3 Strengthening Global Oil Governance
3.2 The Effect of Low-Carbon Policies on Oil Markets
The global oil market is also impacted by policies for moving towards a low car-bon economy, particularly due to the fact that the greenhouse gas emissions re-sulting from the burning of fossil fuels contribute to global warming. The lack of policies for internalizing this externality into the price of oil and other fossil fu-els represents a huge market failure – one that has only until relatively recently begun to be addressed through various means, including the Kyoto Protocol car-bon markets and emerging Post-Kyoto climate regimes.
However, attempts in Copenhagen in 2009, in Cancun in 2010 and in Durban in 2011 to set binding CO2 emissions reductions target have failed and cap-and-trade systems still remain in their infancy. As witnessed in the U.S. and Austra-lia, even if cap-and-trade sys-tems are proposed, they will each take on a consid-erably different flavor depending on the political-economic circumstances in each country (Behr et al., 2009). Emerging markets such as China are certainly exper-imenting with domestic cap and trade schemes as well, but these laudable steps are clearly in their early stages. Moreover, economic interests of different coun-tries or regions may well top climate change goals. Broadening Europe’s ETS sys-tem towards air traffic recently experienced major resistance from the U.S. and China, an issue which has the capacity to lead to a trade war in the aviation sec-tor between Brussels on the one side and Beijing and Washington on the other.
This patchwork of carbon markets and the varying the degree to which regional or domestic carbon regimes are implemented impacts the oil market. Investments in the oil market, as in any other market, depend on stable expectations on the
‘rules of the game’. Depending on the success of any existing or emerging car-bon market regimes, the price of carcar-bon will vary and have an effect on the price of oil. This, in turn, may have negative implications on investment choices due to uncertainty among business on how future low-carbon policy choices might affect their costs. Industry representatives have therefore expressed strong inter-est in politics defining and implementing carbon regimes – with a clear outlook on design and timing. Furthermore, as the OECD signals its desire to move to-wards low-carbon economies, there is an even lower incentive for producer coun-tries to make the necessary investments unless policies are set in place that pro-vide for clear a outlook on the implementation and consequences of low carbon policies. Taken together, these uncertainties can lead to an environment of price volatility – something which is harmful to both producers and consumers alike.
3.3 Opportunities for Transatlantic Cooperation
While most observers on both sides of the Atlantic would subscribe to the gen-eral statement that a market provides the most effective allocation mechanism
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for any commodity, including energy, markets themselves do not exist in a vacu-um. They are created by states and maintained by state agencies and institutions – on a national or global level. These institutional foundations of energy mar-kets require constant overhaul and adjustment. In light of the key challenges de-scribed above, there are a number of opportunities for the EU and the U.S. – as the core and driver behind existing global energy governance structures – to en-sure that the institutional foundations underpinning the global oil market are in-clusive and effective.
3.3.1 Reforming the International Energy Agency
As the share of global oil consumption shifts from the OECD to the non-OECD world, coupled with the emergence of a new low carbon energy paradigm among mostly Western nations, the primary transatlantic goal must be to ensure cooper-ative outcomes and a transparent, effective and efficient way to account for new players demanding their share of the cake – be it new consumer economies en-tering the global oil market or new industries.
At present, the only existing organization functioning as both a regulatory au-thority and a global hub for oil market information is the International Energy Agency. As discussed above, the organization faces a considerable challenge to its original mandate of facilitating a collective consumer response to potential oil supply shocks. As the overall share of the oil market represented by the strategic oil stocks of IEA members continues to fall, the ability of consumers to effective-ly hedge against an oil suppeffective-ly shock is compromised. Therefore, it is of crucial interest for the transatlantic alliance to ensure the IEA continues to serve a func-tional role in global energy governance by making the Coordinated Emergency Response Measures (CERM) fit for the future. This can only be accomplished by either providing the proper incentives to consumers such as China and India to join the organization, namely through the elimination of the OECD link and by reforming the IEA’s out-of-date voting mechanisms, or to design an alternative system of cooperation which incorporates emerging economies into emergency response measures. Either way, reforming the IEA is truly a multilateral endeav-or which requires a strong transatlantic cendeav-ore driving the process.
3.3.2 Improving Market Transparency and Investment Planning
The shifts in consumption and production patterns and the carbon pricing chal-lenge stressed above lead to considerable implications for market fundamentals, including levels of supply and demand, price formation, investment planning and, of course, accurate information for measuring these. In order to ensure that the oil market can function properly, governance mechanisms are needed which in-clude transparency and planning security through dialogue among consumers and producers as well as long-term policy certainty regarding the price of carbon.
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The key problem in the global oil is not the long-term availability of oil supply, but ensuring that supply keeps up with demand and that major global players have a voice in the development of global energy governance and energy devel-opments. First, only through producer-consumer cooperation emphasizing accu-rate market information for investment planning can this challenge be addressed head on. As observers have stressed, the only quasi-institutional arrangement at the international level for promoting producer-consumer cooperation so far is the International Energy Forum (IEF). The IEF is unique in that it brings together all major actors in the global oil market, including the IEA, OPEC, emerging econ-omies as well as business representatives, to discuss key issues including market transparency, price volatility, production and consumption rates and investment planning. The IEF’s Joint Oil Data Initiative (JODI) was constructed in order to address market transparency by collecting, coordinating and publishing data representing almost 90 percent of world oil supply and demand (Harks, 2010).
In the absence of a perfect market, the IEF thus represents the best opportunity for bringing together all relevant players in the global oil market to ensure coor-dinated efforts in addressing key issues such as market transparency, investment planning, and supply and demand levels.
Second, in the absence of an effective multilateral response to these, and other, pressing energy challenges, the role of other informal groupings of major global players such as the G8 and G20 are also important (Graaf and Westphal, 2011).
Whereas the IEF can play a key role in ensuring market transparency and in-vestment planning, the G8 and the G20 can provide complementary platforms for discussing key energy issues and broader trends. While the record of the G8 and G20 on energy issues is spotty at best, the groups can serve to provide a po-litical impetus for group members and existing institutions of global and region-al energy governance to address existing and future chregion-allenges.
While China’s participation in existing mechanisms of global energy governance has been limited, anecdotal evidence suggests this may be changing. At the Fifth World Future Energy Summit on 16 January 2012, Chinese Premier Wen Jiabao stressed the need for a better global energy market governance mechanism with-in the G20 framework to ensure fair, reasonable and bwith-indwith-ing with-international rules to make the global energy market more secure, stable and sustainable. (Ministry of Foreign Affairs of the People’s Republic of China, 2012). This represents both a positive development as well as a key opportunity for the transatlantic alliance to ensure more effective and inclusive means of governing global energy markets.
Finally, with regards to the carbon pricing challenge, as a global market for car-bon is highly unlikely in the coming years, regional solutions will prevail and it is thus crucial to find ways to link different pricing regimes and have clarity re-garding how they contribute to a global GHG emissions trajectory. Moreover, as the widespread development and deployment of renewables depends on being cost-competitive with fossil fuels such as oil, a predictable oil (and carbon) price is crucial for planning a low-carbon transition.
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3.4 Policy Conclusions
• To prepare for and ensure an effective consumer response to a supply cri-sis, China and India should be invited to actively participate in the IEA’s exercises of its Coordinated Emergency Response Measures.
• Producers and consumers must coordinate to a much greater extent than currently being undertaken. The International Energy Forum and its Joint Oil Data Initiative represent the best existing mechanism for ensuring mar-ket transparency through reliable data and cooperative decision-making.
• The G8 and the G20, as high-level and informal fora for discussing crucial global issues amongst major global actors, should work towards creating a common vision for global energy governance and translate this vision into policy recommendations for group members and the more functional in-stitutions of energy governance, for example, the IEA, OPEC and the En-ergy Charter Secretariat. The G20 in particular, as a result of China’s new policy stance on the need for more effective energy market governance, is set to play a key role.
• As a uniform global carbon price is unlikely any time soon, aligning the carbon pricing policies of existing regional, national or sub-national re-gimes is crucial in order to ensure a more transparent and predictable in-vestment environment.
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About this Paper
This paper is the result of a two-year research and dialogue program titled “Com-mon Goals – Different Approaches? Strengthening Transatlantic Cooperation on Global Energy Issues,” conducted by the Global Public Policy Institute (GPPi) and the Brookings Institution. The program was supported by a generous grant from the European Commission, with additional support from the Draeger Foun-dation and Central European University. For more information on the program, please visit www.globalenergygovernance.net.
The Global Public Policy Institute
GPPi is an independent think tank based in Berlin. mission is to develop innovative strategies for effective and accountable governance and to achieve lasting impact at the interface of the public sector, business and civil society through research, consulting and debate. To learn more about GPPi, please visit www.gppi.net.
The GPPi Approach
• GPPi is an independent and non-profit institute. GPPi receives project fund-ing from foundations as well as from project partners and clients from the public and private sectors. The institute reinvests profits from consulting activities into its research work.
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• GPPi promotes policy entrepreneurship. Its work strengthens strategic com-munities around pressing policy challenges by bringing together the pub-lic sector, civil society and business.
The Brookings Institution
The Brookings Institution is an independent, nonpartisan organization devoted to research, analysis, education, and publication focused on public policy issues in the areas of economics, foreign policy, and governance. The goal of Brookings activities is to improve the performance of American institutions and the quali-ty of public policy by using social science to analyze emerging issues and to offer practical approaches to those issues in language aimed at the general public. For more on the Brookings Institution, please visit www.brookings.edu.
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The European Commission
The European Commission supports the joint GPPi/Brookings “Common Goals – Different Approaches? Strengthening Transatlantic Cooperation on Global Energy Issues” project as well as the “Transatlantic Energy Governance Dia-logues” conference series through a generous “EU-U.S. Policy Research and De-bate” grant. More information on the European Commission can be found at http://ec.europa.eu/index_en.htm.
The Draeger Foundation
The Draeger Foundation, founded in 1974, is a non-profit institution committed to the promotion of science and research, especially in the field of national and international economic and social order. By encouraging the intensive exchange of experience and ideas regarding issues which are of importance for our future, the Draeger Foundation endeavors—within the bounds of its capabilities—to make a contribution toward improved international relations. More information can be found at www.draegerstiftung.de.
Central European University (CEU)
Located in one of Europe’s most elegant capital cities, Budapest, accredited in both the U.S. and Europe, CEU offers a uniquely international atmosphere of ac-ademic excellence, critical reflection, and social engagement. CEU students come from over 100 countries of five continents, our faculty – from 30 countries. CEU stresses both academic excellence and public policy relevance of its teaching and research. We focus on key issues of the 21st century ranging from climate change to democratic governance and from international security to deeper understand-ing of history and philosophy. To learn more about CEU, please visit www.ceu.hu.
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Endnotes
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