Neither PV nor EVs will make much of a difference in addressing the challenges posed by the current fossil-fueled war. Short-term measures to disentangle EU dependence on Russian oil and gas ought to focus on decreasing demand and finding alternatives to Russian supplies. That implies increasing the production of both oil and gas elsewhere. It also means short-term measures, such as avoiding the German nuclear exit scheduled for December 2022, and some other hard trade-offs—a short-term increase in European coal power production, for example. (Ironically, a good portion of coal used in the European Union also comes from Russia, compounding the challenge.)
Assessing risk
Russia’s unprovoked war, and the world’s reaction to it, also lays bare another, much more fundamental, issue: economic and broader energy policy analyses’ inherent limited ability to inform policymakers’ decisions in tackling crises such as those we now face, especially crises that overlap.
To begin with, no serious analysis published before Russian President Vladimir Putin’s invasion of Ukraine even imagined that Russia would cut off gas deliveries to the European Union altogether. A deliberate EU break from Russian gas imports was considered all but impossible. For example, the European Network of Transmission System Operators for Gas (ENTSOG), charged with stress-testing the European gas network, never even considered the possibility. ENTSOG’s latest stress test imagines what might happen if no Russian gas flowed through Belarus or none through Ukraine. No Russian gas at all was not part of the set of modeled scenarios. The very idea was apparently unimaginable, or so radical that it belied any stress test. The stress on the system would simply be too large.
Economic models at the time were similarly limited. A widely cited analysis by European Central Bank economists has the promising title “Natural Gas Dependence and Risks to Euro Area Activity.” Its headline conclusion: a 10 percent gas supply shock would cut euro area GDP by 0.7 percent. The hardest-hit sector? Electricity, gas, steam, and air-conditioning supply, the sector most dependent on gas as a direct input. The sector’s output, thus, would fall by almost 10 percent due to a 10 percent gas supply shock. That conclusion seems reasonable at first blush. The methodology, relying on standard input-output methods, is well-established. The problem is the static nature of the analysis and the resulting status quo bias.
Benefits and costs
Heat pumps represent one of the most promising low-carbon energy technologies. They replace oil and gas furnaces and do so much more efficiently. In fact, heat pumps are so efficient that even if all electricity comes from natural gas, the resulting emissions are still lower than if natural gas were burned directly in a home’s gas furnace. Heat pumps are also essentially air-conditioners run in reverse. Why then would the air-conditioning sector suffer in a scenario with less gas? Demand for heat pumps would skyrocket, something apparent all over Europe right now, with a clogged supply chain adding to inflation pressure.
That does not mean that cutting off Russian gas somehow portends an economic boom. To the contrary, there are real costs. Change is hard. But costs also imply opportunity. McKinsey’s report on the net-zero transition has the promising subtitle “What It Would Cost, What It Could Bring.” In short, its analysis shows costs of about $25 trillion over 30 years to convert the world economy from its current path to one that achieves net-zero carbon emissions by midcentury.
