Lecture 11

Question 1

Energy and climate crisis are interrelated

Answer 1

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

Question 2

Stabe energy supply is important

Answer 2

 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

Question 3

Opec timeline

Answer 3

 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

Question 4

OPEC oil embargo

Answer 4

• 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

Question 5

Oil prices and cartel OPEC

Answer 5

• 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

Question 6

What is OPEC today?

Answer 6

 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

Question 7

What is the IEA

Answer 7

 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

Question 8

What is climate change in essence?

Answer 8

o Essentially prisoners dilemma, since mitigating climate chance is a public good

Question 9

Kyoto protocol 1997

Answer 9

• Limits for developed to make cuts
• US never ratifies, Canada pulls out
• Emerging economies (China & India) grow rapidly but have no obligations under Kyoto

Question 10

Paris agreement

Answer 10

• 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

Question 11

Domestic interests

Answer 11

 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

Question 12

Domestic collective action problem

Answer 12

 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

Question 13

2 outcomes CA problems

Answer 13

Climate action is stopped or watered down due to forceful lobbying
Costs of climate action are born by customers and not businesses

Question 14

Related problem energy poverty

Answer 14

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

Question 15

3 common policy approaches

Answer 15

1. Carbon Taxes
2. Emission Trading
3. Green Industrial Policy

Question 16

Carbon taxes

Answer 16

• 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

Question 17

emissions trading

Answer 17

• The world’s largest carbon market: European Emissions Trading System (ETS)
  just like year 1 economics

Question 18

Globalized trade = carbon leakage

Answer 18

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

Question 19

EU carbon border adjustment mechanism

Answer 19

• 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

Question 20

WTO; What is allowed?

Answer 20

• 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

Question 21

Big green push; green industrial policy

Answer 21

• 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

Question 22

US inflation reduction act

Answer 22

• 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

Question 23

WTO rules and US IRA

Answer 23

• 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

Question 24

Limits of state capacity

Answer 24

• 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

Question 25

International climate finance

Answer 25

• “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

Question 26

New supply challenge; raw materials

Answer 26

• Energy transition depends on critical raw materials
  used in batteries, low-carbon power generation and
  electricity grids
• Danger of disruptions – countries (and companies)
  have started to invest in lowering their dependence:
   recycling, at-home processing, substitution