The Energy Issue - School of International and Public Affairs ...

climate front, the EU is signaling its resolve by
mandating that, by 2020, 20 percent of energy
used in all member countries must come from
renewable sources. Considering the lack of major
hydroelectric projects, this probably would
involve sextupling the nonhydro renewable energy
supply—in practice increasing wind, solar,
and sustainable biomass—from 2 percent to 14
percent of total EU energy use. Such a move
would require the creation of production capacities
two times as large as the total hydro energy
capacities of the EU today, in addition to the
massive backup capacity needed for wind and
solar (close to 90 percent in some countries). Not
only would this call for rates of deployment well
beyond present levels of social acceptance, but it
would also lead to a whole park of “white elephants”
feeding on the dead trees of cost-benefit
analyses.
Capping risk: policymakers as portfolio
managers
The second policy option is for governments
to trust markets to allocate resources efficiently,
subject to measures limiting what bankers would
call “system risk,” namely, risk so ubiquitous that
individuals cannot diversify it away. Diversification
and risk mitigation play a key role in
such an approach, and policy alternatives are
evaluated and compared. Governments then
behave like portfolio managers, setting limits on
the risks their countries should take to keep
vulnerabilities below the level that would jeopardize
their security.
Capping risk for energy security can take the
form of limits set on dependence from one supplier
(as Spain and Italy do for their dependence
on Algerian or Russian gas) and of encouragements
for diversification. Risk mitigation can
limit how much diversification is required.
Strategic Petroleum Reserves are used, for example,
so that importing countries can have the
time to deal with major supply interruptions.
Similarly, the International Energy Agency (IEA)
has identified demand management policies that
could be put in place temporarily to mitigate the
impact of serious disruption. For a relatively small
cost, a number of energy-using installations can
also be configured to be able to switch fuels, and
networks can be made more resilient to disruptions.
In the case of climate policies, risk-capping
was the chosen policy at the 1992 Rio summit.
Drawing insights from U.S. markets in sulfuremission
rights, the Kyoto Protocol attempted to
limit governments to “capping” the global
amount of carbon-emissions rights, with these
rights then freely traded in the market. The
Clean Development and Joint Implementation
mechanisms enable companies to diversify emission
reduction projects well beyond their own
narrow set of opportunities. In practice, however,
too many implementation modalities are at odds
with the original policy concept. (Problems
come notably from the noninclusion of many
sectors, notably transportation, from generous
“grandfathering” clauses, from the ambiguity in
“baseline” and “additionality” criteria used to
assess reductions, and from opportunistic use of
“Clean Developemnt Mechanisms” by some
recipient countries.)
Capping becomes more discretionary and
trading distorted, reproducing some of the inefficiencies
of the “independence” policy approach.
The benefits of an overall market price reference,
as assessed on the “carbon market,” are then lost
in an ocean of specific and overlapping measures,
many of which would not stand the light of costbenefit
comparisons.
Making interdependence work: the institutional
agenda
Of the three ways in which governments can
make their influence felt, the most promising one
from an efficiency perspective is interdependence.
To mitigate the risks of their energy suppliers
turning against them, buyer countries can
increase the level of interdependence by finding
additional ways to engage with producers,
notably to accelerate the diversification of their
economies. Such is the attempt of the EU as it
engages Russia, not very successfully at this
stage, in discussions about the adoption of common
principles summarized in an Energy
Charter. Such is also the approach of Saudi
Arabia as it hosts and supports—so far with more
limited impact than could be envisioned—the
International Energy Forum. Companies and
NGOs are key players in developing international
regimes that can sustain trust and interdependence
and can be involved in the development of
new institutions such as various transparency initiatives.
Equivalent steps are more difficult to articulate
for climate policies, since the very creation
of markets for carbon-emission rights can be perceived
as a government intervention. But the
U.S. has played a pioneering role in setting up
such markets for domestic pollutants, is engaged
with China and India in joint technology initiatives
that could be made more significant, and
could catalyze the much-needed transformation
of Kyoto into a genuine, market-driven risk management
tool.
How to restore the trust needed for such policies
to succeed could be a central topic in a revitalized
U.S.-EU dialogue embracing both energy
security and climate change. The U.S. could help
In a world where trust is scarce, policymakers will
resort to the visible hand in order to achieve certain
desired outcomes that they see as more compatible
with security objectives than would happen from
normal market mechanisms.
the EU avoid the pitfalls of policies that could
end up looking like the pursuit of “carbon independence.”
Meanwhile, agribusiness lobbies permitting,
the EU might help the U.S. multilateralize
the search for “energy security.” Policies high
on emotions and symbols but lacking in costbenefit
analysis could then give way to a joint
search for the institutions that today’s interdependence
is still lacking.
Albert Bressand is professor in the professional practice of
public affairs and director of the Center for Energy, Marine
Transportation and Public Policy at Columbia University.
SIPA NEWS 23