Energy and climate crisis are interrelated
Stable energy supply, no energy poverty and climate change mitigation form the energy trilemma
Not a strict trilemma, it is hard but possible to achieve all 3
Stabe energy supply is important
Energy is a good, extremely fundamental to our economies and lives
Abundance of reliable cheap energy fuels economic development
Lack of reliable, cheap energy can cause of deep economic crises
Global sources of energy are coal, gas, oil
* Most of this energy is not consumed in the place where it was won
There is no one institution that governs energy policy
Opec timeline
First half 20 century, oil production dominated by 7 sisters, now exxon, shell, bp and chevron
In 1960, 5 countries (Saudi Arabia, Iraq, Iran, Kuwait and Venezuela) form OPEC to stabilize prices and ensure fair return on capital for investors
* = trade union to negotiate with oil companies
1970; OPEC asserts power, oil embargo on the west for security reasons
From 1980s; mandatory production quotas for members to keep supply steady and prices high, OPEC becomes kind of a cartel
2016; OPEC+ (coordination with Russia and others)
Oil embargo 1973
OPEC oil embargo
- OPEC production at over 50% of world share
- 1973 Yom Kippur war (Russia vs US in Israel/Palestina)
- Arab members impose oil embargo on US and nl and cut production
- Result; price of imported oil to US quadrupled, double digit inflation
- A reason for the stagflation
Oil prices and cartel OPEC
- OPEC negotiates curbing production through quotas, keep prices high for everyone
- But, coordinated outputs cuts hard to maintain -> prisoners dilemma
- Some argue Saudi Arabia (biggest OPEC producer) tries to uphold discipline through tit for tat
What is OPEC today?
13 member countries
Still accounts for more than half of worlds crude oil
Shale boom in US and Canada has undermined OPEC’s influence in North America
What is the IEA
Created in 1974 under OECD framework, only developed country members
Goal; reliable energy supply, avoid future oil shocks
Measures
* Emergency stocks and collective oil emergency response
* Promote energy efficiency and diversification
* Research into energy markets and consulting
* Nowadays promote clean energy transition
What is climate change in essence?
o Essentially prisoners dilemma, since mitigating climate chance is a public good
Kyoto protocol 1997
- Limits for developed to make cuts
- US never ratifies, Canada pulls out
- Emerging economies (China & India) grow rapidly but have no obligations under Kyoto
Paris agreement
- More politically palatable
- Everyone has to do something
- What “something” looks like, is something each country decides (NDCs)
- Designed to allow US president to circumvent congress
- Offers some climate finance to poor countries or countries hit by climate change
- Core issues today are 1. Stock take, naming and shaming. 2. Phasing out of fossil fuels. 3. “loss and damage” fund
Domestic interests
Climate action requires that restrict GHG intensive activities through higher prices, bans or quotas
In long run, we all win from policies to mitigate climate change, but in short to medium run
Domestic collective action problem
Costs of effective climate action are acute and concentrated = easy for industry to organize and lobby
Benefits of effective climate action are diffuse and benefit everyone, especially most young citizens and it is easy to free ride off others climate protests
2 outcomes CA problems
Climate action is stopped or watered down due to forceful lobbying
Costs of climate action are born by customers and not businesses
Related problem energy poverty
When the price of GHG-intensive products rises, not all households
can:
Pay to insulate their homes
Pay for an electric car
Install solar panels and heat pumps
Problem: The poorest households spend the biggest income share
on energy
3 common policy approaches
- Carbon Taxes
- Emission Trading
- Green Industrial Policy
Carbon taxes
- Put a tax on carbon to “price in” the negative effect of climate change (Pigouvian
tax) - What do you do with the tax revenue?
Pay for energy transition
Pay for adaptation, loss and damage of climate change
Use the money for something else - Canada and Switzerland: Rebates
still creates incentives, because your behavior does not affect your rebate
only the worst polluters worse off in the end
can be progressive – poorer households get back more
Problem: people tend to underestimate their rebates and overestimate the costs of carbon taxes
emissions trading
- The world’s largest carbon market: European Emissions Trading System (ETS)
just like year 1 economics
Globalized trade = carbon leakage
High price of carbon => companies shift production to countries with lower carbon prices
Evidence of existence of carbon leakage is mixed: so far, seems limited, but we don’t know what would happen
at higher carbon prices
* 3 possible solutions to carbon leakage:
1. Global price on carbon (very, very hard to negotiate)
2. Tariffs on foreign goods at the border to “level the playing field”
3. Give free permits/tax breaks to companies that export/compete against energy-intensive imports
EU carbon border adjustment mechanism
- Initially, EU gave away free ETS permits to companies to “level the playing field” in importcompetition and exports
- Problem: Lots of free permits limit incentives to decarbonize
- New solution: Instead of free permits for import competition, CBAM: tariff on products from
countries that do not have equivalent carbon prices
Companies liked the idea of the CBAM AND free permits
Companies did not like the idea of paying for permits when CBAM introduced - Note: This may incentivize countries that are dependent on EU market to also put a price on carbon
WTO; What is allowed?
- You CAN impose trade measures to prevent climate change – exceptions for environmental
protection in GATT Article XX - BUT those measures can’t be arbitrary or discriminatory:
You CAN impose a CBAM
You CAN put tariffs only on products from countries without carbon pricing
You CAN’T impose a CBAM and ALSO give your industry free permits
Big green push; green industrial policy
- Some argue that green industries should be treated as “infant industries”
- Green transition requires large-scale investment in low-carbon technologies
- Changes to public and private infrastructure:
charging networks for EVs,
pipelines for green hydrogen
smart grids in energy networks - Green industrial policy has political benefits:
Instead of imposing costs on polluters, you give incentives and subsidies to green industries
Building up your green industries creates jobs
Green industrial policy fosters industries that will lobby in favor of climate action
US inflation reduction act
- Introduces Tax Incentives, Grants, Loan
Guarantees - Tax credits (=subsidies) for companies
investing in clean energy, transport and
manufacturing - Tax credits for consumers to make EVs,
solar panels, heat pumps etc. more
affordable
WTO rules and US IRA
- Many of the tax breaks are only applicable to locally produced goods (or goods produced by “trade
partners)
E.g. consumers get a tax break for EVs produced in the US, but not in the EU
What WTO rule does that violate? - The EU might challenge the IRA at the WTO
- In addition, EU loosening “state aid” rules to provide its own green subsidies in race to become green
leaders
Limits of state capacity
- Definition State Capacity: “ability and effectiveness of a government or state in performing its
functions and responsibilities, including policy-making, implementation, and service delivery, to
meet the needs of its citizens” (Peters, 2018) - Green transitions require money and good governance:
Make and incentivize major investments
Monitor and enforce climate laws
Monitor the effective use of climate subsidies and climate aid
Build resilient infrastructure and disaster response - Many developing countries lack the state capacity to effectively implement a green transition
