The prospects for G20 energy reform

OPINION: At the upcoming G20 Brisbane Summit in November, leaders look set to consider reform of the global energy governance architecture. This would mark the first time that G20 leaders have actively considered whether the existing international energy architecture, largely created in response to the oil shocks of the 1970s and dominated by the International Energy Agency (IEA), is sufficient to meet the rapidly changing demands of the global energy sector, a sector which now accounts for two-thirds of global greenhouse gas emissions.

The global energy sector is experiencing a transformation. Nations that were major energy importers only a few years ago are becoming exporters, exporters are becoming large consumers, and previously small consumers are now the prime source of global demand for oil and gas. China is now the world’s largest energy consumer and is set to become the largest oil importing country. India is projected to become the largest importer of coal within a decade. And the US, once the largest energy consumer, and dependent on Middle Eastern oil, could be on track for energy self-sufficiency with the revolution in unconventional oil and gas supplies. In other words, the global energy sector is no longer dominated by a small band of energy-importing OECD countries in Europe and North America. Rather, it is quickly being reconfigured by the growing demand for energy from non-OECD countries, especially in Asia and the Middle East.

However, these changes are also taking place in a carbon constrained world. “As the source of two-thirds of global greenhouse gas emissions, the energy sector will be pivotal in determining whether or not climate change goals are achieved”. Put simply, the climate problem is an energy problem. Yet energy emissions continue to rise and the likelihood of reducing global temperatures to 2˚C, the so-called guardrail for preventing dangerous climate change, appears the hope of a previous decade, not this one. If the world does not take action to reduce global greenhouse gas emissions it is projected that by the end of the century average global temperatures will rise by 5˚C above pre-industrial levels.

The international energy architecture has not kept pace with these rapid transformations and it is no surprise that there is an emerging consensus that a ‘global energy governance gap’ exists. As Florini points out, “the current system of global energy governance is a mess, with many actors, many priorities, little coherence, and limited effectiveness”. Hirst and Froggatt argue that “all this points to the need for a genuinely global body for cooperation on energy policy including all major energy consuming countries and working with energy producers in areas where they have interests in common.”

While there has been much discussion in the G20 on the potential role of the G20 on energy, there is much less on what conditions need to be met for the G20 to act in a significant fashion. In other words, to drive changes that secure the reliable and affordable supply of energy on the one hand, and the transformation to a low carbon energy future on the other. If there is a general recognition among G20 countries that such reforms are required, why is it not happening on a global scale? What is required for the most powerful countries in the world to reform the governance system in a significant fashion? This paper takes up this task and examines in turn the principal conditions that will need to be met, if the G20 is to drive more than piecemeal change.

Conditions for G20 energy reform

Unilateral leadership from the United States or China

For most of the twentieth century, the United States has been the most powerful state in the world and arguably remains so today. US leadership has also been crucial to the success of the G20. Its establishment as a leaders’ summit owed much to US coordination, and two of the first three summits were hosted in the United States (in Washington, DC in 2008 and Pittsburgh in 2009). In addition, it is the major donor to most international institutions, including the IEA, the predominant energy organisation. As a result, should the United States decide to take a leadership role on energy in the G20 there is a good reason to believe that global energy governance reform can be achieved.

However, while the United States remains a constructive member of the G20, under President Obama it has not been inclined to lead. To a large extent, this reflects the fact that the United States is able to serve its interests in other forums and via other means. For example, the United States has been more comfortable using bilateral channels, such as the US-China Strategic and Economic Dialogue, to manage its relationships with emerging economies. There is also a general antipathy in the US Congress to new multilateral initiatives, evident in recent delays on the passage of multilateral trade agreements and a refusal by Congress to grant the president fast-track authority to negotiate such agreements.

That said, the Obama administration has recognised the need to recast the existing international energy architecture. For example, in 2009, then US Secretary of State, Hillary Clinton, publicly acknowledged that IEA membership should be enlarged to include China and India, and the United States has supported the IEA’s association initiative to engage the major emerging economies that remain outside the IEA, by virtue of the fact that they are not OECD members. It is also likely that the United States is open to the possibility of a new world energy organisation. Yet at the moment it does not view such an institution as realistic, nor is it prepared to invest the political capital to drive such a reform. Instead, it appears that the preference of the Obama administration is to pursue its energy goals bilaterally and within the existing international architecture.

After the United States, China is the only other state that could unilaterally drive global energy governance reform through the G20. As the world's largest energy consumer and largest emitter of greenhouse gases, it is now at the centre of every discussion on global energy policy. In fact, China and the United States are now the two largest energy consumers, the two largest oil consumers, the two largest coal producers and consumers, and the two largest carbon emitters. As a result, in the absence of a US desire to lead the G20, China stands as the obvious, and likely the only alternative state that could drive reform.

China has used the G20 to question other areas of global governance, such as the governance of the IMF and the World Bank following the global financial crisis. And China has expressed concern about the fragmented nature of the current international energy architecture and has supported moves to reform existing institutions. China was one of six countries in 2013 to issue a joint statement with the IEA supporting the association initiative. Yet even with this initiative China will not be a member of the IEA, and it is hard to believe that it will be willing to accept the rules and norms of a system in the long term without having a voice in how it is run. In short, there are reasons to expect that China could be motivated to drive substantive global energy governance reform.

Yet China so far seems to have accepted the existing international order. Although China has clearly become more active in multilateral forums, it has not been inclined to take a leadership role and advocate new institutions or globalise regulations. As others have pointed out, China may appear more confident on the international stage, but this only goes so far. While it is certainly more comfortable in the G20 as it never was in the G8+5 process, Chinese leaders have continued to argue in multilateral settings that China is a developing country “and cannot take on a level of obligation that goes beyond its capacity”.

Further, and equally importantly, China, much like the United States, appears to have no clear preference or vision for a future multilateral energy architecture. It is turning to bilateral and regional channels to secure its energy objectives. It has used bilateral dialogues with the United States and Japan to manage energy issues and its national oil companies are active in over 30 countries, where they have signed long-term contracts to secure oil and gas supplies.[13] China has also used the Shanghai Cooperation Organization (SCO) to promote regional energy cooperation, which it founded in 2001, and whose members include Russia and Kazakhstan.

Coalition leadership from the BRICS

In the absence of a powerful state providing unilateral leadership, reform could come from a coalition of states. In multilateral forums, coalitions that defend a common position by explicit coordination can provide a powerful force to direct negotiations toward their preferred outcome. In the context of the G20, the BRICS – Brazil, Russia, India, China and South Africa – are the most likely coalition to drive energy reform, not simply because of their growing economic power, but because the transformations in their economies are driving the rapid transformation of global energy markets and at the same time they are excluded from the principal international energy organisation, the IEA.

However, the behaviour of the BRICS coalition suggests they are unlikely to drive substantive global energy governance reform in the near term. First and foremost, they have used their rising economic power to act as a veto coalition, to obstruct initiatives they do not support, rather than to drive reforms they do. The BRICS have questioned the legitimacy of the existing global order, but they have not sought to transform it. As has been documented elsewhere, the BRICS used the global financial crisis in 2008 and their temporarily increased bargaining power, due to their relative economic stability, to question the legitimacy of the global financial institutions, namely of the IMF and World Bank.[14] And, in return for agreeing to provide increased financial resources to the IMF, BRICS countries were able to force the G20 to undertake a series of quota and governance reforms of the IMF to increase their voting power. Yet even when the latest of these reforms is implemented, the so-called 2010 governance reforms, the United States will still hold a voting share of 16.5 per cent (compared to 6 per cent for China and just over 2 per cent for Russia, India and Brazil); enough to veto any IMF decision.

Second, the BRICS do not have a clear preference or vision for a future international architecture, be it for finance or energy. In the case of finance, they are quick to chastise the United States or the EU on economic and non-economic issues in G20 meetings, notably the United States’ failure to ratify the 2010 IMF governance reforms, but they are less eager to put forward constructive alternatives that they are united behind. It is the same on energy. For instance, the BRICS have supported the IEA’s association initiative and its outreach to other energy bodies, such as the IEF, but they have not articulated a vision for a future system of energy governance. In short, the BRICS have been able to force piecemeal changes to the existing order, but they have not been willing or able to drive global governance reform in a significant fashion. In other words, they have resisted the type of leadership that has characterised US behaviour in this arena.

Crises

Given the existing preferences of the United States, China and the BRICS, it is likely that substantive reform will require something to change, some form of crisis to shift behaviour.

Major crises have the potential to transform the context in which G20 negotiations on energy take place. Others have noted the role that crises can play in shifting state behaviour.[18] The most common pathway is where a dramatic event, or series of events, captures the imagination of mass publics, after media organisations dramatise the event, and state actors are forced to act to placate the public and the media. The Bhopal accident in 1984 and Chernobyl accident in 1986 are classic cases of events that catalysed mass public reactions and forced states to act both domestically and internationally.

Exogenous shocks are not new to the G20. After all, the G20’s legitimacy has largely been determined by its success as a crisis committee, particularly following the global financial crisis. Without a crystal ball it is difficult to know whether an energy crisis is on the horizon, but it is not hard to imagine a scenario. After all, the IEA was only established in response to the oil shocks of the 1970s, and given the current demands on global energy markets from a new cast of consumers and producers, it is only a matter of time before a shortfall of energy in a major consuming nation, such as China following a disruption to oil trade routes, or Europe following a crisis with Russia, or the United States following another hurricane Katrina, sparks a response from the G20.

Conclusion

Without the unilateral leadership of the United States or China, or leadership from a coalition of states, most likely the BRICS, which is mobilised by a crisis that shifts the behaviour of these actors, it is difficult to envisage the conditions under which substantive global energy governance reform will occur. Instead, what we are likely to witness in the energy arena are piecemeal changes to the existing order, such as the IEA association initiative, rather than an attempt to transform the existing international energy architecture to match the transformations in global energy markets.

Christian Downie is a Vice Chancellor’s Postdoctoral Research Fellow at UNSW's Faculty of Arts and Social Sciences.

This opinion piece was first published by the Lowy Institute.