lecture 12 Trade in Energy, OPEC and the IPE of Climate Change

Two Interrelated Crises

• russia’s invasion of ukraine

• climate crisis

game plan

• Game Plan

• The Energy Trilemma

• Oil Institutions: OPEC and the IEA

• ClimateChange:

  • International Institutions

  • Domestic Interests and Institutions

  • 3 Common EconomicClimatePolicies

The Energy Trilemma

its logically possible to achieve all three but its hard

Stable Energy Supply

• Energy is a good that is more fundamental to our economies and lives than almost any other. We need it to:

  • Power production

  • Fuel most forms of transportation

  • Heat our homes

  • Supply Electricity to our homes

• Abundance of reliable, cheap energy fuels economic development

  • allows more production

• Lack of reliable, cheap energy can cause deep economic crises

Global Sources of Energy

• mostly comes from fossil fuels

• gas, oil, and coal = chunk of our energy

Global Trade in Energy

• this energy is trade

• huge flows of imports and exports

• russia and middle east is a major supplier to europe

Institutions Governing Energy Policy

• no overarching institutions like the WTO how to coordinate this trade in energy

• •No ONE institution or agreement governing energy policy

• Main Institution Oil Exporters: Organization of Petroleum Exporting Countries (OPEC)

• Main Institution Oil Importers: International Energy Agency (IEA)

  • founded in response to OPEC

• A lot of others related to energy:

  • UNFCCC (global climate change framework, more on that later)

  • IRENA (International RenewableEnergy Agency)

  • IAEA (International Atomic Energy Agency)

  • World Bank

    • increase lending for switch to green the economy

OPEC History

• First half 20th Century: Oil production dominated by the “Seven Sisters”

  • Now: Exxon, Shell, BP, Chevron

• 1960: 5 countries (Saudi Arabia, Iraq, Iran, Kuwait, Venezuela) form OPEC to“ stabilize prices” and “ensure a fair return on capital for investors”

  • because before for exploitative

    • = trade union to negotiate with oil companies

    • more negotiation as a group rather then individuals

• 1970s: OPEC asserts power, oil embargo

• From 1980s: Mandatory production quotas for members to keep supply steady and prices high

  • = OPEC becomes a “cartel”

  • small number of companies to try to manipulate the price on how they produce v how they charge

• 2016: OPEC+ (coordination with Russia and others)

  • coordinate with 10 other countries

OPEC Oil Embargo 1973

• this started stagflation

• By 1973: OPEC’s production of oil at over 50% world share

• 1973: Yom Kippur War

• Arab members of OPEC impose an oil embargo on US & Netherlands and cut production

  • they refused to export oil

• Result: Price of imported oil to US quadruples, double-digit inflation

  • high unemployement = bring monetarism and brings down keynesianism

Oil Cartel and Oil Prices

• OPEC negotiates to curb production through quotas, keep prices high for everyone

• •E.g. oil price drop after 2008 financial crash –OPEC countries jointly reduce output

• BUT: coordinated output cuts hard to maintain –Prisoners’ Dilemma

  • everyone has a incentive to drill more oil and not cut

• Some argue that Saudi Arabia –OPEC’s biggest producer –tries to uphold discipline through tit-for-tat

  • if you break the quota saudi arabia will break the quota

  • reciprocity

  • enforcing through multiple interactions

OPEC Today

• 13 member countries + 10 others with opec +

• Still accounts for more than half of world’s crude oil

  • looks at opec when theres inflationary and energy crisis

• Shale boom in US and Canada has undermined OPEC’s influence in North America

  • us produces alot by fracking

  • less on a influence on the US then it did in the 90s and 80s

The IEA: An Organization for Oil Consumers

• Created 1974 under OECD framework (= only developed country members)

  • only members of the OECD

• Goal: Reliable energy supply, avoid future oil shocks

• Measures:

  • Emergency stocks & collective oil emergency response Promote energy efficiency and diversification

    • countries release oil stocks to try to counteract some of the price shocks that came with sactions (russia v ukraine)

  • Research into energy markets & consulting

  • (today) Promote Clean Energy Transition

Climate Change as Prisoners’ Dilemma

nash equilibrium: D

when no changes

Pareto optimality

Pareto optimality is the state at which resources in a given system are optimized in a way that one dimension cannot improve without a second worsening

colonialism and climate change

• should we hold them rlly accountable if previously colonialized?

International Climate Negotiations

• pre paris video

• 1992: countries agree on UNFCCC (United Nations Framework Convention on Climate Change)

  • Conference of the Parties (COP) held every 2 year

    • framework of yearly meetings

    • 1)nations try to limit climate change to a extend that is manageable

    • 2) we all have responsibility but differentiated by econ dev

  • COP 29 held in Baku this November

• 1997: Kyoto Protocol

  • Set limits for developed countries to make cuts

    • not for developing!!!!!!!!!!

  • US never ratifies, Canada pulls out

  • Emerging economies (China, India) grow rapidly but have no obligations under Kyoto

    • did the EU meet its obligations?

      • yes!!

A New Model: The Paris Agreement

• More politically palatable:

  • Everyone has todo “something”

    • got rid of clear division where only developed had to cut

  • Countries themselves decide how much: Nationally Determined Contributions(NDCs)

    • but you can decide how ambitious you are

    • before hand kyoto had clear targets

  • Designed to allow US President to circumvent Congress

    • us refused to ratify the kyoto and prob would refuse under kyoto! So it means the pres can sign and doesn’t have to put it as a vote

  • (Some) Climate Finance

    • developed provides some money to the developing world

• Core issues today:

  • Stock-take last year: How have countries done sofar? (result: not enough)

    • 2.7 degrees warmer

  • Phasing out of fossil fuels

    • cop 28 was the first time actually mentioned fossil fuels

    • and transition out “phase out”

  • Climate finance, including“Loss and damage” fund

    • developing can draw on a fund when experiencing climate related disasters

Domestic Interests

• Climate action requires that we restrict GHG-intensive activities through higher prices, bans, quotas..

• In the long run, we all win from policies to mitigate climate change, but in the short-medium run:

  

cattel farms: land and water intensive

Domestic Collective Action Problems

• The costs of effective climate action are acute and concentrated = easy for industry to organize and lobby

Domestic Collective Action Problems

• The benefits of effective climate action are diffuse, they benefit everyone in the world = most (young) citizens benefit, but easy to free-ride off others’ climate protests

  • but not as much as lobbying on the industrial side

Domestic Collective Action Problems

• Two outcomes that can arise from collective action problems:

• 1.Climate action is stopped/watered down due to force full lobbying

• 2.The costs of climate action are born by CONSUMERS, not BUSINESSES

  • 1.E.g. The German Energy Transition largely paid for by energy taxes on households, not businesses

A 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

• 1.Carbon Taxes

• 2.Emission Trading

• 3.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 (Lump Sum = everyone gets the same back)

  • tax everyone take the money, take the total sum, and divide by tax payers and give the same amount of back to everyone.

    • 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

      • you don’t rlly look at how much you get back (rebates)

      • you look more at what you have to pay for taxes

      • = more unpopular

        

Carbon Taxes How are Lump Sum

Rebates Progressive?

• poorer spend more on energy

• poorer gets more money back on rebates

• richer spend more —> less or non back

Emissions Trading: how do carbon markets work

cap and trade

• more incentive for innovation and reduce emissions as fast as they can

• more they cut —> fewer permits they need to buy

• historically underpriced carbon —> less incentive to decarbonize

• lots of permits—> started horting the permits, and lowered cap —> to make supply less = incentivize decarbonization

• The world’s largest carbon market: European Emissions Trading System (ETS)

  • set up for the kyoto obligations

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

The EU Carbon Border Adjustment Mechanism

• Initially, EU gave away free ETS permits to companies to “level the playing field” in import-competition 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

    • instead of free ones

• Note: This may incentivize countries that are dependent on EU market to also put a price on carbon

  • pos effect on other countries

why not free permits and tariffs?

• 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:

    • YouCAN impose a CBAM

    • YouCAN put tariffs only on products from countries without carbon pricing

    • You CAN’T impose a CBAM and ALSO give your industry free permits

  • Sorry, European Industry, you can’t have it all

“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 2022

• instead of taxing pollutions you give tax credits (subsidies) to those who invest in green energy (both companies and consumers)

• 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 the US IRA

• problem

• only gives subsidies to those made in the USA

  • violates the national treatment principle

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

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

International Climate

Finance

• “financing that seeks to support mitigation and adaptation actions that will address climate change”

• Under UNFCCC, developed countries are supposed to provide and mobilize funds for developing countries’ climate action

  • In Paris, developed countries reaffirmed commitment to mobilize $100 billion per year until 2020

  • 2022 exceeded $100 bn for first time ($118bn)

  • In Baku, they just agreed to increase that to $300 billion per year until 2030. Developing countries called this “a joke,” -trillions are needed

A New Supply Challenge: Raw Materials

• Energy transition depends on critical raw materials used in batteries, low-carbon power generation and electricity grids

  • we will have to electrify alot of things

    • almost all are processed in china

    • china might leverage west dependence

• Danger of disruptions –countries (and companies) have started to invest in lowering their dependence:

• recycling, at-home processing, substitution

• Watch out for global fights over raw materials:

  • https://www.nytimes.com/2022/03/18/podcasts/the-daily/cobalt-climate-change.html40