Global Energy Governance in a Multipolar World

Dries Lesage, Thijs Van de Graaf

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317127925
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Multipolar governance permits a number of important states to have significantly more economic and political clout than others, but among them there is hardly any hierarchy. The new energy challenge, with its intricate socio-economic, ecological and international-political considerations, is a multi-dimensional, multi-level and multi-actor issue that requires a minimum of 'central' political steering, because neither the invisible hand of the market, nor unilateral or bilateral power politics are capable to bring about sustainable solutions. Global Energy Governance in a Multipolar World investigates the relationship between the emergence of a multipolar world order and the enormous challenges of global energy governance that the world is facing in the 21st century. It reflects on fundamental questions such as how the main consuming countries can avoid conflict over scarce resources, how they will cooperate to bring about open energy markets, energy conservation and efficiency, and how they can promote renewable energy sources.

Chapter 1
Introduction

Multiple sea changes are currently afoot in the world economy. The most sweeping shift is the rise of new economic powerhouses beyond the traditional Triad (United States, Europe, Japan). Gradually, a multipolar power constellation is taking form. The ability of the West to exercise leadership in global governance is eroding correspondingly (Subacchi 2008). At the same time, the world is facing numerous critical energy challenges: soaring prices, global resource competition, climate change and energy poverty, to name but a few. Obviously, these two phenomena – rising multipolarity and acute energy challenges – are closely intertwined since fast-growing economies such as Brazil, Russia, India and China (the so-called “BRICs”) have accelerated and exacerbated existing energy trends. By dint of their sheer size, demographic weight and rapid economic ascendency, energy developments in these new poles are transforming the global energy system. China and India are emerging as new demand centers, while Russia and Brazil have turned into important energy exporters, leading up to a new geography of the world’s supply and demand structure.

Given their importance for the global energy equation, it seems natural that these rising powers take part in the multilateral efforts that regulate and govern the various energy challenges we are confronted with today. Yet, as in other domains of global economic governance, these new key players on the international energy markets are hardly or not integrated in the existing global energy governance mechanisms. This is partly due to a reluctance to reform existing institutions both on the part of the “old” major powers, as on the part of the emerging powers (Bergsten 2008). But it is also related to the fact that global energy cooperation is still weakly developed, compared to related fields such as trade, environment and climate, despite the growing need for multilateral governance. There exists no body of agreed global rules on energy, nor is there a single site for dialogue and decision-making on energy policy. International energy governance has been mostly limited to the extraction, production and trade of fossil fuels. Renewable energy sources have basically remained a matter of domestic energy governance. In addition, international energy governance and international climate governance, although physically closely related, have been conducted in different arenas. Overcoming these boundaries will prove to be a necessary but difficult step. The few existing schemes for international energy cooperation thus need substantial updating, not only in terms of membership but also in terms of scope.

In short, we argue that multipolarity is a major political factor that has to be seriously taken into account when constructing a global energy regime capable of delivering a sustainable energy future. Rather than investigating what the rise of the BRICs and other emerging economies signifies for the world’s energy supply and markets, this book focuses on the possibilities for cooperation and discord on energy policy at the intercontinental diplomatic level. Our basic hypothesis, which we will theoretically underpin and empirically test, is that global governance arrangements that reflect growing multipolarity can provide considerable value-added to global energy governance, more precisely in the form of leadership. Concretely, we think of “major power concerts” such as the G8, the burgeoning G8+5 system, the Major Economies Forum and the G20.

The New Energy Challenge

Without any doubt, energy is to become one of the major international political issues of the 21st century. The basic problem is rather simple. The world economy is still heavily dependent on a number of energy sources, namely fossil fuels (oil, coal and natural gas). This is disquieting because these sources are exhaustible, geographically concentrated, increasingly expensive and very polluting. The alternatives do not go without problems either. Some alternatives, such as biomass, large-scale dam projects for hydro-power or nuclear energy, are highly controversial because of their negative side-effects or risks. Others, for example new technologies such as carbon capture and storage and nuclear fusion, still demand high efforts in terms of investment or are veiled in scientific uncertainty. Nevertheless, energy demand is set to rise spectacularly in the coming decades, especially in the emerging and developing world. Without policy adjustments, global energy demand will increase by over 50 percent by 2030, and up to 80 percent of this demand will be met by fossil fuels (IEA 2007b).

Failure to solve the issue will have dramatic consequences in various spheres of human life. By far the most disastrous consequence is global climate change. The polluting nature of fossil fuels is the main cause of human-induced climate change, an ecological disaster that puts in danger the security, livelihoods and health of hundreds of millions of people (IPCC 2007), and may reduce global welfare by an amount equivalent to a reduction in consumption per head of between 5 and 20 percent (Stern 2006). Energy-related air pollution also directly affects the health of innumerous city-dwellers. In addition, high energy prices pose a threat to the global economy. The worldwide protests against the rising fuel prices in the spring of 2008 may provide a glimpse of how the future will look. The combination of rising demand and scarcity, both biophysically and due to cyclical underinvestment, is likely to exert a continuous upward pressure on prices over the coming years and decades. Since energy is a “hinge” upon which our economies are critically dependent (Yergin 2005: 60), structurally high energy prices may depress the world economy, and make life even more difficult for the poor, both in the North and the South. At the moment, about 1.6 billion people still do not have access to electricity (IEA 2006: 357).

Finally, the geographical concentration of the remaining energy reserves in politically unstable regions such as the Persian Gulf, the Caspian Sea and West Africa, entails a plethora of intricate foreign policy risks. On the supply side, high prices seem to inflate the power of autocratic regimes, and even yield them international support (Friedman 2006a). Large exporting countries such as Russia, Venezuela and Iran have firmly re-established state control over the domestic energy sector and venture to adopt bolder foreign policies buttressed by their increased market power. On the demand side, the increasing dependence of a growing number of consumers on a limited number of politically unstable suppliers has led to intense competition between consumers to secure supplies. Human rights, democracy and good governance are very often the first victims of this “scramble for resources” in mineral-rich countries or regions, but peace and stability are also at stake. In a world with dwindling reserves and an ever-mounting appetite for energy, the risk of armed conflict should not be completely discarded beforehand. After all, energy is of the utmost strategic importance for nation states’ economies, militaries and domestic social peace. Such an armed conflict may take the form of intra-state civil wars, interventions by great powers, or Cold War-style “proxy wars” with local belligerents backed by powerful capitals (Ross 2004; Klare 2005, 2008). Nobody knows exactly how the energy future will look, but one thing is certain, namely that without profound policy changes outcomes in the social-economic, ecological and international-political realms will be catastrophic.

The Rationale for Global Energy Governance

Energy in a broader sense represents one of the most thorny, multi-faceted and daunting policy challenges in today’s world. Both the actual energy challenges and their possible solutions are characterized by a huge complexity and urgency. In fact, energy is a good example of what can be described as a “mega-issue.” Mega-issues typically demand a vertically and horizontally integrated policy response. Vertically, because the solutions require the cooperation of billions of actors, ranging from the global down to the individual level. All of these actors have a significant impact on the global energy system either through their policies, investment decisions or their lifestyles. Horizontally, because addressing the energy challenges requires a variety of policy measures across several policy domains. Certain mega-issues such as energy and climate change even require profound economic and even societal transformations. However, the global energy challenge is not only extremely complicated, it is also very urgent. People are easily tempted to project both the catastrophic consequences of unsustainable energy policies and the solutions that are hoped for, into a far-flung future, in order to legitimize the continuation of business as usual. In many circles, a sense of urgency is still lacking. This distant time frame is illusionary, though, as problems in the social-economic, ecological and international-political spheres are already underway. Each year lost means a lot of damage.

Given the enormity of the challenge and its global scope it seems evident that, along with many other policy levels, the global level will have to play a role in managing the energy transition. The action undertaken at the global policy level is what we understand, for the purpose of this book, by the concept of “global governance.” As we envisage it, the global level comprises diplomatic practices among actors from different continents in various contexts such as multilateral institutions, international treaties, or informal networks and groupings. Now, what exactly constitutes the value-added of global energy governance supplementary to dynamics at other levels?

First, the global energy system is plagued by several instances of market failure, such as climate change, underinvestment, persistent energy poverty and geopolitical distrust. These externalities are by nature collective action problems (Olson 1965) that cannot be adequately addressed by governments individually in a context of “complex interdependence” (Keohane and Nye 2001). Perhaps no single issue in the modern world economy illustrates so well the state of far-reaching interdependence and intervulnerability as energy. Each country’s energy policy affects the social-economic, ecological and political dimensions of the global energy condition in one way or another. This was made clear for example in 2008 when high price volatility equally harmed consumers and producers. Global energy governance rests on the normative premise that on “Spaceship Earth,” which is a single, integrated ecosystem, states cannot just do what they want. Global energy governance provides a framework to coordinate these policies, to ensure that states take other states’ interests into account. Diplomatic practices at the global level have a role to play in raising awareness and international norm-setting, which are, by the way, in all too many cases preconditions for national action. Related to this perspective is the idea that the global policy level bears a kind of final responsibility and has to intervene in appropriate ways in case lower policy levels fail to guarantee sustainable energy.

Second, global institutions can exert several functions that are particularly relevant for energy policy. They can, for instance, create a level playing field by globally coordinating action. Today, states willing to unilaterally conduct progressive energy policies face strong economic constraints, because in a context of globalization their national competitiveness is said to be undermined if they are too ambitious on an individual basis. The difficult negotiations on a post-Kyoto climate change agreement illustrate this point quite well. The main reason why these negotiations have been gridlocked for so long is that some economies fear serious harm if others do not join the effort to a sufficient degree. Another function global institutions could take up is to pool expertise on a variety of energy-related issues, from collecting data on oil reserves to disseminating technological knowledge on renewables. This function includes assisting developing and emerging economies in their transition to more sustainable production and consumption. Global energy governance could also comprise a framework to organize large-scale financial and technical support from the North to the South. According to the emerging concept of ecological debt, the developing world is entitled to massive aid because of the overuse by the North of the planet’s “environmental carrying capacity” (Martinez-Alier 2004; Sachs et al. 2007). Projects under Kyoto’s Clean Development Mechanism (CDM) are a case in point.

In sum, we believe it is very unlikely that the urgent and multidimensional global energy challenge can be dealt with in an orderly, timely and sustainable way, merely through decentralized dynamics, or an “invisible hand” of markets and individual states. We need some kind of global energy governance. The next question is of course: how can the needed governance structures be erected?

Leadership for Constructing Global Energy Governance

Global energy governance structures do not have to be put together in a vacuum. There have been international energy governance structures before, but they have been steadily in flux, driven by a struggle over capturing of rents, and over prices. Mommer (2000) develops a picture of three phases, in which the interplay of companies, consumer and producing countries has changed. The first phase is characterized by a clear dominance of the international oil companies (in particular the “Seven Sisters”). The second phase was characterized by a more active role of energy-producing countries (as reflected in the foundation of the Organization of Petroleum-Exporting Countries) and a reactive policy of the consuming countries to secure their energy supply (as reflected in the foundation of the International Energy Agency). The third phase started in the 1980s and was driven by neoliberalism: liberalization, deregulation and privatization in the energy industries in the North American and European markets made significant inroads into energy (hydrocarbon) producing countries.

When oil prices increased substantially in the early 2000s, the pendulum was swinging back in favor of oil and gas producing countries. As a result, the international energy system is currently characterized by an antagonism between the different markets with varying features ranging from liberalized to regulated or monopolized markets, and from market prices to regulated or subsidized prices. A useful way to look at this current field of tension, is the dichotomy between the storylines “markets and institutions” (MI) and “regions and empires” (RE), as put forward by the Dutch Clingendael Institute (Correljé and van der Linde 2006; Hoogeveen and Perlot 2005). The two models are Ideal-types, and both are to some degree at work in our current world. In the MI model, energy supply and consumption are governed by international markets that are open to investors and consumers. Those markets send economically sound price signals. The markets, but also their environmental and social conditions, are properly regulated by multilateral institutions. The latter requires both open markets and strict regulation, which is only thinkable in a context of multilateral regimes and institutions. As such the MI model corresponds with Liberal thought in international relations theory. In the RE model markets and institutions are put aside by mercantilist state strategies, which have transformed the energy system into a highly competitive and conflictual zero-sum game. In order to secure energy provision, powerful governments conduct protectionist policies to shield their natural stocks and transport routes, operate through state companies, conclude non-transparent bilateral contracts, try to control zones of influence just like in the age of imperialism and the Cold War, redirect their defense systems towards energy interests and are even prepared to kick-off energy wars. The RE logic fits in with Realist assumptions. The two competing logics reflect the ambivalent nature of energy itself: it is both a strategic and a commercial good as well as a service (Westphal 2004).

Liberal authors still tend to be quite optimistic about the prospects for global energy governance along the lines of the MI scenario. At present, both markets and institutions are already in place, they argue. There is a globally integrated and fungible oil market that functions very much like a global auction. By consequence, the so-called “oil weapon” of countries like Iran or Venezuela has become a meaningless concept (Adelman 2004). Even China’s widely discussed “scramble” for African oil should be put into perspective, since Chinese oil companies sell a lot of their equity oil on the world market instead of shipping it exclusively to China (Downs 2007). As regards natural gas trade, the growing demand for liquefied natural gas (LNG) is paving the way for a liquid and integrated global market, comparable to the oil market (Soligo and Jaffe 2006). Gas that is transported through pipelines, on the other hand, creates a relationship of mutual dependence between exporting, transit and importing countries, so that a long-lasting disruption of gas delivery for political reasons becomes highly unlikely (Goldthau 2007; Finon and Locatelli 2008; Noël 2008). In sum, smoothly functioning markets are the best insurance for a country’s security of supply. Furthermore, liberal authors believe that, if the right investments are made, fossil fuels will remain available and affordable for decades. At the same time, they also presume that the law of demand and supply will generate the right price signals to develop environment-friendly alternatives to polluting energy sources and technologies. Liberals conclude that the MI model presently thrives quite well, despite all the pessimist talk on looming depletion, ecologic catastrophe and energy wars. Of course, they add, institutions to smooth the markets and accompany the transition to sustainability have to be improved. Nevertheless, there is no need to expect a “securitization” or “militarization” of energy policy, or any other doomsday scenario (see, e.g., Goldthau and Witte 2009; Yergin 2005).

We are willing to share this optimism, but only under strict conditions. Markets and institutions are indeed essential for a global sustainable energy future, but from a political science perspective they cannot be taken for granted. In this debate some fundamental questions are systematically overlooked. Where do markets and institutions come from, and how can they be maintained, improved and extended? In other words, one should take a closer look at the political dynamics that underpin markets and institutions; the latter should be regarded as dependent rather than independent variables. In this respect, the MI model as such contains some flaws, and it faces a series of severe threats. What does guarantee us that markets will actually send the right price signals to put global energy consumption on a sustainable track? If we look at how markets have responded to the science of climate change over the past two decades, there is no reason to be overly optimistic. The prospect of multi-trillion dollar investments in production capacity for fossil fuels, for example, is good news for the world economy in the short and medium term, but disastrous for global warming. This strategy also amounts to a mere postponement of structural undersupply. To make matters worse, a swift shift away from oil is far from evident in the transport sector for technological reasons, rendering the incentive to opt for a massive extension of oil production capacity even stronger. In addition, the MI logic has also been failing to combat energy poverty. With structural undersupply inevitably looming ahead, powerful states continue to have incentives to apply an RE logic, as exemplified by the neo-mercantilist tendencies in the energy policies of countries like China, Russia and India, but also by the energy dimension in the foreign and military strategy of the United States (Klare 2008). How effective the MI model might still be today, it is not proof against the geophysical reality of natural resource depletion. Therefore, it is not to be precluded that the RE model will gain a lot of ground against the MI logic during this century. Or to put it more plastically, without profound changes in global energy governance, the RE model is “eating up” the MI model.

Admittedly, this very process can be fueled by self-fulfilling prophecies stemming from overly pessimist approaches, but perceptions happen to be part of political reality. To these arguments, Liberal optimists will reply that strong institutions are exactly the answer. But then is the question: who will strengthen the existing institutional landscape and render it more coherent and will this be done in time, given that the energy issue is extremely complicated and pressing? For us, the MI model does remain the key to a sustainable energy future, but instead of indulging in either optimism or pessimism, we need a more in-depth examination of the political dynamics that facilitate or hamper the build-up of the appropriate regimes and institutions.

Here we touch upon the question of effective multilateral governance. We will argue that before the United Nations (UN) or any other multilateral setting can assume any effective governance role for the world, leadership is necessary among its members. Leadership for urgent mega-issues in particular is an extremely difficult task. The actors that underpin the leadership and its institutional design, should combine the power (capabilities) and the purpose (incentives and vision) to lead (Ikenberry 1996). We will critically examine the idea that a “concert” of major powers might be the only institutional set-up that can encompass these assets. In today’s multipolar world, a hegemonic superpower is by definition not an option. The secretariats of well-equipped international institutions, on their sides, simply lack the political power to tell states what to do on a very strategic issue like energy. Ideally, the General Assembly of the UN would put the world on a sustainable energy track by reaching a bold agreement or even establishing a well-resourced and influential World Energy Organization. But here the question is: how could the General A...