The role of international law and economics in renewable power

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.