Could the EU’s Green Deal provide security benefits?

The European Green Deal proposed by the European Commission, aims to make the European Union climate neutral by 2050. Launched in 2020, it focuses on reducing greenhouse gas emissions through a transition to clean energy sources. Its proponents credit it with numerous benefits, as noted by economist Claudia Kemfert:

“A Green Deal for Europe […] not only create economic opportunities but also reduce geopolitical disputes, thus securing peace within and outside Europe.”

This statement, made in Intereconomics, a leading forum for research-based discussions of major European economic policy issues, probably reflects the view of many European decision-makers to the effect that curbing trade in fossil fuels would secure peace in Europe. Unfortunately, the claim of a causal link between the European Green Deal and European security has never been explicitly and critically examined. In a recent paper published in Energy Economics we assess this claim, particularly addressing whether curbing energy imports from Russia could enhance the EU’s security.

The geopolitical promises of a European Green Deal

At first glance, reducing dependence on Russian fossil fuels appears to offer security benefits for Europe. That claim rests on two key arguments:

First, Russia’s economic policy seems to be largely subordinated to military objectives. Furthermore, the Stockholm International Peace Research Institute reports a correlation between the energy prices and the level of Russia’s military budget: Russian military expenditure experienced a decline between 2016 and 2019 as a result of low energy prices (combined with sanctions in response to Russia’s annexation of Crimea in 2014); in 2021, however, thanks to high oil and gas revenues, Russia could increase its military expenditure by 2.9% and raise its military spending to 4.1% of GDP. The argument follows that if Europe buys less fossil fuel from Russia, the resulting decrease in revenue would reduce Russia’s ability to fund its military.

Second, the gas markets are undergoing several structural changes, such as the development of a global LNG market, which are likely to lead to lower gas prices over the long run. And that potential lowering of prices is seen by many authors as an opportunity to increase the bargaining power of European countries and of the EU in its diplomatic and security relations with Russia, and this despite an initially very substantial dependence of Europe on Russian gas.

A microeconomic analysis

Despite their appeal, these arguments falter under economic scrutiny, particularly in terms of market power and incentives.

First, the notion that Europe could gain leverage over Russia assumes that Europe operates as a monopsony (a market with only one buyer). However, this is increasingly inaccurate as Russia continues to build new pipelines and export facilities to Asia. While these developments might not entirely compensate for Russia’s loss of European markets, they diminish the EU’s potential bargaining power.

Second, reduced energy revenues do not necessarily change Russia’s prioritisation of military spending. Indeed, given the vital importance the Kremlin attaches to its war effort, it will not touch this item of expenditure even in the event of a significant drop in its energy revenues, preferring to cut other expenses.

Moreover, the cost of implementing the European Green Deal could strain EU countries’ budgets, potentially reducing their already underfunded military investments. Russia’s military threat largely stems from its nuclear arsenal, which to a large extent involves sunk costs, and from relatively inexpensive hybrid warfare tools, such as cyber operations and subversive activities. A reduction in its revenues may not have a significant impact on its ability to threaten Europe militarily.

Finally, money does not necessarily mean efficiency. And if the European defence industry makes weapons of a better quality than their Russian counterparts, Europe could keep consuming relatively cheap Russian energy and spend the money saved on its military industry to keep an edge over Russia’s military capabilities.

Therefore, a basic economic analysis suggests that the European Green Deal could well have a moderate or no positive impact on its security and diplomatic relations with Russia. Yet in our paper, we suggest that the assessment of the deal’s impact must go beyond a pure cost-benefit analysis. And that it should integrate a strategic analysis of the way the different agents at stake will react to the consequent drop in revenue over the long run.

A strategic analysis

Using game theory, our paper identifies one key political economy variable likely to mediate the relationship between the Deal’s implementation and military relations between Europe and Russia. Namely, the way the different Russian elite groups currently vying for power will react to it.

Russian political sociology literature indicates two main elite groups: a smaller, pro-Putin, military-focused group, and a larger, pro-business faction open to Western trade.

In game theory, the size of a group is a very important variable when the expected benefit of an action must be divided among the members of the group. The action in question here is vying for power to control energy revenue. Given that the pro-Putin group is smaller in size, even reduced energy revenue can still be profitably shared among its members, which is not the case for the larger, pro-business group. As a result, under the deal, vying for power still makes sense for the smaller group, but less so for the larger one.

Furthermore, given that with the pro-Putin group, the expected benefit from energy export is likely to be spent on weapons, military operations, and to support the ruling elite domestically, Europe’s security is far from being guaranteed as a result of the Green Deal’s implementation.

Interestingly, increasing Russia’s energy revenue would not necessarily lead to a proportionate increase in military efforts by the smaller group. According to the law of diminishing marginal utility of wealth, as per capita income rises, agents gain a correspondingly smaller increase in satisfaction, resulting in lower incentives to vie for gaining political power over the economic resources.

Policy implications

If the EU aims to base its policies on this strategic model, it should consider the unintended consequences of reducing Russian energy revenues. Lowering energy revenue could depress the efforts of the larger, pro-business group that might advocate for peaceful relations with the EU.

A simple solution could involve sending credible signals to Russia’s pro-business elite that increased trade with the EU is possible if they gain power and pursue peaceful relations with its neighbours – an approach that is compatible with the full implementation of the Green Deal.

Indeed, renewable-energy sources inherently create interdependence between countries due to their intermittent nature, requiring smart electricity grids capable of balancing supply and demand. Consequently, there are strong economic incentives to expand grid interconnections, including between the EU and Russia. Additionally, Russia’s dependence on imported renewable energy technologies, alongside its mineral wealth necessary for constructing them, could foster a healthy interdependence between the technologically more advanced EU and Russia.

Finally, the Green Deal includes a hydrogen strategy that could be leveraged to promote economic diversification in Russia. The EU could engage Russia in developing green hydrogen that could be exported to Europe using the existing pipeline infrastructure.

Fabian Battaglini ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.