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I am pleased to welcome you here and to have
this opportunity to share with you some thoughts on energy and its
relationship to trade and to trade governance. These are indeed complex
questions of rising importance in international economic relations.
The first time I publicly entered the debate on energy and trade was in
a speech two years ago to the World Energy Congress in Rome. In that
speech I discussed some of the reasons why energy had not featured
prominently so far in the GATT/WTO, notwithstanding the fact that many
of the principles underlying our trading rules were applicable in key
ways to international commerce in energy and energy services. I also
argued that for a range of reasons the time might be ripe to consider
these issues more closely. Two years on, I believe that this is even
truer than it was then. It is for this reason that I welcome the
initiative taken by the organizers of this conference.
Key energy products display special
features
As we all know, energy as a product embodies a
number of special characteristics that render its treatment in policy
terms different from that of many other products in sectors such as
manufacturing and agriculture.
Markets clearly play a part in the economics
of energy supply and demand, but in a rather more complicated way than
what a standard textbook would tell us about the workings of markets and
the role of international trade.
Let us briefly consider some of the reasons for this.
First, much of today’s energy supply — particularly fossil fuels and
natural gas — is geographically concentrated, fixed in terms of
location, and prominent in the production and trade of the countries
that possess the resource. Thus, trade patterns on the supply side are
largely pre-determined and change only slowly, in contrast to the
shifting comparative advantage we associate with economies that are less
resource-endowed in this way.
But compared to the geographical concentration that characterizes the
supply side of energy markets, demand is very widely spread because we
all need energy to run our economies. This relationship between supply
and demand has important implications for the economic and political
conditions under which trade takes place.
A second feature of today's key energy products is that they are scarce
and non-renewable. Combined with their fixed and concentrated location,
this makes for less direct competition in production and the presence of
significant economic rents.
Thirdly, natural resource sectors tend to
display a high degree of price volatility. While no leading economic
model explains the causes of such volatility, contributing factors
include supply uncertainties, inelastic demand due to the lack in the
short run of substitutes for traditional energy products, and the role
of speculation and political uncertainty in some producing countries.
Trade and the traditional WTO focus on
particular trade rules do not play their “standard” role in many energy
markets — but trade and trade rules are still relevant
This combination of circumstances means that
trade does not enhance competition and adjust resource allocation in the
standard “Ricardian” manner that we think of in relation to trade in
manufactures, agriculture and services.
The GATT/WTO’s traditional focus on the
instruments of trade policy, such as tariffs and quotas, is less
applicable in energy markets. Indeed, there is a sense in which it is
“markets” rather than “trade” that inform the core of policy concerns in
the field of energy. Such policy concerns — relating among other things
to competition and access to supplies have not really been the core
focus of the GATT/WTO’s work over the years.
On a purely practical level, there is also the
reality that many of the suppliers of traditional energy products are
either recent entrants into the WTO, or are still in the process of
negotiating their accession. Let me just mention a few of those knocking
at the WTO door to illustrate this point: Russia, Kazakhstan,
Azerbaijan, Algeria, Lybia, Iran, Iraq, Sudan to name but a few.
In addition, regardless of where traditional
sources of energy are located, sovereignty and strategic concerns figure
much more prominently in this sector, making for a greater reluctance to
enter into internationally binding agreements.
Let me be clear, however. I am not arguing,
either normatively or positively, that the WTO and the world of energy
are parallel universes and should forever remain so. Far from it. The
culture of international trade cooperation that defines the WTO — and
many of the rules underpinning it — is actually and potentially relevant
to energy in several sorts of ways that I shall return to in a minute.
Realities in energy markets are changing
Before that, though, I would like to take note
of some significant changes that are occurring in energy markets, and
which some argue fortify the case for closer attention on the part of
the WTO to the energy sector. Over time, a larger number of players have
entered the field on the supply side. In no small part this is the
result of technological advances and the diversification of energy
sources. Fossil fuels and natural gas increasingly compete with
alternative energy sources such as nuclear power and renewables,
including bio-fuels, wind, water and solar power.
The trend towards embracing renewable sources
of energy will only continue as concerns about global warming intensify.
Climate change, and how we can secure international cooperation to
combat it, has become a central preoccupation of the global policy
community. This carries significant implications for energy markets.
I am not suggesting that the structure of the
energy market will change overnight, or that technology will not work
its wonders in the traditional energy sector as well as in new areas,
such as through the development of carbon capture and storage
techniques.
But I am arguing that the panorama is changing and that this reinforces
the case for examining how an institution like the WTO might contribute
to an orderly and mutually beneficial framework for cooperation in the
energy field.
Issues actually and potentially relevant
to the WTO
I have already said that the purpose of the
WTO, its existing structure and the content of some of its rules are
directly relevant to the energy sector. I would also argue that natural
extensions of existing rules could be relevant to the sector.
Let us briefly examine these propositions more
closely.
For all the reasons already discussed, the WTO
does not address energy as a distinct sector. But in a broad sense, the
purpose and framework of the WTO is applicable to all trade.
Non-discrimination, transparency, an explicit structure of rules that
provides predictability and reduces circumstances, greater openness over
time and a mechanism for settling disputes constitute the foundations of
the system.
This is the starting point. After that, a
number of specific rules are particularly relevant. Just like any sector
where trade is feasible, obstacles to trade are equally feasible.
Among the issues that come to mind in the
context of energy are subsidies that distort trade, state trading
disciplines, transit rights for transporting energy, and export
restrictions. As has been discussed in one of your previous sessions
today, the WTO has something to say on each of these.
In the field of services, the WTO has
established a framework of cooperation that includes services incidental
to the extraction of oil and gas, services incidental to energy
distribution and pipeline transportation of fuels. Indeed, the current
negotiations on energy services cover a broad range of activities
relevant for energy suppliers and traders, encompassing all energy
sources, including renewables. Governments are seeking commitments from
one another in services areas such as drilling, engineering, technical
testing, pipeline construction, and distribution.
Many of these issues are being negotiated in
the on-going Doha Round: energy services, transit rules, subsidies or
climate friendly goods and services.
But there are obvious questions which remain
to be answered. More and more questions in the area of energy relate to
competition and investment policy, on which the WTO has presently little
to no say. There are also no disciplines on export taxes, for the
moment.
And as climate change concerns loom larger,
the WTO becomes relevant in relation to the possible use of trade
measures to manage leakage or competitiveness concerns arising from the
costs of carbon constraints on production. The potential development of
international trade in carbon emission permits and the establishment of
carbon offset arrangements which could be considered as “subsidization”
may also involve a WTO angle.
Concluding observations
I have not attempted to present an exhaustive
account of the interface between energy and the WTO. But the links are
clear enough. There is a core question that I think we need to ask
ourselves, based on three “givens” that I have already discussed:
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that energy is of fundamental importance to
every economy in the world,
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that the energy sector embodies particular
characteristics affecting the nature and content of international
cooperation,
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and that the sector is changing rapidly in
quite fundamental ways.
The core question I refer to is whether we
need a new, more comprehensive global governance in energy. Following
from this, if the answer is affirmative, is what the form and content of
such governance should be and in what institutional setting. Finally,
what would be the WTO role in this new energy governance? For instance,
should the WTO adapt its existing rules or define specific rules to
energy.
I regard these as questions that need to be explored. I hope that a
conference such as this one will help to disentangle the complex set of
issues involved and start to direct us towards research-based answers. I
look forward to learning of the results of your deliberations.
You have had a long day and I shall stop here. I welcome any comments
and questions.
Thank you.
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