Considerations for Net Zero Targets in Climate Change Policy: The Good, the Bad, and the Ugly

Policy Pulse – 6 July 2022 – Veritas Global

Photos by Gabor Koszegi, Chris LeBoutillier, and Dulana Kodithuwakku on Unsplash

Key points

Considerations for net zero emission targets in climate change policy:

• The good: targets are conceptually easy to grasp by policy makers, appropriate for technology modeling and suitable for signaling long-term policy intention

• The bad: sectoral targets risk being less cost-effective if they do not allow the use of carbon offsets from other sectors; when targets are narrowly applied, they can crowd-out investments that help reduce emissions

• The ugly: in the absence of scaled-up access to climate finance, targets risk condemning the poor to poverty for longer or at the other extreme poorer countries may pull out of climate protection programs leading to collapse of the global climate agenda

Context

Net zero emission targets have become an increasingly popular means through which to communicate climate policy ambition. According to the latest available global data, 134 countries covering 83% of emissions, 91% of economic activity, and 80% of the population have pledged to achieve net zero emissions this century. While private sector actors also actively use net zero targets as part of their climate strategies, the focus of this brief is on national and global emission targets.

The good

Net zero emission targets are conceptually easy to grasp by policy makers and the broader public. They offer a relatable benchmark against which to measure success and are a useful reference point for the scale of action required to achieve temperature goals. The Intergovernmental Panel on Climate Change (IPCC) has used net zero metrics to explain the link between greenhouse gas (GHG) emission trajectories and Paris Agreement temperature goals. In its 2018 Special Report on 1.5°C, the IPCC highlighted that limiting global warming to 1.5°C implied achieving net zero emissions globally by around 2050 whereas limiting global warming to 2°C implied achieving net zero emissions globally by around 2070.

Net zero emission targets can be used in modeling to identify climate-friendly technology roadmaps in specific sectors. Such roadmaps are particularly useful for design of technology innovation policy. For example, modeling done by the International Energy Agency (IEA) on roadmaps for the energy and heavy industry sectors can help identify specific research and development interventions to support technology innovation in these sectors.

More broadly, having net zero emission targets in place offers greater certainty on future intended trajectory of climate mitigation policy. There are many different policy options and means through which to achieve net zero emission targets. Therefore, to reduce uncertainty, a clear policy framework is needed that supports achievement of net zero emissions. Nevertheless, even in the absence of a detailed policy framework for implementation, net zero targets can offer some certainty on the overall intended policy trajectory.

The bad

Sectoral net zero emission targets risk focusing on measures that are less cost-effective if they do not allow the use of carbon offsets from other sectors. The cost of reducing one metric ton of carbon dioxide varies significantly from sector to sector. The midpoint estimate in the latest IPCC report indicates that agriculture, forestry, and other sectors, can generate about 40% of the global mitigation potential under $100 per metric ton of carbon dioxide in 2030 (see chart below), with carbon sequestration actions making-up a significant portion of these measures. Meaning that the midpoint expectation is that carbon sequestration activities offer significant cost-effective opportunities for neutralizing emissions from other sectors. Therefore, to be cost-effective, net zero emission targets for a sector (such as energy and heavy industry) should allow trading of mitigation actions with other sectors.

Some scenarios considered by the IPCC, expect that as much as 1221 Gt of CO2 (about 80% of all CO2 emitted by human activity since 1750), may be sequestered from the atmosphere in this century through carbon dioxide removal methods. However, these estimates are highly uncertain. Given the uncertainty, it is critical to use technology neutral policy instruments to incentivize desired investments. Carbon pricing policies can be designed in a technology neutral way and are generally more efficient instruments than engineered technology-based emission trajectories. Carbon pricing is not a panacea and is most effective when combined with a broader policy mix. Nevertheless, in general, a price signal on carbon ensures that the most cost-effective emission reductions are prioritized not only within a sector but also across sectors.

In this context, the net zero emission trajectories developed by the IEA for the energy and heavy industry sectors do not reflect the most cost-effective trajectories because they do not appropriately incorporate carbon trading opportunities for sourcing offsets from agriculture and forestry sectors and more broadly from carbon dioxide removal. Furthermore, it is unclear whether the IEA approach allocated the mitigation burden across developed and developing countries in a manner that is acceptable to the global community. For these reasons, IEA modeled scenarios should not be used in determining whether investments or activities are aligned with Paris Agreement temperature goals.

Requiring the use of IEA net zero emission trajectories in screening for Paris Agreement alignment as a condition for accessing international public finance will have adverse consequences. First, doing so risks mis-prioritizing investments and channeling resources to less cost-effective climate actions. Second, it could make it harder for project developers to access technologies that are climate-friendly, which help reduce emissions but might not eliminate them. Third, project developers could instead seek financing from non-OECD sources that are less aware of Paris Agreement alignment considerations. The increasing role of non-OECD countries serving as creditors makes this a real possibility. The share of external public debt held by non-OECD creditors grew from about 25% in 2006 to about 65% in 2020 in countries eligible for the Debt Service Suspension Initiative. Therefore, a common understanding, across diverse creditors and borrowers, on how to align investments with the Paris Agreement, needs to be developed in a transparent and inclusive manner. In this respect, the announcement by G7 leaders on 28 June 2022 to take a transparent and inclusive approach to creating a global climate club, for addressing GHG emissions from heavy industry, should be welcomed. Experience from designing the global scheme for addressing emissions from international aviation demonstrates the importance of taking a transparent and inclusive approach.

Narrowly applied net zero emission targets can crowd-out investments that reduce emissions and help fight climate change. Europe has already fallen victim to narrow application of net zero emission targets. For years, European policy makers postponed strategically important decisions to invest in diversifying natural gas supply, in large part because of misplaced climate concerns. For example, projects that would have brought pipeline natural gas from the Caspian to Europe were not sufficiently supported. In part because of this indecision, coal is making a strong comeback in Europe. In 2021 power generated from coal increased by about 20%. Generating electricity from unabated coal emits about twice the amount of carbon dioxide compared to conventional natural gas. European reliance on coal has intensified further in 2022, as the Russian invasion of Ukraine and its consequences uncloaked the pitfalls of having poorly diversified energy supply.

Europe has an immediate need to strengthen energy security by enhancing access to Caspian energy resources, in particular to diversify its natural gas supply. Natural gas can play an important role in enabling greater renewable energy deployment by offering a viable solution for balancing capacity to manage fluctuations in renewable energy supply. In addition to being an immediately deployable low-carbon alternative to coal, natural gas can be used in a way that has its emissions neutralized through carbon capture and storage, carbon offsets, or increasingly cost-competitive direct air carbon capture processes. Meaning that when a broader perspective is considered, use of natural gas can be fully compatible with EU’s 2050 net zero emission target.

The ugly

In the absence of scaled-up access to climate finance, net zero emission targets risk condemning socioeconomically vulnerable groups to poverty for longer. Net zero targets can lock-in more costly development trajectories and slow economic growth. In developing countries, especially where access to modern energy remains a challenge and poverty rates are high, access to scaled-up climate finance is critical to limit the adverse effects of more costly development.

However, even inflated estimates of climate finance, where systematic overestimation has been documented, confirm that developed countries have not provided the promised $100 billion per year. Realistic assessments suggest that less than half of the committed amount has materialized. There is an immediate need for developed countries to meet existing climate finance commitments. In the longer-term, further scaled-up access to climate finance will be critical for ensuring that the transition to net zero emissions does not slow the rate of poverty eradication and subdue economic growth in developing countries.

Developing countries with a significant proportion of population in poverty should not be faced with the choice of either taking climate mitigation action or reducing poverty. If faced with this choice, poorer countries are likely to pull out of climate protection programs, which may lead to a collapse of the global climate agenda.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Economics of Natural Gas Supply Diversification for EU

Policy Pulse – 28 March 2022 – Veritas Global

Photo by Darya Jum on Unsplash

Key messages

• Expanding Caspian natural gas pipeline supply will greatly benefit EU’s energy security in the 2030-time horizon and beyond

• Had the White Stream project been realized, it would have brought more Caspian gas to EU, generating savings of between €24 bn to €48 bn in 2021 for natural gas users in EU

• Increasing capacity of natural gas supply to EU will improve price stability

• Support for receiving more LNG and development of new pipelines are mutually reinforcing policy measures that advance consumer interest

• EU can continue to use natural gas indefinitely while cost-effectively meeting its 2050 net carbon neutrality target

Background and context

On 8 March 2022 the European Commission proposed measures for addressing EU’s energy insecurity. The proposal identified diversification of supply as one of the key levers for addressing EU energy security. Specifically, the proposal looks to increase supply of non-Russian natural gas by sourcing more Liquefied Natural Gas (LNG) and increasing imports of pipeline natural gas. Other measures covered by the proposal include reducing demand for natural gas through developing renewable substitutes, including hydrogen produced from renewable energy sources.

The European Commission proposal outlines in detail immediate measures that can be taken to reduce EU’s dependence on Russian natural gas. However, for the 2030-time horizon the proposal simply extrapolates the current measures. In our view, there is an opportunity to improve EU’s energy security over the 2030-time horizon and beyond through focusing on increasing the capacity of new pipelines.

Our previously published analysis “Caspian Gas Is Key to EU Supply Diversification” highlighted that enhancing access to Caspian and Central Asian natural gas is the best option for EU supply diversification. Caspian gas is a critically needed supplement to EU’s hydrogen strategy. The hydrogen strategy is an ambitious program for long-term decarbonization, but it does little to address EU’s energy security needs over the next two to three decades.

This policy brief explains how the full operationalization of the White Stream project, which would bring natural gas from the Caspian to EU, can contribute to price stability for European consumers. Furthermore, this brief explains how development of new natural gas pipelines and support for new LNG supply are mutually reinforcing policies. The brief also highlights that continued use of natural gas can be fully compatible with EU’s 2050 net carbon neutrality target.

Increasing capacity of natural gas supply to EU will improve price stability

As shown in Table 1, if the White Stream project had been implemented, there would have been an increase in supply of 5.8% in the European market which would have resulted in a 24% decrease in the wholesale price of natural gas. On aggregate, this would have generated savings for users in the European Union of between €24 bn to €48 bn in 2021.

Table 1: Savings to EU consumers in 2021 if White Stream had been implemented

The White Stream project, if fully operationalized, would bring 32 billion cubic meters (bcm) of natural gas from the Caspian to the European Union, which is the equivalent of about 5.8% of total natural gas consumption across Europe in 2021.

On aggregate, demand for natural gas is inelastic, meaning a large change in price is needed to produce a small change in quantity consumed. Short-term price elasticity of demand is estimated at - 0.24, which means that a 10% increase in price reduces demand by about 2.4%. In the absence of an estimate for short-term price elasticity of supply, this value for price elasticity of demand is assumed to be a reasonable proxy.

Using this short-term price elasticity, would mean that a 5.8% increase in supply would translate to a 24% decrease in the price, which if applied to the total natural gas spending by consumers would translate to savings to natural gas users in EU of about €48 billion in 2021. A more conservative approach for estimating the potential savings would be to calculate impacts only against the price increase since 2019, which we estimate at about €100 billion in the wholesale market. Using this more conservative approach would imply savings to natural gas users in EU of about €24 billion in 2021. While each approach has its merits, the range offers the most relevant reference point for policy makers.

A crucial point to realize is that the benefits of lower gas prices accumulate downstream and eventually are passed on to consumers. Given the structure of the gas market, these benefits are not captured by natural gas suppliers. In effect, the benefits of lower prices are transferred from current suppliers to consumers. This characteristic of the gas market means that existing suppliers of natural gas are incentivized to discourage entry of new suppliers. Given these features, there is a strong case for public sector intervention in facilitating new entry and development of diversified supply infrastructure.

Support for new LNG and development of new pipelines are mutually reinforcing policy measures that advance consumer interest

In our view, there is an opportunity to improve EU’s energy security over the 2030-time horizon and beyond by focusing more on increasing the capacity of new pipelines bringing gas from the Caspian. According to the European Commission, about 80% (or 50 bcm per year) of the natural gas supply diversification is planned to come from increasing LNG supply. The remaining 20% (10 bcm per year), is planned to come from new gas transported by pipelines. While this approach may be appropriate for the short-term, it is not appropriate for the medium term. Priority should be given to developing new natural gas pipelines.

Natural gas production cost modeling for the European market, commissioned by the UK Department for Business, Energy & Industrial Strategy, identified a cost advantage of new pipeline gas projects over new LNG supply (See Figure 1). The production cost curve presented in Figure 1, identifies different sources of natural gas that could be supplied to the European market. The height of each bar corresponds to the cost of supplying the natural gas from a particular source to the European market whereas the width of the bar corresponds to the estimated volume that could be delivered per year from the identified source. Caspian gas offers a cost competitive option for supplying the European market and could deliver over 50 bcm per year.

Figure 1:

Base Case Gas Supply Cost Curve – 2035 (2015 prices)

Source: Fossil Fuel Supply Curves, Report of the UK Department for Business, Energy & Industrial Strategy, May 2016, prepared by Wood Mackenzie Ltd.

The impact of increasing access to new LNG compared to increasing new sources of piped gas has different consequences for the natural gas supply curve. The impacts from these mutually reinforcing measures would further European consumer interests.

Policy support that is targeted at increasing access to future LNG projects will flatten the slope on the tip (right-hand side) of the natural gas supply curve (see image I in Figure 2 below). The reason is because the vast majority of future LNG potential is on the right-hand side of the production cost curve, therefore, the supply response will largely impact this segment.

However, increasing support for gas from new (future) pipelines will shift the entire supply curve to the right. The shift will be less pronounced on the left-hand side of the supply curve and more pronounced in the middle (see image II in Figure 2 below). The scale and segment of the shift in the supply curve is presented in proportion to opportunities identified in the production cost curve from future piped gas.

If the two measures are pursued in parallel, the cumulative impact will be both a flattening of the slope of the tip of the supply curve and a shift in the supply curve. Basically, the sum of the two effects (see image III in Figure 2 below).

Figure 2:

Impact of policy support for new LNG and new pipes on natural gas supply curve

Box 1: The Geographic Market – Is it Just Europe or Europe and Asia?

A relevant technical point to note, is that this analysis is done using the assumption that the geographic market for natural gas is Europe. However, some analysts consider that the relevant geographic market is broader and should encompass both Europe and Asia, as the two regions are linked indirectly through LNG trade. In fact, the price correlation across leading European and Asian benchmarks increased to 0.93 in 2021 compared to below 0.8 in 2019. Nevertheless, a correlation in spot prices across LNG products should not necessarily be interpreted as the existence of a single geographic market.

However, even if a broader geographic market definition is applied, that encompasses both Europe and Asia, the scale of the benefits estimated in the analysis from adding additional capacity would not change. Although, the benefits would be distributed more widely, accruing to both European and Asian consumers in the broader Europe-Asia natural gas geographic market. The addition of 32 bcm in 2021 would have increased supply in the broader Europe-Asia geographic market by about 2.2%. If the same price elasticity assumptions are used, this increase of supply would correspond to a decrease in prices by 9.2%. The benefits to consumers in 2021 would still have been in the range of €24 bn to €48 bn but these saving would be distributed more widely across the broader Europe-Asia geographic market.

Even under the broader geographic market definition, there are compelling reasons why Europe would find it in its interest to secure higher volumes of natural gas supply from the Caspian. The lower production cost of Caspian gas makes it possible for Europe to potentially lock in supply at a lower rate than offered through new LNG projects. Piped Caspian gas also offers the possibility to have certainty of supply and reduce over reliance on new LNG capacity, access to which depends on continuously outbidding Asia. Furthermore, enhanced access to piped gas from the Caspian will help reduce exposure of Europe against supply disruptions in natural gas markets.

EU can continue to use natural gas indefinitely while cost-effectively meeting its 2050 carbon neutrality target

Carbon capture and storage technology offers a technically viable solution for capturing nearly all carbon dioxide emissions that result from the combustion of natural gas. Currently, this method is not economically attractive as it is cost prohibitive. However, with research, development, learning, and accommodative polices, carbon capture and storage technology has the potential to become commercially viable.

In the meantime, there are vast pools of cost-effective emission reduction opportunities in developing countries. The newly agreed rules at UNFCCC COP 26 for international collaboration under the Paris Agreement (also known as Article 6 of the Paris Agreement) offer an unparalleled opportunity for delivering the best greenhouse gas emission reductions, which can be used to offset emissions from using natural gas.

But capturing “tailpipe” emissions and offsetting are not the only options. The rapid progress in recent years in direct air carbon capture processes and technology has the potential to be truly transformational. Based on our forthcoming assessment, which is in the process of being peer reviewed, our estimate is that certain companies, through leveraging existing mature technology and process innovation, have achieved the ability to capture carbon directly from the air at a cost of between US$90 to US$130 per metric ton of carbon dioxide. While this is much more expensive than the abatement opportunities available in developing countries, it is comparable to the current price point of carbon emission permits in EU. The significance of this development is that direct air carbon capture conceptually offers endless opportunities for emission reductions at the same carbon price. In effect, this technology puts a price ceiling on reducing carbon emissions.

Whether it is through carbon capture and storage, carbon offsets, or direct air carbon capture processes, there are many options available for neutralizing greenhouse gas emissions. EU can continue to use natural gas indefinitely and still meet its 2050 carbon neutrality target without incurring huge costs. Natural gas plays an important role in enabling greater renewable energy deployment by offering a viable solution for balancing capacity to manage fluctuations in renewable energy supply. Except for nuclear power, electricity generated through natural gas currently offers the most viable and low-carbon alternative to coal-based power as a solution for intermittency.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Caspian Gas Is Key to EU Supply Diversification

Policy Pulse – 9 March 2022 – Veritas Global

Photo by KWON JUNHO on Unsplash

Key messages:

• The EU is right to be concerned about dependence on Russian natural gas

• Enhancing access to Caspian and Central Asian natural gas is the best option for EU supply diversification

• Expected benefits to the European energy system include sustainability, security, stability, and competitiveness

On 8 March 2022 the European Commission proposed a series of measures for addressing the EU’s energy insecurity. The proposal includes both immediate and longer-term measures for addressing dependence on Russian natural gas. Crucially, the proposal identifies diversification of supply as one of the key levers for addressing EU energy security for the medium and long-term. In this context, there is an opportunity to build on the European Commission proposal and take decisive actions to diversify supply though enhancing access to Caspian and Central Asian natural gas.

Enhancing access to Caspian and Central Asian natural gas is the best option for EU supply diversification

According to the European Commission, domestic supply of natural gas meets about 10% of total EU consumption and has limited scope to boost production. The EU is highly reliant on imports and has limited alternatives for diversifying away from Russian natural gas. North Sea production is at capacity and reserves have been significantly depleted, making it very difficult to maintain and grow supply. Algeria is already doing its part to supply the EU, with market share of natural gas imports increasing significantly in recent years. Suppliers of liquefied natural gas (LNG) are expected to boost production, but it is uncertain whether they can be a reliable source for meeting EU demand in the medium-to-long term. Qatar can significantly boost LNG production but is better positioned to serve markets in Asia. The US may continue to supply modest quantities of LNG to Europe, but it is unlikely to become a large-scale supplier. Fracking practices, which have been a key driver for increasing US natural gas production, are increasingly coming under pressure, including due to local environmental and health impacts. These developments raise questions about the viability of the US to sustain volumes needed to meet expected local natural gas demand while at the same time supporting large-scale exports.

The EU’s best option to diversify supply is to tap into resources in non-Russian countries of the Caspian basin and Central Asia, which are home to about one quarter of all proven natural gas reserves globally. Diagram 1 shows the largest proven natural gas reserves that exist in proximity to Europe with the size of white circles drawn in proportion to proven reserves.

Diagram 1:

Caspian and Central Asia region has the largest proven natural gas reserves in proximity to EU

Source: Veritas Global using graphics from mapchart.net and data from BP Statistical Review of World Energy July 2021

The benefits for Europe to access the vast energy pool in the Caspian and Central Asia is partially being realized through the Southern Gas Corridor, a project that was operationalized at the end of 2020 and continues to increase deliveries. However, the scope for scale-up is far greater than what is currently planned to be implemented. One of the best options for enhancing diversification of natural gas supply to Europe is to develop additional capacity that brings Caspian gas to European markets through transit routes that do not pass through Russia or other members of the Eurasian Economic Union.

The option that offers the best supply diversification benefits (known as White Stream) would bring natural gas from the Caspian to the EU. For example, natural gas could originate in Turkmenistan or in the shallow water offshore fields of the Caspian and be transported by pipeline through Azerbaijan and Georgia to the Black Sea. From the Georgian Black Sea coast, the gas could be transported by an underwater pipeline directly to Romania, where it would plug into the EU gas network (an alternative but more costly and technically complex option is to ship the natural gas across the Black Sea after converting it to LNG). The technical aspects of this project have been assessed in detail with feasibility studies supported through EU funding for common projects of interest. However, a lack of political will combined with misplaced concerns over the project’s climate change impacts has meant that the project has not received a green light despite being nearly shovel ready. The slow progress of developing this corridor has given Russia a dominant position across European gas markets and in practice has increased EU’s reliance on coal for electricity generation.

The EU has prioritized development of hydrogen-based energy obtained by using renewable energy as one of the main responses to addressing supply side dependence in natural gas markets. The EU’s hydrogen strategy, if fully implemented, targets production of up to 10 million metric tons of renewable hydrogen in the EU by 2030, which is the energy equivalent of about 5% of current natural gas demand in Europe. The European Commission proposal from 8 March 2022 sets 2030 targets that go beyond the hydrogen strategy, but these additions will have limited impact on overall natural gas demand. Between 2030 and 2050, the EU hopes that renewable hydrogen technologies reach maturity and start being deployed at a large scale. While this strategy offers an ambitious program for long-term decarbonization, it does little to address the EU’s short- and medium-term energy security needs. Even if all goes to plan, the EU hydrogen strategy implies that renewable hydrogen will not be effective at containing Russian’s dominant position in natural gas markets for at least the next two or possibly even three decades.

Expected benefits to the European energy system from improving access to Caspian and Central Asian natural gas include sustainability, security, stability, and competitiveness

• Sustainability: A key feature of the EU’s climate change mitigation strategy is to increase electrification in the economy while decarbonizing electricity generation. In significant part the EU plans to achieve this objective by deploying greater renewable energy. Natural gas plays an important role in enabling greater renewable energy deployment by offering a viable solution for addressing supply intermittency. Except for nuclear power, electricity generated through natural gas currently offers the most viable and low-carbon alternative to coal-based power as a solution for intermittency. In Europe, limiting supply of natural gas and making it more expensive in practice incentivizes the use of coal. In 2021, as natural gas prices rose, electricity generators across the EU switched from gas-to-coal leading to higher greenhouse gas emissions. For example, in Q4 of 2021 in northwest Europe, in response to record-high natural gas prices, coal fired power plants increased their output by 20% year on year. Natural gas plays an essential role in supporting a more sustainable energy system in Europe.

• Security: The crisis in Ukraine has also revealed that Europe is not immune from large scale military confrontation. The heightened risk environment exposes critical natural gas transmission infrastructure to the possibility of subversive actions which could include cyber or even direct attacks. Increasing the geographic scope for both the source of natural gas and transmission infrastructure helps improve system reliance and security. Access to a diversified pool of suppliers could also help limit the exposure to spillovers from broader supply disruptions in linked markets.

• Stability: LNG is the marginal source of gas for Europe, this means that non-LNG suppliers sell pipeline gas at the competitive equilibrium price with LNG. (The exceptions to this are the gas deliveries made against long-term contracts). However, pipeline suppliers may also influence market outcomes when LNG market condition are tight (demand exceeds supply). If a large enough pipeline supplier withholds natural gas sales it could drive up the LNG price. A key development in gas markets in 2021 has been an increase in the correlation between the European and Asian gas benchmarks to 0.93 (from below 0.8 in 2019). Given how tight natural gas markets have become across Europe and Asia, we think that a withholding in pipeline deliveries (or reduction in production) in one market could lead to upward price pressure in the LNG price in both markets. This in effect increases incentives for collusion across natural gas suppliers and encourages development of an OPEC equivalent for natural gas (it could also create incentives for collusion between OPEC and major natural gas producers that also produce oil). Broadening the pool of suppliers offers the best means through which to limit incentives for supplier collusion.

• Competitiveness: As highlighted by the European Commission, Russia has a large market share in natural gas markets across Europe. In addition, the combination of excess production and transmission capacity to Europe in our view magnifies Russia’s market dominance. Existence of excess capacity in transmission and production discourages new investments by other participants especially new entrants. The IEA estimates that in 2021, Gazprom production was about 7% below capacity despite strong domestic and external demand with historically high gas prices. In addition, domestic storage injections in Russia rose to new records while deliveries to the European Union fell by 3%. Furthermore, at the end of 2021, Gazprom while continuing to meet long-term contracts, nearly stopped making new sales on the spot market and did not fully use existing reserved capacity. While some of the disparities may be explained by technical disruptions, weather variance, and maintenance, the overall picture suggests strategic and anti-competitive behavior. Some observers have suggested the withholding of deliveries was part of Gazprom’s effort to drive up the gas price to increase incentives for the German regulator to approve certification of NordStream2 whereas others have linked the behavior to escalating tensions in Ukraine. In either case, the behavior would be considered strategic and is likely to have had a material impact on the entire gas market through creating upward price pressure. The observed dynamic further supports the notion that Russia has not only acquired monopoly power but has already abused it to intentionally influence market outcomes. Improving Europe’s access to Caspian and Central Asian natural gas could help, at least in part, to limit strategic behavior and improve the competitiveness of the natural gas market.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.