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Addressing Carbon Emissions
and Oil Price Volatility
Wade Hoxtell • Andreas Goldthau
Challenges and Opportunities for
Transatlantic Energy Cooperation
Supported by the
European Commission
February 2012
Transatlantic Agenda Paper
Imprint
Global Public Policy Institute (GPPi)
Reinhardtstr.
Berlin
Phone: +••-
Fax: +••-
gppi@gppi.net • www.gppi.net
Authors: Wade Hoxtell, Andreas Goldthau
Published: Berlin,February
About the Authors
Wade H ox t el l is a project manager with the Global Public Policy Institute (GPPi)
in Berlin. His research interests include global energy governance, climate change,
public-private partnerships and corporate social responsibility. He also works as
a consultant to a number of United Nations agencies, including the UN Global
Compact Office, UNICEF and the ILO, on partnerships and sustainability issues.
Before joining the Global Public Policy Institute in May 2006, he was a project
assistant with the Aspen Institute Berlin. From 2003-2004 he worked as a legis-
lative aide in the Wisconsin State Senate. He holds an MA in European Studies
from Jagiellonian University in Krakow, Poland and undergraduate degrees in
international relations, German, European studies and global cultures from the
University of Wisconsin-Madison.
Dr. Andreas Goldthau is the head of the department of public policy and as-
sociate professor at Central European University, an American graduate school
based in Budapest, Hungary. His current academic interests focus on energy se-
curity and on global governance issues related to oil and gas. Prior to joining
Central European University, Andreas worked as a transatlantic postdoc fellow
in international relations and security with the Paul Nitze School of Advanced
International Studies at Johns Hopkins University, the RAND Corporation and
the German Institute for International and Security Affairs. He was also a re-
search fellow with the Institute for East European Studies at the Freie Universi-
ty in Berlin and a Fulbright senior scholar with the Elliott School of Internation-
al Affairs at George Washington University. He has further worked as a Robert
Bosch visiting lecturer at the Tyumen State University in Russia. Andreas holds
a joint graduate degree in political science from the Institut d’Etudes Politiques
de Paris and Freie University Berlin, a state certificate in Russian language from
Lomonossow University in Moscow, and a PhD from Freie University Berlin.
Acknowledgements
This report draws on a two-year research and debate project entitled “Common
Goals – Different Approaches? Strengthening Transatlantic Cooperation on Global
Energy Issues” which was conducted by the Global Public Policy Institute (GPPi)
and the Brookings Institution and generously funded by the European Commis-
sion. The report is based on and summarizes the main findings of both applied
research and the Transatlantic Energy Governance Dialogues (TEGD), a multi-
stakeholder conference series bringing together EU and U.S. policy-makers, rep-
resentatives of think tanks, NGOs, academia and the private sector.
The authors would like to thank Björn Conrad for valuable contributions and
comments to this paper.
Table of contents
1 Introduction .............................................................. 5
2 Mitigating Carbon Emissions ............................................ 7
2.1 Diverging Policy Stances ............................................... 7
2.2 Engaging China ........................................................ 9
2.3 Opportunities for Transatlantic Cooperation ............................. 10
2.4 Policy Conclusions ..................................................... 18
3 Strengthening Global Oil Governance .................................. 20
3.1 Shifting Consumption and Production .................................. 21
3.2 TheEectofLow-CarbonPoliciesonOilMarkets ........................ 23
3.3 Opportunities for Transatlantic Cooperation ............................. 23
3.4 Policy Conclusions ..................................................... 26
About this Paper ............................................................. 27
The Global Public Policy Institute ............................................. 27
TheBrookingsInstitution .................................................... 27
Supporters .................................................................. 28
Endnotes ...................................................................... 29
1 Introduction
The common dependency on energy, shared by societies around the world, en-
tails policy challenges of global nature and scope. From dealing with the nega-
tive externalities of greenhouse gas emissions and adapting to dwindling low-cost
reserves of fossil fuels in the context of massively rising demand driven by ma-
jor emerging economies such as China and India, energy poses challenges that
transcend national borders, involve both the public and private sectors and can-
not be meaningfully addressed at national or regional levels.
While the global dimension of energy challenges is unambiguous, the interna-
tional community generally, and the transatlantic alliance in particular, has so far
failed to supply the effective governance mechanisms that would form the basis
of an effective multilateralism. Most of the existing institutions of energy gover-
nance have been crafted by the transatlantic alliance after the end of the Second
World War, and thus in many ways reflect the economic and political realities of
the Cold War era. There can be no doubt that this existing and largely fragment-
ed system is in need of serious reform. And it is also clear that the transatlantic
partners will have to play a decisive role in that process.
However, the transatlantic alliance is confronted with a number of crucial chal-
lenges in this context. First, while the EU and the U.S. promote broadly con-
gruent goals and objectives in the context of global energy policy, there remain
conspicuous exceptions where the transatlantic partners do not pull their end of
the rope. The issue of climate change is one example. Americans and Europe-
ans still promote fundamentally different goals and strategies in international
climate negotiations under the umbrella of the United Nations Framework Con-
vention on Climate Change (UNFCCC). Transatlantic unity, while no longer a
sufficient precondition for effective global solutions to emerge, is nonetheless of
absolute necessity.
Second, as indicated above, joint transatlantic action is no longer sufficient to or-
ganize effective global energy governance. Even in case Europeans and Americans
agree not just on goals but also on strategies to achieve such goals, their common
weight, while still considerable, won’t be enough to result in lasting policy solu-
tions. New powers, especially the major emerging economies such as Brazil, Rus-
sia, India and China (the so-called BRIC countries) need to be brought into the
mix. Thus far, the transatlantic partners have failed to effectively include these
crucial new players in the global energy arena. This especially holds true with
regards to China, an increasingly important player in global energy.
Enhanced cooperation between the EU, the U.S. and China is therefore a cru-
cial prerequisite for more effectively addressing global energy challenges. Indeed,
as Javier Solana, the former EU High Representative for the Common Foreign
and Security Policy, has argued the EU needs to “go beyond a narrow Western
Addressing Carbon Emissions and Oil Price Volatility
5
prism” in seeking effective global energy governance. Only through a shared un-
derstanding – not necessarily to be equated with an alignment of interests, but
rather an increased awareness of, and the capacity to manage, divergences – can
Europe and the United States succeed in contributing to designing effective glob-
al energy governance and help to include China as a joint stakeholder for effec-
tive global energy multilateralism.
This report addresses transatlantic commonalities and dividing lines in two key
energy issue areas: mitigating carbon emissions and governing the global oil mar-
ket. These issue areas are highly intertwined and a prerequisite for mitigating car-
bon emissions consists of stable prices of oil, the prime energy commodity. This
report sketches opportunities and constraints for the transatlantic alliance in ex-
erting leadership on these issues.
The report draws on a two-year research and debate project funded by the Euro-
pean Commission. The project, entitled “Common Goals – Different Approach-
es? Strengthening Transatlantic Cooperation on Global Energy Issues”, was based
upon a two-pronged approach of applied research and the Transatlantic Ener-
gy Governance Dialogues (TEGD), a multi-stakeholder conference series bring-
ing together EU and U.S. policymakers, representatives of think tanks, NGOs,
academia and the private sector. Research and dialogue were closely integrated
and implemented in parallel in order to inject interim research results into the
planned dialogue sessions to foster substantive debate while at the same time also
leveraging the expertise and experience of dialogue participants towards the re-
search process. This reports summarizes the main findings of the project by de-
liberately focusing on the two issues that participants considered the key chal-
lenges to current global energy governance: climate change mitigation and oil
market management.
Addressing Carbon Emissions and Oil Price Volatility
6
2 Mitigating Carbon Emissions
As the scientific understanding of the catastrophic effects of global warming
deepens, climate change is gradually being accepted as one of the most daunting
challenges of our times. Like few other policy areas, global warming as an unam-
biguously transnational phenomenon highlights the inadequacy of national ap-
proaches. This presents considerable challenges for the EU and the U.S., not only
due to the diverging policy stances in the EU and the U.S., but also due to the
fact that any significant reduction of global carbon emissions will have to reach
beyond traditional alliances and integrate the emerging economies of the devel-
oping world, particularly China.
Despite these challenges, numerous opportunities exist for transatlantic coopera-
tion. While the U.S. has thus far failed to follow the EU’s lead on multilateral ef-
forts for binding emissions reductions, there are many potential avenues for coop-
eration at the sub-national level where interests among actors in the EU and the
U.S. align, for example, among municipalities and businesses. Moreover, transat-
lantic cooperation on research and development holds considerable potential, not
just for the development and deployment of new technologies such as smart grids,
renewables and carbon capture and storage (CCS), but also to serve as the pow-
erful core pushing towards a low-carbon transition. Finally, joint EU-U.S. strat-
egies for engaging China on carbon emissions represent a critical area of cooper-
ation which, arguably, must be a key building block of any transatlantic agenda.
2.1 Diverging Policy Stances
The transatlantic partners have been fundamentally divided over their approaches
and priorities towards climate change in the past. The EU has established itself as
the global role model and vanguard of climate change policy by setting a number
of ambitious carbon emission reduction goals as well as spearheading legislative
measures like the European Union Greenhouse Gas Emission Trading Scheme
(EU ETS). While flawed, the EU ETS by far represents the most advanced mar-
ket-based carbon emissions trading scheme in the world. While the EU’s mitiga-
tion efforts have not been immune to serious concerns about other world regions
free-riding on Europe’s unilateral restrictions as well as internal conflicts about
the distribution of mitigation costs, the EU can still consider itself the most com-
mitted player in the global climate change arena.
The EU puts a strong emphasis on multilateral emissions reduction efforts and has
acted as the primary advocate for internationally coordinated measures against
climate change since the early 1990s. It has been one of the main forces be-
hind international agreements created under the umbrella of the United Nations
Framework Convention on Climate Change (UNFCCC) and a staunch promot-
er of internationally binding and quantifiable greenhouse gas (GHG) reduction
Addressing Carbon Emissions and Oil Price Volatility
7
commitments. In addition, the EU has put forward various incentive schemes to
promote pro-climate action. For instance, the EU has committed to scale up its
emissions reduction targets for 2020 from 20 percent to 30 percent if other de-
veloped countries define and commit to similar targets for their own economies.
In addition, in July 2009 as part of the Major Economies Forum the EU reiter-
ated its commitment to scale up its emissions targets if China agreed to limit the
growth of emissions to 15 to 30 percent below the business-as-usual benchmark.
In contrast, the U.S. has been extremely cautious in binding itself to any sort of
mandatory carbon reduction commitments and the domestic political situation at
present has created enormous barriers for any action on climate change. While
ironically the most innovative approaches to emissions reduction, including the
idea of cap-and-trade, originated in the U.S., domestic efforts to limit U.S. car-
bon emissions have been modest at best. The emissions reduction goals formulat-
ed by the Bush administration in 2002 stipulate the reduction of GHG intensity
by 18 percent over a ten-year period. This goal, representing merely a slowdown
of U.S. emissions growth instead of any absolute emission reduction, has to be
considered unambitious by any standard.
Moreover, the U.S. role in international climate change negotiations mirrored
the lackluster domestic approach. While the Kyoto Protocol was signed during
the Clinton administration, it was never put before Congress for ratification. In-
stead, the Byrd-Hagel Senate resolution of 1997, stating that the U.S. would not
sign the Protocol without appropriate binding commitments for developed and de-
veloping countries and assurances that the carbon reduction commitments would
not seriously harm the U.S. economy, set the tone for the noncommittal U.S. po-
sition in international climate change negotiations. The inevitable deadlock be-
tween the U.S. and China on agreeing to binding emissions targets represented
a convenient pretext for the U.S. not to invest itself in multilateral efforts to re-
duce global emissions.
With the election of Barack Obama, there were high hopes for a shift in U.S. cli-
mate change policy and a breaking of the vicious cycle. The spring of 2009 wit-
nessed a legislative battle in Congress with the introduction of the American Clean
Energy and Security Act – a bill which was passed by the U.S. House of Repre-
sentatives, but failed to achieve a vote in the Senate, ultimately resulting in the de-
mise of both the bill and hopes for a shift in U.S. policy in the foreseeable future.
Since 2008, both blocs continue to suffer from the economic and financial crisis
that hit the globe, a state of affairs which has shifted policy agendas. While the
low carbon agenda in Europe has been impacted by more dominating policy is-
sues, notably the Euro crisis, the EU continues to inch the process for mitigating
global carbon emissions forward. In the U.S. against the backdrop of upcoming
elections in 2012 as well as a slowing U.S. economy, the Obama administration
seems to have ultimately put the low carbon agenda on hold.
Addressing Carbon Emissions and Oil Price Volatility
8
With diverging policy stances, the challenge of finding common transatlantic
goals for mitigating carbon emissions cannot be understated. As the U.S. con-
tinues to lag behind the EU in setting up a mandatory carbon reduction mecha-
nism at the federal level, goals and expectations for any sort of effective transat-
lantic cooperation in mitigating carbon emissions must be adjusted accordingly.
2.2 Engaging China
As the world’s largest carbon emitter, China plays a decisive role in combating cli-
mate change. According to projections of the International Energy Agency, Chi-
na’s energy demand is set to grow by 75 percent until 2013, then representing 22
percent of global consumption (IEA, 2010). Since most of this demand increment
will need to be satisfied by fossil fuels, notably coal, Chinese emissions stand to
grow further. However, despite the massive growth of demand for fossil fuels,
China has instigated a dramatic reversal of its domestic approach to emissions re-
ductions over the span of only a few years, moving from climate change skeptic
to dynamic player in the effort to move towards a lower carbon economy. In its
twelfth five-year plan (2011-2015), China has set a number of ambitious targets,
including a 16 percent reduction in energy intensity by 2015; greater industrial
energy efficiency and more efficient buildings; increasing non-fossil fuel energy
sources to 11.4 percent of primary energy consumption, part of which is planned
to result from an increase in wind power to 70 gigawatts over the next five years,
exceeding the 2020 target set a few years back; among other targets (WRI, 2011).
China’s position in international climate policy has so far been to stress its still
comparably low per capita GHG emissions. Against the backdrop of their heavy
carbon heritage, both on a per capita basis and in absolute terms, China there-
fore regards the U.S. and Europe as being mainly in charge of carrying the bur-
den of mitigating climate change. While there is truth to this argument, it is fu-
ture emissions paths – notably China’s – that will determine whether climate
change can be contained or not. However, the diverging policies of the transat-
lantic partners and lack of shared leadership has proven effective engagement of
China extremely difficult. A transatlantic agenda, combining U.S. and EU influ-
ence and resources, would be the ideal prerequisite for successfully engaging Chi-
na in a multilateral framework for carbon reduction. These frameworks could be
flanked by incentive schemes rewarding Chinese mitigation efforts with overpro-
portionate efforts by the U.S. and Europe. However, the fundamentally diverg-
ing interests and strategies on both sides of the Atlantic have effectively prevent-
ed the emergence of a desperately needed transatlantic agenda on climate change.
In the absence of this strong transatlantic lever, engaging China on reducing car-
bon emissions has led to a more fragmented approach which is closely reflected
by both sides’ strategies towards China. The EU, true to its role as a global pro-
moter of climate change mitigation, has gradually built a multi-layered network
of EU-China cooperation on climate change consisting of institutionalized mech-
Addressing Carbon Emissions and Oil Price Volatility
9
anisms for political dialogue in combination with an array of working-level ini-
tiatives and joint programs covering most aspects of carbon emissions reduction.
Despite this comprehensive framework for engagement, EU-China cooperation
on climate change has thus far produced mixed results, suffering from political
resistance of powerful veto players on the Chinese side, non-existent backing from
the U.S. side as well as internal divisions and political ambiguity on the EU side.
The U.S., likewise true to its role as a procrastinator of decisive action on climate
change, also lagged in engaging in cooperative measures with China on the is-
sue of climate change until relatively recently. Issues having to do with climate
change were virtually absent from the U.S.-China political dialogue and exchang-
es on the bureaucratic level were extremely limited until the Obama administra-
tion acted quickly to change this situation by moving the issue to the very top
of the U.S.-China agenda. In July 2009, the U.S. and China signed a memoran-
dum laying the basis for an unprecedented level of bilateral cooperation on cli-
mate change (U.S. Department of State, 2009). The Memorandum provided a
coherent framework for cooperative projects, created a coordinating committee
for energy and environment agencies in the U.S. and China and formed a work-
ing group for coordinating efforts through the Strategic and Economic Dialogue
(S&ED) and the Ten Year Energy and Environment Framework – two high-lev-
el fora for bilateral cooperation (Seligsohn et al., 2009).
Yet, creating reliable partnerships for engaging China on climate change, either
through effective transatlantic collaboration or, more realistically, through sep-
arate though coordinated approaches, is certainly no trivial endeavor. It will re-
quire building a common understanding of goals vis-à-vis China, making a collec-
tive choice of instruments most promising to achieve these goals and agreeing on
a set of strategies to facilitate the implementation of these instruments in China.
Moreover, a major barrier to bilateral or even trilateral cooperation is the poten-
tial clashing of economic interests. While the problem of climate change requires
cooperative measures and transfers of key technologies to solve it, new technol-
ogies are also sold in a very competitive market and the rents on innovation are
substantial. Reconciling these two opposing forces is thus a considerable chal-
lenge for both cooperation among the EU, U.S. and China as well as for solving
the climate dilemma (Conrad and Meissner, 2011).
2.3 Opportunities for Transatlantic Cooperation
It is becoming increasingly clear that, despite the best efforts of the Europe-
an Union to the contrary, a comprehensive global agreement for the reduction
of greenhouse gases is unlikely in the next decade. This is primarily due to the
stance of both the United States and China who, due to a number of political, so-
cial and economic conditions, have not committed to binding and verifiable emis-
sions reductions targets and, in doing so, create disincentives for other states to
commit as well. Exacerbating the situation, the ongoing financial crisis has led
Addressing Carbon Emissions and Oil Price Volatility
10
to environments of austerity in the EU and the U.S. and trade-offs have relegat-
ed climate policy to the back burner, particularly in the U.S..
Despite these challenges, opportunities exist for a wide spectrum of meaningful
transatlantic initiatives. These range from top-down cooperation on governance
challenges at the global level, bilateral cooperation on research and development
and best practice sharing for transitioning to low-carbon economies through the
short- to medium-term replacement of coal with cleaner-burning natural gas, to
bottom-up initiatives at the sub-national level for promoting sustainable growth.
Finally, while all approaches will be necessary to achieve broad-based progress
on emissions reductions in the EU and the U.S., strategies for engaging China on
reducing emissions should represent a key priority for the transatlantic alliance.
2.3.1 Multilateral Cooperation
Despite the failure of the multilateral process in creating a global regime for le-
gally binding carbon emissions reductions, there is plenty of space for transat-
lantic cooperation at the global level. First, with the commitments made at the
2010 United Nations Climate Change Conference in Cancún, Mexico for setting
up a US$ 100 billion per year green climate fund by 2020, new international in-
stitutions and mechanisms are needed to manage the flows of future climate fi-
nance and to set key priorities. Yet. such discussions would not necessarily take
place within the Transitional Committee of the UNFCCC. Rather, as past ex-
perience shows, outlets such as the G20 or the Major Economies Forum become
major fora for addressing issues of global concern. Crucially, they include emerg-
ing powers, notably China but also India. Moreover, they lend legitimacy to these
talks as they give voice to developing countries in the process. Finally, they op-
erate through top level summits, where key negotiations and agreements tend to
take place anyway. Channeling carbon emission issues through the G20 and MEF
means that emerging economies, particularly China, will need to have a bigger
role in decision-making and thus take on more responsibility, something which
China currently avoids.
Second, massive commitments of public money will be necessary to ensure that
investments are made for transitioning to low-carbon economies, in addition to
funding the commitment as agreed upon in Cancún. The EU and the U.S. must
develop a shared vision on how to move forward in order to make a strong polit-
ical case to constituent populations, as well as the private sector and investors,
of why and how energy investments need to be made, particularly in light of the
current economic and financial turmoil. Such discussions could occur within
the context of the EU-U.S. Energy Council, a high-level forum launched in 2009
with the aim of providing a new framework for tightening transatlantic dialogue
on energy issues, particularly with respect to economic growth and speeding up
the low-carbon transition through cooperation on research programs and regu-
latory regimes.(Council of the European Union, 2010).
Addressing Carbon Emissions and Oil Price Volatility
11
2.3.2 Bilateral/Trilateral Cooperation
Multilateral outlets and efforts will not be sufficient to avoid climate change and
considerable opportunities exist for bilateral cooperation between the EU and the
U.S., as well as together with emerging economies such as China. In particular,
cooperation is needed in the areas of research and development and strategies
for bridging the fossil fuel age with the low carbon age. First, in order to push to-
wards a low carbon economy, the world needs a substantial investment into re-
search and development of promising new technologies, including renewables,
smart grids and, of particular importance, carbon capture and storage and ener-
gy efficiency technologies, without which the achievement emissions reductions
targets are impossible. For example, a new initiative between the United States
Department of Energy and the Joint Research Centre of the European Commis-
sion aims to facilitate global standardization of electric vehicles and the charg-
ing infrastructure (smart grids) which would allow seamless operation of vehi-
cles and EVSEs across borders and service areas of different utilities.(Argonne
National Laboratory, 2011).
While public money will play a key role in contributing the needed capital for
financing a global green transition, commitments by national governments will
not be enough. In order to fill this gap, the role of the private sector is crucial and
governments in the EU and the U.S. must commit political backing to this agen-
da by setting the right incentives for R&D, by creating clear and reliable regula-
tory frameworks, including, if appropriate, subsidy schemes in clean energy, and
design frameworks that allows for corporate-level cooperation.
Second, soaring unconventional (shale) gas production in the United States, to-
gether with the widespread discovery of shale formations in key demand centers
such as OECD countries and China, has led many to make the case for natural
gas as a transition fuel towards a low-carbon age. Due to new technologies de-
veloped and tested in the U.S., there is now the possibility of accessing huge re-
serves of unconventional natural gas at a relatively low cost. Taken together, there
is a legitimate possibility for a large-scale replacement of coal-fired power plants
with natural gas plants – a move which many believe could achieve more than a
50 percent reduction in greenhouse gas emissions.
This development opens up new opportunities for the transatlantic alliance. As
a global leader in the effort to stop climate change, shale gas is attractive for the
European Union with respect to driving the efforts of the world’s largest pollut-
ers, namely the United States and China. In the case of the U.S. where shale is
already competitive against coal, this could lead to huge reductions without the
need for implementing politically unpopular cap-and-trade or carbon tax policies.
In China, there is also a compelling argument for domestic shale production.
While coal represents roughly 66 percent of total primary energy demand and is
growing (IEA, 2010), there are natural limits of growth in Chinese coal consump-
Addressing Carbon Emissions and Oil Price Volatility
12
tion to cover this demand. At present, half of the country’s railroad system is ded-
icated only to the transportation of coal as reserves tend to be located consider-
ably far away from major Chinese demand centers; pollution levels in major cities
have reached maximum peaks, exerting negative effects on health and the envi-
ronment and hence creating costs elsewhere. Thus, China would be well-served
to increase the share of gas for meeting energy demand, particularly through do-
mestic shale gas sources, of which there are plenty, as well as through LNG im-
ports or imports from Russia.
Despite these optimistic prospects, a number of challenges remain which, at the
same time, represent key opportunities for transatlantic cooperation. First and
foremost, concerns regarding the need for large volumes of water for hydraulic
fracturing and the potential risk of groundwater contamination are a huge po-
tential sticking point. A study by the U.S. Environmental Protection Agency on
the impact of hydraulic fracturing on drinking water is due in 2014, with prelim-
inary results to be made public by 2012. However, additional research on the en-
vironmental implications of unconventional gas production is needed.
Second, as opposed to the United States, in Europe logistical and administrative
hurdles regarding land access may halt widespread production of unconvention-
al reserves (IEA, 2010). Whereas U.S. citizens own resources located under their
property, and can thus reap considerable financial benefits if gas is produced on
their land, this is not the case in the European Union. As resources in Europe in
most cases belong to the government, there is considerable opposition to shale
gas due to disruptive exploration and production methods, especially in areas of
high population density.
To assist in framing the debate in Europe, the EU should continue to learn from
the U.S. by sharing information and lessons learned, especially on environmental
issues. The U.S. Global Shale Gas Initiative (GSGI), which helps countries iden-
tify and develop their shale resources safely and economically, already has part-
nerships with China, India and Poland, among others and is one potential forum
for the transfer of technological, regulatory and environmental best practices.
2.3.3 Sub-National Cooperation
Despite popular support among a majority of Americans for policies to both pre-
vent climate change as well as develop innovative new energy technologies, it is
highly unlikely that the United States Congress will adopt a federal policy for
mitigating carbon emissions any time soon. Because of this stalemate, efforts by
the European Union and the UNFCCC to reach a global agreement on carbon
emissions are likely bound to fail.
However, national policy measures and the top-down UNFCCC discussions and
are not the only game in town. In the absence of a global climate deal, the best
Addressing Carbon Emissions and Oil Price Volatility
13
opportunity for EU-U.S. cooperation is to identify those actors with an overlap-
ping interest in mitigating greenhouse gas emissions. The most promising ave-
nues in this respect are numerous bottom-up initiatives designed to encourage
emissions reductions, the most interesting and potentially constructive of which
is cooperation between municipalities, regions and industry sectors in the EU
and the U.S., as well as with third parties such as China.
In fact, expertise in this type of cooperation has been built up for years, with the
European Union participating and providing expertise in numerous municipal,
state and regional initiatives in the U.S. which aim overcome the federal stale-
mate on climate legislation. For example, the mayors of 1054 U.S. cities signed a
Climate Protection Agreement which aims to meet or exceed the obligations of
the Kyoto protocol. The state of California and many northeastern states have ad-
opted aggressive policies for reducing greenhouse gas emissions, promoting en-
ergy efficiency and establishing renewable portfolio standards. Various regional
cap-and-trade initiatives are also popping up, including the Regional Greenhouse
Gas Initiative (RGGI), a collection of ten northeastern and mid-Atlantic states
and the Western Climate Initiative (WCI), a collection of six U.S. states and four
Canadian provinces. In addition, hundreds of corporate, non-profit and govern-
ment entities have signed on to The Climate Registry, a non-profit organization
that establishes standards throughout North America for businesses and govern-
ments to calculate, verify and publicly report their carbon footprints in a single,
unified registry.
In addition, U.S. municipalities and states cooperate with their European counter-
parts in a number of global initiatives. The International Carbon Action Partner-
ship, for example, shares best practices in designing and implementing cap-and-
trade systems and includes member states from the European Union and states
participating in the RGGI and WCI, among others. The C40 Cities Climate Lead-
ership Group, together with the Clinton Climate Initiative, is a network of large
cities from around the world committed to implementing climate policies, while
the Cities for Climate Protection, an association of over 1220 local government
members and from over 70 countries committed to sustainable development, co-
operate to implement sustainable development policies
These cooperative networks, among numerous others, represent the most prom-
ising opportunity for the European Union and the United States to both jointly
mitigate carbon emissions as well as engage with other crucial actors in China.
They are sub-state levels and hence less politically charged. There is expertise on
how to coopt actors from various countries into regional or even global policy
networks. And a problem oriented approach – through mayors sharing a clean-
air agenda or businesses caring about the carbon image of their products – pro-
vides for natural ‘allies’ as Chinese, European and American policy makers or
businesses are exposed to similar issues.
Addressing Carbon Emissions and Oil Price Volatility
14
2.3.4 Engaging China on Global Carbon Emissions
While all of the above represent crucial opportunities for EU-U.S. cooperation
on mitigating greenhouse gas emissions, it will not be enough to slow the onset
of potentially catastrophic global warming. It is crucial that China, as the world
largest emitter of carbon dioxide, be brought on board. Between the established
channels of institutional cooperation between the EU and China on many cli-
mate-related issues and commitments for more bilateral cooperation between
the U.S. and China, a promising starting point exists for the creation of a coher-
ent and comprehensive transatlantic agenda vis-à-vis China and climate change.
The first step on the way to a transatlantic agenda will be the definition of a set
of common goals that strikes the right balance between an effective reduction of
GHG emissions and high feasibility in light of the Chinese political reality. Sim-
ilar to the EU’s engagement with the U.S., this means parallel processes of high-
politics for hashing out an international agreement with China on board, bilat-
eral cooperative measures at the national level, as well as sub-national initiatives
among actors in the EU, the U.S. and China with common interests, for example,
municipalities, business sectors or researchers. Only through more depoliticized,
sub-national initiatives, flanked by international processes such as the UNFCCC
and bilateral cooperation measures, can China be engaged on a level which is both
politically possible and allows for the credible delivery of emissions reductions.
2.3.4.1 Multilateral Cooperation
Moving towards a transatlantic agreement on goals and objectives starts with a
debate about the most fundamental aspect of governing global carbon emissions,
namely the fair distribution of the burden associated with emissions mitigation.
Support for carbon reduction hinges upon a distribution of costs that is perceived
as acceptably fair by all parties. Reaching such a common understanding with
China is inconceivable without first creating a stable agreement between the trans-
atlantic partners regarding an appropriate framework for global burden-sharing.
In the past, the most prominent instrument used by the EU for emissions reduc-
tions in China has been the Clean Development Mechanism (CDM) under the
Kyoto Protocol. However, the CDM is a mechanism that is most suitable for har-
vesting low-hanging-fruits such as energy efficiency and the potential of the CDM
in China in this respect is approaching exhaustion. While the overall effectiveness
of the CDM is subject to much debate, it has succeeded in building local aware-
ness of carbon reduction as a tradable good. China’s experiences with the CDM
therefore might be a promising starting point for the promotion of a nation-wide
market-based emissions trading system (ETS) and thus becomes an interesting
avenue to explore for an emerging transatlantic agenda.
While binding commitments towards absolute and quantifiable emissions reduc-
Addressing Carbon Emissions and Oil Price Volatility
15
tions certainly represent the key objective, China will continue to perceive ab-
solute reduction goals as effectively creating a ceiling for China’s economic de-
velopment, rendering such demands unfeasible in the mid-term. An alternative
approach to this could rather include measurements of GHG intensity – primar-
ily the amount of GHG emissions per unit of GDP – which is a measuring unit
more in line with the Chinese domestic climate change efforts and perhaps a more
appropriate target value for an emerging economy.
2.3.4.2 Bilateral or Trilateral Cooperation
Another instrument that is being prominently promoted in China by the EU is
the development of Carbon Capture and Storage (CCS) facilities. Initially, making
cost-intensive and experimental CCS technology a primary focus of EU climate
change policy vis-a-vis China was highly contested among EU member states.
Eventually, the proponents of CCS under the leadership of the United Kingdom
prevailed and CCS has since become the f lagship of EU climate change efforts
in China. While it is still too soon to evaluate the ultimate success of the EU’s
efforts in this field, the introduction of CCS technology has already become an
instructive example for the diversity of interests and the intricate setup of actors
on the Chinese side that will also influence the success of a future transatlantic
agenda. While CCS has met intense resistance from powerful Chinese govern-
ment entities, and thus putting the future of the EU’s efforts at constant risk, it
has also found an internal champion with the Chinese Ministry of Science and
Technology.
A further avenue for potential cooperation is through supporting China’s legislative
and regulatory efforts by sharing experiences and best-practices. Administrative
support initiatives represent a way to improve the formulation and implementa-
tion of domestic climate change policies in China. The EU has gathered exten-
sive experiences with these kinds of initiatives in the past, for example, through
the EU-China Energy and Environment Programme (EEP) or more specific ini-
tiatives such as the CDM facilitation project or the EU’s Support to Regulatory
Activities for CCS (STRACO2). These EU initiatives have encountered signifi-
cant constraints due to China’s concerns regarding any sort of foreign meddling
in domestic policy issues as well as by inflexible and bureaucratically convoluted
processes on the EU side. The lessons learned from past EU administrative sup-
port initiatives can provide a head-start for comparable transatlantic measures to
be implemented in the future.
In addition to prominently discussed instruments of emissions reduction such as
carbon markets, there exists a whole spectrum of innovative measures worthy of
exploring which could represent the pieces of a joint transatlantic agenda. The de-
velopment of China’s market for natural gas through the utilization of abundant
Chinese coalbed methane (CBM) or the creation of low-carbon Economic Zones
(LCZs) modeled after China’s Special Economic Zones of the early 1980s repre-
Addressing Carbon Emissions and Oil Price Volatility
16
sent two of many options. But as the example of CCS promotion vividly shows,
all of these approaches have something in common. They will have to be pursued
with great awareness and sensitivity for the interests of different Chinese actors,
expectations and political context.
Other thinkable strategies to facilitate the implementation of emissions reduction
instruments through burden-sharing include major EU and U.S. investments in
China’s energy infrastructure. These large-scale infrastructure deals, as argued
by scholars such as David Victor, could significantly increase leverage on carbon
emissions in China. For example, investments into natural gas infrastructure that
make it more feasible for China to implement a shift from coal-fired to gas-fired
power plants appear to be a promising option to be considered within the frame-
work of a transatlantic agenda.
2.3.4.3 Sub-National Cooperation
A joint transatlantic agenda, combining U.S. and EU inf luence and resources,
would be the ideal prerequisite for successfully engaging China in a multilateral
framework for carbon reduction. However, in the absence of this strong transat-
lantic lever, the multilateral process must be flanked by a more fragmented and
depoliticized approach involving actors with common interests and common chal-
lenges, for example, at the level of business sectors and municipalities.
While China’s experiences with the CDM may represent a promising starting
point for the eventual adoption of a promotion of a nation-wide carbon market in
the future, the more feasible avenue in the short- to medium-term is the creation
of regional emission trading schemes, something which has already occurred in
Tianjin, Beijing and Shanghai and which illustrate the opportunities of an emis-
sions trading system in China. An intermediate step on the way to a full-f ledged
ETS might be sectoral crediting mechanisms (SCM), which establish a less am-
bitious carbon crediting scheme for especially well-suited business sectors, for
example the electricity sector, spanning across different world regions. Sectoral
mechanisms thus represent a way to participate in a ‘global’ agreement without
making binding emissions reductions at the national level (Gavard et al., 2011).
The most hotly debated option for burden-sharing is the transfer of cutting-edge
green technology that would save China the investments and time necessary to de-
velop these technologies itself. While considered by China as the most important
prerequisite for its commitment to an international accord on emission reductions,
western governments and patent holders resist comprehensive technology trans-
fer, which will create intensified competition by Chinese manufacturers entering
the global market for green technology and thereby limit the rent on innovation.
As previous international cooperation efforts shaped primarily by the logic of
economic competition have failed to significantly affect China’s energy transi-
Addressing Carbon Emissions and Oil Price Volatility
17
tion, joint technology development and testing could be a much more promising
approach (Conrad and Meissner, 2011). European companies, having had ample
experience with unfavorable joint ventures and intellectual property rights (IPR)
infringements in China in the past, remain reluctant to engage in technological
cooperation with Chinese partners. The UK’s Near-Zero Emissions Coal initiative
(NZEC) in China follows this approach and illustrates its opportunities as well
as its limits. One solution could be the creation of an IPR compensation fund for
minimizing risks and increasing incentives for EU and U.S. companies interest-
ed in joint collaboration with Chinese companies (Conrad and Meissner, 2011).
Finally, joint technology development, particularly in the area of smart grids, rep-
resents a tremendous opportunity, particularly for EU and U.S. companies. While
R&D on smart grids is still in its early phases in the EU and the U.S., and only a
few pilot projects are up and running in, for example, Mannheim, Germany and
Austin, Texas, China plans to install a smart grid system by 2020 and has pledged
to invest upwards of US$ 37.6 billion in the coming years (China Economic Re-
view, 2011). This presents considerable opportunities for EU and U.S. companies
to use the “China laboratory” to improve their own technology through cooper-
ation In fact, companies such as Siemens, General Electric and IBM are already
involved in joint ventures with Chinese companies in the area of smart grids.
2.4 Policy Conclusions
Multilateral Cooperation
• Designing mechanisms and institutions for governing financial flows need
to occur at the highest level, not within the UNFCCC process, but through
fora such as the G20 or the Major Economies Forum. Emerging econo-
mies, particularly China, will need to be encouraged to play bigger role in
decision-making and take on more responsibility in designing the appro-
priate institutions and mechanisms.
• China’s experiences with the CDM therefore might be a promising start-
ing point for the promotion of a nationwide market-based emissions trad-
ing system (ETS) and thus becomes an interesting avenue to explore for an
emerging transatlantic agenda.
• China will continue to perceive absolute reduction goals as effectively cre-
ating a ceiling for China’s economic development, rendering such demands
unfeasible in the mid-term. An alternative approach to this could rather
include measurements of GHG intensity – primarily the amount of GHG
emissions per unit of GDP – which is a measuring unit more in line with
the Chinese domestic climate change efforts and perhaps a more appropri-
ate target value for an emerging economy.
Addressing Carbon Emissions and Oil Price Volatility
18
Bilateral/Trilateral Cooperation
•
The EU and the U.S. must set the right incentives for R&D and create
clear and reliable regulatory frameworks for encouraging private sector
investments.
• The EU and the U.S. must develop a shared vision on how to move for-
ward regarding the transition to low carbon economies. In order to con-
vince constituent populations in the EU and the U.S. regarding the need
for large-scale energy investments. Such discussions could occur within
the context of the EU-U.S. Energy Council.
• The EU and the U.S. should explore the development of China’s market
for natural gas, including the potential for investments into natural gas for
encouraging a shift from coal-fired to gas-fired power plants.
• Additional research on the environmental and regulatory implications of
unconventional gas production is needed in order to determine the limits
and potential of natural gas as a bridge fuel to low-carbon economies. The
EU and China, among others, should continue to learn from the U.S. by
sharing information and lessons learned, especially on environmental is-
sues through the U.S. Global Shale Gas Initiative (GSGI).
• Past EU administrative support initiatives should be evaluated for lessons
learned in order to provide a head-start for comparable transatlantic mea-
sures to be implemented in the future.
Sub-National Cooperation
• A problem oriented approach at the sub-national level provides for natu-
ral ‘allies’ as Chinese, European and American policy makers or business-
es are exposed to similar issues. These “bottom-up” initiatives, such as the
C40 group of cities and partnerships between industry sectors, must play
a key role, flanked by multilateral efforts.
• An intermediate step on the way to a full-fledged ETS in China might be
Sectoral Crediting Mechanisms (SCM), which establish a less ambitious
carbon crediting scheme for especially well-suited sectors, such as electric-
ity generation.
•
To encourage joint cooperation in the research and development of new
technologies between the EU, U.S. and China, an IPR compensation fund
could be created for minimizing risks and increasing incentives for EU and
U.S. companies interested in joint collaboration with Chinese companies.
Addressing Carbon Emissions and Oil Price Volatility
19
3 Strengthening Global Oil
Governance
Oil continues to play a critically important role as a source of energy for both
industrialized nations and for newly industrializing countries, particularly Chi-
na. Caused by an unmatched globalization process since the end of the last cen-
tury, oil has become a truly global commodity. Now, oil is traded on exchanges
in London, New York and Beijing; energy deals are hedged by financial service
companies; prices are set by market movements and expectations of private agents
of all kind; and all sorts of energy derivatives have become a playground of their
own for financial speculators.
However, a number of challenges are putting in question the existing structures
and mechanisms for governing global oil relations, including: a shift in the levels
of consumption from west to east; a shift in non-domestic oil production from in-
ternational oil companies to new state-controlled oil companies; and uncertainty
regarding policies for mitigating carbon emissions.
These challenges are complex and involve an interplay of numerous actors and in-
struments involved in financing, producing, trading and consuming oil, together
with the international, regional or national governance structures which set var-
ious incentives or disincentives. However, the current debates on oil are primar-
ily focused on the security perspective and, particularly, on the role of national
governments as the key actors in global energy relations (Goldthau, 2011a). This
unilateral focus on “securing supply” is detrimental and can lead to the self-serv-
ing prophecy of zero-sum relations in global energy where one state’s gain is an-
other state’s loss.
If solutions to these challenges are not provided by the market, public action is
required in order to avoid market failure and to ensure the provision of the global
public good “energy security”. To do so, a number of criteria and key elements of
institutions, organizations and processes to facilitate the provision of this global
public good are necessary, including enhancing transparency on markets, decreas-
ing uncertainty among state and non-state agents and regulating energy markets
on a national and international level. For this, the existing framework of global
energy governance must be updated, organizations are needed for exerting regu-
latory power, serve as a clearing house for vital oil market information and data
and promote dialogue among consumers and producers.
Through analyzing the rules which govern the global oil market as well as the in-
terplay between different actors, policymakers can develop solutions which are
based not only on national interests, but on cooperative, win-win mechanisms.
The transatlantic alliance must form the core of any push towards more effective
and inclusive mechanisms for governing global oil. However, none of these tasks
Addressing Carbon Emissions and Oil Price Volatility
20
can be taken on by the transatlantic partners alone and, in this context, defining
the building blocks of a transatlantic agenda that give viable answers to these is-
sues must also recognize the essential role that “new” oil consumers, particular-
ly China, need to play in governing global oil.
3.1 Shifting Consumption and Production
Global oil consumption is rising drastically due to increasing demand from the
non-OECD world, in particular Asian countries. The International Energy Agen-
cy (IEA), the OECD energy watchdog, projects that global oil demand will rise to
99 million barrels per day (mbpd) by 2035 – a 15 percent increase over 2010 con-
sumption levels. Since OECD demand falls in absolute terms, all of this growth
comes from non-OECD countries, and almost 50 percent from China alone (IEA,
2011). By that time, the International Energy Agency projects China to consume
70 percent more energy that the U.S., the second largest consumer (IEA, 2011).
At the same time, the world’s oil reserves are increasingly controlled by state-
backed national oil companies (NOCs), which control about 80 percent of the
world’s oil reserves (The Economist, 2011). While in itself not a threat to global
oil production, the problem is that many NOCs, as opposed to international oil
companies (IOCs), tend to be opaquely governed and not required to report their
activities. Consequently, market information such as exploration and production
costs, investment volumes, total oil output or the financial information of their
project is not made available, resulting in an increasing lack of market transpar-
ency and thus an unstable price environment (Goldthau, 2011a). This coincides
with an increasing role of OPEC in the global market in the years to come. Until
2035, the organization will account for most of the output increment in global oil,
pushing OPEC’s share in global production to more than 50 percent (IEA, 2011).
These shifts in consumption and production come with implications and chal-
lenges for existing institutions and mechanisms of global energy governance,
particularly in two key areas: measures for mitigating supply shocks and ensur-
ing accurate and timely market information. First, as the institution responsible
for coordinating strategic oil stocks for responding to oil supply shocks, the IEA
faces considerable challenges in fulfilling this role as a result of the shift in glob-
al oil consumption to non-IEA members. The mechanism designed to mitigate
against supply shocks, the Coordinated Emergency Response Measures (CERM),
requires member countries to maintain a strategic petroleum reserve equivalent to
its consumption of net oil imports for a period of 90 days. The main function of
the CERM is thus to ensure that, in case an international disruption to the global
oil supply occurs, the IEA is empowered to release emergency oil stocks to mem-
ber countries to help buffer the supply shock. However, as China and India are
not members of the OECD and thus not integrated into the IEA and its emergen-
cy response measures, the strategic stocks of the OECD world reflect a decreas-
ing market share which translates to reduced effectiveness against a supply crisis.
Addressing Carbon Emissions and Oil Price Volatility
21
While integrating major non-OECD consumers into the IEA and its emergency
response mechanisms and data reporting requirements would be the most forth-
right way of both ensuring the effectiveness of the CERM and the availability of
comprehensive, accurate and up-to-date oil market data, the bylaws of the IEA
require that new members first become members of the OECD, which entails cer-
tain democratic and market economy principles. Even if potential new members
fulfill these criteria (or if they are changed), potential new member will likely
(and rightfully) challenge the distribution of voting rights in the organization in
order to ref lect their gravity in the global oil market. Furthermore, the current
situation represents a classic free-rider dilemma where consumers such as China
and India benefit from the existence of IEA strategic stocks and market informa-
tion while not bearing the associated costs. The overall challenge, then, is wheth-
er the IEA can either provide sufficient incentives to make membership IEA at-
tractive to these countries. If this isn’t the case, alternative governance solutions
must be found. As the rule setting power in global energy is clearly shifting east,
this is both a tremendous challenge to established IEA mechanisms (represent-
ing the ‘old’, OECD consumers), as it is a clear call on the emerging consumers
in the oil market: China and India.
Second, while members of the IEA are bound to provide data on production and
consumption, non-IEA members are bound to no such requirement. As a greater
share of consumption is represented by non-IEA members, the overall accuracy
and reliability of global oil market data is jeopardized. Compounding this prob-
lem, as discussed above, NOCs in non-IEA member states are not required to
report their exploration and production costs, investment levels and production
output. Taken together, these intransparencies have consequences on the prop-
er functioning of the oil market, particularly with respect to price stability/vola-
tility, supply and demand volumes and investment needs – potentially leading to
supply crises down the road (Goldthau, 2011b, Harks, 2010). As the percentage
of global oil both consumed by non-IEA members and produced by state-backed
NOCs continues to increase, this problem can only become more exacerbated.
Finally, and coming as an additional challenge, oil market governance will need
to cope with a still increasing share of supply stemming from a volatile region.
As the recent diplomatic quarrels surrounding Iran’s nuclear program have re-
vealed, the Persian Gulf remains prone to conf lict. This may not only have im-
plications for oil price volatility, historically also a function of political turmoil
in the Gulf, but also with regards to physical supply and transit. Traditionally,
the U.S. has secured oil transit through the Strait of Hormuz, the world’s main
‘chokepoint’ for seaborne oil shipment. Yet, according to IEA projections, the
U.S. will consume and hence import much less oil from the region in the future,
due to efficiency gains in its car fleet and new domestic supplies (IEA, 2011). As
a result, Washington may in the future be less inclined to foot the bill for keeping
sea lanes open at any costs, which may have governance implications for physi-
cal trade and transit in oil.
Addressing Carbon Emissions and Oil Price Volatility
22
3.2 The Eect of Low-Carbon Policies on Oil
Markets
The global oil market is also impacted by policies for moving towards a low car-
bon economy, particularly due to the fact that the greenhouse gas emissions re-
sulting from the burning of fossil fuels contribute to global warming. The lack of
policies for internalizing this externality into the price of oil and other fossil fu-
els represents a huge market failure – one that has only until relatively recently
begun to be addressed through various means, including the Kyoto Protocol car-
bon markets and emerging Post-Kyoto climate regimes.
However, attempts in Copenhagen in 2009, in Cancun in 2010 and in Durban
in 2011 to set binding CO2 emissions reductions target have failed and cap-and-
trade systems still remain in their infancy. As witnessed in the U.S. and Austra-
lia, even if cap-and-trade sys-tems are proposed, they will each take on a consid-
erably different flavor depending on the political-economic circumstances in each
country (Behr et al., 2009). Emerging markets such as China are certainly exper-
imenting with domestic cap and trade schemes as well, but these laudable steps
are clearly in their early stages. Moreover, economic interests of different coun-
tries or regions may well top climate change goals. Broadening Europe’s ETS sys-
tem towards air traffic recently experienced major resistance from the U.S. and
China, an issue which has the capacity to lead to a trade war in the aviation sec-
tor between Brussels on the one side and Beijing and Washington on the other.
This patchwork of carbon markets and the varying the degree to which regional
or domestic carbon regimes are implemented impacts the oil market. Investments
in the oil market, as in any other market, depend on stable expectations on the
‘rules of the game’. Depending on the success of any existing or emerging car-
bon market regimes, the price of carbon will vary and have an effect on the price
of oil. This, in turn, may have negative implications on investment choices due
to uncertainty among business on how future low-carbon policy choices might
affect their costs. Industry representatives have therefore expressed strong inter-
est in politics defining and implementing carbon regimes – with a clear outlook
on design and timing. Furthermore, as the OECD signals its desire to move to-
wards low-carbon economies, there is an even lower incentive for producer coun-
tries to make the necessary investments unless policies are set in place that pro-
vide for clear a outlook on the implementation and consequences of low carbon
policies. Taken together, these uncertainties can lead to an environment of price
volatility – something which is harmful to both producers and consumers alike.
3.3 Opportunities for Transatlantic Cooperation
While most observers on both sides of the Atlantic would subscribe to the gen-
eral statement that a market provides the most effective allocation mechanism
Addressing Carbon Emissions and Oil Price Volatility
23
for any commodity, including energy, markets themselves do not exist in a vacu-
um. They are created by states and maintained by state agencies and institutions
– on a national or global level. These institutional foundations of energy mar-
kets require constant overhaul and adjustment. In light of the key challenges de-
scribed above, there are a number of opportunities for the EU and the U.S. – as
the core and driver behind existing global energy governance structures – to en-
sure that the institutional foundations underpinning the global oil market are in-
clusive and effective.
3.3.1 Reforming the International Energy Agency
As the share of global oil consumption shifts from the OECD to the non-OECD
world, coupled with the emergence of a new low carbon energy paradigm among
mostly Western nations, the primary transatlantic goal must be to ensure cooper-
ative outcomes and a transparent, effective and efficient way to account for new
players demanding their share of the cake – be it new consumer economies en-
tering the global oil market or new industries.
At present, the only existing organization functioning as both a regulatory au-
thority and a global hub for oil market information is the International Energy
Agency. As discussed above, the organization faces a considerable challenge to
its original mandate of facilitating a collective consumer response to potential oil
supply shocks. As the overall share of the oil market represented by the strategic
oil stocks of IEA members continues to fall, the ability of consumers to effective-
ly hedge against an oil supply shock is compromised. Therefore, it is of crucial
interest for the transatlantic alliance to ensure the IEA continues to serve a func-
tional role in global energy governance by making the Coordinated Emergency
Response Measures (CERM) fit for the future. This can only be accomplished by
either providing the proper incentives to consumers such as China and India to
join the organization, namely through the elimination of the OECD link and by
reforming the IEA’s out-of-date voting mechanisms, or to design an alternative
system of cooperation which incorporates emerging economies into emergency
response measures. Either way, reforming the IEA is truly a multilateral endeav-
or which requires a strong transatlantic core driving the process.
3.3.2 Improving Market Transparency and Investment Planning
The shifts in consumption and production patterns and the carbon pricing chal-
lenge stressed above lead to considerable implications for market fundamentals,
including levels of supply and demand, price formation, investment planning and,
of course, accurate information for measuring these. In order to ensure that the
oil market can function properly, governance mechanisms are needed which in-
clude transparency and planning security through dialogue among consumers
and producers as well as long-term policy certainty regarding the price of carbon.
Addressing Carbon Emissions and Oil Price Volatility
24
The key problem in the global oil is not the long-term availability of oil supply,
but ensuring that supply keeps up with demand and that major global players
have a voice in the development of global energy governance and energy devel-
opments. First, only through producer-consumer cooperation emphasizing accu-
rate market information for investment planning can this challenge be addressed
head on. As observers have stressed, the only quasi-institutional arrangement at
the international level for promoting producer-consumer cooperation so far is the
International Energy Forum (IEF). The IEF is unique in that it brings together all
major actors in the global oil market, including the IEA, OPEC, emerging econ-
omies as well as business representatives, to discuss key issues including market
transparency, price volatility, production and consumption rates and investment
planning. The IEF’s Joint Oil Data Initiative (JODI) was constructed in order
to address market transparency by collecting, coordinating and publishing data
representing almost 90 percent of world oil supply and demand (Harks, 2010).
In the absence of a perfect market, the IEF thus represents the best opportunity
for bringing together all relevant players in the global oil market to ensure coor-
dinated efforts in addressing key issues such as market transparency, investment
planning, and supply and demand levels.
Second, in the absence of an effective multilateral response to these, and other,
pressing energy challenges, the role of other informal groupings of major global
players such as the G8 and G20 are also important (Graaf and Westphal, 2011).
Whereas the IEF can play a key role in ensuring market transparency and in-
vestment planning, the G8 and the G20 can provide complementary platforms
for discussing key energy issues and broader trends. While the record of the G8
and G20 on energy issues is spotty at best, the groups can serve to provide a po-
litical impetus for group members and existing institutions of global and region-
al energy governance to address existing and future challenges.
While China’s participation in existing mechanisms of global energy governance
has been limited, anecdotal evidence suggests this may be changing. At the Fifth
World Future Energy Summit on 16 January 2012, Chinese Premier Wen Jiabao
stressed the need for a better global energy market governance mechanism with-
in the G20 framework to ensure fair, reasonable and binding international rules
to make the global energy market more secure, stable and sustainable. (Ministry
of Foreign Affairs of the People’s Republic of China, 2012). This represents both
a positive development as well as a key opportunity for the transatlantic alliance
to ensure more effective and inclusive means of governing global energy markets.
Finally, with regards to the carbon pricing challenge, as a global market for car-
bon is highly unlikely in the coming years, regional solutions will prevail and it
is thus crucial to find ways to link different pricing regimes and have clarity re-
garding how they contribute to a global GHG emissions trajectory. Moreover,
as the widespread development and deployment of renewables depends on being
cost-competitive with fossil fuels such as oil, a predictable oil (and carbon) price
is crucial for planning a low-carbon transition.
Addressing Carbon Emissions and Oil Price Volatility
25
3.4 Policy Conclusions
• To prepare for and ensure an effective consumer response to a supply cri-
sis, China and India should be invited to actively participate in the IEA’s
exercises of its Coordinated Emergency Response Measures.
• Producers and consumers must coordinate to a much greater extent than
currently being undertaken. The International Energy Forum and its Joint
Oil Data Initiative represent the best existing mechanism for ensuring mar-
ket transparency through reliable data and cooperative decision-making.
• The G8 and the G20, as high-level and informal fora for discussing crucial
global issues amongst major global actors, should work towards creating a
common vision for global energy governance and translate this vision into
policy recommendations for group members and the more functional in-
stitutions of energy governance, for example, the IEA, OPEC and the En-
ergy Charter Secretariat. The G20 in particular, as a result of China’s new
policy stance on the need for more effective energy market governance, is
set to play a key role.
• As a uniform global carbon price is unlikely any time soon, aligning the
carbon pricing policies of existing regional, national or sub-national re-
gimes is crucial in order to ensure a more transparent and predictable in-
vestment environment.
Addressing Carbon Emissions and Oil Price Volatility
26
About this Paper
This paper is the result of a two-year research and dialogue program entitled
“Common Goals – Different Approaches? Strengthening Transatlantic Cooper-
ation on Global Energy Issues,” conducted by the Global Public Policy Institute
(GPPi) and the Brookings Institution. The program was funded by the Europe-
an Commission.
The Global Public Policy Institute
GPPi is an independent think tank based in Berlin. It’s mission is to develop in-
novative strategies for effective and accountable governance and to achieve last-
ing impact at the interface of the public sector, business and civil society through
research, consulting and debate.
The GPPi Approach
•
GPPi is an independent and non-profit institute. GPPi receives project fund-
ing from foundations as well as from project partners and clients from the
public and private sectors. The institute reinvests profits from consulting
activities into its research work.
• GPPi builds bridges between research and practice. The institute’s interna-
tional team combines research and public policy expertise with manage-
ment consulting skills. GPPi fosters the exchange of knowledge and expe-
rience between researchers and practitioners.
•
GPPi promotes policy entrepreneurship. Its work strengthens strategic com-
munities around pressing policy challenges by bringing together the pub-
lic sector, civil society and business.
• To learn more about GPPi, please visit www.gppi.net.
The Brookings Institution
The Brookings Institution is an independent, nonpartisan organization devoted
to research, analysis, education, and publication focused on public policy issues
in the areas of economics, foreign policy, and governance. The goal of Brookings
activities is to improve the performance of American institutions and the quali-
ty of public policy by using social science to analyze emerging issues and to offer
practical approaches to those issues in language aimed at the general public. For
more on the Brookings Institution, please visit www.brookings.edu.
Addressing Carbon Emissions and Oil Price Volatility
27
Supporters
This program was supported by a generous grant from the European Commis-
sion, as well as support from the Draeger Foundation and Central European Uni-
versity (CEU) in Budapest, Hungary.
The European Commission
The European Commission supports the joint GPPi/Brookings “Common Goals
– Different Approaches? Strengthening Transatlantic Cooperation on Global
Energy Issues” project as well as the “Transatlantic Energy Governance Dia-
logues” conference series through a generous “EU-U.S. Policy Research and De-
bate” grant. More information on the European Commission can be found at
http://ec.europa.eu/index_en.htm.
The Draeger Foundation
The Draeger Foundation, founded in 1974, is a non-profit institution committed
to the promotion of science and research, especially in the field of national and
international economic and social order. By encouraging the intensive exchange
of experience and ideas regarding issues which are of importance for our future,
the Draeger Foundation endeavors—within the bounds of its capabilities—to
make a contribution toward improved international relations. More information
can be found at www.draegerstiftung.de. For more on this program, please visit:
www.globalenergygovernance.net.
Central European University (CEU)
Located in one of Europe’s most elegant capital cities, Budapest, accredited in
both the U.S.A and Europe, CEU offers a uniquely international atmosphere of
academic excellence, critical reflection, and social engagement. CEU students
come from over 100 countries of five continents, our faculty – from 30 countries.
CEU stresses both academic excellence and public policy relevance of its teach-
ing and research. We focus on key issues of the 21st century ranging from cli-
mate change to democratic governance and from international security to deep-
er understanding of history and philosophy. To learn more about CEU, please
visit www.ceu.hu.
Addressing Carbon Emissions and Oil Price Volatility
28
Endnotes
Argonne National Laboratory (2011). Ground Being Laid for EV-Grid Compatibility
in the U.S. and EU. http://www.transportation.anl.gov/media_center/news_sto-
ries/2011_us_eu_ev_centers.html
Behr, Timo, Jan Martin Witte, Wade Hoxtell and Jamie Manzer (2009). Common
Objective, Diverging Regimes? Prospects and Challenges in Building a Global Carbon Mar-
ket. Berlin: Global Public Policy Institute
China Economic Review (2011). Smart call. http://www.chinaeconomicreview.
com/node/26444
Conrad, Björn and Mirjam Meissner (2011). Catching a Second Wind: Changing the
Logic of International Cooperation in China’s Wind Energy Sector. Berlin: Global Pub-
lic Policy Institute
Council of the European Union (2010). EU-US Energy Council Press Statement. h t t p://
www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/117862.pdf
Gavard, Claire, Niven Winchester, Henry Jacoby and Sergey Paltsev (2011). What
to expect from Sectoral Trading: A US-China Example. Cambridge, Mass.: Massachus-
setts Institute of Technology
Goldthau, Andreas (2011a). Challenges in Global Oil Governance. In R. Looney, ed.
Handbook of Oil Politics. London: Routledge.
Goldthau, Andreas (2011b). A Public Policy Perspective on Global Energy Security. In-
ternational Studies Perspectives, December.
Graaf, Thijs Van de and Kirsten Westphal (2011). The G8 and the G20 as Glob-
al Steering Committees for Energy: Opportunities and Constraints. Global Policy, Sep-
te mber 2011.
Harks, Enno (2010). The International Energy Forum and the Mitigation of Oil Market
Risks. In Andreas Goldthau and Jan Martin Witte, eds., Global Energy Gover-
nance: The New Rules of the Game. Washington, DC: Brookings Institution Press.
IEA (2010). World Energy Outlook 2010. International Energy Agency.
IEA (2011). World Energy Outlook 2011. Paris: OECD.
Ministry of Foreign Affairs of the People’s Republic of China (2012). Wen Jiabao
Attends the Fifth World Future Energy Summit Opening Ceremony and Delivers a Speech.
http://www.fmprc.gov.cn/eng/zxxx/t897067.htm.
Addressing Carbon Emissions and Oil Price Volatility
29
Seligsohn, Heilmayr, Tan and Weischer (2009). China, the United States, and the Cli-
mate Change Challenge. Washington, DC: World Resources Institute
The Economist (2011). Big Oil’s bigger brothers. http://www.economist.com/
node/21534794
U.S. Department of State (2009). Memorandum of Understanding to Enhance Co-
operation on Climate Change, Energy and the Environment. Washington, DC:
WRI (2011). How Does China’s 12th Five-Year Plan Address Energy and the En-
vironment. http://www.wri.org/stories/2011/03/how-does-chinas-12th-five-year-
plan-address-energy-and-environment.
Addressing Carbon Emissions and Oil Price Volatility
30
Global Public Policy Institute (GPPi)
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