Russian Economic Transformation: Navigating Climate Policy and Trade Restrictions

Natalia Turdyeva

Introduction

1. Delegates at the 28th Conference of the Parties to the United Nations Framework Convention on Climate Change, held in Dubai in December 2023, recognized a proactive climate policy as a paramount imperative.
2. 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.

Russian Exports and Carbon Footprint

• 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.

Climate and Trade Policies

1. The ongoing deglobalization trends in the world economy might result in the emergence of self-sufficient regional trade blocs and economic spheres of influence.
2. Many governments are increasing support for national industrial policies, imposing non-tariff trade barriers and restrictions on exports and investment, including in the form of climate policy instruments.
3. This underscores the nuanced interplay between climate and trade policies, necessitating a comprehensive study.

Research Methodology

• 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.

Computable General Equilibrium Model

1. This study uses a Computable General Equilibrium (CGE) model, analyzing possible implications of climate policy for Russia.
2. 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.
3. The model calculations indicate that the significance of quantitative export restrictions diminishes amid deteriorating external economic conditions, exemplified by declining prices for Russian exports.

Scenario Calculations

• 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.

Limitations and Recommendations

• 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.

Conclusion

• The author estimates that 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%.
• 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.
• 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.

Full text of the research in Russian

SDGs, Targets, and Indicators

1. SDG 13: Climate Action

   • Target 13.1: Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters
   • Target 13.2: Integrate climate change measures into national policies, strategies, and planning
   • Target 13.3: Improve education, awareness-raising, and human and institutional capacity on climate change mitigation, adaptation, impact reduction, and early warning
   • Target 13.a: Implement the commitment undertaken by developed-country parties to the United Nations Framework Convention on Climate Change to a goal of mobilizing jointly $100 billion annually by 2020 from all sources to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation and fully operationalize the Green Climate Fund through its capitalization as soon as possible
   • Target 13.b: Promote mechanisms for raising capacity for effective climate change-related planning and management in least developed countries and small island developing States, including focusing on women, youth, and local and marginalized communities

   The article discusses the need for a proactive climate policy to curtail greenhouse gas emissions and transition away from fossil fuel dependence. This aligns with SDG 13, which aims to take urgent action to combat climate change and its impacts.

2. SDG 8: Decent Work and Economic Growth

   • Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading, and innovation, including through a focus on high-value-added and labor-intensive sectors
   • Target 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity, and innovation, and encourage the formalization and growth of micro-, small-, and medium-sized enterprises, including through access to financial services
   • Target 8.4: Improve progressively, through 2030, global resource efficiency in consumption and production and endeavor to decouple economic growth from environmental degradation, in accordance with the 10-year framework of programs on sustainable consumption and production, with developed countries taking the lead

   The article discusses the potential shifts in global trade dynamics and the need for Russia to navigate the evolving economic landscape. This relates to SDG 8, which aims to promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all.

3. SDG 9: Industry, Innovation, and Infrastructure

   • Target 9.1: Develop quality, reliable, sustainable, and resilient infrastructure, including regional and transborder infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all
   • Target 9.2: Promote inclusive and sustainable industrialization and, by 2030, significantly raise industry’s share of employment and gross domestic product, in line with national circumstances, and double its share in least developed countries
   • Target 9.4: Upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes, with all countries taking action in accordance with their respective capabilities

   The article mentions the potential reduction in the output of petroleum products and crude oil extraction, as well as the need for the development of ‘green’ industries. This aligns with SDG 9, which aims to build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation.

SDGs, Targets, and Indicators