Energy Commons as a Governance Framework for Climate Stability and Energy Security

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* Article: THE ENERGY COMMONS. A Governance Framework for Climate Stability and Energy Security. By Charles Elworthy.


Executive Summary

Charles Elworthy:

"The interrelationship between energy, energy security and environmental protection at an international level can be understood using the context of an energy commons, a communal form of governance without a central authority. The current energy commons governance system fails to adequately address environmental externalities, and the attempts of the Kyoto Protocol to control carbon emissions through measures by energy consuming states are fundamentally flawed. Energy producers have been given perverse incentives to increase rather than curtail extraction, and to divert energy production to non-Kyoto states which generally possess dirtier energy technologies.

The appreciation of supply-side feedback mechanisms leads to the conclusion that controlling carbon emissions will require quantitative restrictions on extraction and exploration. The implementation of a cap and trade system for fossil-fuel extraction and exploration is proposed, to be administered by an intergovernmental organisation. The suggested governance structure is based on the successful model of independent central banks: strategic decisions would be made by an intergovernmental council, with operational implementation delegated to an accountable and effective executive. The achievement of relevant energy security and carbon emission objectives requires particular policies and mechanisms.

...

The governance framework has similarly fundamental consequences for energy suppliers and consumers, and indeed all those affected by climate change. Involving the most relevant stakeholders at an early stage would bring their expertise to the evaluation and improvement of both the overall proposal, and its particular elements. It is in this participative spirit that this paper is intended to contribute to discussion about appropriate global governance systems, and the provision of climate stability and energy security."


Excerpts

Introduction

"This paper has the ambitious objective of reconciling the economic and the environmental impacts of energy usage. It is an unpolished “work in progress,” and covers a wide range of themes from a variety of perspectives. Despite the generous assistance that I have been given I am very aware of its inadequacies, and suggestions and criticisms are most welcome. It is in this participative spirit that this paper is intended to contribute to discussion about appropriate global governance systems, and the provision of climate stability and energy security.

These two worlds of energy and the environment tend, in both their academic and their practical manifestations, to speak different languages. The paper develops a simple interpretive framework connecting the two worlds using the concept of the commons, a communal form of governance without a central authority. It contends that the interrelationship between energy and the environment at a global level can be understood from the context of an energy commons, and shows that the failure of the Kyoto Protocol is comprehensible—und was predictable—from this perspective.

The paper examines attempts to impose demand-side constraints over the emission of carbon dioxide. It concludes that control must instead be achieved by addressing the fundamental causes of carbon emissions—the extraction and combustion of fossil-fuels. This implies the control of current and future extraction through an international authority. The characteristics of energy security are examined as the critical requirement for economic growth and development. The paper then assesses the extent to which the apparently divergent needs of energy security and climate stability can be reconciled in an energy commons regime. It examines the characteristics of a possible institutional structure and assesses the most important governance objectives of such a system, concluding with a brief review of the financing, feasibility and fairness of the proposal.


The Concept of the Commons

The word “commons” originally described an area in England of communal ownership, such as the village green. While perhaps evoking images of country cricket and bucolic rural scenes, the expression has been broadly extended and is often associated with central issues which generate intense social conflict. In general it refers to common pool resources (or common property resources, CPRs), where resources are held in common and the use by one actor reduces the utility derived from that resource by everybody else. In contrast to open access resources CPRs are characterised by property rights, but they are exercised by a collective or community rather than one private entity.

It has long been recognised both theoretically and practically that resources may be subject to overuse if property rights are not clearly and appropriately assigned. In particular this happens when competing parties gain the entire benefit from an activity, such as fishing, while the costs are spread over all users of that resource—in this case all fishermen. Garrett Hardin coined the memorable expression “The Tragedy of the Commons” for this phenomenon, which has been observed in a wide variety of areas and eras. Hardin’s analysis is widely interpreted to imply that communal usage will lead generally lead to suboptimal management of CPRs and that private property rights are preferable.

This line of thinking has been challenged by important research generally associated with Elinor Ostrom and her co-workers who have shown, through use of an inter-disciplinary framework and detailed examination of particular cases, that communal rights do not automatically lead to overuse of CPRs. Instead outcomes are not pre-determined, depending instead upon the characteristics of each particular case. In the face of what appear to be very similar situations, it is not uncommon for one community to develop an excellent management regime, while the neighbouring village does not. A related finding is that externally recommended or imposed solutions, such individual property rights to replace collective rights, may lead to substantially inferior outcomes.

Resolving this apparent dichotomy between the apparent advantages of private property and common property is made easier if we look at the details of the arguments that Hardin and Ostrom have made, and recognise that property rights are embedded in a complex institutional framework which supports their definition, enforcement, and exchange.


Partha Dasgupta created a generalised theoretical analysis of CPRs, showing that the provision of private property rights is a particular institutional solution that leads to socially optimal results in certain conditions, but that:

both privatisation of the grazing land and cooperation over the use of that land as a CPR involve trust. If the allocation defined by equation … is to be realised, the herdsmen have to trust the ‘legal system’ to enforce private property rights to their parcels of land. Similarly, if cooperation over the use of the pasture as a CPR is to be achieved, they have to trust one another to enforce the agreement to limit each herd size.

Dasgupta’s analysis helps to tease out the various elements of various CPR governance solutions. In particular he demonstrates the relative attractiveness of a private property solution when there is a trustworthy external actor, typically the state with its judicial systems, to assist the definition and maintenance of property rights. In contrast it is generally more difficult for a community to create arrangements which result in socially beneficial collective agreements. Communities find it difficult to create credible and longterm commitments to impose punishments and sanctions on those that exploit common property and therefore tend to unravel.

In general:

  • the higher the discount rate (the value of goods today as compared to in the future)
  • the greater the uncertainty about the future
  • the larger the size of the community
  • the lower the productivity of the resource, the more difficult it will be to induce actors to limit their individual self-interest for the collective good.

Ostrom’s research meshes with this observation, as the following list of design principles which she has found are associated with successful CPRs illustrates:

  • Clearly defined boundaries
  • Congruence between appropriation and provision rules and local conditions
  • Collective-choice arrangements allowing for the participation of most of the appropriators in the decision making process
  • Effective monitoring by monitors who are part of or accountable to the appropriators
  • Graduated sanctions for appropriators who do not respect community rules
  • Conflict-resolution mechanisms which are cheap and provide easy access
  • Minimal recognition of rights to organize (e.g., by the government)
  • In case of larger CPRs: Organisation in the form of multiple layers of nested enterprises, with small, local CPRs at their bases.

These rules have the effect of creating clearly defined and easily enforceable property rights without private property as such. They show that clearly defining the group that “owns” a resource, and then giving it appropriate structures to monitor activity and impose sanctions, is central to the prospects for success.


Similarly, Hardin’s argument can by no means be regarded as simply advocating private property rights:

- "The tragedy of the commons as a food basket is averted by private property, or something formally like it. But the air and waters surrounding us cannot readily be fenced, and so the tragedy of the commons as a cesspool must be prevented by different means, by coercive laws or taxing devices that make it cheaper for the polluter to treat his pollutants than to discharge them untreated. We have not progressed as far with the solution of this problem as we have with the first. Indeed, our particular concept of private property, which deters us from exhausting the positive resources of the earth, favors pollution. The owner of a factory on the bank of a stream--whose property extends to the middle of the stream, often has difficulty seeing why it is not his natural right to muddy the waters flowing past his door. The law, always behind the times, requires elaborate stitching and fitting to adapt it to this newly perceived aspect of the commons."

More generally, authors such as Karl Wittfogel have argued that the coordination needed if a community is to meet the challenges of a complex irrigation system was a centralfactor behind the creation of large and effective states.

Extending this idea, such a capacity can be regarded as an important dimension by which to measure the ability of a society to coordinate individual behaviour in order to achieve collective goals.

In Dasgupta’s words

“we usually reserve the term ‘society’ to denote a collective that has managed to equilibrate at a mutually beneficial outcome”.

Energy from the Perspective of the Commons

At first sight it may seem odd to consider addressing energy resources, especially those derived from fossil-fuels, from the perspective of the commons. For the most part fossil-fuels are subject to clearly defined property rights. Yet closer investigation reveals that in the vast majority of jurisdictions there are no simple private property rights which provide for the ownership and sale of energy resources in a similar way to other resources such as land or buildings. Instead governments are generally the legal owners of energy resources, and control extraction either directly, through their own enterprises, or indirectly through the creation of licences to extract for certain periods under certain conditions. Those few countries which allocate direct ownership rights for energy resources, such as the United States, have very extensive systems of laws and regulations governing multiple dimensions of energy extraction, from financial payments through to technical and environmental provisions.

There are a myriad of reasons for this special role for the energy sector which include strategic, financial, technological and environmental factors, but which would go beyond the scope of this paper to explore further. This government control of energy property rights is especially apparent where energy resources lie outside conventional land property definitions. In the United States, for example, there is no private ownership of mineral rights in territorial waters. They belong to either State or Federal governments, who sell leases to energy companies.

A second form of commons is at the “energy frontiers”. These are regions, such as the Arctic, where the territorial sovereignty is not clearly ascribed to particular states. The value of energy resources is so high that where such rights do not exist solutions tend to be rapidly found. Important developments in the demarcation of rights under the Law of the Sea and in areas such as the Arctic and the South China Sea can be ascribed to this pressure.12 Similar processes have led to the resolution of extractive commons, as when several parties had rights to gas resources which were linked to create one common pool.

A third form of commons relates to attempts to harvest “free” renewable resources such as wind, wave, tidal or solar energy. These are open access resources, and with increasing energy extraction we can expect increasingly negative spatial externalities among the producers. This is leading to calls for the establishment of legal frameworks which provide solutions to this aspect of the commons, such as by assigning appropriate property rights.

The fourth usage of the energy commons is somewhat more abstract and normative.

We can speak of a village community’s governance of its fishery, forestry, or river commons, even when individuals have legal or customary rights of management and usage of particular resources in that system. Such commons regimes balance the rights and duties enjoyed by individuals with the economic, social, and environmental needs of the community.

In a similar fashion we can speak of the governance of the global energy commons, especially those linked to fossil-fuels, and it is this sense that the expression is used in the rest of this paper. The international system has no clear authority, so that the logic of the fundamental collective action problem is very similar. Good behaviour of one country alone, even if large and well-intentioned, is doomed to failure unless other countries are similarly cooperative. It is a similar logic to that of the “good villager” who restricts his fishing catch only to watch others exploit the resource.

This applies even when states have particular rights to specific resources, and these are allocated further to particular private companies and other commercial entities. It is the states that are in competition with each other in the international system, so that it is the states as actors that have the role of villagers as actors in a local commons. As with a village commons the international system has multiple possible equilibria, typically some associated with high-trust solutions which lead to maximisation of the general welfare and some with low-trust solutions.

The current organisation of the global energy industry is strongly reminiscent of an uncoordinated commons. The “anarchic” character of the international system is particularly visible here, as states have ultimate control over the energy resources within their jurisdiction and generally use this control for their national and strategic purposes. The role that energy plays in international relations is critical but difficult to precisely specify, as it may be associated with relationships ranging from highly cooperative to commercially and militarily conflictual—depending upon the particular parties and situation involved.

Coalitions and alliances have been created between energy supplying states, such as OPEC, but they are generally focused on coordinating production to maximise financial and strategic interests, rather than maximising general welfare. In general the current energy commons is dominated by a search for “energy security” by each country and low levels of trust and cooperation between states. The provision of energy security conventionally implies “securing adequate energy supplies at reasonable and stable prices in order to sustain economic performance and growth”, but the combustion of conventional fossil-fuels has dramatic implications for carbon emissions and the global environment."


Summary and Conclusions

The paper contends that understanding the interrelationship between the environmental and the economic aspects of energy use is best achieved in terms of the concept of an energy commons. It argues that the current energy commons governance system fails to adequately address environmental externalities, and that the attempts of the Kyoto Protocol to control carbon emissions through measures by energy consuming states is fundamentally flawed. Energy producers have been given perverse incentives to increase rather than curtail extraction, and to divert energy production to non-Kyoto states which generally possess dirtier energy technologies.

The appreciation of supply-side feedback mechanisms leads to the conclusion that controlling carbon emissions will require quantitative restrictions on extraction and exploration. The implementation of a cap and trade system for fossil-fuel extraction and exploration is proposed, to be administered by an intergovernmental organisation. While such controls might superficially appear to conflict with the need for „reliable and adequate supply of energy at reasonable prices“, further consideration reveals that energy security is best fostered by international cooperation rather than attempts at national energy independence.

The suggested governance structure is based on the successful model of independent central banks: strategic decisions would be made by an intergovernmental council, with operational implementation delegated to an accountable and effective executive. The achievement of comprehensive energy security and effective carbon emission objectives requires particular policies and mechanisms as discussed in section 5 and summarised in the table below. It is argued that these measures are generally common to both domains, with the exception of the compensation of environmental externalities through mitigation and adaptation.

It is generally accepted that in a local pastoral, forest or water commons a cooperative solution, based on the self-restraint of individuals, can maximise the welfare of the all. The proposed governance framework offers a similar vision for the energy commons: a cooperative international solution, based on the self-restraint of individual states, ensuring energy security and climate stability.

This governance solution represents a remarkable opportunity, given the centrality of the issues at stake. Realising this vision, however, requires the energy producing countries to accept explicit quotas on their extraction and exploration, and would be most stable with a broadly based agreement encompassing both energy producing and energy consuming countries. In essence this implies the proposed International Energy Organisation would be combination of a Super-IEA with respect to energy security and a Super-OPEC with respect to restrictions on fossil-fuel supply. Such an international institution would have strategic implications for each state, as the broad participation needed for stability requires the sharing of sovereignty between countries that have often experienced conflictual relationships. The geopolitical dynamics within this heterogenous group of states would be particularly complex and the collection of the revenues from the extraction permits would place the energy producers in a position of relative power. Whether such an international cooperation would be feasible is clearly one of the central issues that the proposal raises.

The governance framework has similarly fundamental consequences for energy suppliers and consumers, and indeed all those affected by climate change. Involving the most relevant stakeholders at an early stage would bring their expertise to the evaluation and improvement of both the overall proposal, and its particular elements. It is in this participative spirit that this paper is intended to contribute to discussion about appropriate global governance systems, and the provision of climate stability and energy security."