METHODS OF ANALYSIS

What are the possible methods to handle this situation? The EC has had some experience over the past two years. In September 1993, a paper on the economic

foundations for an energy policy was prepared in which the complex role that energy plays in society was identified. Energy is a factor of production, and there is an extraordinarily large geopolitical dimension to the energy trading relationships with our neighbours — Russia and Norway, Algeria and the Persian Gulf area. These are important aspects of our foreign policy relationships, but there are also interconnec-tions with other dimensions, including energy and the environment.

Several years ago, we proposed a carbon energy tax, and we did this with some enthusiasm. This enthusiasm was lacking when we discussed the matter with a number of countries. The appreciation of a carbon energy tax differs from one country to another, depending on the country's energy policy. Consequently, when seeking to achieve an environmental objective, other objectives should not be dis-regarded. One of the fascinating problems in preparing an analysis is that we have to try to make the very complex interrelationship between different pillars of policy easier to survey. We are entering a transition period of great uncertainty that might last a decade or even two decades. In some ways, it is a historic moment, and we need to be able to deal with massive uncertainties and major political changes. There-fore, we launched the "2020 Strategic Analysis", based on a scenario approach and on our appreciation that the tectonic plates of geopolitics and economic relationships are moving.

Three scenarios were considered, centred on the political challenges and priorities within Europe and the problems facing Governments, since they might influence the energy structures more than internal energy matters. These scenarios were then translated into macroeconomic scenarios and trading scenarios. Also, four possible future marketplace scenarios were identified: Conventional wisdom, Battlefield, Forum and Hypermarket. Their characteristics are as follows:

( 1 ) Conventional wisdom: T h i s p r o v i d e s a v i e w o f t h e m o s t l i k e l y e v o l u t i o n o f e v e n t s . E c o n o m i c g r o w t h g r a d u a l l y w e a k e n s i n t h e l o n g t e r m . A l t h o u g h s o m e p r o g r e s s is m a d e , m a n y o f t h e w o r l d ' s s t r u c t u r a l , s o c i a l a n d e c o n o m i c p r o b l e m s r e m a i n .

(2) Battlefield: The contradictions and instabilities in the global system make economic integration very difficult. Globalization is seen as too ambitious. The geopolitical system is divided into blocs, with tensions and friction between and within the blocs. This leads to a Europe 'à la carte'.

(3) Hypermarket: Global economic integration is self-reinforcing and continues.

The force driving this scenario is the continued application of the market mechanism that is regarded as the best way to produce wealth and to handle complexity in uncertain times. Liberalization and privatization lead to new results and encourage new groups of persons with higher demands to enter the market.

(4) Forum: The process of global economic integration produces new imperatives for collective public action. National, European and international institutions

are gradually restructured so as to be able to deal more effectively with broader, more complex, shared problems and interests.

Each of these scenarios may present some surprises. For example, in Sweden, Conventional wisdom means that nuclear power will be phased out by the year 2010;

however, in France, Conventional wisdom leads to totally different decisions. There-fore, the marketplace scenarios have to reflect a diversity of current thinking.

These scenarios were matched with three technology scenarios: abundant renewables, relaunch of nuclear power (dealing with the problems of how it would take place and what are the conditions to bring it about); and plentiful and moderately priced fossil fuels, which is a new paradigm. Finally, two energy price scenarios were developed: one with a rather high oil price (about US $30 per barrel, as in the IE A scenarios) and the other with a more moderate oil price, which would remain more or less at today's price over the next 20 years or so. Regarding the most difficult issue, the climate change, it was assumed that the precautionary principle mode would be maintained up to the year 2005, but that, around the turn of the century, environmental consequences would become obvious and we would move from the assumption of a possible climate change to the conclusion that such a change will happen and, therefore, that we have to begin to react. These scenarios were applied to the fifteen EU Member States and the focus was on a detailed bottom-up approach. A more complex analysis was done for the neighbouring countries of the EU, namely North Africa, the Middle East, central and eastern Europe and the territories of the former Soviet Union.

Two of the scenarios, Hypermarket and Forum, are very contrasting. Each of them implies a different energy policy, a different taxation policy, a different economic policy and different interest rates. They do, however, highlight the remarkable robustness of the energy sector and its ability to survive and to make money under the conditions of these scenarios.

Concerning the models needed, this kind of scenario analysis cannot be done without a good tool kit. There is definitely a need for new and improved analytical tools. Given the complexity of the policy choices, they cannot be addressed correctly without good tools. Furthermore, these tools have to be used with modesty and with a certain scepticism about the mechanisms of forecasting and analysis. The EC Directorate General for Science, Research and Development has developed several models, for example:

— MIDAS: A model that is central to the present exercise;

— POLES: A long term (2010-2030) world supply and demand simulation model;

— GEM-E3: A macroeconomic general equilibrium model for interactions between the environment and the energy system;

— PRIMES: A partial equilibrium energy system model, covering market structures of the actors in the field of energy and economy.