Tade Oyewunmi, Doctoral Researcher, oyetade.oyewunmi@uef.fi
IN A forthcoming paper on the topic- ‘Examining the Instrumental Role of Regulation in the Development of Gas Supply Markets: Highlights from the US and EU’ (2017)[1] I considered the effectiveness of regulation in the path towards restructuring and the development of competitive gas markets in which parallel policy objectives such as security of supply and sustainability are being pursued.
IN A climate change and decarbonisation context, debates relating to the effectiveness and implications of market-based mechanisms like carbon tax and emissions trading scheme (ETS) as opposed to standard-setting or rule-making conventional approaches to regulation have gained significant attention recently.[2] Pollution resulting from operations in the energy and petroleum industry are often considered as a major cause of greenhouse gas (GHG) emissions and climate change.[3] In an increasingly international gas industry which is now ever more interconnected with electricity markets in major industrialized economies, the disposition of the major energy-related GHG emitting countries such as the US, Russia, and China becomes highly relevant.
THE NORTH American shale gas revolution over the past eight years undeniably positions the US as the leading oil and gas producing country globally.[4] It is therefore not surprising to see several legal disputes between environmental protection groups against energy firms who are seeking to take advantage of the boom in unconventional hydrocarbon production to obtain approvals for gas commercialisation and LNG projects. Recently, in Earthreports, Inc., et al. vs. Federal Energy Regulatory Commission, Dominion Cove Point LNG, et al. (2016).[5] a US Court of Appeal for the DC Circuit rejected the claims of such environmental groups who contested the Federal Energy Regulatory Commission (FERC)’s conditional authorization of the conversion of the Cove Point LNG facility from an import maritime terminal to a mixed-use, import-and-export terminal. The environmentalists had argued that the FERC failed to consider the indirect environmental impacts that the Cove Point LNG conversion into a gas export facility might have, and therefore failed to satisfy its obligations under the National Environmental Policy Act (NEPA) of 1969. The Court held that under NEPA, the FERC is not required to consider indirect effects of increased natural gas exports through the Cove Point facility, including potential climate impacts.[6] Assuming this decision indicates the current disposition in the US to gas utilisation and commercialisation, it may be argued that conventional and prescriptive standard-setting or rule-making regulatory approaches may not necessarily hinder the shale gas production and commercialisation boom. However, as with any conventional regulation approach, it does create additional compliance and monitoring costs. Another important issue in the scheme of things is the possibility of the US pulling out of the 2016 Paris Agreement following the recent elections and subsequent change in government.[7]
Conventional Regulation vs. Market-based Pricing of Carbon Emissions
ADVOCATES OF market-based mechanisms like the ETS and carbon tax contend that placing a strong and predictable price or charge on carbon emissions is the most cost-effective and efficient path to GHG emissions reductions.[8] It is noted that the ETS framework seem to have come under stronger criticisms, while carbon tax proponents seem to be gathering more support.[9] Arguably, there are justifiable concerns about the de facto effectiveness of the ETS and its ‘cap and trade’ mechanism.[10] Such concerns relate to whether it actually limits GHG emissions or it is just another theoretical economic construct which in reality depends on perfect markets and effective balancing of demand and supply of trading allowances and permits. Another problem with carbon pricing, especially carbon tax is the socio-political challenge of curtailing pass-through costs on final energy (gas and electricity) consumers. Hence the question- who eventually pays for the ‘charge’ on carbon? According to the International Energy Agency (IEA), the main reasons for low carbon prices generally includes: (i) economic downturn which led to lower-than-anticipated emissions, resulting in a surplus of emissions allowances; (ii) the socio-political challenge of setting tight emissions cap or high carbon prices vis-à-vis industrial competitiveness and rising consumer electricity prices; (iii) flattening or falling electricity demand (resulting in reduced demand for ETS allowances) due to the positive effects of energy efficiency policies in many jurisdictions.[11]
IN COMPARING carbon tax with subsidies as plausible market-based mechanisms for the US, it has been posited that: “A carbon tax is superior to subsidies for carbon-free energy sources [e.g. renewables] in two important respects. First, it has the opposite effect on the budget deficit. While subsidies increase the deficit, a carbon tax would decrease the deficit. Second, it is much easier to design and to implement. To be effective, a carbon tax need only deter consumption of hydrocarbons. Consumers are left with complete discretion with respect to the ways in which they reduce their consumption of hydrocarbons. For example, by increasing the efficiency of their use of energy or by substituting for hydrocarbons some mix of carbon-free fuels like wind power, solar power, or nuclear power.”.[12]
NOTABLY, IN most market and developed economies, who also happen to be the leading GHG emitting countries seemingly due to high energy utilisation and industrialisation, there has been a general disenchantment with the interventionist and seeming highhandedness of traditional regulatory forms. Consequently, there has been a preference for more deregulation and to adopt alternative regulatory approaches which encourages the desired behaviour by economic and financial incentives rather than by legal compulsion or sanctions. In this regard, such incentives can be: (i) negative i.e. the conduct is legally unconstrained unless the a firm chooses to act in an undesired way, then it must pay a charge e.g. carbon price; or (ii) positive i.e. if a firm chooses to act in a desired way it is awarded a subsidy or allowed a more cost-efficient tariff such as feed-in tariffs for renewables or energy conservation.
THE APPARENT flexibility of market-based instruments should incentivize innovation and technological development. What it, however, does not guarantee ipso facto is accountability and trust unless such factors are built into the market structure and framework. It has also been argued that while the conventional command-based regulatory approaches may lead to more uncertainties about the apprehension, prosecution, and level of sanctions; market and economic instruments, on the other hand, could provide more a definite and predictable level of compliance motivating charges and payments. As far as developed market economies are concerned, it appears there is strong argument in favour of placing a price or a charge on energy-related GHG emissions. Although the main caveat or pragmatic concern is the credibility of the carbon emissions market, and whether such approaches will effectively curtail negative environmental and climatic impacts without imposing avoidable costs on operators and energy consumers. Also, as inquired earlier, who pays for the price of carbon emissions in an increasingly international gas supply and energy context?
[1] This paper will be published in a forthcoming 2017 issue of the Houston Journal of International Law.
[2] Brittany A Harris, ’Repeating the Failures of Carbon Trading’ (2014) 23(3) Pac Rim L & Pol’y J 755 – 793; the International Energy Agency (IEA), ‘Energy, Climate Change and Environment 2016 Insights’ (IEA Publications, 2016) 1 – 133; Adam Whitmore, Can Emissions Trading Produce Adequate Carbon Prices? Energycollective, January 23, 2017.
[3] Energy industry related GHG emissions include CO2, methane (CH4) from natural gas production and nitrous oxide (N2O). These gases are quantified in terms of their global warming potential relative to CO2. For instance, gas flaring and venting is one of the main hydrocarbon exploration and production processes with environmental implications to the extent that CH4 is one of the main components of natural gas. Flaring is the controlled burning of natural gas produced in association with oil in the course of routine oil and gas production operations. Venting is the controlled release of unburned gases directly into the atmosphere. In addition, water management, including water usage during drilling and hydraulic fracturing, and the protection of surface and ground water during drilling, fracturing, production and disposal activities, is a central environmental issue for unconventional gas production. See the International Energy Agency (IEA), ‘Energy Policies of IEA Countries: The United States 2014 Review’ (IEA Publications, 2014) at 209 – 211; IEA, ‘Energy, Climate Change and Environment 2016 Insights’ (IEA Publications, 2016) 1 – 133.
[4] Proven gas reserves in the US has increased by almost three-quarters since 2000, up to 9.1 trillion cubic metres (or 323 trillion cubic feet) by end 2012, or the equivalent of more than 100 years of production at 2012 consumption rates. Natural gas production is projected to continue to increase over the period to 2040. Improvements in advanced crude oil production technologies, such as hydraulic fracturing, are widely expected to continue to lift domestic supply into the medium term. The renaissance that the oil industry is undergoing is largely the result of growth in light tight oil (LTO) production, a boom that is expected to continue until 2020 at least. According to Forbes, ‘The 25 Biggest Oil and Gas Companies in The World’30 March, 2016: “The U.S. has seven companies in the top 25, more than any other country” Other countries/companies in the list includes Russia’s Gazprom and Rosneft as well as China’s Petro China.
[5] Earthreports, Inc., et al. vs. Federal Energy Regulatory Commission, Dominion Cove Point LNG, et al, No. 15-1127 (D.C. Cir., 2016)
[6] Ibid.
[7] The previous US government administration, signed and ratified the Paris Agreement on climate change on 22 April 2016. According to Platts, Fact Box: Global energy implications of Tillerson as top US diplomat, 1 February 2017 at <www.platts.com/latest-news/oil/washington/fact-box-global-energy-implications-of-tillerson-21766883> accessed 09/02/2017, it seems the new administration may be more favourably disposed to Carbon Tax and intends “to keep a seat at the table of global climate talks to understand the impacts on Americans and US competitiveness”.
[8] See IEA, ‘Energy, Climate Change and Environment 2016 Insights’ ibid. In the power sector, carbon prices can influence the economic choices of investors, technology developers and consumers. They can moderate energy demand, deter new high-carbon investment and encourage low-carbon instead, and curtail the operation of existing high-emitting assets. Carbon pricing also plays a role in shifting corporate behaviour: by making climate change a financial rather than environmental reporting issue, it directly engages top management.
[9] Tade Oyewunmi, ’Emissions trading scheme and gas flaring in the United Kingdom Continental Shelf: a comment’ (2011)(5) International Energy Law Review 193-199; Adam Whitmore, Can Emissions Trading Produce Adequate Carbon Prices? Energycollective, January 23, 2017. In Brittany Harris, Repeating the Failures of Carbon Trading, (2014) 23(3) Pacific Rim Law & Policy Journal pp. 755 – 793. the author also points to the de facto ineffectiveness of the carbon trading mechanisms as applied in the pacific rim countries. See also Richard J. Pierce Jr., ‘The Past, Present, and Future of Energy Regulation’ (2011) 31(2) Utah Environmental Law Review pp. 291-308.
[10] Ibid.
[11] IEA, ‘Energy, Climate Change and Environment 2016 Insights’ note 3 supra.
[12] Pierce Jr., note 9 supra.
