R. Leal-Arcas Designing international trade in energy - SSRN papers

R. Leal-Arcas

Designing international trade in energy governance

Queen Mary University of London, School of Law Legal Studies Research Paper No. 197/2015

Designing International Trade in Energy Governance for EU Energy Security

Dr Rafael Leal-Arcas

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Electronic copy available at: http://ssrn.com/abstract=2608911

R. Leal-Arcas


Designing International Trade in Energy Governance for EU Energy Security By Dr Rafael Leal-Arcas [forthcoming in Heffron, R. and Little, G. (eds.) Delivering Energy Law and Policy in the EU and the US: A Reader, Edinburgh University Press, 2015]

1. Introduction: What is the problem? Energy security is one of the main problems that humanity faces today and the European Union (EU) has to rely on energy-rich countries for its energy needs. The European Innovation Union, the Energy Community, and the Europe 2020 initiative address energy security as a priority, but policies seem to be reactive instead of addressing energy security in its complexity. This problem can be solved with appropriate legal tools. Energy governance has links with several policies: trade, investment, environmental protection, energy transit, energy security, finance, et cetera. Of these policies, energy trade has a high impact for European energy security policy. Currently, the international community does not address trade in energy as a cohesive entity and its governance is fragmented. Therefore, it is necessary to develop effective trade policy instruments for EU energy security to identify the existing gaps in energy trade governance. Thus the idea is to develop a concept of ‘governance by design’ through the interplay of various legal regimes and institutions, with the ultimate aim of facilitating the creation of the planned European energy union. The aim is to achieve affordable, secure and sustainable energy. This energy union is based on five pillars: security, solidarity and trust; the completion of a competitive internal market; moderation of demand; the decarbonization of the EU energy mix (i.e., greater use of renewable energy); and technologies. The EU is the first region in the world to set up the ambitious target of decarbonizing its economy by 2050. All of this could be reproduced in other regions of the world and eventually create a new international energy order. This requires a fresh and comprehensive approach to legal instruments. To do that, some fundamental questions need to be answered: i. ii. iii. iv.

How does current energy trade governance affect EU energy security? How should the international trade in energy system be adapted to ensure EU energy security? How can the EU diversify its energy supply to improve EU energy security? How can the EU’s preferential trade agreements facilitate renewable energy for the EU?

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Reader in European and International Economic Law, Queen Mary University of London (Centre for Commercial Law Studies), United Kingdom. 2015 Research Fellow, Energy Community Secretariat. Editor-inChief, Renewable Energy Law and Policy Review. Ph.D. (European University Institute, Florence); JSM (Stanford Law School); LL.M. (Columbia Law School); M.Phil. (London School of Economics and Political Science); BA, LL.B. (Granada University). Member of the Madrid Bar. Author of the books INTERNATIONAL ENERGY GOVERNANCE: SELECTED LEGAL ISSUES (Edward Elgar Publishing, 2014); CLIMATE CHANGE AND INTERNATIONAL TRADE (Edward Elgar Publishing, 2013); INTERNATIONAL TRADE AND INVESTMENT LAW: MULTILATERAL, REGIONAL AND BILATERAL GOVERNANCE (Edward Elgar Publishing, 2010) and THEORY AND PRACTICE OF EC EXTERNAL TRADE LAW AND POLICY (Cameron May, 2008). Editor-in-Chief, Renewable Energy Law and Policy Review. Contact: [email protected]

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2. International trade in energy governance Currently, there is no cohesive governance for global energy trade. On the contrary, governance of energy trade arises by default, rather than design, through the ad hoc interplay of different aspects of the international economic system.1 This has implications for the EU, which relies heavily on the rest of the world for its energy supply and, consequently, its energy security. The governance regime for energy trade is not conducive to EU energy security because of the fragmentation of the global and European energy trade regimes, the lack of cohesiveness of the global and European energy trade systems, divergent national interests, and the diversity of energy sources.2 It is vital that the EU take the right steps and decisions to ensure a more secure, clean, competitive and sustainable energy system. At the global level, a more cohesive global governance system for energy trade would facilitate energy flows, avoid unnecessary legal disputes and provide predictability. Achieving this will require a thorough understanding of the elements, workings, and evolution of the current global energy trade governance regime and its consequences for European energy security. Energy trade is a key component of both the global and EU economies, and international trade in energy spans a number of policy areas, including trade, investment, economic development, and environmental protection (see Figure 1). The very nature of energy – namely its centrality to almost every field of human endeavor – and the very nature of traditional energy resources – namely finiteness, uneven distribution, and high desirability – lead to the politicization of energy and encourage intense competition for control over energy resources between actors.3 While energy supply and consumption are important aspects of the global and EU energy economy, they do not exist in an equilibrious relationship. Rather, they are heavily mediated by political considerations and by the very operation of global markets, which dictate the extent to which energy needs are ultimately met.

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A Florini & BK Sovacool, ‘Who governs energy? The challenges facing global energy governance,’ Energy Policy, Vol. 37, Issue 12, 5239-5248, 2009. 2 R Leal-Arcas and A Filis, ‘Conceptualizing EU Energy Security through an EU Constitutional Law Perspective,’ Fordham International Law Journal, Vol. 36, No. 5, pp. 1225-1301, 2013. 3 P Andrews-Speed, (ed.) International Competition for Resources: The Role of the Law, the State, and of Markets, Dundee University Press, 2008; N Schrijver, Sovereignty over Natural Resources: Balancing Rights and Duties, Cambridge: Cambridge Univ Press, 1997; A Wenger et al. (eds.) Energy and the Transformation of International Relations, Oxford: Oxford University Press, 2009.

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Figure 1: The various aspects of energy governance

The dominant opinion is that trade liberalization will increase economic activity and therefore energy consumption. All countries require energy resources, but few possess them, and thus trade in energy (primarily oil and gas) is crucial to fulfil global energy needs. Internationally, there is more trade in oil than in anything else. “Fully half of world trade in services is intensely energy-dependent.”4 Yet, the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO) has historically not preoccupied itself with energy trade. Very few energy-rich countries saw a need to join the GATT/WTO club, given that the reduction of import restrictions—one of the main goals of the multilateral trading system—is not an issue when it comes to energy. Saudi Arabia, the main energy-producing country in the world, only joined the WTO in 2005 and many energy-producing countries are still not WTO Members. This chapter challenges the dominant assumptions of the energy trade system in its capacity to address EU energy security. Despite apparent overlaps between institutions and regimes involved in energy trade governance, there are significant gaps in the system. The result is a mixed bag of incidental outcomes arising from an array of disjointed energy-related institutions and processes operating at various scales (bilateral, regional, et cetera), often each with its own selective membership. 3. Sovereignty over natural resources Energy is one of the biggest challenges facing the EU today. With very few energy reserves of its own, the EU currently imports over half its energy, making it extremely reliant on the rest of the world for its energy supply. It is in the EU’s interest to diversify its energy sources and supply channels, and also increase energy efficiency by promoting more sustainable practices and greater energy market integration. In fact, we see efforts in those directions 4

J Gault, “A World of Introduction from the Energy Industry Perspective,” in J Pauwelyn, (ed.) Global Challenges at the Intersection of Trade, Energy and the Environment, Geneva: The Graduate Institute, 2010, p. 9.

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through the promotion of the Internal Energy Market and the Energy Community. Trade policy and regulation can be instrumental in achieving these goals. For example, there is potential to incorporate energy-efficient provisions within regional and multilateral agreements; there are trade incentives to better manage competition and invest in technologies such as up-to-date energy grids; and possibilities for exporting cutting-edge EU technologies through the EU’s trade and bilateral cooperation agreements. EU energy security depends upon institutionalized energy-related internal as well as international cooperation. For instance, arguably, effective systems for energy trade and energy transit enhance energy security for those economies involved in such cooperation. At the domestic level, a single agent – namely the State – is the authority that adopts measures towards the energy security of the territory/economy that it controls. Such an agent is not omnipotent in its attempts towards energy security, given that energy security often relies on factors – e.g., energy commodities’ price and availability – over which it has little or no control. At the EU level, there are numerous actors who have influence over the energy economy, including EU and Member State bodies. This plurality of actors and the variety of interests at play – e.g., interests across the national-regional-universal spectrum, the publicprivate spectrum, and across the policy spectrum – mean that the achievement of EU energy security is a considerably complex challenge. While all sovereign actors/economies have an interest in their respective energy security, global energy security is essentially a concern to none. In that sense, it is not a common concern as is the case of climate change.5 At the international level, the EU is one of a patchwork of institutions that may have implications for cross-border energy trade. While the EU lacks the powers of a sovereign actor to diplomatically pursue its energy security in the manner that China or the US may, it does possess a comprehensive energy policy that is multifaceted and that makes good use of the powers that lie within its competences. The WTO also provides governance over trade within its scope, including over energy trade. The WTO does not handle energy commodities any differently from other tradable commodities within its scope. In that sense, it provides energy trade governance by default. Another example is the Energy Charter Treaty (ECT), whose principal concerns surround the investment protection and trade aspects of energy between contracting States.6 Many other institutions exist that provide degrees of governance over aspects of trade in energy at the inter-State level. This patchwork of institutions and regimes amounts to a sort of “accidental” energy trade governance, and presents some areas of overlap. For instance, both the WTO and the ECT have rules that apply to the trade, investment, and environmental-protection aspects of energy. These overlaps in no way amount to cohesive governance of energy trade. 4. Future challenges Without a deep understanding of the current systemic aspects of energy trade governance and their implications for EU energy security, it is impossible to achieve effective change. Our world faces two major challenges when it comes to energy. For one thing, one person in five on the planet still lacks access to electricity, and almost three billion people still use wood, coal, charcoal or animal waste for cooking and heating. The other main global energy challenge is that, in places with access to modern energy services, the lion’s share of energy usage stems from fossil fuels. A fuller understanding of the link between energy trade governance and EU energy security is necessary to propose reforms. 5

R Leal-Arcas, Climate Change and International Trade, Cheltenham: Edward Elgar, 2013. T Wälde, The Energy Charter Treaty: An East-West Gateway for Investment and Trade, Kluwer Law International, 1996. 6

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