• This field is for validation purposes and should be left unchanged.
  • Earth.Org Newsletters

    Get focused newsletters especially designed to be concise and easy to digest

  • This field is for validation purposes and should be left unchanged.

The New Economy of a Warming Arctic

by Tristan Bove Global Commons Sep 2nd 202116 mins
The New Economy of a Warming Arctic

For centuries, the high latitudes of the Arctic have remained inaccessible to humans. Despite the region’s wealth of extractable resources and diversified shipping routes connecting the world’s continents, few mariners have risked the frigid temperatures and inhospitable environment. The promising opportunities presented by an “Arctic economy” have been entombed in impassable and perennial polar ice caps. Warming temperatures and a rapidly increasing rate of glacial melt may unlock the economic potential of the Arctic over the coming decades. A lack of binding legal or jurisdictional frameworks also increases the likelihood of future geopolitical struggles in the region, as countries in the Arctic Circle and beyond stake their claims to regional dominance.

Global temperature rise is causing the Arctic to warm at almost twice the rate as anywhere else in the world, which is rapidly increasing the rate of sea ice loss. Since the 1980s, the volume of Arctic sea ice has decreased by 75%, and the region could experience ice-free summers by 2050, if not earlier. 

You might also like: UN Global Climate Poll: ‘The People’s Voice is Clear – They Want Action’

winter maximum and minimum

Fig. 1: 2018 winter maximum (left) and summer minimum (right) extent of Arctic ice cover. Magenta line indicates historical ice cover from 1981-2010 during the same seasons; NOAA Arctic Program; 2018.

Warming temperatures are causing a dramatic shift in the Arctic’s climate, which is becoming characterised by open water and rainy seasons instead of expanses of ice blanketed by snowfall. A transforming Arctic may soon become the epicentre of a new global era of market activity, geopolitical conflicts and a race for freshly uncovered natural resources. Melting sea ice and thawing permafrost will uncover treasure troves of unspoiled resources, including fisheries, reserves of oil and gas, more farmable land and minerals such as iron ore, copper, nickel, zinc phosphates and diamonds.

Melting sea ice is also increasing the navigability of the Arctic Ocean, creating new shipping routes which are traversable for longer periods of time throughout the year. This, as well as possibilities to set up permanent extraction stations at oil and gas fields, will make the Arctic Ocean a hotbed of global economic activity. Increased navigability is also contributing to the growth of Arctic tourism. The waters of Canada’s Northwest Passage, once only visited by explorers and research vessels, is now frequently traversed by cruise ships.

The changes occurring in the Arctic have the potential to upheave and reshape not only the global economy, but also the global power status quo and alliances between nations. Currently, there is no legal or jurisdictional framework that regulates economic activity across the entire Arctic region, and if institutional changes are not pursued now, the stage will be set for an unregulated and chaotic scenario where power dynamics are dictated by wealth and displays of military force, outpacing any diplomatic efforts at achieving regional stability in the Arctic.

Foreseeable geopolitical struggles do not bode well for the sustainable development of the Arctic and extraction of its resources. Developing the Arctic will be an unprecedented herculean endeavour for interested nations and firms, fraught with economic, social and political risk. However, the riches being slowly uncovered in the region are far too appealing, and at this stage, the question is not so much whether the Arctic could or should be developed economically, but if it can happen sustainably and without creating potential for international conflicts. 

Governance in the Arctic Circle

In 1996, the Arctic Council was established as the premier forum for intergovernmental cooperation between countries with sovereignty within the Arctic Circle. The council’s eight members are the US, Canada, Russia, Finland, Sweden, Norway, Denmark and Iceland.

Upon its creation, the primary function of the council was to maintain peace and stability in the Arctic in the aftermath of the Cold War. The Arctic Council has proved to be impressively resilient after weathering geopolitical tensions between its member states and changing environmental circumstances. The council has made a point to avoid involving itself in military and political squabbles between nations. For instance, while tensions were high when cooperation between the West and Russia was suspended after the latter annexed Crimea in 2014, these disputes had no tangible effect on the activities of the Arctic Council.

In addition to its eight member states, the Arctic Council also reserves seats for delegations representing the interests of indigenous populations of the Arctic Circle. Six organisations representing the interests of almost 600 000 members of indigenous groups across the Arctic Circle hold the positions of Permanent Participants in the council. These organisations are granted full consultation rights and their local perspectives are considered in decision-making processes.

With its apoliticised mandate, the Arctic Council has mediated multilateral agreements on search and rescue operations, oil spill prevention and scientific cooperation. The council also helped establish the independent Arctic Coast Guard Forum, which enlists the financial and personnel support of Arctic states in ensuring safe, secure and environmentally sustainable maritime activities in the Arctic, and the Arctic Economic Council, which facilitates business transactions and sustainable economic development in the Arctic.

Most experts in Arctic affairs agree that these accomplishments would not have been possible were it not for the Arctic Council’s aversion to security matters. However, the environmental shifts in the region have laid bare the political and economic appetites of Arctic states. 

In 2019, at a ministerial meeting of the Arctic Council, US Secretary of State Mike Pompeo said: “The [Arctic] region has become an arena for power and for competition, and the eight Arctic states must adapt to this new future.”

The Arctic Council’s mandate of peace and lasting cooperation has thus far restrained countries from initiating a competitive and potentially militaristic ‘scramble for the Arctic.’ However, there is no comprehensive jurisdictional framework of enforcement that protects the Arctic Circle’s environment and can prevent Arctic states from exploiting the region’s resources. In terms of legal frameworks, activities in the Arctic are governed by a number of bilateral trade agreements, the work of the Arctic Council and the 1982 UN Convention on the Law of the Sea

Under the Law of the Sea, each coastal Arctic state has a legal economic claim to all living and nonliving natural resources within their exclusive economic zone (EEZ) that expands up to 200 miles offshore. North of the five Arctic EEZs, however, is 1.1 million square miles of open and ungoverned ocean. In this region that has been termed the ‘Arctic donut hole,’ waters and resources lie outside of any country’s jurisdiction.

eez and territorial waters

Fig. 2: EEZs and territorial waters of the Arctic. Shaded areas represent individual countries’ EEZs, the central unshaded area is the Arctic donut hole, points represent disputed territories; Council on Foreign Relations; 2014.

Political Economy of the Arctic

Some legislators see the climatic shifts in the Arctic as a potential boon for certain sectors. Nowhere is this more the case than in Russia, where the agricultural, energy and shipping industries are preparing for massive growth before the end of the century.

It has been estimated that, under current temperature rise trajectories, 2 million square miles of land in Russian Siberia currently covered in permafrost will thaw and become at least partly farmable by 2080. Due to this growth in agricultural capacity, Russia’s ability to support and employ future climate migrants could increase ninefold, a capacity especially relevant when considering the future status of climate migrants from neighbouring countries. A report by the US National Intelligence Council discussed how climate stressors in China, including droughts and water shortages, could push migrants from China ‘in large numbers,’ moving from their homeland to permanently settle in Russia’s sparsely populated Far East and Siberian regions by 2030.

arctic economy

Image 1: A Chinese farmer and landowner who moved to Russia’s Far East in his 20s in search of opportunity and livelihood. Russia could become home to an increasing number of climate migrants over the coming decades.

Thawing of permafrost, however, does not mean that all formerly covered land will be farmable, nor does it mean that the gains will necessarily be worth the environmental impact. Soil in Siberia’s northernmost latitudes tends to be significantly thinner and more acidic than conventional farmland, and would require extensive use of fertilisers to become arable. Thawing permafrost also weakens soil stability, causing gradual erosion and collapse of urban infrastructure, roads and bridges. Finally, according to a study by the Intergovernmental Panel on Climate Change, any reduction between 30 and 99 percent of near-surface permafrost in Siberia would account for the release of up to 240 billion tonnes of methane and carbon into the atmosphere.

Despite the clear and present dangers that the 2 million Russian residents in the Arctic will soon face, climate change remains on the periphery of political discourse in Russia. The state has gone through concerted legal efforts to muzzle the voices of NGOs and international agencies advocating for meaningful action to mitigate climate change, and has been successful in accordingly shaping the public discourse. Based on one recent survey, only 13 percent of Russian citizens believed climate to be the most important environmental issue facing their country. The Russian state has been able to accentuate the gains the country could be poised to make in certain sectors, while minimising the adverse environmental effects the country’s developmentalist attitudes will have on its most at-risk communities. 

In recent years, Russia’s Arctic initiatives have become closely aligned with Chinese interests, although this appears to be more of a business alliance rather than a political or ideological one. China has struck deals with Russian energy providers to source natural gas from the Arctic, in a move that is expected to weaken the US’s position as the world’s largest natural gas provider. A Russian-Chinese partnership is also expected to establish a near-monopolistic control over shipping and trade in the Arctic, strengthening Russian seaports and providing Chinese harbours easy and unrestricted access to Arctic shipping routes. Termed the Polar Silk Road, China’s economic moves in the Arctic represent the latest tendril of its greater Belt & Road Initiative.

The fossil fuel resources in the Arctic are beckoning developmental action from Russia and its Chinese partners. By some estimates, the Arctic is home to 13% of the world’s undiscovered oil resources and 30% of undiscovered natural gas stores. Around 84% of these undiscovered energy resources are thought to lie in offshore reserves. 

oil and gas fields arctic

Fig. 3: Distribution of oil and gas fields in the Arctic Circle. Shaded areas have at least a 50% chance of being the site of an undiscovered reserve, points indicate existing fields; Council on Foreign Relations; 2014.

Given its reliance on hydrocarbons, Russia is leading the pack in terms of Arctic fossil fuel extraction, encouraged by the fact that, of almost 60 large known oil and natural gas fields in the Arctic, 43 lie in Russia’s EEZ. Compared to the other major Arctic power, the US, Russia is much more in need of the Arctic’s fossil fuel resources. Companies in the US have shown little interest towards drilling in the Arctic wilderness in northern Alaska, and the supply of crude oil in the mainland of the US has remained reliable for developers, however Russia needs its Arctic stores to fulfil its ambitions of becoming an energy superpower.

Interestingly, private multinational fossil fuel companies have distanced themselves from Arctic drilling plans. In the US, several corporations including Shell and ConocoPhillips relinquished drilling leases in the Arctic in 2016. In 2018, ExxonMobil pulled out of a joint venture with Russian state-owned petroleum company Rosneft. Drilling in the Arctic, despite its promise, is an expensive and risky proposition for corporations with invested shareholders, especially in an area still deplete of drilling and crude oil transportation infrastructure. Further disincentivising fossil fuel companies, oil prices were low when most decided to relinquish their stakes, and are even lower now as a result of the COVID-19 pandemic. 

Undeterred, the Russian government is moving ahead with its development plans for the Arctic, relying on the strength of its large state-owned enterprises and support from China. Russia is playing a strategic game that should yield higher benefits in the future. Also, while oil may not be particularly profitable at the moment, the potential for immediate profits from natural gas extraction is far greater. 

Russia’s strategic plan also involves heavy investments towards expanding its shipping industry and laying claim to the emerging Arctic sea routes. New transarctic shipping routes will soon become accessible, such as the Northeast Passage, which connects the Bering Strait between Alaska and Russia to northern Europe via the Siberian coastline. Parts of the Northeast Passage have so far only been accessible for less than two months out of the year, making the route unviable for development of a maritime trading industry and relevant infrastructure. Within the next few decades, however, changing climatic conditions will make this route and others like it increasingly accessible to all types of shipping vessels.

The Northeast Passage will become critical to the trade and shipping interests of Russia and East Asia in general, as it could shorten distances between Asian and European ports by up to 4 000 miles. For instance, a ship travelling from Shanghai to Hamburg using the Northeast Passage would reduce distances by around 30% compared to taking conventional routes through the Suez Canal, and would avoid the pirate-infested waters around the Malacca Strait and the Horn of Africa. 

Existing lanes such as the Northwest Passage running along northern Canada could not only become navigable year-round, but will also for the first time be accessible to ordinary ships in addition to expensive ice-breaker vessels. In 2013, the Danish cargo carrier Nordic Orion travelled from Vancouver to Finland along the route, becoming the first ship of its kind to do so and saving around USD$80 000 in fuel costs. 

Attention is also beginning to turn towards the Transpolar Sea Route, a 2 100-mile potential king of maritime traffic in the Arctic. The route, which would pass directly over the North Pole, would provide the most direct corridor from Asia to the Atlantic. Most experts believe this routing will remain sealed off for several more decades, as year-round accessibility and commercial viability remain low.

Fig. 4: Current and projected Arctic shipping lanes based on polar melt scenarios; Earth.Org

Geopolitical Tension

The looming concern and threat in the Arctic is militarisation. Five Arctic Council member states, the US, Canada, Norway, Denmark and Iceland, are allied members of NATO, creating significant tensions between these states and the emerging military power of Russia. 

Since 2011, Russia has reopened several military bases, airfields and radar stations, modernised its sea-based nuclear arsenal and expanded its Northern Fleet of large surface ships stationed in the Arctic. More confident forays of Russian submarines into the Arctic have also elicited concerns from bordering Arctic states. Russia is the only country in the world constructing nuclear-powered icebreaker ships, massive and powerful vessels powered by nuclear reactors with the ability to forge through otherwise impassable ice cover for the benefit of cargo ships.

The buildup of military capacity in the Arctic is considered necessary by Russian authorities, who view the country’s longest coastline as increasingly vulnerable due to retreating ice. Militaristic expansion in Russia is meant to counter the combined might of the NATO Arctic allies. Regardless, many observers view Russia’s Arctic militarisation as a sign of power projecting into other regions, particularly the North Atlantic, in an effort to stake an early claim to dominance over the region and its resources.

The rhetoric coming from China is doing little to assuage concerns. In 2018, China released its ‘Arctic Policy Paper.’ In it, the country outlines its vision for development in the Arctic and its intentions regarding relations with Arctic states. China labels itself a near-Arctic state, in that despite being nowhere near the Arctic, it will be a major stakeholder in regional affairs. Neither the paper nor China’s recent polar expeditions exclude the possibility of China developing its military capabilities to protect its Arctic interests.

China claims that it will respect the sovereignty rights of Arctic states, while emphasising how it will actively participate in areas concerning fishing, navigation, aviation, scientific research and laying of submarine cables and pipelines. China has expressed interest in extracting Arctic resources, as evidenced by heavy investments towards Arctic mining operations in Greenland, and is aiming to become a major player in controlling future shipping and navigational routes in the Arctic.

Alarmed by growing militarisation and strengthening of relations between Russia and China, the US has indicated it will increase its military capacity in the Arctic in equal measure. A 2019 policy brief by the Department of Defense names the Russia-China partnership as ample reason for the US to pivot the attention of its military branches to focus more closely on the Arctic, as well as expand the number of US naval and icebreaker vessels in the region. The US Navy has also evaluated the possibility of repurposing its Second Fleet, traditionally tasked with countering Russian presence in the North Atlantic, to focus on containing Russian and Chinese expansion into the Arctic Ocean.

Tensions between these three countries already permeate most global affairs and now threaten to spill over into the Arctic. Control over the region is not limited to control over material resources. The accessibility of unregulated navigational routes can create security concerns for countries with newly exposed coastlines, and a lack of jurisdictional governance in the heart of the Arctic Ocean only exacerbates the issue. The stage is set in the Arctic for a competitive international scramble for resources and regional dominance, and while the current chance of military escalation is slight, it remains a dangling threat to the prospects of stability and sustainable development in the Arctic.

Sustainable Development in the Arctic

To sustainably develop the Arctic, the militaristic and unrelenting developmentalist attitudes of the region’s main actors need to be contained and minimised, by establishing authoritative regulatory entities. As the main purveyor of human activity in the Arctic, Russia needs to adopt the right practices and implement the policies that can ensure lasting sustainability in the region. As the only existing jurisdictional entity with a proven track record of cooperative and sustainable development action, the Arctic Council needs to take on a more prominent role.

Conservationists have called for the UN’s Sustainable Development Goals (SDGs) to be applied to the Arctic and enforced by the Arctic Council. Implementing these goals would not only address the issues related to climate change and environmental preservation, but also the socio-economic challenges that the Arctic’s indigenous populations will face. Incorporating SDGs as economic indicators could help maintain traditional livelihoods, such as reindeer herding and berry picking. They could also indicate which public services are needed for indigenous groups, such as education, healthcare and local infrastructure. 

The Arctic Council is currently restricted from incorporating SDGs and actively coordinating sustainable development initiatives due to a lack of adequate funding. The activities and initiatives of the Arctic Council are almost entirely funded by the member states that propose them, meaning that it is normally funding that informs projects, rather than projects attracting funding. This structure limits long-term planning, encourages voluntary and non-binding agreements and grants disproportionate levels of power and influence to the governments of member states. 

Expanding the Arctic Council’s jurisdictional power and fundraising capacity will be crucial to achieving sustainable development goals. An independent and non-governmental fund should be established, dedicated to advancing environmental conservation and equitable socio-economic development. To ensure that fossil fuel extraction activities do not reach excessive levels, a carbon tax should be levied in the Arctic region, wherein tax revenue is funneled directly to the fund supporting the Arctic Council’s sustainable development goals. The Arctic Council’s jurisdiction should be written into binding law, and expanded to cover the unregulated open waters surrounding the North Pole.

Russia’s militarisation and economic dealings are a sign that the country won’t abide by non-binding guidelines. The country’s documented resistance to transnational cooperation, particularly with regards to sustainability and environmental action, means that it will need to be contained and policed by the Arctic Council, as well as more amicable actors. China’s role will be important, given its close ties to Russia and shared economic interests. China has made clear that it envisions itself as a global leader in climate action, a role it will presumably continue to grow into over the coming years. If the international community can make China more amenable to exploring sustainable development strategies in the Arctic, Russia may well follow suit.

As Russia looks to invest heavily in natural gas extraction in the Arctic, states should impose unilateral policy measures that limit the amount of gas Russian companies can sell abroad. The EU is already doing this through a carbon border adjustment mechanism that imposes additional levies on imported goods manufactured through processes that incur high CO2 emissions, a proposal that has elicited strong opposition from Russian authorities. Similar unilateral policy measures can be used by the EU and other nations to limit the amount of natural gas Russia is able to export while still being profitable, although for such a measure to be successful, it will require China’s participation given the importance of natural gas in the partnership between the two countries.

Russian ship Arctic

Image 3: Prirazlomnaya, the first and so far only Russian oil platform in the Arctic.

Other economic activities in the Arctic will need to be closely regulated as well. Overfishing can be avoided by imposing strict guidelines and regulations on coastal fisheries and open water fishing. Jurisdictions of policing entities need to expand to cover international waters outside of EEZs, otherwise non-Arctic states would have no disincentive to overexploit the region. Additionally, the environmental impact of shipping can be minimised in EEZs and beyond by regulating marine pollution and codifying sustainable ship design and construction requirements.

Another important measure will be to highlight the negative effects of climate change and environmental degradation on the Arctic. While more farmable land, increased job opportunities and accessible shipping lanes are all well and good, climate change and pollution are exacting a devastating toll on the wildlife and people of the Arctic Circle. Siberian wildfires, methane releases from thawed permafrost, river floods and oil spills worthy of state of emergency declarations may place the livelihoods of up to 10 million people at risk and irreparably damage biodiversity. By setting aside the marginal macroeconomic benefits of warmer temperatures and focusing on the losses climate change is incurring, perhaps a better picture of what a warming Arctic means will emerge.

Ultimately, stable if not friendly cooperation among Arctic and near-Arctic states will be the most important factor. Current dynamics are positioning a predominantly Western alliance of NATO states against shared Russian and Chinese interests. While the latter partnership may have been borne out of purely economic and business interests, the threat of military escalation is conceivable and should be avoided at all costs. 

Keeping the Arctic Council apolitical and separate from security issues, a new forum should be established that allows diplomatic discussion over military and security matters between Arctic states. Attempts at creating such a body, for example the Arctic Security Forces Roundtable, have tended to antagonise Russia or otherwise disincentivise its participation. Containment of emerging powers does not need to be an isolationist strategy, and every attempt should be made to involve all the relevant actors in discussions on maintaining stability in the Arctic. The environmental, security and social challenges that will become ubiquitous in the Arctic are interconnected, and none are confined by borders or ideology.


About the Author

Tristan Bove

Tristan is an International Studies and Chinese graduate of DePaul University. He has experience researching the impacts of humanity's relationship with the environment, and how states can successfully implement strategies for sustainable development. As Policy and Economics Editor, his current interests revolve around the developmental policies that can reconcile equitable economic growth with pathways to a net-zero future.

Subscribe to our newsletter

Hand-picked stories once a fortnight. We promise, no spam!

Instagram @earthorg Follow Us