A carbon border tax proposed by the European Union is no big threat to petroleum-power Russia’s broader economy and could even present an opportunity, according to research from the World Bank.
“Even if Russia continues its current growth model, the economy-wide macroeconomic effect of EU Carbon Border Adjustment Mechanism (CBAM) would be negligible to small depending on its design,” the World Bank said in a report.
Reducing the environmental footprint of economic activities has emerged as a significant factor in international competitiveness and attracting global investment. The European Green Deal and Beijing’s commitment to carbon neutrality are a few examples of external actions by Russia’s main trading partners that would affect the competitiveness of Russian exports.
The EU proposed CBAM on polluting goods from 2026, which could increase fees on products from Russia, mainly its metals and fertilizers exports.
The preferences of global consumers are changing, and green technologies and business models are disrupting markets, including those where Moscow has a comparative advantage.
Yet there is no immediate threat to Russia’s carbon-heavy economy. The CBAM introduction may reduce Russia’s exports to the EU, but this could be partly offset by redirecting exports to other countries not participating in climate mitigation policy.
Even as Russia has non-green alternatives, the World Bank believes that Russia is well-prepared for a green energy transition, and sees the moment as one of opportunity. Joining the green transformation not only hedges risk but also emerges as an opportunity to boost economic diversification and modernization, which the Russian economy needs.
It would also prepare the nation for a future where green issues become more and more dominant.
Meanwhile, the EU’s low-carbon transition efforts have gotten the attention of the Russian leadership. President Vladimir Putin has ordered the government to work towards cutting emissions. While sustainability efforts are still at a nascent stage in Russia, the country has been exploring green bonds and other options amid a greater ESG focus. Russia still plans to rely on oil in the long term.
And before taking steps, countries that joined the Paris Agreement – including Russia – are concerned that their unilateral increase of “green” ambition could lead to “leakage” of emissions to countries that allow unconstrained greenhouse gas emissions.
Yet, Russia’s optimal response to rising global climate ambition is diversification, according to the Bank. And that’s something the economy needs anyways.
“In the medium and long term, Russia needs new drivers of economic growth as fossil fuels and energy-intensive industries will largely cease to play this role,” according to the research. “Our modeling shows that asset diversification may provide benefits from new opportunities generating growth in new sectors and better jobs.”
The World Bank has a point. Entry into greener energy and manufacturing can help Russia become more resilient to external shocks, such as oil and gas prices volatility. And those shocks may become greater in the future as the energy transition promises volatility in commodities prices.
Meanwhile, as the Bank points, out the current risks are small. The carbon tax as it stands may be worrisome to Russia and contrary to plans, yet it is more than manageable.