Energy security and climate change - what role for trade policy?

Peter Mandelson, EU Trade Commissioner

Oslo Military Society

9 February 2007

I want to start with a simple contrast. Two weeks ago at the time of the announcement of the possible Statoil - Norsk Hydro merger the Chief Executive of Statoil made a point of saying that the new company’s single most important goal would be “reliability of supply”. You might say most companies would say this - that’s true. But why make the point so clearly? Well, if you’ve been half-way aware of recent events on Europe’s eastern border you know why. And the point that Helge Lund was making by implication is one that I’m willing to make more explicitly. For a continent that will import 70% of its energy supplies by 2030 the European Union is inevitably concerned about the hands on the taps.

 That political and geostrategic problem - the problem of security of energy supply in a world still utterly dependent on oil and gas - is one half of the global energy picture. The other half is the urgent challenge of addressing the climate crisis, which will force us to rethink the whole way in which we produce energy on this planet. And the two questions are closely linked. 

 Both are forcing us to think hard about how efficiently we use energy - because to use less is also to be less dependent on others. Both are driving us towards much greater use of renewable energy sources for the same reason. And both confront us with the urgent need to build international partnerships for change, judiciously, transparently - and ultimately, in a race against time. Because solutions to both problems are only possible if we act together, and act fast.

 Norway is almost unique in the way that it straddles both debates. Anxiety about security of energy supply has made the role of suppliers like Norway crucial.  You account for a quarter of EU imports of gas and produce more energy than any single EU country, and will produce even more if recent discoveries are exploitable. But Norway is also on the sharp edge of global climate change, and is a leader in green technologies such as hydro power and energy efficiency.

 Norway is one of the worlds biggest energy producers and also one of the most advanced and committed economies in adapting to the challenge of managing the environmental impact of global energy use. In energy terms Norway is like a chocolate maker putting himself on a very strict diet. It sounds like a paradox but it is in fact profound foresight.

So, there is no more appropriate place to discuss the solutions to our energy problems. I am speaking as a Member of a European Commission that has put energy issues right at the heart of its agenda. The Barroso Commission adopted ambitious targets for cutting carbon emissions in Europe and shifting to renewable energy sources; it has set ambitious targets for energy saving through energy efficiency; it has set up and overseen the establishment of a carbon trading system; it has championed the creation of a single market for energy in Europe, unbundling existing production and distribution networks and cutting waste by allocating energy more efficiently. My own role is to determine the place of trade policy in all of these areas, and that is what I have been invited to discuss today. 

Energy security

We trade energy, but we don’t trade it like any other good or service. The GATT international trading system was conceived to meet the interests of traders in goods. But energy is not just a good, it is a need, and a finite one, controlled by a small number of exporters, some of them in volatile and even insecure political environments in Russia and central Asia, Iran and the Middle East; Libya and Algeria. But apart from these familiar uncertainties, another reason why energy trade can be a source of geopolitical tension and insecurity is that it effectively takes place in an international legal vacuum. 

The EU and Norway share the same view of how energy markets should operate. Norway is an integral part of the European internal energy market. So we are suppliers and consumers in a confident and comfortable long term relationship - as the recent opening of the first stage of the Langeled pipeline between Norway and Easington in Britain showed. The expectation of stability on the part of the EU doesn’t prevent the relationship being a profitable one for suppliers in Norway.

 Our challenge in the EU is to find ways of extending this stable ‘Norwegian model’ to other international energy markets. Because although we can lessen our dependence through efficiency and renewables, energy imports - especially gas from Russia - are an inescapable part of our immediate future.

 Trade policy could help here. Clear international rules, laid out through the WTO, or - less ideally but perhaps more realistically - regionally or bilaterally could help producer countries find foreign markets, and consumer countries find resources beyond their borders. And by allowing both sides to invest in each other - producers in downstream supply markets and users in the markets they depend on for imports - by interlocking producer and consumer markets, we deepen stability. 

Russia would be a clear beneficiary if countries along its export routes, such as Belarus or Ukraine, had clear regulatory frameworks for transit. It would avoid the much more expensive alternative of building long circumventing pipelines. In turn, countries further afield, like Kazakstan or Turkmenistan, would benefit if Russia gave them the transit rights to which they feel entitled and which Russia is seeking for itself from its neighbours to the East.

 And producer countries would also benefit from international rules, agreed bilaterally or regionally, that help channel domestic and foreign capital for exploration and extraction, and which in equal measure support their own investments in the markets they supply. This is something the EU hopes to do bilaterally with Russia - which privately knows it will need external help in tapping its vast resources..

 None of this is to deny the legitimate right of producers to benefit from oil and gas reserves - indeed none of it would stop them doing so. It's about creating the predictable and transparent energy environment we need. We need to recognise that energy is not like any other product. But the more we turn energy into a political commodity as well as a commercial one, the more volatile the system becomes.

Climate security

 In climate change we face a different dilemma, but one in which the stakes are similarly high - if not even higher. And one in which there is the same imperative for collective action.

 The results of last Friday's report of the UN International Panel on Climate Change make sobering reading. The costs of inaction on climate change are unsustainably high and they will fall first and heaviest on the weakest shoulders. And sooner than we thought.

Again I think there is a role for trade policy here. At first sight, trade is part of the problem rather than the solution, since trade promotes economic growth and transport using carbon-based fuels is an inherent part of modern trade. To be sure, the greening of transport is essential. Emissions trading that calculates and imposes the carbon costs of travel is an inevitable part of the future of the automobile and aviation industries.

 The Barroso Commission has already proposed a comprehensive emissions trading system for aircraft. This week the European Commission sent to Council vehicle emissions rules tougher than any equivalent in Japan or the US. Collective European action encourages our own industry to have the confidence to change. It will compel those outside the EU to do the same.

 The basic challenge of addressing climate change is triggering a global revolution in how we produce and use energy. What the President of the Commission calls a ‘post-industrial’ industrial revolution. The first and most important step is in creating a global carbon price through emissions trading that puts a clear cost on pollution and a clear incentive on clean technology. It needs to be predictable and transparent to enable planning in the energy industry. And that price has to be global - carbon emissions have to cost the same in Africa or Asia or America. That then creates the incentive for a global trade in green technologies. 

 I have said in the past that one way to look at the Kyoto Protocol -and whatever global agreements will follow it- is as an investment and trade agreement. Governments accept emissions targets. But reaching those targets will depend on the technologies available to their industries. Carbon trading can drive up the cost of polluting and restrain it. Shifting to green technology is what will ultimately drive emissions down altogether.

 So an important hidden imperative behind Kyoto - and the successor to Kyoto we now need to negotiate is the creation of an open global market in environmental technologies and in investment in green industrial change. Here the EU is a global leader, as is Norway. But so increasingly are India and China. 

 I have argued for an initiative at the level of the WTO which would see - alongside a wider deal on manufactured goods as part of the Doha Round - an agreement to a 0% tariff deal for these key green goods and free trade in green services. Last year I wrote to Pascal Lamy urging him to lead this process and I welcome the fact that he will champion this effort - as will Norway.

Global coalitions for global challenges

 The core of these two challenges is a political one. Countries cannot resolve either of these issues acting alone. The problems caused by energy supply and climate change transcend national borders. 

 Energy security requires that we recognise our interdependence and shared dependence on a finite resource. The same is true of climate change. There is little real point in Europe reducing our CO2 emissions drastically, if China is building a coal-fired power station every week that more than offsets the reductions we achieve? Even if we tried, we could not solve the problem acting on our own.  And like markets for carbon emissions, markets for green technology have to be global or they will be beside the point.

 That’s the main reason why I have doubts about a Kyoto tariff. All the debates over whether such a tariff would be legal, or economically sensible or even practical - are important but secondary. A Kyoto tariff gets the international politics of climate change wrong. The climate crisis requires that we build international consensus for radical change.  That we build a global coalition. It’s ultimately more productive to encourage clean trade than to try and punish dirty trade. We will never bully the non-signatories to Kyoto into being virtuous - it is counterproductive to try.

 And public pressure, insurance bills and the incontrovertible science is already pushing even the most apparently recalcitrant to the right conclusions - look at the US debate. Or China’s decision to set up a carbon exchange in Beijing - the first in the developing world. Our best strategy is to lead the market in a direction it is inevitably going to go. 

Conclusion 

I began with a contrast and I’ll end with one. Individually the countries of Europe are all but powerless to affect the global debate on energy security or climate change. Together we have the weight to shape the debate; the weight to bring others to the table. One of the reasons why the European Union is indispensable for Europe in the global age is precisely because without it - or when it is divided against itself - we suffer a political power cut. That’s another blackout we cannot afford.

 We have arguably never had to ask so much of human ingenuity and human adaptability in such a short space of time. More energy efficiency, cost efficient carbon storage, better management of nuclear waste, a greater and better use of biofuels. Effective global carbon trading systems. Dramatic emissions reductions. And ultimately a break between energy generation and greenhouse gas emissions altogether.

 And the dependency on oil and gas which makes all this necessary has to be balanced and mitigated by stable and reliable supply.  The European countries specifically, and I count Norway in this group, must assume global leadership in making this happen.

 Norway may be on the European Union’s periphery but our challenges and our ambitions for the global energy future are identical. And as I said, we have plenty to learn from your experience. The politicians of this generation have an enormous responsibility to get the politics of energy security and climate change right. Trade is only one part of that wider energy policy, but it has an important part to play.