7 min read

For A Few Carbon Molecules Less

Every large emitter will be making these tradeoffs in the years ahead. Few, however, face the same problems of political economy as Russia because of the pecularities of its rentierism.
For A Few Carbon Molecules Less

A funny thing happened at the Eastern Economic Forum on September 2. Energy minister Nikolai Shul'ginov, Alexander Novak's replacement with a background at RusHydro, went on record that plans to continue the electrification of the Trans-Siberian and Baikal-Amur Mainline (BAM) by Russian Railways should be put on hold after 2024. Instead, current plans to build out additional power generating capacity in the Far East to support the network should be redone. Current plans for additional capacity in the 3rd phase of modernization per existing RZhD spending plans would increase coal generating capacity, and therefore undermine targets to reduce CO2 emissions now affecting government policy calculi. The original low-carbon strategy document adopted by the government infamously set reduction targets for 2030 at 67% of 1990 emissions levels with a vague "low-carbon" commitment for 2050:

Generally speaking, the gasification of the regions offsets most declines in solid or liquid fuel consumption through 2016. That's still a net positive for emissions compared to what they'd be otherwise and substitution of power sources no doubt prevented the growth period from 1999-2012 from resulting in a particularly large increase in emissions relative to Russia's growth rates. Efficiency gains, the closure of inefficient factories, reduced subsidies, and reduced waste all played a positive role as did the greater alignment with European standards for some industries, notably the metallurgical sector. These fuel substitution balancing acts were pulled off not just with the aid of direct fossil fuel subsidies, but also price control schema dictating investment levels, affecting efficiency investments, and demand. Given the relatively small populations living in many of the major hydrocarbon production sites across West and East Siberia, it's not surprising that when the IMF calculated fossil fuel subsidies, Russia's terrible rating reflects the ease with which the environment has been trashed:

It's only since 2018-2019 that we've seen a significant change in federal policy and efforts to clean up industry, and even within that, it's primarily the issue of recycling and landfill use triggering local protests that shunted Victoria Abramchenko's brief into the spotlight. Attempts to increase the utilization of recycled materials face considerable supply and price constraints – the government just rolled back some of the original regulatory requirements for 2022 for automobile manufacturers because of the price inflation and supply chain stresses seen in 2020 and 2021. Pollution has been understood to be a problem for a long time. The solutions for emissions prior to this year, however, were farcical. "Renting" out tracts of forest to private firms as an offset that doesn't actually reduce emissions is, in the strictest sense, the creation of a regulatory rent that does not lead to any productive investment or economic activity and simply transfers income to the state or, in this case, a state-owned body tasked with managing the system. At no point would emissions actually be offset. They'd just use existing forests as a write-off while increasing the cost of doing business and narrowing market access and competitiveness further into the hands of SOEs and firms with the best political connections. The state would be creating an intangible commodity it can trade for nothing and slot into a cap-and-trade system to allow industries to get away with inactivity.

MinEnergo's concern about the 2025 cutoff date for electrification works reflects the more recent push to commit to a truly net zero 2050 strategy in place of a 'low-carbon' one in which Russia makes little serious efforts to change course through at least 2030. I find it a useful case study of the contradictions of energy transition policymaking since failure to electrify the entire grid – a distinct possibility insofar as large projects in Russia are usually behind schedule and they have to cap costs – increases demand for diesel. Major investments into road infrastructure and infrastructure investment in general also increase demand for diesel, bitumen for roadworks, and other non-energy or energy-adjacent commodities. In short, there's a large time disjuncture in the way discussions of net zero ambitions tend to be framed and the avoidance of one type of dirty power affects demand for other sources of emissions. Short-run increases in investment and construction intended to reduce future oil, gas, and/or coal consumption will require countervailing surges in demand and output of other commodities, sometimes other hydrocarbons. Intersectoral balances and demand are complicated in otherwise fully liberalized economies with decent regulatory and market structures that provide a level of resilience and have fostered the large-scale deployment of renewable power generating capacity. They become far more fraught in a Russian context where the denial of demand via state procurement contracts and requirements in one sector increases contracts in another as well as interacting with existing supply/demand constraints affected by trade distortions from duties and tariffs, import substitution policies, and more. The political power of the individuals and firms involved is often considerable and frequently distorts policymaking in the first place.

MinEnergo's pressure about electrification works comes down to poor planning, a desire to lock in works before the power grid has to expand to meet other needs post-2025, and to increase the pressure on the power monopolists like Inter RAO to accelerate modernization investments. Here's a map as a reminder of where in Russia we're talking about for the Trans-Siberian and BAM:

The scramble to avoid expanding power generation comes after the late realization at the end of 2020 that existing plans in which planned capacity expansions of new thermal power plants that emit a lot were curbed to reduce costs wouldn't provide enough power. Fears of greater coal-powered thermal power generation are also about price levels, earnings, and exports intended to sustain monotowns. MinTrans wants to give monotowns producing coal priority on the rail network for coal exports. The more the government tries to control inflation through formalized mechanisms reducing domestic levels relative to global prices on top of the usual 'manual control' agreements struck between firms and sectors, the more pressure on coal exports to sustain these towns if they can't realize analagous earnings domestically. Reducing coal consumption domestically is fantastic for emissions reduction, but not for coal country. If you think American senators who couldn't give a **** about the working man fear the annihilation of coal for their constituents, imagine just how much more pressing that problem becomes in Siberia and the Far East. The export strategy adopted by the government and Kremlin increasing coal output to sell abroad is perfectly rational. The aim is to gain market share as supply is curbed elsewhere and give these towns, workers, and voters a light at the end of the tunnel. Unfortunately, it openly contradicts the turn towards net zero and doesn't sustain economic development effectively.

All of that gets even more worrisome to think through given the last two months of leaks and press reports suggesting that Shoigu's bizarre dream of building new Siberian cities clustered around resource extraction feeding into manufacturing/value-added production. Standing up equipment like smelters for aluminum requires a huge amount of energy, energy that can only come from an increase in the size of the investment program into power generation. But instead of trying to build market conditions wherein renewables are expanded considerably while backstopped through Gazprom and the state's ability to take a loss on output due to low production costs, the single most important claim made for the competitiveness of Russian gas supplies in the first place, they're haggling over which types of carbon molecules to emit knowing full well the current growth model can't sustain systemic decarbonization. New industries have to be launched around monotowns, new forms of income transfers considered, and fundamentally different approaches to economic development between heavier industries and the services sector considered.

The federal budget for 2022-2024 includes planned electricity tariff indexation at 5% annually, 1% higher than the annual inflation target set by the Bank of Russia and sure to cause anxiety among lower-income households living in Siberia and the Far East. Every problem Russia and any country chasing net zero have to solve requires greater comfort with inflation and higher levels of state-spending as well as new regulatory and competitive market structures. It's no shock that in the runup to COP26 in Glasgow, the UK, Italy, and EU are calling on Russia to commit to carbon neutrality. I fully expect it will happen since the government ordered a framework be worked out to roughly coincide with COP26. Whether that framework matches the ambition of the UK and EU members is an open question. The Gilet Jaunes protests in France have been invoked as a sign of things to come in a world where fuel gets more expensive. The dispossessed, the working poor, and those that feel otherwise ignored by elites react when the goods that glue their lives together rise in price. Russia has avoided this fate in general through subsidies and price controls that have come at the expense of investment, efficiency, and the health of millions of Russians. Yet those same subsidies have built an interlocking web of material interests that cumulatively increase the adjustment costs of net zero in financial and political terms. MinEnergo would prefer more diesel be burned if need be by locomotives than coal at a power plant for that reason. Every large emitter will be making these tradeoffs in the years ahead. Few, however, face the same problems of political economy as Russia because of the pecularities of its rentierism.

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