Chairman and CEO
The Institute of Energy Economics, Japan
“The need to integrate Economic Security and Global Climate Change policies”
Message for April 2023
These days, economic security and global climate change are often cited as the two most important issues. Yet, the two issues are addressed separately without meaningful coordination between the adopted policies. The world needs to integrate these two issues.
Economic security and global climate change are two of the most current important issues. Unfortunately, those engaged in developing the respective policies do not really talk with each other, resulting in inconsistencies among policies.
1. Reducing dependence on Russian energies
If the world is expected to reduce its dependence on Russian energies, the policy advisors in charge of ensuring economic security should know that we must secure alternative sources of energies because insufficient energy supplies would ultimately raise prices and affect the economy. In 2021, Russia represented 12% of the global oil export market and 24% of the global gas export market. It is clear from those statistics that a substantial development of non-Russian energies must be pursued if our reliance on Russia is to be reduced. On the other hand, the advisors on climate change policies seem to simply hate fossil fuels and are therefore opposed to any investments related to fossil fuel. Climate policy experts argue that de-fossilization would reduce our dependence on Russian energies.
It is true that if we could easily drastically reduce our use of hydrocarbons, it could be seen as ending our dependence on Russian fossil fuels. But the reality is that it would take decades before we can stop using fossil fuels. In the meantime, underinvestment in fossil fuels could lead to occasional price hikes which could seriously erode the public support for the energy transition and, in a way, neutralize the climate objective it was meant to achieve. A shortage of excess capacity would leave us vulnerable to shocks. If we are serious about reducing our dependence on Russia and if we are serious about ensuring stability in energy prices, we must support the necessary investments for non-Russian energies.
Policy makers must understand that the long-term objective of achieving carbon neutrality can also be consistent with the development of fossil fuels in the short-term. Carbon neutrality could be achieved through the “decarbonization of fossil fuels” with the production of low/zero carbon hydrogen from fossil fuels. The CO2 emitted from the process can easily be removed with CCS/CCUS.
2. Avoiding supply chain domination
Climate change policy experts want to see as many solar panels, wind turbines, batteries and EVs as possible. While those technologies would certainly reduce CO2 emissions, they also could lead to a spectacular increase in the demand for and use of critical minerals. A dramatic increase in demand may quickly turn into tight supply-demand situations with price hikes for some of the critical minerals. There is no assurance for the sustainability of most of the critical minerals.
In addition, China seems to have anticipated the situation and already enjoys dominance in the control of the supply chain for many critical minerals. Expansion of the demand for critical minerals would simply strengthen China’s already strong position. China’s dominance is not just for the supply chain of critical minerals, but it extends to clean energy products including solar panels, wind turbines and batteries. The control of those supply chains could be used by China to pursue other national ambitions.
To ensure sustainability of critical minerals and avoid being a hostage to such ambitions, we must start taking actions. In fact, Western countries are in the early stage of development for alternative supply chains for critical minerals and batteries. We also need to enhance efficiency in using critical minerals, develop alternative materials and strengthen our recycling activities. Stockpiling of critical minerals could also be helpful.
To reduce the burden on critical minerals and reduce CO2 emissions, we must also look further into the technology mix. Rather than simply rely on batteries to deal with the intermittency of renewable energies, it might be better to use low carbon hydrogen/ammonia to generate dispatchable power. Rather than putting bigger batteries on EVs to obtain long driving distance, it might be better to use hybrid vehicles or PHVs running on synthetic fuels or e-fuels to reduce the requirement for bigger batteries. Using less critical minerals and smaller batteries could alleviate our vulnerability of depending on one dominant supplier while enhancing the sustainability of critical minerals simultaneously.
3. Impact on Middle East
Not only pressures from the financial sector and investors but also the negative policies of some governments and multinational organizations have discouraged Western companies to invest in upstream oil and gas.
As the result, the ratio of investment by Middle East NOCs is getting higher, further strengthening the position of the Middle East as the oil and gas supplier. While we trust the commitment by major Middle East players for a stable supply of energies, the possibility of geopolitical tensions in the region could expose the world to more energy supply disruptions. The most essential element to ensure supply security is diversification which requires more investment by Western companies elsewhere around the world.
While the West is currently refraining from investing in fossil fuels, China is strengthening its position as a major customer and investor in Middle East energy. The mediation by China of the diplomatic normalization between Saudi Arabia and Iran could not have been possible without China’s rising influence in the region.
The emerging energy security challenge should present a strong case for the alignment of economic security concerns with our climate change responses.
4. Influence in Asia
Some western countries, together with multinational development banks, have been restricting the international public financing of projects related to fossil fuels. Many private sector financial players are joining such restrictions.
As the result, it is getting more and more difficult to obtain financing for fossil fuels related projects, including gas fired power plants and LNG receiving terminals. But, as energy demand is growing fast in many emerging/developing economies, especially in Asia, there is an urgent need for financing and support for the transition from coal to gas. If Asian countries cannot get the financing from the West, they will get it from somewhere else and the most likely source will be China. China would be happy to provide the financing, the investment and the construction support required for fossil fuels related projects. This would certainly enhance China’s influence, especially in Asia.
From an economic security point of view, is this prospect in line with what Western countries would like to achieve in Asia? Weren’t the Western countries alarmed by the expansion of China’s Belt and Road Initiative?
Once again, the alignment of economic security concerns with global climate policies is necessary.
5. G7 Summit Meeting
The G7 Summit Meeting will be held in Hiroshima, Japan in late May. Both economic security issues and global climate change issues will certainly be discussed at the Summit. I sincerely hope that the G7 process would help the integration and alignment of economic security policies with climate policies. Otherwise, our policies would be contradicting each other, making them far less effective.
As we aim for a better coordination at the international level, it is important to stress that we must also have a much better integration of policies within our respective governments at the same time.