We need new energy governance

Globally, our systems are flawed. Better internationally agreed rules are essential for our economies and environment

Energy lies at the heart of the world's most pressing global challenges. Yet at both global and national levels, energy is poorly governed. The fiasco of the Copenhagen climate summit is just one illustration of how far the world is from being able to bring about the desperately needed transition to a system of sustainable and secure provision of energy services.

The key role of energy in global problems is clear. Some two-thirds of the greenhouse gas emissions causing climate change trace back to fossil fuel use. A renewed scramble for oil is raising fears of a new generation of geopolitical conflicts. Global economic instability correlates strongly with energy-price volatility. Economic development is in significant part defined by the process of overcoming energy poverty, yet 1.6 billion people still lack access to even the most basic energy services.

Only recently has it become clear that these seemingly disparate issues are a collective manifestation of a dysfunctional energy system. Globally and at the national level, energy is still conceptualised and managed in terms of energy sources, not in terms of the energy services these sources provide. Yet consumers have no particular interest in what sources of energy fuel their production, transportation, lighting, heating, air conditioning, or appliances. The existing paradigm serves to rigidify decision-making at a time when extraordinary flexibility and rapid change are essential.

At the global level, a host of intergovernmental organisations is tasked with addressing various pieces of the energy puzzle. Among these, the most conspicuous is the International Energy Agency (IEA). Created by oil consumers in the 1970s in response to the Opec price shocks and embargoes by Arab oil exporters, the IEA has succeeded in establishing and supervising a system of national oil stockpiles, which has helped to prevent a recurrence. With a small but highly competent professional staff, the IEA has also become the primary source for the world's energy statistics and is playing a key role in the climate debate.

But it is nowhere near the truly international organisation that its name implies. The IEA was established by and for a small number of wealthy oil-importing countries, under the aegis of the OECD. Its membership remains restricted to OECD countries, even though surging demand from non-member countries like China and India is rapidly undermining the IEA's ability to speak for, and co-ordinate responses among, oil importers as a group. Although the IEA's mandate has expanded beyond oil since the early 1990s to include broader energy policy, several of its own member governments, led by Germany, found its record on renewables so unsatisfactory that they recently established the International Renewable Energy Agency, whose membership is open to all.

Other key intergovernmental organisations face their own limits. The International Energy Forum, which grew out of a series of meetings of energy ministers, is intended to provide a common forum for fossil-fuel producers and consumers. It has taken some useful steps that may help to stabilise markets, such as the Joint Oil Data Initiative, but it plays a relatively minor role. The Energy Charter treaty has failed to bring Russia into a rule-based framework for international transit via oil and gas pipelines. The World Bank's energy financing remains overwhelmingly dedicated to fossil fuels, despite limited efforts to establish funding for low-carbon energy.

Numerous networks and partnerships have emerged in response to the gaps in global energy governance. For example, the Renewable Energy and Energy Efficiency Partnership, founded in the UK, has grown into a multi-stakeholder body supporting renewables and efficiency in numerous countries. So far, however, such initiatives remain quite small. They will not, in the foreseeable future, operate on a scale that can foster a rapid transition away from fossil fuels or provide energy services to billions of new consumers.

As is true of other global problems, a lot depends on the capacity and willingness of the most powerful national governments to act collectively. Yet these countries' deeply flawed systems of national energy governance will make such action all the more challenging.

Indeed, in many ways, the situation has been getting worse. Over the past two decades, advocates of privatisation have promised greater efficiencies and lower energy prices, but the failure to accompany privatisation with appropriate regulation and enforcement has left many countries with poorly governed and often deeply corrupt energy sectors.

Moreover, given the vast profits available under the current system, the struggle to bring about a significant energy transition faces stiff resistance from deeply entrenched vested interests. Market forces alone are unable to cope with major externalities such as greenhouse gas emissions, with overwhelming government control over major energy sources such as oil, and with huge numbers of people too poor to constitute a market.

Our fractured landscape for energy governance was not planned. It has evolved piecemeal, with little co-ordination among its various parts. If we are to avoid paying a high economic, strategic, and environmental price for its shortcomings, a better system of developing and enforcing internationally agreed energy rules is essential.

Copyright: Project Syndicate, 2010.