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The role of international law and economics in renewable power

The UN has set out its ambition for an international policy on sustainable energy. But is the UN’s lead enough? What will it take to make nations follow? Creating and harnessing incentives to participate…

To stop some countries doing all the renewable energy work and others doing none, we need incentives to cooperate. Stefan Svensson

The UN has set out its ambition for an international policy on sustainable energy. But is the UN’s lead enough? What will it take to make nations follow?

Creating and harnessing incentives to participate in (and comply with) international regulation is vital if the UN plan to reduce global energy-based carbon emissions is to be achieved. And economic theory can help law-makers focus on what is most needed in order to do it.

Renewable energy targets provide clear goals

The UN’s Sustainable Energy for All (SE4ALL) initiative has proposed a global renewable energy target of 30% by 2030 (doubling the current proportion of roughly 15%). It has emphasised the importance of the initiative by declaring 2014–2024 as the Decade of Sustainable Energy for All. In theory, this SE4ALL goal will be achieved primarily through domestic action, which has already begun.

Australia is one of 118 countries with domestic renewable energy targets. Recently, the Australian Climate Change Authority recommended maintaining the current Renewable Energy Targets. This will provide a degree of market certainty and bolster incentives for ongoing investments in renewable energy.

However, not all 118 renewable energy targets are equal. The effectiveness, stringency, degree of compliance and domestic enforcement will vary between countries. As a result, their collective effectiveness at reducing greenhouse gas emissions, in line with urgently needed global energy “decarbonisation”, is likely to be sub-optimal and may not achieve the SE4ALL renewable energy goal.

Achieving the SE4ALL renewable energy goal will require unprecedented political, financial and technological cooperation and coordination at the international, regional and national levels, by government, business and civil society. International law can play a crucial role in providing the modalities, incentives and process for effective international cooperation.

International regulation of renewable energy is limited

At the international level, meaningful and binding regulation of renewable energy is scarce. For example, the UN climate change regime does not create enforceable obligations to use or increase the share of domestic or global renewable energy (although renewable energy does constitute a large proportion of Kyoto Protocol Clean Development Mechanism projects).

Historically, concerns for national sovereignty and energy security policy have caused widespread aversion to international regulation. These concerns have also spawned a set of particularly nasty versions of what economists call “problems of collective action”.

Economic theories of human behaviour predict that in specific circumstances individuals (and, by proxy, countries) will have trouble cooperating. This is because the strategy that serves each individual best (regardless of what the others do) is the selfish strategy. Paradoxically, individuals would be better off if they could find a way to trust each other and cooperate, as demonstrated in the prisoner’s dilemma.

Although international cooperation with regard to renewable energy has grown with the recent creation of the International Renewable Energy Agency, its powers are limited. It cannot establish binding renewable energy targets.

It is possible for individuals to naturally cooperate under specific circumstances (see the work of the late, great political scientist Elinor Ostrom). But cooperating to achieve a unified global energy policy is unlikely to be one of those cases, without clear incentives enshrined in international law. This could be facilitated through, for example, “top-down” internationally binding country-specific targets and timetables for increasing the global renewable energy share. Other approaches include a “bottom-up” approach where states voluntarily pledge renewable energy targets.

Providing incentives for global renewable energy generation

To be effective at galvanising international cooperation, incentives for participation and compliance with international agreements are necessary. One incentive is clear, objective, common goals for action: a timetables and targets approach. This approach can encourage reciprocity (mutual adherence to obligations) among countries, which may then foster increased participation, leading to improved international governance and a stronger rule of law. A virtuous cycle could be established. This would be especially so for targets that span decades, like SE4ALL, rather than five years, like the Kyoto Protocol’s first commitment period.

There are numerous other incentives to support quantified targets. Financial assistance could be provided to developing countries to subsidise their shift to substitute products, such as from coal to renewable sources of power (who pays, and on what basis, is another question). This is also likely to drive innovation and create markets. Technology transfers can help “leap-frog” countries into cleaner energy sources (though intellectual property issues will likely persist).

Allowing developing countries a grace period before they must comply with quantified targets is a powerful incentive, as seen in the Montreal Protocol that addresses CFCs. So too was the threat of trade restrictions against non-members, which goaded higher levels of membership. In addition, knowledge transfer, institutional support and international monitoring can assist implementation and compliance.

While the context of the Montreal Protocol (which targeted specific chemicals, and where cost-effective substitute products were readily available) differs to energy production (with a wide variety of energy sources and costly capital), private investment in renewable energies is escalating, despite uncertain domestic and global regulation. With strong leadership and a more cosmopolitan view of international law (for the global good), existing tools can be employed to facilitate advancement of the SE4ALL renewable energy goal.

Economics can guide agreement design

Economic research suggests that some of these incentives can be used to improve the chances of successful cooperation. For example, while cooperation is more likely when there is a clear socially optimal outcome, parties are reluctant to cooperate unless the burden involved has been fairly distributed. Perceptions of what is “fair” can themselves be influenced by self-interest. The financial assistance and technology transfers discussed above could be used, in part, to address this problem. And to the extent that technology transfer can involve collaboration between countries to meet each others' obligations, they can also help break down the barriers between “us” and “them” that often frustrate cooperation.

Even if and when a “fair” set of targets is established, studies in behavioural economics indicate that penalties for non-compliance are a vital part of ensuring cooperation. Similarly, a self-imposed commitment device of some kind can help parties keep their promises. An agreement on renewable targets could, for example, incorporate contributions from nations into a fund which can only be recovered upon meeting their targets. This may offer a way to penalise non-compliers, while also serving as a kind of commitment device to eliminate cheap talk in negotiations.

Incorporating such research into international law is no simple matter, and requires careful consideration in order to minimise the unintended consequences of regulation. Existing attempts to consider such prospects must now be joined with renewed efforts to do so.

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24 Comments sorted by

  1. William Ferguson

    Software Developer

    Excellent article! So the question is, what's the best way of getting the appropriate incentives and collaborative agreements in place?

    What can be done from a grass roots levels to get some rational action to be taken.

    1. Walter Greencon

      Fact Seeker

      In reply to William Ferguson

      William "What can be done from a grass roots levels to get some rational action to be taken."

      This attitude recalls similar statements made in the 1970's during the panic to stop global COOLING!

      Luckily no action was taken.

    2. Mark Lawson

      senior journalist at Australian Financial Review

      In reply to William Ferguson

      Whatever Schneider said at the time there most certainly was a scare about global cooling in the 1970s..cover story in Time magazine and all that.. It was, however, quite minor and short lived. teh clip you give is in fact after the "crisis" had eneded and temperatures had turned up

      You'll find its quite common for people to deny that there was any talk about a crisis after the crisis has not lived up to expectations. The classic is the Y2K bug craze of 1999. People have told me that it was ridiculous to suggest that there was any concern over a Y2K bug before the turn of the century, its just a myth. My vivid recollection is that you couldn't move fore stories about the Y2K bug before the date.

    3. Andrew Vincent

      Marketing . Communications . Multimedia

      In reply to William Ferguson

      Yes Mark there were a few sensationalised reports of cooling - but not amongst scientists. There were actually more scientists predicting warming in the 70's.

      graphs p. 13.

      To claim there was some kind of scientific consensus on cooling is simply false.

    4. John Hunter

      University Associate, Antarctic Climate & Ecosystems Cooperative Research Centre at University of Tasmania

      In reply to William Ferguson

      Mark: So now you are an expert on computer science as well as climate science - congratulations - a polymath even. My view, and the view on numerous people far more qualified in this subject than I, is that there was a problem perceived well before 2000 in much of the computer software in current use. This software would have failed, or at least malfuntioned if nothing had been done to correct it. However, much was done to correct it, and the outcome was that few Y2K problems emerged when 2000 began…

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    5. Felix MacNeill

      Environmental Manager

      In reply to William Ferguson

      Mark, I think you're confusing the world of journalism with reality.

      As Andrew correctly points out, the 'global cooling' thing was a pure media beat-up.

      And as John Hunter points out, Y2K actually was a bit serious - it's a classic case of a crisis/problem not occuring precisely becuae we listened to the warnings and took sensible precautionary action and NOT because "as ever the Cassandras and doom-predictors are wrong and will always be wrong..."

  2. John Newlands

    tree changer

    What is the real objective here? I thought it was low emissions regardless of technology. Instead of renewable energy why not insist x% of electricity is transmitted through purple coloured wires?

    Secondly there seems to be a disturbing emphasis on punishing those who don't fall into line. I think within a year or two we will see a major admission by Germany that non-hydro renewable energy is fickle and expensive. For some reason the Spanish experience is ignored. It looks increasingly as though…

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  3. Ngoc Luan Ho Trieu

    logged in via Facebook

    Yes, the unintended consequences of subsidies or provision of incentives often happen.

    Also, history has shown even oil cartel formed by just a few major oil producing countries has often failed resulting damaging wars to the world in spite of the hard tangible target of maximizing the pool of profits for its members so it is very tough for the ambitious but almost powerless UN to coerce non-compliers into rank with soft targets on renewable power.

    More economical is to focus on R&D to bring unit price of renewable energy down well below even the cheapest fossil sources such as coal, gas, shale oil. I think the UN can afford this through UNESCO, IEA, its many other affiliated science and technology organisations throughout the world.

    1. Robert McDougall

      Small Business Owner

      In reply to Ngoc Luan Ho Trieu

      Renewable energy generation is already cheaper per megawatt hour than construction of new fossil fuel power stations and investment in new renewable energy is outstripping new fossil fuel energy investment substantially.

    2. John Newlands

      tree changer

      In reply to Ngoc Luan Ho Trieu

      Some minor overlooked details
      1) because of the RET electricity resellers have to purchase wind and solar whether they want to or not
      2) there are major carrots and sticks eg the LGC subsidy of $33 per Mwh (which should be added to the cost) and the shortfall charge of $65
      3) these claimed low prices of wind and solar are for when available. We expect coal, gas, hydro and nuclear to be there whenever we want. The prices should be 'on demand' if we wanted say a solar powered aluminium smelter.

      Ask yourself this question; if new renewables are so cheap how come we still have coal fired power stations? Will they all be gone in 5 years?

    3. Robert McDougall

      Small Business Owner

      In reply to Ngoc Luan Ho Trieu

      i would say its about getting a return for investments already made.

      We still have coal fired power stations as they are a legacy and are still productive, but come with a lot of externalised costs, i.e. health, environment, subsidies, community disclocation.

      I don't think that fossil fuels will be replaced in the next five years mainly for the reasons above without getting into dodgy deals between miners, lobbyists, politicians and gold plating.

      The absolute key to renewables taking over…

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    4. Ngoc Luan Ho Trieu

      logged in via Facebook

      In reply to Ngoc Luan Ho Trieu

      Excellent! Free energy from wind, sun, geothermal, wasted biomass must give cheaper energy per energy unit than what one can get from costly fossil fuels. But R&D is needed to increase conversion efficiency and storage costs. UN can direct its money to this to reduce renewable power costs even further. As for biofuels, feedstock supply and cost problems plus CO2 pollution from biofuels still hinder the development of a feasible biofuel industry in Australia (compared to conventional fossil fuel based industry). I think UN R&D can help in this area as many biofuel producers in Australia cannot afford ts own R&D given their cost disadvanges without government's help through reduced excise rate and greenhouse gas trading program (still in its infancy).

    5. Paul Cm

      logged in via email

      In reply to Ngoc Luan Ho Trieu

      Thanks for the link Robert, good news. Have you found a (free) copy of the Bloomberg report?

  4. Paul Cm

    logged in via email

    "...the Montreal Protocol (which targeted specific chemicals, and *where cost-effective substitute products were readily available*)"

    That part there is key. Cheaper alternatives to high emitting energy sources are needed, that (IMO) should be the primary focus.

  5. Mark Lawson

    senior journalist at Australian Financial Review

    Look, its all very nice but it doesn't get us anywhere. Effective, enforceable international action on emissions has been kicked around for years now without any result. If anything, international enforcement is going backwards. The author's proposals need to be more specific and practical. How is this going to happen?.

  6. Gerard Dean

    Managing Director

    So, the authors claim, "The UN’s Sustainable Energy for All (SE4ALL) initiative has proposed a global renewable energy target of 30% by 2030"

    That is in 16 years. Looking back that was 1997. Are you blokes living on the same planet that I am?

    Perhaps you have missed the collapse of the European Emissions Trading credits to such an extent that the Australian Carbon Tax is totally doomed.

    And who in the hell is going to impose the 'Penalties' recommended by the authors if a nation doesn't toe the proposed renewable energy regulations? The United Nations, the IPCC, the Chinese Politburo, the Russian mafia.

    This article is a total waste of monitor space.

    Gerard Dean