The New Energy Order
David G. Victor and Linda Yueh
Managing Insecurities in the Twenty-First Century
The last decade has seen an extraordinary shift in expectations for the world energy system. After a long era of excess capacity, since 2001, prices for oil and most energy commodities have risen sharply and become more volatile. Easy-to-tap local fuel supplies have run short, forcing major energy consumers to depend on longer and seemingly more fragile supply chains. Prices have yo-yoed over the last 18 months: first reaching all-time highs, then dropping by two-thirds, and after that rising back up to surprisingly high levels given the continuing weakness of the global economy. The troubles extend far beyond oil. Governments in regions such as
A crisis is looming, and it will be difficult to resolve because it will strike as two radically new changes are making it harder for governments to manage the world energy system. The first is a shift in the sources of consumption. The era of growing demand for oil and other fossil fuels in the industrialized countries is over; most of the future growth in demand will come from the emerging-market countries, notably
The other big shift in the world energy system is growing concern about the environmental impact of energy use, especially emissions of carbon dioxide, an intrinsic byproduct of burning fossil fuels with conventional technology and the leading human cause of global warming. Worries about climate change are one reason why the major stimulus packages passed since the global financial crisis began in 2007 have included hefty green-energy measures: by some accounts, these have made up 15 percent of global fiscal stimulus spending. Some believe that such green-tinted stimulus measures will spur a revolution pushing for cleaner and more secure energy. Perhaps. But there is no doubt that energy systems are in for a major change. Curbing global warming will likely require cutting emissions of carbon dioxide and other greenhouse gases by more than half over the next few decades, and that goal cannot be achieved by just tinkering at the margins.
In the face of these new realities, the international and national institutions that were created to help promote energy security over the last three decades are struggling to remain relevant. The most important one, the IEA, has made little headway in involving the new giant energy consumers in its decision-making. That means that it is struggling even to fulfill one of its hallmark functions -- to stand ready to coordinate government responses to energy shocks -- because a large, and growing, fraction of oil consumers fall outside its ambit and are wary of market-based approaches to energy security. Other institutions are doing no better. European states that depend on gas imported from
The traditional solution of creating big new institutions, such as a world energy organization to replace the more exclusive IEA, will not work. What is needed instead is a mechanism for coordinating hard-nosed initiatives focused on delivering energy security and environmental protection. To be effective, those measures will have to advance the interests of the most important governments, of importers and exporters alike, and they will have to align with the needs of the private and state firms that provide most of the investment in energy infrastructure.
A model for these efforts exists in international economic law. Once saddled with too many institutions and too little governance, the world economic system developed a series of ad hoc arrangements during the last several decades that have evolved into an effective management system. Although the system is still imperfect, it now governs most international trade and a growing proportion of finance and banking. The Financial Stability Board, which issues standards for judging the adequacy of banks' capitalization, is a particularly apt example of the system's success. Its so-called
A similar Energy Stability Board could be created to help governments and existing international institutions better manage today's energy problems. It could work with the major new energy consumers, such as
The last three decades have not been kind to efforts to create international institutions. One bright spot has been international economic law, now a set of useful general principles that has grown from practical, bottom-up experience. Its most successful aspects have been rooted in national interests: when governments find it pragmatic to comply with their obligations, broader sets of legal principles and institutions designed to ensure compliance develop.
The most visible of these institutions is the
Governments have also built international institutions to govern finance and investment. The Asian financial crisis of 1997-98 led to the creation of the
The Financial Stability Board's greatest achievement has been the creation of the
One lesson from this experience is that any effort to coordinate global energy policy must include all the most powerful players. Yet today, the most visible institutions for governing energy do not do this. Efforts to expand the IEA have been hobbled by the requirement that the agency's members also belong to the
Another lesson to be drawn from the success of global economic governance is that cooperation must have broad appeal, beyond the most important players. Global trade talks have made the most progress when they have focused on actions, such as the reduction of tariffs, that have a big impact on trade, are rooted in mutual interests, and are easy to enforce. Such successes then set the stage for governments to extend existing trade rules to many more countries and to take on harder tasks, such as building the WTO's dispute-resolution system. Similarly, the G-20's norms against tax havens have spread more widely following success in such states as
Applying these lessons to energy means realizing that no system will be effective unless it starts with the countries that matter most -- the large consumers and the large producers -- and serves their interests. Success will require both that those countries reap practical benefits from cooperation and that the rules be designed so that they can spread widely as their legitimacy increases.
THE IMPOTENT CROWD
There is no shortage of institutions in today's energy markets; what is missing, however, is a practical strategy for setting effective norms to govern the global energy economy. The IEA plays an essential part, but it has had a hard time finding its voice. Although
Beyond these specialized institutions is a landscape of wreckage.
The institutions working on climate change, including the
INVESTORS ABHOR A VACUUM
Fixing these problems should begin not with grand attempts to build still more institutions but with a practical focus on filling the most important governance vacuums in the world's energy system: those regarding how to promote investment to develop urgently needed supplies of today's main energy sources, oil and gas, and how to support the climate-friendly technologies that will transform the energy system over the next several decades.
The security of oil and gas supplies is in question not only because the existing supplies are depleting quickly but also because investors are wary of pouring money into finding new resources. The problem is not geology: technological innovation is more than amply offsetting the depletion of conventional fossil fuels. The problem lies in the massive economic and political risks inherent in new projects, particularly those that supply energy across national borders and thus face a multitude of political uncertainties. Suppliers worry that there will not be enough demand to justify the investments, especially now that growing concerns about climate change have cast doubt on the future of fossil fuels without offering a clear alternative.
Creating the right incentives to supply oil and gas requires efforts on several fronts. But the area in which governance is both the weakest and the most important concerns
Before they can engage
Support for new green technology is a second area regarding which a vacuum in governance has made it hard for governments to achieve their common interests. The energy sector is one of the most exciting technological frontiers today. This is partly because climate change is transforming what societies expect from energy supplies, but it is also, and most immediately, because of the role that governments hope investments in energy infrastructure will play in economic recovery. Over the past year, governments have talked a great deal about coordinating their efforts to revive economic activity worldwide. Yet for the most part, each state is making decisions on its own, even though the
The problem is most obvious regarding the "green" part of the
Coordinating these green-technology programs offers the prospect of a viable new global industry in clean technology, at least in theory. In practice, however, such stimulus plans are prone to economic nationalism.
Existing institutions cannot fill these vacuums. A small, nimble body is needed: an Energy Stability Board modeled after the Financial Stability Board in the banking sector. The Energy Stability Board could gather together the dozen biggest energy producers and users. For its administration, it might rely on the secretariat of the IEA -- by far the most competent international energy institution at present -- much like the Financial Stability Board drew on help from the Bank for International Settlements to catalyze cooperation in the global financial markets. At first, the Energy Stability Board's activities would need to be ad hoc so that other institutions, such as
A key test for the Energy Stability Board would be for it to prove its ability to engage businesses. Firms will not provide the trillions of dollars needed to develop energy infrastructure in the coming decades without credible signals that governments are serious about instituting policies that will allow the private sector to cash in on such investments. One way to reassure these companies would be to allow them to cooperate with governments in performing some of the Energy Stability Board's tasks. For example, leading firms could formally assess governments' green stimulus programs and identify those areas in which governments need to coordinate more effectively. (Governments usually are not effective coordinators of leading-edge technologies on their own because they have neither the necessary knowledge nor the necessary control over investment.) The Energy Stability Board could also become a forum for privately owned firms to work with state-owned companies, which control access to most of the world's oil and gas resources and a large fraction of the world's electric power grid, especially in developing countries. These national enterprises are pivotal in the world energy system yet have not been well integrated into international energy institutions.
Success at these steps would create the right conditions to bring about cooperation in other important areas. Governments have repeatedly failed to establish a multilateral agreement on investment to govern foreign investments of all types, largely because they have taken on too many diverse and contentious topics. A sharper focus on energy infrastructure is more likely to succeed. Another disappointment has been the failure of the world's leading governments to invest adequately in energy research and development. (Despite the world's growing energy problems, the proportion of global economic output devoted to energy research and development is lower today than it was in the early 1980s.) Just as the Financial Stability Board, after it had proved itself, was asked to take on new tasks, such as devising internationally acceptable rules for bankers' compensation in light of the global financial crisis, the Energy Stability Board could be asked to issue guidelines for how to handle research and development and other issues that are difficult to keep on the agenda of existing institutions yet crucial to the long-term development of the energy system. The board could also help build support for important initiatives, such as the new U.S.- and Chinese-led efforts to build a more secure system for nuclear fuel.
Getting started will require leadership. Only
Although energy commodities and technologies are traded globally, the system for governing the markets for these important goods is fragmented and increasingly impotent. As the experience with global financial and trade regulation shows, that need not be the case. Nor is it necessary to devise grand new institutions to fix the problem. A nimble energy agency focused on practical approaches to the new realities of the world energy market can fill the gaps.
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World - The New Energy Order | David G. Victor and Linda Yueh
(c) 2009 David G. Victor and Linda Yueh - Foreign Affairs