Reforming institutions and markets

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Institutional reform at global to local scales will be needed to push forward and to enable the transitions discussed here. Secure energy supplies are essential, but governments must not turn to just one or a few technical fixes. International trade in energy enhances security, provided there are diverse suppliers and some flexibility in fuel use in the importing market. Of course there is a prisoner's dilemma here, and the UK experience is instructive.

The UK market is now open to fuel and electricity imports from around the world. Other nations have embraced open markets more hesitantly, however, which is seen as unfair by UK energy industries. Persuading other countries to open their markets to our exports has been a UK policy priority, but with its oil and gas reserves now largely depleted a more pressing consideration should be to remain on good enough terms with fuel exporting countries that are willing to sell.

This is less precarious than it appears. Fossil fuels are of no value to exporting countries' governments unless they can sell into international markets: their market insecurity balances our energy insecurity. This may be an unattractive equation, but experience has shown the dangers and costs involved in trying to change it using military force or technical fixes such as nuclear power. Policies and diplomacy to improve energy security should proceed from an assumption that national markets for oil, gas and coal will diminish rapidly. Cutting overall demand and meeting as much as possible of the remainder using wind, sun and wave power must be the medium-term goal.

In the interim, diversifying into production and importation of solid and liquid biofuels and low carbon electricity (or hydrogen) would improve security, and, with strong market regulation, would reduce global emissions. The European Commission plans to introduce certification standards for liquid biofuel producers exporting into the EU market. These must ensure significant net savings in emissions, and that production does not destroy or degrade wildlife habitats, or increase food prices for the world's poorest. Substituting fossil fuels with unsustainable biofuels would be counterproductive: overall fuel demand will have to be reduced, and sustainability criteria rigorously applied to fuels and electricity servicing the remaining demand.

At the international level the EU has great potential as a forum for making binding agreements that would reduce carbon emissions, and for making the case for similar action by trading blocs around the world. The World Trade Organisation, the World Bank and G8 should be early targets for reforms to make global trade and investment more climate friendly. International agreements on climate have been a remarkable diplomatic success, but international energy policy as such remains in its infancy. The EU needs to show international leadership by vigorously pursuing its ambitious climate and energy targets.

Technology transfer to developing countries remains a priority issue, and presents significant economic opportunities for all concerned if approached in tandem with stronger innovation and industrial policymaking. New forums for dialogue are necessary for international climate and energy policy to become effective, for example to share international experience and to understand how national circumstances require policies to be adapted. A high-level sustainable energy summit for world leaders representing both developed and developing countries is needed, convening regularly, for example once every two years. However, such an institution needs substance and political authority in addition to its roles in promoting dialogue and learning.

At the national level this should be matched by creation of forums to integrate policy across all sectors with climate and energy priorities. This should bring together all departments, regulators, utilities, NGOs, business leaders and policy analysts to map out paths and commitments to sustainable energy. Building legitimacy, and learning to make better use of public and scientific knowledge and evidence, should be central considerations in institutional design. Section 14.4 elaborates on procedural recommendations to these ends.

The EU ETS has potential to become a very powerful mechanism to reduce emissions. An economy-wide carbon tax remains a good option, but trading schemes could be adjusted to equivalent or possibly greater effect. This could be achieved through the following package of measures. Firstly the caps on total emissions should be agreed on the basis of scientific evidence, rather than as the sum of national targets. Secondly national quotas should be distributed on a burden-sharing basis, in the same way as Kyoto obligations were negotiated. Thirdly the cap should be stringently enforced, and adjusted downwards to reflect savings in emissions arising from initiatives outside the trading scheme. Lastly, to make the carbon price apply across the economy, governments should introduce an 'upstream' trading scheme for fuel and electricity suppliers serving customers outside the EU ETS.

Achieving political agreement on radical institutional and market reforms of this kind will be a very difficult challenge. A positive first step towards making such agreements possible would be to better enable entry of new players into energy systems. In Europe current regulatory and fiscal regimes favour large incumbent energy firms, and there has been a trend towards mergers among these, tending towards oligopoly and concentrated lobbying power. Better enabling small-scale energy and energy service suppliers to participate would weaken the political lobbying power held by large fossil fuel companies, as well as helping to reduce emissions. Providing attractive and predictable financial incentives for these small companies could thereby stimulate demand for more radical reforms. Innovation and market entry could also be stimulated by direct regulation, for example removing the most energy-inefficient products such as conventional light bulbs from markets.

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