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Introduction: For this week’s examination of the Day After, we begin with a look at the renewable energy technologies Europe is relying on to reduce its reliance on Russian energy. From there, we shift our focus to inflation, examining the forces contributing to a rising global tide of prices. This will weigh especially heavy on China, whose slowing growth rate is concerning the CCP. Finally, we conclude with a few thoughts on the energy crisis sparked by Putin’s Ukrainian invasion.

As Europe Seeks to Move Away From Russian Gas, Which Clean-Energy Technologies Will Benefit?

Kim Mackrael, The Wall Street Journal

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Clean-energy technologies will be vital in Europe’s transition away from Russian gas. In response to Russia’s invasion of Ukraine, the European Union has launched a plan to reduce the bloc’s imports of Russian gas by two-thirds this year alone and end its reliance on Russian energy entirely by 2027. While in the short-term coal-fired power plants and other gas suppliers will have to band-aid the energy crisis created by the conflict, the faster expansion of renewable energy will be the EU’s long-term solution, which will also progress its existing climate goals and even pull forward some of its targets for clean energy. Renewable hydrogen, biomethane, wind and solar, and heat-pumps are each a critical part of the energy transition plan outlined by the bloc so far. 

Renewable hydrogen has become more competitive as natural gas prices have skyrocketed. This kind of fuel is made through a process called electrolysis and has multiple uses, including as a substitute for fossil fuels in industrial settings. While new renewable-hydrogen projects will do little to offset Russian gas reliance this year, they have the potential to replace between 34-68 billion cubic meters of Russian gas by 2030. On the other hand, biomethane, a substitute for natural gas that can be injected directly into existing gas infrastructure, could possibly produce an additional 3.5 billion cubic meters this year and is expected to reach 35 billion cubic meters by 2030. Even though large solar and wind projects can take a few years to be built, the European Commission estimates that a rapid scale-up of wind and solar power could replace about 20 billion cubic meters of Russian gas this year alone, with capacity reaching as much as 170 billion cubic meters by 2030. To put things into perspective, the EU imported about 155 billion cubic meters of gas from Russia last year. The EU is also calling for an increase in heat pumps which are much more efficient than gas boilers and are a relatively easy and quick solution for households and businesses to increase energy efficiency. Newly installed heat pumps should be able to replace 1.5 billion cubic meters of Russian gas this year and are expected to replace 35 billion cubic meters by 2030. Nuclear power could also play a key role in the bloc’s energy transition, though it is not officially included in the EU’s initial proposal. If executed properly, the Russia-Ukraine crisis could be turned into an opportunity for an unprecedented energy transformation.

The Specter of Inflation

Storm Clouds Over the Global Economy

Eswar Prasad, Project Syndicate 

The End of an Economic Illusion

John H. Cochrane, Project Syndicate 

In the aftermath of a challenge as monumental as the Covid pandemic, the “ordinary” challenges of macroeconomic development – geopolitical disruptions, supply chain issues, and market volatility – seemed less daunting. Yet these pressures are driving inflationary forces to heights not seen in decades in the developed world, squeezing global economies and clipping the wings of growth. Russia’s economy has been crippled by a series of aggressive sanctions and a rapidly stagnating conflict in Ukraine, China’s exports have been shuttered along with its population due to zero-tolerance Covid policies, Europe has thus far been unable to wean itself off Russian gas, and the US is struggling to cap inflation despite a roaring labor market. Other nations – the UK, Japan, India, and Brazil, to name a few – have seen their output derailed by rising inflation. The causes of this rising tide are multitudinous, but John H. Cochrane asserts that the primary drivers are supply shortages and excess government spending. Cochrane argues that supply-choking policies – “tariffs, industrial protections, labor-market distortions, [and] restrictions on skilled immigration” – have stoked an inflationary fire, and loose stimulus has only added gasoline to the flames. Cochrane also points to short-sighted energy policies that attempted to phase out conventional energy before renewable energy was ready to take its place, exacerbating the energy crisis sparked by the conflict in Ukraine. Such “wishful thinking” has propped up unsustainable systems which unleash economic pain when challenged – as was the case with Putin’s invasion. Realistic policy is needed to address the structural weaknesses exposed by such conflicts.

The Age of Slow Growth in China

Daniel H. Rosen, Foreign Affairs

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China’s growth over the last few decades has been astounding, and the Chinese Communist Party (CCP) has committed to maintaining an annual growth rate of 6-8% which would allow China to surpass the US in terms of GDP by the end of the 2020s. However, there are signs that China is entering a period of slow growth, and the US should take the chance to point out the weaknesses in China’s economic model and the danger of the CCP’s statism. Despite a slew of economic challenges, the CCP announced that GDP growth this year would be 5.5%. In this article, Daniel H. Rosen breaks down the three possible sources for such an expansion and, subsequently, explains why it would be impossible for China to meet this declared rate of growth. Using growth in 2019 as a basis for comparison, Rosen says business investment would need to contribute 1.5% to growth this year. However, because net exports will likely be negative and consumption will likely decrease, business investment will have to actually contribute around 2.5% to growth in 2022. In the last several years, property development has been the primary contributor to business investment, but the country’s largest developers are now facing debt default crises. Further dampening business investment are the new regulatory actions the CCP has taken which have scared investors away from investing in China’s higher-tech industries. The second major source of growth is household and government consumption. Rosen argues this category would need to add 3.5% to growth this year to reach the 5.5% target. This would be extremely difficult given that retail activity has been frozen by Covid-19 lockdowns. Furthermore, job-creating sectors are having to lay off employees thanks to increased government intervention, and the resources of local governments are decreasing. Now, local officials are being told to quickly issue special revenue bonds in order to offset the fall in the housing bubble and consumption slowdown induced by Covid-19. The third source of growth, trade surplus, is looking a bit dismal as well. Rosen argues that exports can go nowhere but down from their historic highs, and China’s import bills have become more expensive due to Russia’s invasion of Ukraine. Additionally, major manufacturing regions in China, like Shenzhen and Shanghai, have been shut down by Covid-19 while the rest of the world’s factories are coming back online. Given these major weaknesses and some significant demographic challenges that will suppress long-term growth, Rosen believes it will be challenging for China to maintain 2% growth, and that even zero growth or economic contraction is not out of the question for this year.

It’s Not Just High Oil Prices. It’s a Full-Blown Energy Crisis

Helen Thompson, New York Times

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While Vladimir Putin’s invasion of Ukraine certainly ignited a global energy crisis, decades of myopic energy investment had been building the pyre. The most recent log to be added was a systemic shortage of traditional energy, driving prices upwards in the months leading up to the invasion. When Russian energy was removed from global markets, the supply crunch was amplified, leading the Biden administration to release millions of barrels of oil from the US’s Strategic Petroleum Reserve. This, coupled with growing Asian demand and a widespread slowdown of oil production, has prompted many countries to view their global alliances in terms of energy security, outrightly picking sides based on who can supply enough oil to keep the economy humming. Domestically, there are increasing tradeoffs between moral activism (is it right to buy Russian gas, is it responsible to burn fossil fuels today) and the standard of living established by decades in the top economic slot. These decisions have emphasized the central role energy plays in politics, and vice versa. As the world looks towards the energy transition, it would do well to remember that the transition to green energy will require a monumental shift in lifestyles for billions of people. For their sake, the world must act wisely.