Russian Economic Transformation: Navigating Climate Policy and Trade Restrictions
Natalia Turdyeva
Delegates at the 28th Conference of the Parties to the United Nations Framework Convention on Climate Change, held in Dubai in December 2023, recognised a proactive climate policy as a paramount imperative. Such policy aims to curtail greenhouse gas emissions and transition away from fossil fuel dependence, thus potentially causing substantial shifts in global trade dynamics, including a possible reduction in demand for traditional Russian exports.
Carbon-intensive energy commodities and energy-intensive industrial goods are the core of Russia’s exports, mirroring the current comparative advantage of the Russian economy in accessing inexpensive fossil fuel resources. Consequently, due to their high energy intensity, Russian export goods carry a substantial carbon footprint. Navigating the Russian economy through the evolving global economic landscape necessitates a meticulous examination of diverse scenarios encompassing both global and Russian transitions towards sustainable energy practices.
The ongoing deglobalisation trends in the world economy might result in the emergence of self-sufficient regional trade blocs and economic spheres of influence. Many governments are increasing the support for national industrial policies, imposing non-tariff trade barriers and restrictions on exports and investment, including in the form of climate policy instruments. This underscores the nuanced interplay between climate and trade policies, necessitating a comprehensive study.
This research explores potential implications of a reduction in greenhouse gas emissions through the emissions trading system (ETS) for the Russian economy. Calculations are based on the scenarios presented by the Network for Greening the Financial System (NGFS): Nationally Determined Contributions (NDC), Below 2°C, and Net Zero 2050. These scenarios, actively employed by central banks, are designed to evaluate the potential consequences of climate change.
This study uses a Computable General Equilibrium (CGE) model, analysing possible implications of climate policy for Russia. The model combines climate and trade policies within the framework of a general equilibrium where climate policy is represented by a cap-and-trade system and trade policy depends on the parameters of the external economic environment, including trade conditions and restrictions on export and import quantities in certain commodity groups. The model calculations indicate that the significance of quantitative export restrictions diminishes amid deteriorating external economic conditions, exemplified by declining prices for Russian exports. This is attributed to the fact that, in the context of low export prices, the optimal quantity only marginally surpasses or may even dip below the imposed limit.
The scenario calculations indicate a reduction in the output of petroleum products, crude oil extraction, and pipeline transportation in the Russian economy compared to the ‘business-as-usual’ scenario. Conversely, sectors driven by consumer demand (food production), machine building, and industries using petroleum products as raw materials (chemical production) demonstrate an upward trend.
These scenarios are based on the current structure of goods and services production in Russia and do not take into account the emergence of new ‘green’ industries. The assessments of the consequences of a proactive domestic climate policy should be viewed as rather conservative, considering that the development of new industries could significantly facilitate the fight against climate change.
The author estimates that, relative to the ‘business-as-usual’ scenario implying that climate policy remains the same until 2040 both in Russia and globally, a moderate climate policy with a 36% reduction in emissions by 2040, compared to 2016, could cause a deviation of real GDP in 2040 by no more than 5%. Noteworthy, a substantial 94% of this deviation is ascribed to fluctuations in the international economic milieu caused by climate policies of other nations and quantitative restrictions on Russian exports, whereas the implementation of an ETS in Russia contributes a mere 6% to this overall impact.
The deviation from the ‘business-as-usual’ scenario becomes more significant as the emissions reduction targets increase. Therefore, a considerably more proactive climate policy might entail disproportionate costs for the economy, especially when it cannot freely access global ‘green’ technologies.
However, without a proactive internal climate policy, the carbon intensity of Russia’s GDP increases, amplifying the consequences of climate-related physical risks. The development of ‘green’ industries in Russia, including export-oriented ones, is becoming a priority for the domestic economy to be able to mitigate these risks.