Chapter 4: Energy Security and Investment

Critical Issues: The Impact of Energy Security on Climate Change Efforts

Energy security and investment issues are becoming a top priority at the national and international level, and will remain so as long as current international geopolitical uncertainties continue to fester and the resource requirements of emerging powers such as India and China continue to grow. Energy security is not a new phenomenon, but what is different in the 21st century is the increased complexity of the issue and the speed at which change is taking place. For example, social and environmental issues (like climate change) that were not previously considered to have interdependencies with energy security issues are now viewed differently, and many regions see certain climate change policies as being in direct opposition to specific energy policies. Addressing energy security has never been more complex.

The world is expected to change dramatically over the next 20 years, presenting significant challenges for energy production and use. In a November 2005 speech, Tony Hayward, British Petroleum Chief Executive, Exploration and Production, illustrated some of the expected changes over this time period:

• demand for oil in 2025 is forecast to be around 45 per cent higher than it is today. On the same estimates, the demand for gas could be more than 65 per cent higher;
• China will be the world’s second largest economy;
• the world will have added between one and two billion people to its population; and
• the next two decades will be the crunch time for dealing with climate change^[1].

Energy security has become an issue of increasing importance. The G8 meeting in Russia in July 2007 focused on Global Energy Security. Energy tops the agenda in the EU as a result of high oil and gas prices; Russian gas supply disruptions in early 2006; discussion on climate change strategies; and increasing investment needs for power generation and energy infrastructure^[2]. Energy supply security, environmental sustainability and competitiveness are central objectives of EU energy policy. A debate has been initiated on energy policy with the publication of the 2006 Green Paper, a European strategy for a sustainable, competitive and secure energy^[3]. The Green Paper notes that climate change needs to be dealt with in a manner compatible with the Lisbon objectives, and recommends that the geographic scope of the EU ETS be broadened and that the EU promote an international agreement on energy efficiency. The European Environment Agency notes that considerable progress has been made in developing policies to reduce the environmental impacts of energy production and consumption, but many of the EU-wide policies have not been fully implemented and positive effects have been less than expected in regard to delivering measurable environmental benefits^[4].

When dealing with energy security and climate change, the dueling issues of growth in fossil fuel energy demand and the need to reduce GHG emissions present challenges for policy-makers. Some view this as a dilemma that cannot be rectified, while others point to the opportunities in crafting appropriate energy policy that takes climate change into account. For example, many policies on energy efficiency and renewable energy often have clear climate change benefits, but care must be taken in developing these policies so as not to impact negatively on other environmental, social and economic issues. Another example is clean fossil fuel production policy, where a number of governments and national and international organizations are working to develop key enabling technologies such as clean coal with carbon dioxide capture and storage (CCS).

A changing climate will have implications for energy systems, especially those that rely heavily upon the natural environment. In its Third Assessment Report, the IPCC noted that of all energy sources, hydropower generation is likely to be impacted the most by climate change due to its sensitivity to the amount, timing and geographical pattern of precipitation and to changes in temperature^[5]. Yet hydro and other renewable, weather-dependent energy sources such as wind, solar, bioenergy and tidal power will need to constitute a significantly larger proportion of the future global energy mix if efforts to mitigate climate change are to be successful. In addition, there are indications that nuclear energy may get a revival, particularly in countries that wish to diversify their energy supply. Although this provides an alternative to fossil fuels that is free from carbon dioxide emissions, it has other implications in terms of finding solutions for storing nuclear waste and proliferation of nuclear technology for military use. Achieving energy security and mitigating climate change though nuclear energy could lead to other security problems.

Opportunities for Integration

Alignment between Climate Change and Energy Security Goals

Policy-makers and advisors have already spent a lot of time thinking about the alignment between climate change and energy goals. The UN-EU Summit in Vienna in June 2006 set out a series of cooperative actions on energy, energy security and climate change. The 2006 G8 statement outlines a useful framework to examine energy security and investment. It is a combination of: international actions and coordination on key aspects of energy production, infrastructure security and trade; recognition of the need for energy efficiency improvements; and the development and adoption of cleaner forms of energy as well as the need for individual countries to develop and implement energy security plans. Investment in all aspects of energy R&D, production, transportation and use are essential because new processes and approaches are needed to address the issues of climate change and sustainable development. This means the development of low-emissions and low-cost energy sources that are widely available and accessible to energy-users of all types (in developed and developing countries).

Actions taken on climate and energy security often are not fully integrated and frequently are not pursued with a sufficient level of urgency. The debate on energy security needs to move beyond the security of supply question for importers and the security of demand question for exporters, to be integrated with other issues such as climate change and access to a modern energy supply by hundreds of million of people in developing countries. Western foreign policy decision-makers may need to take the lead on this integration, simply because many of the world’s energy producers have other pressing social issues and priorities to contend with (such as poverty alleviation and development goals). Meaningful actions need to take place within the next decade if the impacts of climate change are going to be kept within reasonable bounds.The urgency for early action is simply because of the length of time it takes for policy measures and long-term investments to result in significant changes to energy systems and infrastructure, combined with the short time frame in which emissions need to be curtailed in order to keep global atmospheric GHG concentrations at a level that avoids serious harm.

Growing Interdependence in Achieving Energy Security

The growing interdependence between countries in their efforts to achieve energy security reinforces the notion that energy is increasingly becoming part of geopolitical relations. Major new economic powers, such as Russia, China and India are lining up as key consuming and producing countries, and new foreign-policy-making still needs to digest the full implications of this development. Both importers and exporters have an interest in ensuring security of supply at constant levels and affordable prices, and maintaining stable relationships. Thus, any shift in energy patterns to address climate concerns will have to be as concerted and coordinated as possible; otherwise there will be losers at both the exporting and importing ends. On the importing side, there would appear to be some advantage in finding climate-friendly alternatives to traditional energy sources, but these arrangements need to be based on the legitimate energy needs of all countries involved—and the wider foreign policy implications related to creating the right political and economic environment for this to happen.

Many countries and regions, such as China, India, the United States and the EU, increasingly have to rely on imported energy to satisfy their needs. For example, to enhance energy security, China has adopted an aggressive “Go-Out” (Zou chu qu) policy of overseas investments in oil assets by state-owned oil companies^[6], and has introduced a law to increase the use of renewable energy to 10 per cent by 2020^[7]. The renewable energy law, which was developed and passed to respond to power shortages and increases in harmful emissions, will also contribute to reductions in carbon dioxide.

Other countries, such as Russia, Canada and Mexico are increasing their energy exports. As a supplier of several energy types to many countries, Russia must be considered as a potential influence on the development of other countries’ energy security strategies. This is best illustrated by its move in January 2006 to cut off the supply of natural gas to Ukraine and other parts of Europe. The halt on energy exports only lasted for a short period, but clearly illustrated issues of energy insecurity and vulnerability that other energy-reliant countries could potentially face. Russia has long used cheap natural gas to maintain influence in the former republics of the Soviet Union. Russia’s penchant for energy assertiveness has far-reaching implications for Europe’s energy security because of its increasing dependence on Russian natural gas.

Energy security is a global issue, and energy resources (or lack thereof) are essential components of many countries’ foreign policy. Rising global energy use leads to greater interdependence, and with it hard choices related to the security of energy supplies and climate change.

OPEC and the International Community

OPEC countries are highly reliant on revenues from fossil fuel exports and consistently argue that measures to reduce GHGs will have a significant negative impact on their economies. If the climate change negotiations are to engage OPEC and move forward, new approaches will be needed to engage constructively with the energy exporters. Wider economic and political factors influencing OPEC country positions provide opportunities for integrating climate change into foreign policy goals. Four areas worth considering include:

Economic diversification

A number of Gulf countries are liberalizing their economies and undertaking substantial internal economic reform. There is a crucial need to provide new jobs for the growing, young populations in OPEC countries and address the poverty and marginalization experienced among these groups, despite their wealth of resources. This marginalization, often a result of poor governance and uneven distribution of resource wealth, increases sensitivity towards the West, fueling radicalism and, in extreme cases, terrorism. Existing policies by the West to assist OPEC countries to liberalize their economies and increase foreign investment could have a substantial climate change side-benefit. As well as helping OPEC countries diversify their economies, reduce their reliance on wealth from oil and gas, and provide much needed employment, they will also help OPEC participate in the global shift towards a low-carbon economy.

Increased recovery of resources

Energy-producing countries, both exporting and importing, are interested in ways to expand their resource base and increase the recovery of these resources. One topical solution for dealing with climate change that does not imply a reduced role for the fossil fuel industry is CCS. Although this technique of capturing and storing GHG emissions is controversial on some fronts, it has gained considerable support in international circles and with the energy industry. CCS is an attractive option for oil and gas producers simply because the injected carbon dioxide acts, in many circumstances, to increase recovery of hydrocarbons, such as oil and coal bed methane, which translates to increased production and revenues for producing companies and nations. Other techniques for enhancing the recovery of energy resources while decreasing the environmental impacts are being explored.

Stable oil prices

High oil prices can encourage investment in new and more efficient technologies, but can also encourage the switch from oil and gas to coal to other forms of energy. An additional enduring concern for producer countries is that high energy prices may lead to a global recession and the associated reduction in the demand for energy. There is common interest between OPEC producers and consumers to keep demand and prices within reasonable bounds.

Wider physical and economic development plans

OPEC countries will increasingly need to take into account the potential adverse impacts of climate change. While levels of vulnerability vary between countries, most will experience an exacerbation of existing climate conditions with water resources, land degradation, reduced agricultural productivity, sea-level rise, flooding and salt-water intrusion identified as prominent risks.

Danish Strengths in Renewable Energy and Energy Efficiency

Key opportunities are associated with Denmark’s domestic energy knowledge and know-how. Denmark could play a leadership role by orienting foreign policy to influence other countries in regard to increasing renewable energy use and energy efficiency. These two key areas, which are included in most countries’ energy security plans, promote sustainable development, lower environmental impacts and slow climate change.

A report by the Danish Energy Authority stated: “The preliminary energy statistics for 2005 show that consumption of renewable energy etc. in 2005 rose by 4.5 per cent. Consumption of biomass has grown in particular. Renewable energy etc. is accounting for an ever greater proportion of total energy consumption. In 2005, renewable energy etc. made up 15.8 per cent of adjusted gross energy consumption, as opposed to 15.3 per cent in 2004^[8].” This experience in wind energy and bioenergy could be used to influence clean energy choices and develop trade and investment opportunities in the developed and developing world. Denmark is already widely viewed as a global leader in the wind energy industry, but it is not such an obvious leader (to the outside world) when it comes to bioenergy. Perhaps more effort should go into the promotion of Danish efforts in this area. The partnership on bioenergy between Denmark and the other three continental Nordic countries (Norway, Sweden and Finland) might be a very powerful force in bioenergy circles, considering the particularly prominent role that Finland plays in this area.

Denmark has significant experience and knowledge in the use of regulations, market mechanisms, incentives and technology in addressing energy issues which would be valuable to others who are or will be going down the same carbon-constrained path. This approach could build on Denmark’s traditional role as an international trading nation with specific experience in energy trading to include broader dimensions of clean energy for developing countries and experiences in enhancing energy security.

Denmark also has valuable energy demand knowledge through first-hand experience in energy conservation and energy efficiency. In fact, Denmark’s energy intensity is the lowest in the EU and 35 per cent below the IEA average. Denmark has experience on establishing effective voluntary approaches with industry and with sectoral energy efficiency approaches that would be valuable and marketable to other countries, including North America and the developing world. Knowledge of the most effective approaches in energy efficiency improvements is valuable and marketable, especially the lessons learned in first hand experience with a variety of energy-reducing initiatives (e.g.,those with a negative cost, those with a low cost [below US$10 per tonne CO₂e saved] and those which are expensive [above US $50 per tonne CO₂e saved]).

Opportunities to exploit these strengths and other identified opportunities could be pursued through participation in international technology cooperation programs, many of which include the large emitting developed and developing economies. The EU is a member of the Carbon Sequestration Leadership Forum, International Partnership for a Hydrogen Economy, Generation IV Nuclear Partnership, ITER, and the Renewable Energy and Energy Efficiency Partnership (REEEP). While most of these agreements have not demonstrated substantive outcomes to date (often because they do not have a permanent source of funding), participation in specific initiatives can enhance opportunities to promote Danish strengths in technology and know-how.

Notes

1. ^Hayward, Tony, 2005. “Global Energy Sustainability.” Business Today International Conference. New York, November 25.
2. ^European Environment Agency (EEA), 2006. Energy and Environment in the European Union: Tracking progress towards integration. EEA Report, No. 8/2006, p.11.
3. ^Commission of the European Communities (CEC). 2006. Green Paper: A European strategy for sustainable, competitive and secure energy. {SEC(2006) 317}, Brussels, 8.3.2006, COM(2006) 105 final.
4. ^European Environment Agency (EEA), 2006. Energy and Environment in the European Union: Tracking progress towards integration. EEA Report, No. 8/2006, p.11.
5. ^Intergovernmental Panel on Climate Change (IPCC), 2001. Climate Change 2001. Impacts, Adaptation and Vulnerability. Contribution of Working Group III to the Third Assessment Report of the IPCC.
6. ^Downs, Erica S., 2004. “The Chinese Energy Security Debate.” China Quarterly, No. 177.
7. ^National People’s Congress, 2005. The Renewable Energy Law of the People’s Republic of China. Government of China.
8. ^Danish Energy Authority, 2006. Continued Improvement in Energy Efficiency in Denmark.