Kristina Borovikova on the nuances of the carbon intensity of the economy

The connection between GDP growth and CO2 emissions is gradually weakening – this is the conclusion contained in an article published on the IEA website last week by agency analyst Siddharth Singh. Based on the latest IEA World Energy Outlook, he states that the trend is more typical for developed economies, for example the European Union, whose economy has grown by 66% since 1990 while reducing emissions by 30%. The trend is partly due to a marked increase in investment in clean energy. According to IEA estimates, twenty years ago, every dollar invested in fuel accounted for only 50 cents of investment in green energy, but already in 2016 the ratio was 1:1. Today, for every “fuel” dollar there is $1.8 “clean”.

However, in many respects the weakening of the connection between output and emissions is ensured not by the expansion of the use of renewable energy sources, but by the structural restructuring of the economy. The share of the service sector, which makes a larger contribution to economic growth and a smaller contribution to total CO2 emissions, is growing, while the share of industry, with its smaller contribution to GDP and higher energy intensity, has been declining (including due to its export to third countries). This would seem to give hope that with the almost inevitable introduction of a carbon price, the average company will still pay less and less.

However, this is unlikely to be the case: the effect of restructuring will sooner or later be exhausted, reducing both the rate of divergence between emissions and GDP growth in developed countries, and reducing the payment for them. Moreover, due to the fragmentation of the global economy, the price of emissions for businesses may even rise. Tightening the terms of trade between blocs of countries in the future means not only a change in the local rules of the game, but also an increase in “climate” costs at the borders of these blocs – with less freedom to spread green technologies. Moreover, one of the consequences of fragmentation is already considered to be the return of production from China “to their homeland” – to the EU and the USA: given stricter regulation there, companies will pay more for emissions there, not less – and cross-border regulation will allow them to shift this payment to suppliers and counterparties.

For Russia, the issue of the connection between economic growth and CO2 emissions will also remain sensitive. In addition to the fact that the country remains a significant exporter of hydrocarbons, the need to replace imports with domestic output will slow down the growth of the share of services in the economy, and tightening environmental regulations for the sake of technological modernization will require higher investments due to limited access to its tools. De facto, local “greening” of the economy will cost more than participation in the global one. And if the participants of the latter can hardly count on reducing the environmental burden, then Russian companies – even more so.