20 percent by Chinese ones; fewer than two percent were being built by U.S. companies. This will increasingly enable Moscow and Beijing to influence norms regarding nuclear nonproliferation and impose new operational and safety standards designed to give their own companies a lasting leg up in a sector that will need to grow as the energy transition unfolds.

Moving to a net-zero global economy will lead to conflicts—and ultimately produce winners and losers.

A second source of dominance in a clean energy world will be control of the supply chain for minerals such as cobalt, copper, lithium, nickel, and rare earths, which are critical to various clean energy technologies, including wind turbines and electric vehicles. Here, the analogy to oil power holds, to an extent. According to the IEA, should the world begin to move with haste toward a more sustainable energy mix, demand for such substances will far outstrip what is readily available today; in the agency’s estimation, a world on track for net-zero emissions in 2050 will by 2040 need six times as much of them as it does today. Meanwhile, global trade in critical minerals will skyrocket, from around ten percent of energy-related trade to roughly 50 percent by 2050. So over the course of the transition, the small number of countries that supply the vast majority of critical minerals will enjoy newfound influence. Today, a single country accounts for more than half the global supply of cobalt (the Democratic Republic of the Congo, or DRC), half the supply of lithium (Australia), and half the supply of rare earths (China). By contrast, the world’s three largest oil producers—Russia, Saudi Arabia, and the United States—each account for just ten percent of the world’s global oil production. Whereas smaller, poorer countries, such as the DRC, may be hesitant to use their mineral strength to exert pressure on more powerful countries, China has already demonstrated its willingness to do so. China’s embargo on the export of critical minerals to Japan in 2010, in the context of rising tensions in the East China Sea, could be a sign of things to come.

China’s control over the inputs for many clean energy technologies is not limited to its mining prowess; it has an even more dominant role in the processing and refining of critical minerals. At least for the next decade, these realities will give China real and perceived economic and  geopolitical power. Yet in the long term, this influence will wane. The oil price spikes of the 1970s led new players to search for new sources of oil; the mere prospect of political manipulation of scarce minerals is producing the same phenomenon. Moreover, such minerals can be recycled, and substitutes for them will also materialize.

The third element of clean energy dominance will be the ability to cheaply manufacture components for new technologies. This will not confer the same advantages as possessing oil or gas resources has, however. China, for example, accounts for the manufacturing of two-thirds of the world’s polysilicon and 90 percent of the semiconductor “wafers” used to make solar power cells. By suddenly removing these items from global supply chains, China could create major bottlenecks. But inputs for clean energy products that produce or store energy are not the same as the energy itself. If China did restrict exports of solar panels or batteries, the lights would not go out. China would not be able to bring economies to a standstill overnight or put the well-being and safety of citizens at risk—as Russia did when it curtailed natural gas exports to Europe during the frigid winters of 2006 and 2009.

To be sure, China’s actions would create disruption, dislocation, and inflation akin to the effects of the delays in computer chip exports throughout 2021. Such turmoil could stall the energy transition if it encouraged consumers to turn back to gasoline vehicles or cancel plans to install rooftop solar panels. Yet even if China adopted that tactic, over time, markets would respond, and other countries and companies would generate their own substitute products or supplies—in a way that is much harder to do with a natural resource available only in certain locations, such as oil.

A final way in which a country could become a clean energy superpower is through the production and export of low-carbon fuels. These fuels—especially hydrogen and ammonia—will be critical to the transition to a net-zero world given their potential role in decarbonizing hard-to-electrify sectors, such as steel production; fueling trucks, ships, and other heavy vehicles; and balancing grids supplied primarily by renewable sources of energy that can experience intermittent disruptions. The IEA’s “net zero by 2050” scenario anticipates that trade in hydrogen and ammonia will rise from almost nothing today to more than one-third of all energy-related transactions. Over time, hydrogen supplies are projected to consist mostly of green hydrogen produced in places with abundant, low-cost renewable energy, such as Chile and the Gulf states, which have vast quantities of cheap solar energy. In this way, some of the petrostates threatened by the move away from fossil fuels may be able to transform themselves into “electrostates.”

If a well-supplied and diversified market for hydrogen and ammonia eventually develops, a gap in one location can be offset with supplies from another, much as with oil today. This will limit the geopolitical influence of dominant suppliers. In the near to the medium term, however, the evolving production and trade of low-carbon fuels will create tensions and geopolitical risks. Much as was true of the nascent global market for liquefied natural gas decades ago, the supply of low-carbon fuels will at first be dominated by a small number of producers. As a result, if a country such as Japan bets on hydrogen and ammonia and depends heavily on just one or two countries for its supply of fuel, it may face outsize energy security risks.

The dominant suppliers of low-carbon fuels will also evolve over time. Before green hydrogen (or ammonia, which is easier to transport and can be converted back to hydrogen) becomes dominant, “blue” hydrogen will likely prevail, according to the IEA. Blue hydrogen is made from natural gas using carbon capture technology to reduce emissions. Countries with cheap gas and good carbon dioxide storage capacity, such as Qatar and the United States, may emerge as some of the top exporters of blue hydrogen or ammonia. For countries that lack natural gas but have the capacity to store carbon dioxide underground, the cheapest way to get hydrogen—which is hard to transport over long distances—may well be to import natural gas and then convert it into hydrogen close to where it will be used, thus presenting some of the same risks and dependencies that natural gas presents today. And worst off will be countries that lack both gas and storage capacity, such as South Korea, and so will have to import blue hydrogen, green hydrogen, and ammonia; these countries will remain vulnerable until a much larger and more diversified market for hydrogen and ammonia develops.

GREENER BUT LESS GLOBAL

A net-zero global economy will require large supply chains for clean energy components and manufactured products, trade in low-carbon fuels and critical minerals, and continued trade (albeit much smaller than today) in oil and gas. At first blush, then, a decarbonized world might seem likely to be more globalized than today’s fossil-fuel-dependent planet. But getting to that net-zero world will generate three forces that will push against globalization.

First, a decarbonized world will rely more on electricity—and a more electricity-reliant world will see less global trade in energy. The IEA has projected that in a net-zero world of 2050, total energy-related trade will be only 38 percent of what it would be if the world were to stay on its current trajectory. The cheapest and easiest way to decarbonize several sectors of the economy, such as cars that run on oil products or heat generated by burning natural gas, is often to electrify them and ensure that the electricity is generated from zero-carbon sources. For this reason, total electricity usage in the United States will likely be two to four times as great in a fully decarbonized economy as compared with today, according to the Princeton researchers. And compared with oil and gas, decarbonized electricity is much more likely to be produced locally or regionally; less than three percent of global electricity was traded across borders in 2018, compared with two-thirds of global oil supplies in 2014. That is because electricity is harder and more expensive to transport over long distances, notwithstanding the evolution of high-voltage, direct-current transmission technology. Dependence on imported electricity also creates more energy security concerns for a country than, say, dependence on imported oil, since electricity is much harder to stockpile and store in the case of supply disruptions or to import from other sources.

Getting to a net-zero world will generate forces that will push against globalization.

Additional pressure against globalization will come from the fact that clean energy is already contributing to the trend toward protectionism. Countries around the world are erecting barriers to cheap clean energy inputs from abroad, fearing dependence on other countries and seeking to build job-generating industries within their own borders. A prominent example of this is the customs duties and tariffs that India is placing on Chinese solar panels in order to nurture its own domestic solar industry. In a similar vein, the U.S. Congress is considering a tax credit that would favor companies that manufacture electric vehicles in the United States with union labor. And international efforts to eliminate obstacles to trade in environmental goods, such as wind turbines and solar panels, have stalled.

Finally, countries taking strong steps toward decarbonization may try to compel others to follow suit through economic statecraft—which in turn might lead to global fragmentation. For instance, policymakers in the EU are intent on instituting border adjustment mechanisms related to greenhouse gas emissions by 2023. Under this policy, goods imported from countries that do not match the EU’s climate standards will be subject to tariff-like fees intended to equalize the price of goods based on their carbon content. That way, “green” steel made in Europe, for example, will not be disadvantaged in the European market relative to “dirty” imported steel. Over time, however, tariffs aimed at leveling the playing field might morph into tariffs aimed at pressuring countries considered too slow in decarbonizing to pursue stronger climate policies. And although the idea of using sanctions to compel speedier decarbonization may seem over the top now, in a world in which carbon emitters are increasingly seen as threats to international peace and security, sanctions could become a common tool to force laggards to act.

WINNERS AND LOSERS

Moving to a net-zero global economy will require an unprecedented level of global cooperation but will also lead to conflict along the way and ultimately produce winners and losers. Some great powers, such as China and the United States, are  well positioned to benefit from the transition. Others, such as Russia, seem more likely to wind up worse off. These diverging paths will, of course, alter relations among the great powers.

The relationship between Beijing and Washington is more fraught now than it has been in decades. Thus far, cooperation between the two powers on climate change has been minimal, notwithstanding a last-minute agreement to work together on the issue that they reached at the COP26 (26th Conference of the Parties) meeting in Glasgow this past fall. If recent developments—such as Chinese President Xi Jinping’s failure to attend the Glasgow meeting in person, China’s lackluster revision of its climate targets, and Beijing’s softening on coal policy in the face of recent gas shortages—are indicative of a trend, China and the United States could increasingly clash over climate change, which may then sap the political will of other countries to take strong climate action.

The transition to clean energy seems likely to become yet another sphere in which the two countries compete aggressively over technology, talent, supplies, markets, and standards. That competition may accelerate the pace of clean energy deployment, but it will also fuel tensions between the two great powers. China will increasingly assert its power, leveraging its dominant position in clean energy manufacturing and its control of critical minerals. As the transition progresses, however, China’s influence may wane as new technologies emerge elsewhere, supply chains shift, and more plentiful materials are used to produce clean energy.

Another great-power relationship that the energy transition might transform is that between the United States and its European allies. At a time when transatlantic relations require repair and rejuvenation, climate policy could potentially act as a powerful bonding agent. Washington and its partners in Europe could ultimately use their collective economic and diplomatic power to spur decarbonization around the world; they might form a “climate club” of countries committed to net-zero emissions that would impose tariffs on imports from outside the club—as advocated in these pages by the Nobel Prize–winning economist William Nordhaus in 2020. They could also put in place joint mechanisms to decarbonize the most energy-intensive industries, such as steel, cement, and aluminum, and even repurpose nato to focus on responding to climate-related environmental and security disasters.

Yet in the short term, the road to a net-zero world may not be smooth for U.S.-European relations. Washington’s convoluted climate politics require tortured policy approaches, such as trying to use congressional budget reconciliation to overcome Republican opposition to stringent emission standards and carbon taxes and relying solely on carrots (such as subsidies) rather than sticks to change corporate and consumer conduct. This will make it difficult to harmonize policies across the Atlantic and risks exacerbating trade tensions as Europe commits to measures such as carbon border tariffs.

Finally, the energy transition will inevitably transform Russia’s relations with the other major powers. Russia is highly dependent on oil and gas exports, and in the long term, the clean energy transition will pose significant risks to its finances and influence. In the messy transition, however, Russia’s position vis-à-vis the United States and Europe may grow stronger before it weakens. As European countries come to increasingly depend on Russian gas in the coming years and as volatility in the oil market rises, both the United States and Europe will count on Russia to keep prices in check through its partnership with Saudi Arabia as leaders of the OPEC+ alliance, which is made up of the members of OPEC and ten other major oil-exporting countries.

Meanwhile, Russia’s largely dismissive approach to climate change will become a growing source of tension in Moscow’s relations with Washington and Brussels—even though Putin’s recent rhetoric has become more climate-friendly. And in a decarbonized world that is increasingly electrified and interconnected digitally via the Internet of Things, Russia may find it hard to resist targeting energy infrastructure with cyberattacks, as it did when it took down Ukraine’s electric grid in 2015 and 2016. Moreover, as traditional energy consumers in the West curb their fossil fuel use, Russia will increasingly turn to the Chinese market to offload its supplies, fostering the geopolitical alignment of Moscow and Beijing.

FROM CONVERGENCE TO DIVERGENCE

For the past 30 years, rates of growth in the developing world have on the whole exceeded those in the developed world, fueling a gradual economic convergence of rich countries and poor ones. In the long run, the transition to clean energy promises to reinforce that trend. Although a net-zero world will still entail hardships, it will also mean far less pain for developing countries than a world of unchecked climate change. Moreover, many developing countries enjoy abundant, low-cost clean energy resources, such as solar power, which they will be able to use at home or export as either electricity or fuels. A fair number also boast geologic formations excellent for storing carbon dioxide that will need to be removed from the atmosphere. (According to some estimates, one-fifth of the reduction in carbon dioxide necessary to achieve net-zero emissions will come from carbon removal.)

The rocky pathway to decarbonization, however, also poses serious risks for developing countries. The rift between rich and poor nations was on full display at the climate meeting in Glasgow. Lower-income countries were emphatic in their calls for industrialized nations to pay for the damage their historical greenhouse gas emissions have caused. Climate change is the result of cumulative carbon emissions over time. One-quarter of total emissions from the beginning of the industrial age until now have come from the United States, and nearly as much, from Europe. A mere two percent has come from the entire continent of Africa. As rich countries feel an increased urgency to slash carbon emissions and developing countries remain focused on the need to deliver growth to their citizens, the two groups are set to clash.

There was also evidence of tension over the fate of the $100 billion in aid to poor countries that rich countries pledged at the 2009 Copenhagen climate summit to deliver by 2020. That commitment remains unfulfilled—and even that large sum is a rounding error compared with the roughly $1 trillion to $2 trillion needed annually in clean energy investment in developing and emerging-market economies to achieve net-zero emissions by 2050. As the urgency of decarbonization increases along with the costs of climate change, the failure of rich countries to assist poor ones will be a growing source of geopolitical tension—particularly as developing countries disproportionately bear the brunt of damage they did not cause.

The clean energy transition demands a complete transformation of the global economy.

Given how long the world has waited to act on climate change, poor countries will need to follow development trajectories different from the one taken by rich countries; developing countries will have to rely far less on fossil fuels. Yet nearly 800 million people lack access to any energy services, much less the amount of energy needed to drive meaningful levels of economic growth and industrialization. Although solar power, wind, and other renewable sources of energy can be an excellent way to meet some of the needs of the developing world, they are currently insufficient to power industrialization and other paths

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