Trade in Energy, OPEC and the IPE of Climate Change Flashcards
1
Q
The energy trilemma
A
Unlike the monetary policy trilemma, this is not a strict trilemma, it’s hard but not impossible to obtain all three
- Stable energy supply
- No energy poverty
- Climate change mitigation
2
Q
Why is stable energy supply important?
A
- 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
- Lack of reliable, cheap energy can cause deep economic crises
3
Q
Institutions governing energy policy
A
- 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)
- A lot of other related to energy
– UNFCCC (United Nations Framework Convention on Climate Change)
– IRENA (International Renewable Energy Agency)
– IAEA (International Atomic Energy Agency)
– World Bank
4
Q
OPEC history
A
- First half of 20th century: Oil production dominated by “Seven Sisters”
– Now: Exxon, Shell, BP, Chevron - 1960: 5 countries (Saudi Arabia, Iran, Iraq, Kuwait, Venezuela) form OPEC to “stabilize prices” and “ensure a fair return on capital for investors”
– = trade union to negotiate with oil companies - 1970s: OPEC asserts power, oil embargo
- From 1980s: Mandatory production quotas for members to keep supply steady and prices high
– = OPEC becomes a “cartel” - 2016: OPEC+ (coordination with Russia and others)
5
Q
OEPC oil embargo 1973
A
- 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 and Netherlands and cut production
- Result: Price of imported oil to US quadruples, double-digit inflation
6
Q
Oil cartel and oil prices
A
- OPEC negotiates to curb production through quotas, keep prices high for everyone
– eg. oil prices drop after 2008 financial crash - OPEC countries jointly reduce output - But: Coordinated output curs hard to maintain - prisoner’s dilemma
- Some argue that Saudi Arabia - OPEC’s biggest producer - tries to uphold discipline through tit-for-tat
7
Q
OPEC today
A
- 13 member countries
- Still accounts for more than half of world’s crude oil
- Shale boom (fracking) in US and Canada has undermined OPEC’s influence in North America
8
Q
The IEA (an organization for oil consumers)
A
- 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
– Promote Clean Energy Transition
9
Q
International climate negotiations
A
- 1992: Countries agree on UNFCCC
– Conference of the parties (COP) held every 2 years
– COP 28 held in UAE right now - 1997: Kyoto Protocol
– Set limits for developed countries to make cuts
– US never ratifies, Canada pulls out
– Emerging economies (China, India) grow rapidly but have no obligations under Kyoto
10
Q
The Paris Agreement
A
- More politically palatable (than Kyoto Protocol)
– Everyone has to do “something”
– Countries themselves decide how much: Nationally Determined Contributions (NDCs)
– Designed to allow US president to circumvent Congress
– (Some) Climate finance - Core issues today
– Stock-take: How have countries done so far?
– Phasing out of fossil fuels
– “Loss and damage” fund
11
Q
Domestic interests in climate action
A
Climate action requires that we restrict GHG-intensive activities through higher prices, bans, quota, in the long run, we all win from policies to mitigate climate change but in the short-medium run:
- Winners among producers
– Producers of green energy
– Producers of green transportation
- Losers among producers
– Fossil fuel producers
– Energy-intensive producers
– Producers that use energy-intensive inputs
– Petrol car producers
– Airlines
– Cattle farmers
12
Q
Domestic collective action problems of climate action
A
- The costs of effective climate action are acute and concentrated = easy for industry to organize and lobby
- 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
13
Q
Two outcomes that can arise from collective action problems of climate action
A
- Climate action is stopped / watered down due to forceful lobbying
- The costs of climate action are born by consumers not businesses
– eg. The German Energy Transition largely paid for by energy taxes on households, not businesses
14
Q
Energy poverty
A
- 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 share on energy
15
Q
3 common policy approaches to climate action
A
- Carbon taxes
- Emission trading
- Green industrial policy
16
Q
Carbon taxes
A
- Put a tax on carbon to “price in” the negative effect of climate change
- 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 tax
17
Q
What is the world’s largest carbon market?
A
European Emissions Trading System (ETS)
18
Q
How can globalized trading lead to carbon leakage, what are some possible solutions?
A
- 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
– Global prices on carbon (very, very hard to negotiate)
– Tariffs on foreign goods at the border to “level the playing field”
– Give free permits / tax breaks to companies that export / compete against energy-intensive imports
19
Q
The EU carbon border adjustment mechanism
A
- Initially, EU gave away free ETS permits to companies to level the playing field in import-competition and exports
- Problem: lots of free permits limits 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 - This may incentivize countries that are dependent on EU market to also put a price on carbon
20
Q
Green industrial policy
A
- 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
21
Q
US inflation reduction act 2022 (climate action)
A
- 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 accessible
22
Q
US inflation reduction act and WTO rules (climate action)
A
- Many of the tax breaks are only applicable to locally produced goods (or goods produced by trade partners)
– eg. consumers get a tax break for EVs produced in US, but not in the EU
– Breaks national treatment - The EU might challenge the IRA at the WTO
- EU loosening “state aid” rules to provide its own green subsidies in race to become green leaders
23
Q
Definition of state capacity
A
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
24
Q
Limits of state capacity for climate action
A
- 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
25
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, developing countries reaffirmed commitment to mobilize $100 billion per year until 2020
26
Supply challenge (raw materials) for climate action
- 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, substitutions
