The Handbook of Energy Policy 9811967776, 9789811967771

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Farhad Taghizadeh-Hesary Dayong Zhang Editors

The Handbook of Energy Policy

The Handbook of Energy Policy

Farhad Taghizadeh-Hesary • Dayong Zhang Editors

The Handbook of Energy Policy With 169 Figures and 134 Tables

Editors Farhad Taghizadeh-Hesary School of Global Studies Tokai University Hiratsuka, Kanagawa, Japan TOKAI Research Institute for Environment and Sustainability Tokai University Tokyo, Japan

Dayong Zhang Research Institute of Economics and Management Southwestern University of Finance and Economics Chengdu, China

ISBN 978-981-19-6777-1 ISBN 978-981-19-6778-8 (eBook) https://doi.org/10.1007/978-981-19-6778-8 © Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

Energy is one of the most critical natural resources and the foundation of modern society. Fossil fuel energy resources are scarce, non-renewable, and distributed unevenly across the world, making their accessibility and affordability major concerns to countries worldwide. Although clean energy resources, including solar, wind, and hydropower, are renewable, their developments face several challenges, a notable one of which is the many difficulties in financing. In the past few years, there occurred a series of major disturbances that have profoundly impacted the international energy markets. The COVID-19 pandemic, for example, has significantly affected the energy sector, causing extreme short-term price variations. A global consensus to deal with global warming and reduce greenhouse gas emissions has led to long-term energy transitions from fossil fuel energy to renewables. Geopolitical conflicts, such as the Russia-Ukraine war, have threatened European countries with soaring energy prices and insufficient energy supply. To resolve these problems, greater wisdom from policymakers and authorities and international efforts are much needed. In the United Nations’ sustainable development goals (SDG), energy appears to be related to goal number 7 – “affordable and clean energy,” which is directly and indirectly related to several other SDGs. It should be realized that billions of people worldwide still rely on traditional biomass, including wood, dung, charcoal, crop waste, animal residuals, and coal, for cooking. Failure to use clean and modern energy technology has impacted the realization of not only SDG7, but beyond it, it is also one of the fundamental reasons for poverty, hunger, poor health, inequality, and almost all other problems within the SDG framework. It is extremely important to have policies addressing energy accessibility and affordability issues. It also requires high-income countries to lead the way and support the transition in low-income countries. Energy policy is of critical importance in all countries and has clear countryspecific characteristics. However, one country can learn from others’ experiences and avoid making similar mistakes from the lessons in other countries. The Handbook of Energy Policy provides a toolbox comprehensively covering energy policies and related issues in different countries. Discussing and comparing specific policy-relevant issues between energy exporting and importing countries and between developed and developing economies, the handbook seeks to provide v

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Preface

useful information to readers interested in understanding cross-country differences in energy policies and their impacts. It also showcases an international perspective to policymakers around the world. The Handbook of Energy Policy covers various topics of energy policies, including geopolitics of energy markets, energy security, energy poverty, energy trade and integration, energy pricing policies, energy finance, energy and sustainable development, and energy nexus. It also covers policies for sustainable energy innovations and technologies, renewable energy policies and energy transition, energy efficiency policies and programs, electricity market policies, and economics and policies of fossil fuels. The Handbook of Energy Policy is a precious reference for international organizations, governments, public and private sector entities, local communities, universities, research institutions, and other non-governmental organizations. Hiratsuka, Japan Chengdu, China April 2023

Farhad Taghizadeh-Hesary Dayong Zhang

Acknowledgments

We are grateful to Prof. Naoto Yoshikawa, Vice Chancellor of Tokai University, Japan, Prof. Xiansheng Sun, Vice President and Director General of the Energy Industry Cooperation Committee, China Council for International Investment Promotion and Council Chairman of The International Society for Energy Transition Studies (ISETS), and all the participants of the chapter development workshop that jointly organized by Tokai University, Southwestern University of Finance and Economics, and ISETS. We also thank Ms. Juno Kawakami of Springer Nature for her help in publishing this book and Ms. Shameem Aysha S. of Springer Nature for coordinating the handbook project. We are exceedingly grateful to all the contributors to this handbook. Without their valuable contributions, we would not have been able to finalize this book. Farhad Taghizadeh-Hesary acknowledges the financial support by the Grant-inAid for the Excellent Young Researcher of the Ministry of Education, Culture, Sports, Science and Technology of Japan (MEXT); Grant-in-Aid for Young Scientists (No. 22K13432) of the Japan Society for the Promotion of Science (JSPS); and the Grant-in-Aid for Scientific Research (B) (No. 22H03816) of the JSPS. Dayong Zhang thanks financial support from the National Social Science Fund of China (NSSFC) Major Project (No. 20&ZD110).

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Contents

Part I 1

2

The Geopolitics of Energy Markets . . . . . . . . . . . . . . . . . . . . .

1

Harnessing Win-Win Energy Geopolitics and Competitive Global Energy Market by Integrating Energy Efficiency . . . . . . . Riasat Noor and Sumaiya Noor Sanda

3

The Geopolitics of the EU-Russia Gas Trade: Reviewing Power in International Gas Markets . . . . . . . . . . . . . . . . . . . . . . . Francesco Sassi

33

Part II 3

Policies to Achieve Energy Security . . . . . . . . . . . . . . . . . . . .

Energy Convergence and Regional Energy Security: Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ehsan Rasoulinezhad, Farhad Taghizadeh-Hesary, and Lilu Vandercamme

69

71

4

Energy Security in a Resource-Rich Economy: Case of Iran . . . . . Reza Hafezi and Amirhossein Souhankar

97

5

Effective Factors and Policies in Electrical Energy Security . . . . . Hadi Vatankhah Ghadim, Jaber Fallah Ardashir, and Philip Odonkor

129

Part III 6

7

Policies to Alleviate Energy Poverty . . . . . . . . . . . . . . . . . .

161

Policies to Alleviate Energy Poverty in the Cooking Sector in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vijeta Singh, Nandita Mishra, and Farhad Taghizadeh-Hesary

163

Policies to Alleviate Energy Poverty: From Fundamental Concepts to a Practical Framework in the New Era . . . . . . . . . . . Jiajia Li

195

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Contents

Part IV

Energy Trade and Integration Policies . . . . . . . . . . . . . . . .

8

Role of Electricity Trade in South Asian Energy Security . . . . . . . Hemlal Bhattarai

9

Towards the Sustainable Development Through Energy Transnationalism: Study of Integrated Energy Markets in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Akanksha Singh

Part V

Energy Pricing Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

227 229

261

289

10

Fossil Fuel Subsidy Reform Policy . . . . . . . . . . . . . . . . . . . . . . . . . Chang Liu and Yan Xu

291

11

Oil Market Reforms and Pricing Policy Evolution in China . . . . . Fei Wu, Dayong Zhang, and Xiaolei Sun

317

Part VI Energy Finance: Most Recent Developments and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

13

14

Rethinking Green Finance in Greenfield Investments: The Moderating Role of Institutional Qualities on Environmental Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rabindra Nepal, Hammed Musibau, Farhad Taghizadeh-Hesary, Tina Prodromou, and Rohan Best Policies to Attract Private Investment and Finance in Green Energy Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Farhad Taghizadeh-Hesary, Naoyuki Yoshino, and Ehsan Rasoulinezhad Energy Market Financialization and Its Policy Implications . . . . . Fei Wu, Dayong Zhang, and Qiang Ji

Part VII 15

Energy Policies for Sustainable Development

.........

Challenges in Shaping Sustainable Energy Policy in Greater Mekong Subregion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vanvisa Philavong and Phanhpakit Onphanhdala

Part VIII Policies for Sustainable Energy Innovations and Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Technology Diversification in Renewable Mini-Grid Portfolios . . . Gianfranco Gianfrate and Eflamm Gueguen

345

347

379

403

427

429

459 461

Contents

17

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Leveraging Digitalization for Improving Energy Efficiency M. Subramanian

Part IX

.....

Renewable Energy Policies and Energy Transition . . . . . .

483

509

18

Determinants of Energy Transition in Asia . . . . . . . . . . . . . . . . . . Ehsan Rasoulinezhad, Farhad Taghizadeh-Hesary, Ghahreman Abdoli, Farkhondeh Jabalameli, and Sajad Barkhordary Dorbash

511

19

Solar Module Price Determinants . . . . . . . . . . . . . . . . . . . . . . . . . . Farhad Taghizadeh-Hesary, Naoyuki Yoshino, Yugo Inagaki, and Lilu Vandercamme

535

20

Toward an Optimized Biofuel Use Pathway for Indonesia Road Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alloysius Joko Purwanto and Dian Lutfiana

555

Artificial Intelligence (AI) in the Nuclear Power Plants: Who Is Liable When AI Fails to Perform . . . . . . . . . . . . . . . . . . . Ridoan Karim and Firdaus Muhammad-Sukki

587

Hydrogen as Energy Storage for Renewables in East Asia: Economic Competitiveness and Policy Implications . . . . . . . . . . . . Yanfei Li and Farhad Taghizadeh-Hesary

609

21

22

Part X 23

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Energy Efficiency Policies and Programs . . . . . . . . . . . . . . .

Energy Efficiency (EE) for Climate Action: Evolution of India’s EE Policies and Way Forward . . . . . . . . . . . . . . . . . . . . . . Shirish Bhardwaj, Deepak Tewari, and Bhaskar Natarajan Energy Efficiency and Electricity Reforms: A Way Forward for Clean Power Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . Muhammad Mohsin, Farhad Taghizadeh-Hesary, and Ehsan Rasoulinezhad

Part XI

Energy Nexus Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25

Volatility Linkages Between Energy and Food Prices . . . . . . . . . . Ehsan Rasoulinezhad, Farhad Taghizadeh-Hesary, and Naoyuki Yoshino

26

Energy-Pollution-Health-Economy Nexus Study in Southeast Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Farhad Taghizadeh-Hesary and Farzad Taghizadeh-Hesary

643

645

683

713 715

739

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Contents

Intermarket Risk Transmission Across Energy, Carbon, and Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fei Wu, Dayong Zhang, and Qiang Ji

Part XII 28

29

30

Wholesale Electricity Price, Carbon Emissions, and Economic Output in Australia: The Role of Carbon Pricing . . . . . . . . . . . . . Rabindra Nepal, Rohan Best, Thanh Le, Amir Arjomandi, and Nirash Paija

32

33

787

789

An Empirical Analysis of Reform and Efficiency in China’s Electricity Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chin-Hsien Yu, Xinhao Li, Xiuqin Wu, and Ping Qin

817

Identifying and Prioritizing the Indicators of the Optimal Districting in Electricity Distribution Companies . . . . . . . . . . . . . Payam Shojaei and Arash Haqbin

845

Part XIII 31

Electricity Market Policy . . . . . . . . . . . . . . . . . . . . . . . . . . .

761

Economics and Policy of Fossil Fuels . . . . . . . . . . . . . . . .

The Vulnerability to Oil Price Shocks of the Bangladesh Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sakib Amin, Laura Marsiliani, Thomas Renström, and Farhad Taghizadeh-Hesary Policy Dilemmas and Solutions to the Successful Energy Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dayong Zhang and Xunpeng Shi Transmission of Oil Price Fluctuations Through Trade Linkages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Farhad Taghizadeh-Hesary, Naoyuki Yoshino, Ehsan Rasoulinezhad, and Youngho Chang

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

877

879

909

935

957

About the Editors

Farhad Taghizadeh-Hesary is an associate professor of economics at Tokai University in Japan. In addition, he is vice president and co-founder of the International Society for Energy Transition Studies (ISETS). He is a recipient of the Excellent Young Researcher status from the Ministry of Education of Japan. Presently he is also a visiting professor at Keio University (Japan), Chiang Mai University (Thailand), Technology Studies Institute (Iran); a member of the research core on sustainability studies at Tehran University (Iran); and a distinguished research fellow at the University of Economics Ho Chi Minh City (Vietnam). He has taught as an assistant professor at Keio University and Waseda University in Japan. He is currently serving as editor-in-chief of the Journal of Environmental Assessment Policy and Management and associate editor/board member of several other journals, including Economic Change and Restructuring, Energy Efficiency, Singapore Economic Review, and Global Finance Journal. He has guestedited special issues for several journals, including Energy Policy, Energy Economics, Finance Research Letters, Economic Analysis and Policy, Resources Policy, Journal of Environmental Management, and Renewable Energy. He was recognized as a top global scholar in green finance based on a recent journal paper published in Renewable Energy (Elsevier) in 2022. His research credits include authoring more than 250 academic journal papers and book chapters and editing 16 books published by major publishers, including Springer Nature, Routledge, World Scientific, and the Asian Development Bank Institute. He led, managed, and has been involved in dozens of research, capacity building, and training (CBT) and consulting projects for xiii

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About the Editors

international organizations and financial institutions and governments of various countries. He holds a Ph.D. degree in economics from Keio University, Japan, with a scholarship from the government of Japan (Monbusho: MEXT). Dayong Zhang is currently a professor of financial economics at the Southwestern University of Finance and Economics (China). His research interests cover energy finance, climate finance, banking and finance, and general economic and financial issues in emerging economies. He is chief investigator of the National Social Science Foundation of China (NSSFC) Major Project and principle investigator of over ten research grants from the National Natural Science Foundation of China (NSFC) and other sources. He is co-founder of China Energy Finance Network, president of the society for the Studies of Climate Finance (SSCF) in China, vice president of the International Society for Energy Transition Studies (ISETS), founding editor of Journal of Climate Finance, and associate editor of a number of journals including: International Review of Financial Analysis, International Review of Economics and Finance, and Finance Research Letters. He has published over 100 articles in peer-reviewed journals. His research appears in the Energy Journal, Energy Economics, Journal of Banking and Finance, and other top field journals. He is on the Elsevier’s list of China’s Most Cited Scholars in 2020 and 2021; and also awarded the 2021 Clarivate Highly Cited Researcher in cross-field.

Contributors

Ghahreman Abdoli Faculty of Economics, University of Tehran, Tehran, Iran Sakib Amin School of Business and Economics, North South University, Dhaka, Bangladesh Amir Arjomandi University of Wollongong, Wollongong, NSW, Australia Rohan Best Macquarie University, Sydney, NSW, Australia Shirish Bhardwaj Alliance for an Energy Efficient Economy, New Delhi, India Hemlal Bhattarai Department of Electrical Engineering, Centre for Lighting and Energy Efficiency Studies (CLEES), Jigme Namgyel Engineering College, Royal University of Bhutan, Dewathang, Bhutan Youngho Chang School of Business, Singapore University of Social Sciences, Singapore, Singapore Sajad Barkhordary Dorbash Faculty of Economics, University of Tehran, Tehran, Iran Jaber Fallah Ardashir Department of Electrical Engineering, Tabriz Branch, Islamic Azad University, Tabriz, Iran Gianfranco Gianfrate EDHEC Business School, Nice, France Eflamm Gueguen EDHEC Business School, Nice, France Reza Hafezi Science & Technology Futures Studies, National Research Institute for Science Policy (NRISP), Tehran, Iran Arash Haqbin School of Economics, Management, and Social Sciences; Department of Management, Shiraz University, Shiraz, Iran Yugo Inagaki Faculty of Economics, Keio University, Tokyo, Japan Farkhondeh Jabalameli Faculty of Economics, University of Tehran, Tehran, Iran Qiang Ji Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China xv

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Contributors

Ridoan Karim Department of Business Law & Taxation, School of Business, Monash University Malaysia, Selangor, Malaysia Thanh Le University of Wollongong, Wollongong, NSW, Australia Jiajia Li College of Economics, Sichuan Agricultural University, Chengdu, China Xinhao Li Southwestern University of Finance and Economics, Chengdu, Sichuan, China Yanfei Li Hunan University of Technology and Business, Changsha, China Economic Research Institute for ASEAN and East Asia, Jakarta, Indonesia Chang Liu Institute of Western China Economic Research, Southwestern University of Finance and Economics, Chengdu, China Dian Lutfiana Economic Research Institute for ASEAN and East Asia (ERIA), Jakarta, Indonesia Laura Marsiliani Durham University Business School, Durham, UK Nandita Mishra Language for Specific Purpose (SPRÅK), Department of Management and Engineering (IEI), Linköping University, Linköping, Sweden Muhammad Mohsin School of Finance and Economics, Jiangsu University, Zhenjiang, China Firdaus Muhammad-Sukki School of Engineering and the Built Environment, Edinburgh Napier University, Edinburgh, UK Hammed Musibau University of Tasmania, Hobart, TAS, Australia Bhaskar Natarajan Alliance for an Energy Efficient Economy, New Delhi, India Rabindra Nepal University of Wollongong, Wollongong, NSW, Australia Riasat Noor The University of Adelaide, Adelaide, Australia Philip Odonkor School of Systems and Enterprises, Stevens Institute of Technology, Hokoben, NJ, USA Phanhpakit Onphanhdala Faculty of Economics and Business Management, National University of Laos, Vientiane Capital, Lao People’s Democratic Republic Nirash Paija Tribhuwan University, Kirtipur, Nepal Vanvisa Philavong Faculty of Economics and Business Management, National University of Laos, Vientiane Capital, Lao People’s Democratic Republic Tina Prodromou University of Wollongong, Wollongong, NSW, Australia Alloysius Joko Purwanto Economic Research Institute for ASEAN and East Asia (ERIA), Jakarta, Indonesia Ping Qin Renmin University of China, Haidian, China

Contributors

xvii

Ehsan Rasoulinezhad Faculty of World Studies, University of Tehran, Tehran, Iran Thomas Renström Durham University Business School, Durham, UK Sumaiya Noor Sanda Global Resource Mobilisation and Partnerships, BRAC, Dhaka, Bangladesh Francesco Sassi RIE – Ricerche Industriali ed Energetiche, Bologna, Italy Xunpeng Shi Australia-China Relations Institute, University of Technology Sydney (UTS), Sydney, NSW, Australia Payam Shojaei School of Economics, Management, and Social Sciences; Department of Management, Shiraz University, Shiraz, Iran Akanksha Singh Institute for Global International Relations, Tokyo, Japan Vijeta Singh School of Management-PG, MIT- World Peace University, Pune, Maharashtra, India Amirhossein Souhankar Knowledge-Base Economy Group, Technology Studies Institute, Tehran, Iran M. Subramanian Coimbatore, India Xiaolei Sun Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China Farhad Taghizadeh-Hesary School of Global Studies, Tokai University, Hiratsuka, Japan TOKAI Research Institute for Environment and Sustainability (TRIES), Tokai University, Hiratsuka, Japan Keio University, Tokyo, Japan Farzad Taghizadeh-Hesary ENT and Head and Neck Research Center and Department, The Five Senses Health Institute, School of Medicine, Iran University of Medical Sciences, Tehran, Iran Deepak Tewari Alliance for an Energy Efficient Economy, New Delhi, India Lilu Vandercamme School of Global Studies, Tokai University, Hiratsuka, Japan Faculty of Economics, Keio University, Tokyo, Japan Hadi Vatankhah Ghadim Department of Electrical and Computer Engineering, University of Tabriz, Tabriz, Iran Fei Wu Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China Xiuqin Wu Guizhou University of Finance and Economics, Guiyang, Guizhou, China

xviii

Contributors

Yan Xu Institute of Western China Economic Research, Southwestern University of Finance and Economics, Chengdu, China Naoyuki Yoshino Faculty of Economics, Keio University, Tokyo, Japan Chin-Hsien Yu Southwestern University of Finance and Economics, Chengdu, Sichuan, China Dayong Zhang Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China

Part I The Geopolitics of Energy Markets

1

Harnessing Win-Win Energy Geopolitics and Competitive Global Energy Market by Integrating Energy Efficiency Riasat Noor and Sumaiya Noor Sanda

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Background Scenario Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Defining the Fields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recent Changes in Energy Geopolitics That Are Impacting Global Energy Market and Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Channeling the Power of Geopolitics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affordable Energy Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Cooperation Will Change the Status Quo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Renewables Will Change the Energy Landscape, Yet Dependencies Remain . . . . . . . . . . . . . . Electricity Cut-Offs as a Geopolitical Weapon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How Energy Efficiency in Reshaping Energy Geopolitics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Renewable Energy Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pollution and Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Declining Costs of Renewables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and Investor Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of Energy Efficiency on Energy Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How Energy-Efficient Applications Create New Energy Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . Challenges for Smooth Transition to Energy Efficiency for Stabilizing Geopolitics in Energy Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Efficiency Policy Changes Alone Is Not Enough . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lack of Trust and Warmongering Mentality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bottlenecks in Critical Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cybersecurity Vulnerability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Synergistic Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 4 7 10 11 11 11 12 13 14 14 15 16 16 17 17 18 19 20 20 20 22 22 23

R. Noor (*) The University of Adelaide, Adelaide, Australia e-mail: [email protected] S. N. Sanda Global Resource Mobilisation and Partnerships, BRAC, Dhaka, Bangladesh © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_1

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Study Findings and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increasing Green Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increasing the Magnitude of Energy Efficiency Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diversifying the Sources of Energy Efficiency Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuing Energy Efficiency as Part of Grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regularly Measuring and Ensuring the Persistence of Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Formulating a Single International Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Institutional Frameworks at Regional Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Integrating Energy Efficiency Outcomes with Carbon Reduction Frameworks . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract

The energy-starved world is in dire need of a new formula for energy transformation. Energy efficiency is already in place, but it is in its infancy and being used for technology applications only. It is not being integrated into regional energy or electricity trading markets – which can usher immense benefit by improving regional cooperation and thus minimize tussle in energy geopolitics. Combining adaptive markets and resilient energy-efficient technologies can help alleviate some of the major geopolitical problems. Geopolitical tension in India-Pakistan relations, for example, can be mitigated by initiating a common energy market in the subcontinent. This trading market can be developed based on digital energy storage technologies (smart grids and IoT) for energy-efficient industry, transportation, and domestic applications. However, we generally attempt to address the conflicts of energy geopolitics by calculating the affordability or availability of energy resources (energy security), but we can bypass the notion of affordability by integrating energy efficiency in the equation. Through the “waste not, want not” philosophy, if we need less energy to complete the same activity, we will not have to worry about its price or even availability. Even the biggest component of energy transformation is energy efficiency which we tend to not incorporate during the discussion of energy geopolitics. The interconnection between the energy market and energy digitization is often more critical and can be addressed by energy efficiency, which has been laid out in this chapter. Keywords

Energy efficiency · Renewable energy · Energy geopolitics · Energy market · Climate change · Natural resources

Introduction Background Scenario Assessment The energy sources that power our civilizations have been changing at a breakneck pace. Renewable energy has evolved as a technologically practical and economically appealing long-term option which is increasingly capable of

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meeting the need of power and energy of many countries. The worldwide shift to sustainable energy sources is speeding up as addressing climate change becomes more essential and energy-efficient renewable technologies continuously enhance their capacity to supply our energy needs. Energy-efficient appliances, in particular, assist countries in achieving greater energy security and independence by allowing them to access world’s enormous renewable energy resources. The rapid development and integration of energy-efficient renewable technologies, as well as their broad adoption, will undoubtedly have long-term consequences on geopolitical parameters. In distinct global energy markets, the rapid deployment of renewables and integrated applications energy-efficient technology has put in motion a global energy change with important geopolitical ramifications. Energy efficiency – one of the twin pillars of sustainable energy – is responsible for industrial competitiveness in newly industrialized countries (NICs) and developing countries. In the new millennium, new realities affecting the energy industry are constantly emerging because of the environmental impacts of energy consumption and concerns about global sustainability. A strong interaction exists among energy, economics, technology, geopolitics, and sustainability. As renewable energy rises in parallel with greater energy efficiency and the continuing electrification of the global economy, new global competitions can be seen in the new geopolitical context. Increased cross-border trade in electricity and renewable-related fuels, goods, and services, as well as emerging alliances around energy technology, power grids, and trade routes, characterize this environment. Due to technological improvements and lower costs, renewable energy has developed at a faster rate than other energy sources. Most of the renewable energy technologies are already cost-efficient in the electricity sector, even if we disregard their impact on tackling climate change. These are accelerating an unstoppable global transition towards renewable energy. Massive transitions in the wind, solar, and other renewables are happening in the power industry as well as in other areas, thanks to the newer technologies. Electric vehicles and solar pumps are helping to extend the use of renewables in transportation and industry. Innovations in energy and grid digitization and energy storage technologies are allowing renewables to thrive in ways that were previously unthinkable. The fast adoption of renewable energy along with its energy-efficient applications has ignited a global energy revolution with far-reaching geopolitical ramifications. The global distribution of power, energy market relations, state relations, conflict risk, and the social, economic, and environmental causes of geopolitical instability are all being influenced by the energy transformation in the same way fossil fuels mapped the world power and politics two centuries back. Demand for fossil fuel is dwindling and alternative and clean energy sources are rapidly increasing. People are now more aware of energy-efficient applications in household, residential, and residential sectors. According to a sustainable development scenario developed by the International Energy Agency (IEA), peak demand outlook of oil production falls to 67 mbd by 2040. And according to UNEP

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Production Gap Report Scenario, oil production is assumed to fall to 40 mbd by 2040 (Fig. 1). Figure 2 gives us the regional impact of energy transition in global energy geopolitics.

Fig. 1 Long-term oil demand forecasts as of 2019

Net exports (orange) of fossil fule and imports (blue) as % of 2016 GDP

-10

-5

0

5

10

15

20

Middle East and North Africa

CIS

Sub-saharan Africa

Latin America

North America

Southeast Asia

China

Europe

South Asia

Japan

Small Island Developing States

Fig. 2 Regional impact of energy transition. (Source: World Bank, IMF)

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Defining the Fields Initially, “Geopolitics” was conceived as “a deterministic causal relationship between geography and international relations focused on the permanent rivalry, territorial expansion, and military strategies of imperial powers” (Overlanda, 2020). Over time, however, geopolitics started to “denote the influence of geography on the power of states and international affairs more broadly, with less emphasis on determinism and more on the strategic importance of natural resources, their location, transportation routes, and chokepoints” (Overlanda, 2020). Critical geopolitics emerged in the late 1990s (Tuathail & Dalby, 1998). Since then, the field has been divided into two camps: classical and critical geopolitics. From a critical geopolitical perspective, “geographic arrangements [are seen as] social constructions that are changeable over time depending on political, economic, and technological changes” (Amineh, 2003). However, for this chapter, it is considered the conventional definition of geopolitics: “great power competition over access to strategic locations and natural resources” (Overland, 2015). The topic of the geopolitics of energy efficiency and renewable energy was first discussed by the US scholars in the 1970s and 1980s. Northern European scholars, on the other hand, began to dominate the discipline after the year 2000. The widespread usage of modern renewables – first wind and solar electricity – began in Northern Europe. Researchers from Germany and the Benelux countries were among the first to explore renewable energy geopolitics. To give a holistic view of the interplay of energy geopolitics, a comparison of different aspects of fossil fuel technologies, energy-efficient technologies, and their relevance to the global energy market is given in Table 1. Some academics have attempted to determine which states are the most likely gainers and runner-ups (Stegen, 2018; Overland et al., 2019; Stang, 2016; Sweijs et al., 2014; Pascual, 2015). Most of these studies suggest that the energy transition will disproportionately affect large oil exporters (Table 2). As a result, the oil reserves of Brazil, Nigeria, Russia, Saudi Arabia, and Venezuela will most likely become “stranded geopolitical assets,” as Overland et al. coined the term (Overland et al., 2019). Table 2 demonstrates the geopolitical power play of different countries: “Energy Efficiency” is the concept of providing maximum energy supply to meet the growing energy demand. It can reduce import dependency and result in less environmental pollution. It reduces energy consumption without compromising consumer usage or country’s competitiveness. For example, 1 MW of power saved through energy efficiency is equivalent to about half or less than adding 1 MW of coal-fired generating capacity. Energy efficiency is increasingly becoming a critical consideration for countries that are promoting sustainable business and economic growth. Some products, such as energy-efficient light bulbs use less energy to produce the same amount of light. Other products do not use energy directly, but they improve the overall efficiency and comfort of a house or a building. Particular examples are: (1) LED light bulbs with an ENERGY STAR label that use 70–90% less energy than

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Table 1 Global interplay of fossil fuels, energy efficiency, and energy market Main aspects Resource availability Geographic location Resources control International competition International interdependence

Fossil fuels Very significant High

Energy efficiency Significant for critical materials Medium

Supply security Geopolitical tensions Critical materials Cybersecurity Key market aspects

Energy market Very significant

Centralized

Decentralized

High

Low

High

Highly important Frequent

Low for domestic reserve/high if imported Medium important Varies accordingly

Highly important Very frequent

No important

Important

Important

No important Demand and supply, exports and imports

Important Storage, intermittency, infrastructure management

Very important Demand and supply, exports and imports, regional grid, VRE

Extremely high Centralized (for regional market) Varies from regions High

an incandescent light bulb, while providing the same illumination; (2) energyefficient windows made with materials that reduce heat exchange and air leaks and need insignificant energy to heat or cool a space; (3) energy-efficient thermal insulation that does not need to use as much energy to keep house warm in the winter or cool in the summer; (4) Wi-Fi enabled smart thermostats that control heating and cooling in homes by “learning” temperature preferences and schedule to automatically adjust to energy-saving temperatures; and (5) energy-efficient homes that can have 24% less energy bill compared to $1900 for a typical household just by upgrading to efficient ENERGY STAR certified products (Energy Star, n.d.). “Energy Markets” are commodity markets that deal specifically with the trade and supply of energy. An energy market may refer to an electricity market but can also refer to other sources of energy like natural gas and oil. Energy markets are divided into two categories: regulated and unregulated. Traditionally, electricity markets in the USA were regulated, limiting customer choice. With the passage of the Public Utilities Regulatory Policies Act in the 1970s, the concept of deregulation became a reality. The energy industry entered a period of transformation because of this Act. As a result, the passage of the Energy Policy Act in 1992 further opened the market. The purpose of the Energy Policy Act was to boost the use of clean energy and improve energy efficiency. It gave utilities more options and established new rate-setting guidelines. Deregulated energy markets have extended throughout several states since then. All electricity is owned and operated by utilities in a regulated electrical market. The utility has complete control over the entire process, from generation through

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Table 2 Global energy power play

Least and most benefitting from EU energy transition (Vakulchuk et al. 2020) Saudi Arabia (least exposed)

Geopolitical winners vs. laggards (Vakulchuk et al. 2020) Main Main winners laggards Uruguay Brunei

Qatar

Namibia

Qatar

Kazakhstan

Kenya

Bahrain

Egypt

Mali

Kuwait

Libya

Sweden

TimorLeste

Russia

Finland

Algeria (most exposed)

France

Trinidad & Tobago Bhutan

Nicaragua

Slovakia

Honduras India Jordan Mongolia Sri Lanka China

Belize Georgia Bangladesh Gabon Samoa Puerto Rico

GeGaLo index of 156 countries (Vakulchuk et al. 2020) Main Main winners laggards Iceland Nigeria (No. 1 in the (149) index) Mauritania Sudan (2) (150) Guyana (3) Venezuela (151) Bhutan (4) Qatar (152) New Zealand North (5) Korea (153) Uruguay (6) DRC (154) C. African Iraq (155) Rep. (7) Mauritius (8) Yemen (156)

The USA Algeria Source: Overland et al. (2019)

metering. The utility corporation owns the infrastructure and transmission lines, which it then sells to customers directly. Electricity tariffs set by state public utility commissions must be followed by utilities in regulated states. Due to the lack of consumer choice, this market is frequently referred to as a monopoly. Its advantages, on the other hand, are steady prices and long-term certainty. A deregulated energy market, on the other hand, permits rivals to enter the market and buy and sell electricity by allowing market players to invest in power plants and transmission systems. The electricity generated by the generators is subsequently sold wholesale to retail electricity providers. The “supply” element of the power bill is sometimes referred to as the “supply” portion of the bill, because retail electricity suppliers determine pricing for consumers. It frequently benefits consumers by

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allowing them to compare rates and services offered by various third-party supply companies (ESCOs), as well as providing different contract arrangements (e.g., fixed, indexed, hybrid). In a deregulated market, energy-efficient renewable sources and green pricing plans are also more readily available (Energy Watch, n.d.).

Recent Changes in Energy Geopolitics That Are Impacting Global Energy Market and Usage Renewable energy’s rapid expansion and implementation of new global energy policy changes are redrawing the geopolitical map of the twenty-first century. New renewable energy superpowers are emerging because of power and influence shifts, as well as new interests. The transition to green energy can go one of two ways: a legacy path that prioritizes geopolitical interests, or a one that lowers international rivalries and encourages collaboration. Climate change and environmental challenges have heightened the importance of the latter. This collaboration is critical for a reliable and energy-efficient energy supply as well as the elimination of global energy poverty. The geopolitics of energy has altered over time as new discoveries and institutional, economic, and technical advancements have happened. In examining the energy system today, policymakers, businesses, and academics are confronted with some new realities. For example, new economic growth patterns can be noticed in the OECD and emerging economies, particularly in China along with political shifts and increased reform pressures, particularly in the Middle East. The creation of novel ways and processes for extracting current oil and gas resources, particularly shale and deep-water approaches, is emerging. On the other hand, national oil companies’ (NOCs) efficiency and professionalism – or lack thereof – are in question in the context of proper regulation in the face of environmental concerns and climate-change-related domestic and international measures. There is a global rise in resource nationalism. Emerging technologies are projected to alter customer preferences and allow the commercial usage of renewable energy sources over time. There is also the notion of changing national and international policies related to energy. For example, the USA and its international allies are changing foreign policy practices, and key producing and consuming countries are also changing their national strategies (Belfer Center for Science and International Affairs, n.d.). These factors will bring with them a host of geopolitical consequences. For example, the Arabian Gulf’s strategic importance has shifted and changes in the worldwide investment climate for oil and gas exploration and development in prominently noticeable. The vulnerability or robustness of specific countries, such as Russia, as well as their ability to use energy as a foreign policy tool, is also changing especially considering the current Russian-Ukraine war. This includes the USA’s proclivity for using sanctions as a foreign policy tool. Countries are decreasing reliance on monopoly markets to deliver energy supplies. And the creation of new international institutions is emerging to manage an increasingly complicated energy situation.

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In more recent times, some scenarios in energy geopolitics that are impacting the global energy market and usage are given below.

Channeling the Power of Geopolitics The Covid-19 pandemic, economic recovery initiatives, the IPCC report’s conclusions, and the aftermath of COP26 are all prompting extraordinary policy responses. The current mood for change, according to the International Renewable Energy Agency (IRENA), is the ideal time to switch to energy-efficient renewable energy. It is important for global sustainability, energy supply security, and economic growth, as well as for environmental reasons.

Affordable Energy Supply To continue growing and rebuilding industries for economic development, governments will need to secure affordable energy sources and energy generation. After measuring primary energy use, a country should design its national energy policy. Currently, countries that control fossil fuel energy resources and distribution infrastructure wield power, with transit regions playing an important role. Geopolitical interests will concentrate primarily across countries by setting up regional grids in the case of renewable energy and relating the growing importance of integrated regional power grids (Hübner, n.d.). This is good for countries who are already well-equipped to generate renewable energy, therefore collaboration is vital (IRENA, 2020a). Countries can work together on microlevel projects and energy policies to boost financial support and address important concerns (Power Engineering International, 2021). Energy and environmental regulation, climate risk mitigation, cooperative research and development, technology transfer, information exchange, and improving energy availability are all possibilities in this scenario.

International Cooperation Will Change the Status Quo Changing the status quo of fossil fuels in favor of energy-efficient renewables is not appealing to all governments. Resource-rich countries and countries that rely heavily on fossil fuels are adamant about not shaking them. Governments with limited resources and net energy importers, on the other hand, are prioritizing energyefficient technologies. Geopolitics will be used to influence the speed of energy transition due to regional disparities, divisions, and vested interests. Moreover, governments must accept the concept of a net-zero transition as a common aim. As a result, the only role geopolitics can play in the future is to support a transition based on universal and equitable access to energy. In response to a call for assistance, IRENA established the Collaborative Framework on Geopolitics of Energy Transformation (CF-GET) (IRENA, n.d.-b). The goal of the CF-GET is to promote

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discourse, highlight energy policy options, and assist governments in preparing for a clean and efficient energy transition.

Renewables Will Change the Energy Landscape, Yet Dependencies Remain Most energy geopolitics is focused on oil and gas, but it does not mean renewables are exempt. Green energy is expected to contribute 70–80% of global power supply by 2050, according to the IEA and IRENA (IEA, 2021a; IRENA, 2020b). Massive energy trade adjustments are likely because of such increase. Unlike fossil fuels, which are reliant on major producers such as Saudi Arabia and Russia, clean and energy-efficient technologies are widely available. While switching to sustainable energy would make universal access to electricity more affordable, it will not eliminate reliance on resource-rich countries. It could mean a new reliance on countries with abundant raw materials to supply materials for batteries and other items. China, for example, manufactures most solar panels and is a major battery manufacturer and six of the top ten wind turbine manufacturers are based there (Dlouhy, 2021; IRENA, 2020c; BizVibe, 2021) (Fig. 3). Fig. 3 Solar panel marking capacity in China and the USA (Source: Bloomberg)

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According to the IEA, demand for raw materials required for a sustainable energy transition will increase by 3–6 times. However, it acknowledges that geographical variety in raw material extraction and processing is a serious challenge (IEA, 2021b). Similarly, the hydrogen trade is fraught with danger. Unfavorable export terms might put pressure on companies with limited production options in regions with vast, low-cost manufacturing potential. Countries with access to raw resources such as copper, graphite, cobalt, and lithium will have more control over the supply chain in the future. However, a common feature of many of these countries is a lack of effective governance (Marshall, 2020). This could result in an increase in geopolitical interest and pressure from key superpowers. It will also highlight the risk of emerging strategic rivalries and weaknesses, similar to today’s petroleumbased wars.

Electricity Cut-Offs as a Geopolitical Weapon The growth of energy-efficient technologies is resulting in increased electrification and cross-border electricity trading. Renewable energy sources that fluctuate in supply and demand, such as wind and solar, necessitate flexible power systems that can handle real-time demand and supply fluctuations. This demand for flexibility can be successfully addressed by market capacity, smart grids and synchronization, and energy storage technology, as well as high-voltage direct current (HVDC) power lines among nations. Some worry that countries with dominating power systems would exert undue influence over their neighbors, and that interstate energy blackouts, like oil and gas sanctions, will become a vital foreign policy tool. Unlike oil and gas trading, which flow in one way from an exporter to an importer, electricity travels in both directions. When it rains, a country generating solar electricity may get energy from a neighboring country and when the sun shines, that neighboring country may export energy to that country. Electricity has a less exclusive link between suppliers and purchasers. Natural gas, on the other hand, requires fixed pipelines or LNG terminals. When Russia cut off gas supplies to Ukraine in 2009, harming European consumers downstream, European countries had limited alternatives to Russian gas. However, as more countries produce clean power and build interconnections, they will be less vulnerable to a boycott since they will be able to produce more domestically or import it from a variety of sources. Even if a renewable energy exporter gains a powerful alignment in relation, that difference cannot readily be leveraged as an international pressure tool. In this case, countries’ will be two options: either produce their own electricity at home, such as through using renewable energy technologies, or importing electricity through crossborder electricity trading from neighboring countries. This is the reason, trading of renewable energy will be confined in a matrix of importer-exporter interconnections, restricting their potential to use renewable energy as a geopolitical weapon. Cross-border electricity trading, on the other hand, has the potential to foster regional collaboration and the formation of “grid communities.” Examples include

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the Scandinavian countries, who have been trading electricity for decades (Nord Pool). The ASEAN power grid, Africa’s five subregional power pools, Central America’s SIEPAC111, and the Middle East’s SIEPAC111 are all establishing regional electricity pools. To oversee cross-border grids, governments will need to implement appropriate processes that allow power to flow freely in well-regulated and transparent markets (IEA, 2016). For example, the EU Agency for Cooperation of Energy Regulators (ACER) supports the smooth running of Europe’s single energy market. The IRENA Clean Energy Corridors (CEC) project, which is part of NEPAD’s African Infrastructure Development Program, advocates for electricity trading between regional energy markets (Roques, 2021; IRENA, n.d.-b). The African Continental Free Trade Area also creates new opportunities for regional and subregional integration and connectivity.

How Energy Efficiency in Reshaping Energy Geopolitics Energy efficiency allows for economic growth while using less energy. Energy demand grew at a 3% annual rate over the twentieth century, roughly in line with world GDP growth. Primary energy demand is expected to grow at a 1% annual rate between now and 2040. Strong support for electric mobility, alternative fuels, and energy efficiency practices are already reshaping the global energy usage, parameters, and geopolitical interconnection. In particular, the following drivers of energy efficiency adaptation are reshaping energy geopolitics:

Renewable Energy Targets The financial case for energy-efficient renewable technologies and the need to undo the dirty energy industry have pushed a number of governments to raise their expectations and take initiatives to elevate their stance on renewable energy. Till date, 57 states have committed to decarbonizing their power sectors altogether, while 179 have set national or state renewable energy targets (Renewable Energy Policy Network for 21st Century (REN21), 2018). Governments first subsidized and mandated renewable energy, but they are gradually turning to competitive auctions, which are providing cheaper rates (IRENA, 2017a). Due to a paucity of oil and gas reserves and a desire to be less reliant on imported energy, many countries are converting to renewables. While adaptation to renewables seems expensive, even many are switching to energy-efficient renewable energy sources. Unless it changes course, India, for example, would become increasingly reliant on costly energy imports (International Energy Agency, 2018). One of the reasons it has set lofty renewable energy goals is because of this. Several major oil-producing countries are also trying to boost renewable energy’s part of

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their energy mix. By 2050, the UAE’s energy policy aims for 44% renewable energy integration and 70% less in carbon footprint. In a number of countries, local governments and municipalities have stepped in to fill the hole created by central governments’ slow implementation of renewable energy laws. California has established a goal of using 60% renewable energy by 2030, while cities from Mexico City to Madrid have declared diesel automobiles illegal.

Pollution and Climate Change Due to issues such as air pollution and climate change generated by fossil fuels, governments, firms, and common people have acknowledged the need for a cleaner energy transition. Pollution, occurs mostly from the burning of coal and oil, has made the air dangerously unbreathable in places, such as Dhaka, New Delhi, Beijing, and even Paris. According to the WHO, nine out of ten people worldwide inhale toxic air which is damaging their mental and physical health and well-being. Air pollution and related complexities are responsible for the death of seven million people worldwide every year, making it the fourth most dangerous cause of death (World Health Organization, 2018). Humanity and the earth’s ecosystems face an existential threat from climate change. Unless aggressive initiatives have been taken to neutralize the energy industry, the world will not meet the goal of Paris Agreement of keeping CO2 emissions at present levels to uphold “the increase in the global average temperature to well below 2  C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5  C above pre-industrial levels.” A recent IPCC report adds to the growing body of scientific evidence supporting the need to limit global warming to 1.5  C or less to avoid long-term or irreversible effects, such as the loss of important ecosystems (Intergovernmental Panel on Climate Change, 2018). Currently, the globe is on track to raise global temperatures by at least 3  C by the end of the century, compared to pre-industrial levels (UN Environment Programme, 2018). Another recent scientific report warned that if global temperatures rise by more than 2  C, the globe might be thrown into a “hothouse” state. As the energy and its derivative sectors contribute for 67% of global emissions, most pathways to a low-carbon economy would entail significant renewable energy deployment and a doubling of energy efficiency (Intergovernmental Panel on Climate Change, 2018). According to IRENA research, using renewable energy in combination with improved energy efficiency is the most cost-effective way to achieve 90% reduction in energy-related emissions (IRENA, 2018b). The Sustainable Development Goals (SDGs) include an energy goal of providing universal access to modern energy services by 2030, doubling the rate of improvement in energy efficiency, and significantly increasing the share of renewable energy in the global energy mix.

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Technological Innovation Other technological developments, such as higher solar photovoltaic (PV) module efficiency and taller wind turbines, have contributed to the rapid adoption of energy efficiency. Clean energy technologies have seen more technological innovation than traditional energy businesses like fossil fuels and nuclear power, according to patenting rates (EPO, UNEP and ICTSD, 2010). In the long run, next-generation biofuels and electrolysis-generated renewable hydrogen sources may allow renewables to penetrate a growing number of hard-to-electrify industries like aviation, shipping, and heavy industry (IRENA, 2017c, 2018a; Energy Transitions Commission, 2018). New frontiers are also being paved by digitalization and energy storage advances. Artificial intelligence-enabled smart grids synchronization, big data, internet, and the internet of things (IoT) are just a few of the new digital technologies being utilized in this sector to boost energy efficiency. This is also helping to boost the use of renewable energy in smart generation, transmission, and distribution systems. Energy storage, which is critical for variable renewables like wind and solar, is also being created with new energy technologies. Batteries, notably those found in electric vehicles, are projected to become a major storage technology in the future. Boilers, heat pumps, and chilled water can all be used to store electricity in a thermal form. Other solutions for long-term storage include compressed air energy storage or hydrogen.

Declining Costs of Renewables With the declining cost of renewable energy technology, integration of renewable energy in the commercial arena can be a major win-win situation for everyone. For many years, proven renewable energy technologies such as hydropower and geothermal have provided cost effective solution for many remote and hard-to-reach areas. Solar and wind resources, on the other hand, have gained a competitive advantage because of technological advancements and greater investment opportunity. Solar and wind power, formerly dismissed as too costly to develop outside of specialized markets, can now compete on price with traditional generation technologies in many of the world’s most competitive sectors, even without subsidies (Bloomberg New Energy Finance (BNEF), 2018; Marteka & Slaughter, 2018). Since 2010, the average cost of power generated by solar PV and wind energy has reduced by 73% and 2%, respectively. In countries as different as Chile and Saudi Arabia, India, and the USA, electricity is produced in ideal places for around $30 per megawatt hour (MWh). In 2022, the average cost of solar- and wind-powered electricity has lowered more than the cost of electricity generated by fossil fuels, according to auction prices. The price of electric vehicles’ batteries that run on lithium-ion has been reduced by 80% in price compared to the 2010 price (Bloomberg New Energy Finance (BNEF), 2018). As a result of these cost reductions, competitive business models and the economic motivation are increasingly driving investments in renewable technologies.

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Significant cost reductions are projected to continue in the coming decade. Onshore wind, offshore wind, concentrated solar power (CSP) technologies, and solar PVs, according to IRENA, could cut world weighted average electricity costs by 26%, 35%, and 59%, respectively, by 2025 (IRENA, 2016). The cost of stationary battery storage could drop by as much as 60%, and there is rising optimism that electric and conventional vehicles would be supplied at comparable pricing (IRENA, 2017b; Hodges, 2018).

Corporate and Investor Action Corporations’ actions are also causing change. Investor groups like DivestInvest and CA100+ are pressuring companies to reduce their carbon footprints. During the COP24 climate meeting in Poland in December 2018, a group of environmental investors representing over 32 trillion dollars declared their full allegiance to the Paris Agreement and promised to increase climate financing (Climate Action 100+, n.d.). They recommended that governments put a price on carbon, reduce fossil fuel subsidies, and phase out thermal coal power (IIGCC, 2018). Some private banks, including HSBC and the Norwegian sovereign wealth fund, are taking steps to move away from coal. Multilateral development banks such as the Asian Development Bank have vowed to divest from coal financing. The World Bank, among other major international development institutions, has discontinued sponsoring coal projects. According to major insurance companies such as Allianz and AXA, insurance coverage for individual coal projects would be phased out. In addition, several of the world’s most influential firms have pledged to get 100% of their electricity to be generated from renewable sources and cut supply chain, if possible, to reduce carbon footprint. Apple and Microsoft, for example, recently announced that their production facilities fully renewable energy run. Other industrial giants, such as IKEA, Tata Motors, and Walmart, have pledged to generating total of their electricity from renewable energy sources (RE100, 2018). The carbon risk to major firms, particularly those in the fossil fuel industry, is now well understood (CDP, 2019). Shell, for instance, added a goal to decarbonize by about 20% by 2035, including emissions from its customers, in response to mounting investor pressure (Financial Times, 2018). ExxonMobil, Equinor, and other large oil companies are also in favor of a carbon tax.

Public Opinion Public opinion also can be a big driving force for change. Global consumers are now increasingly selecting products and services with a lower carbon footprint, and governments and businesses are reducing carbon emissions by avoiding printing on paper or setting air conditioner at 25 degree Celsius. The moral case for addressing climate change is being bolstered by religious leaders. Pope Francis, for example, called for the phaseout of fossil fuels in his encyclical letter Laudato Si

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(Encyclical letter Laudato si’ of the Holy Father Francis on care for our common home, 2015). Words and deeds are used to express public opinion in a variety of ways. Protests against air pollution have taken place all across the world, from Beijing to London. Around 15,000 Australian schoolchildren went on strike to urge that their government act against climate change (Climate change strike: Thousands of school students protest across Australia, 2018). Two new social groups, “Extinction Rebellion” and “the Sunrise Movement,” are calling for immediate action to reverse climate change (Sunrise Movement, n.d.). Litigation, too, is on the rise. The Dutch government was ordered by a Hague court to reduce greenhouse gas emissions by at least 25% by 2020, compared to 1990 levels (Urgenda, n.d.). Several of the world’s major oil and gas companies are embroiled in legal battles with cities, governments, and even children over the industry’s role in global warming. As a result of these dynamic forces of change, the global energy transformation is gaining traction and speed.

Impact of Energy Efficiency on Energy Markets Unlocking energy efficiency potential is a key strategy for managing energy demand growth and cost-effectively reducing carbon emissions. The IEA estimates that the world will require a cumulative global investment of $24.5 trillion to tap into all available cost-effective energy efficiency potential up to 2040. Nevertheless, the global market fails in delivering this full potential of energy efficiency. Most recently more than 80 countries have changed their energy efficiency policy mechanisms such as energy efficiency labeling and standardization compared to their last years. This, however, is instrumental for the public and private sectors to initiate cost-effective and energy-saving technologies for the common market. Market competitive instruments are vital to provide a stable pricing in the market that can ensure more energy saving and save consumer costs. This can be used by the government agencies as well as they will need less implementation effort for energy efficiency, and legal and regulatory enforcement. Financial steps may consist of the measures with improving energy efficiency financing modeling including loans, grants, and subsidies for related investment. This may also include implementation of related policies to welcome public-private and other third-party investments. Energy markets are mostly impacted by incorporating energy trades or crossborder energy trading (CBET) among mutually benefiting/neighboring countries. Renewable energy will result in new interdependencies and links between bilateral and multilateral trading countries. This way, the load of energy dependency will move from international to regional and trans-regional networks. The oil importing countries will try to develop renewable energy at home and integrate their networks with those of their neighbors. Electricity is taking center stage as the world transitions to more energy-efficient renewable technologies. Oil and liquefied natural gas (LNG) are globally trade, whereas electricity is a commodity which as traded at regional level. When electricity is delivered across great distances, much of it is lost due to present technologies.

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As a result, global energy markets are expected to become increasingly localized. However, the ultra-high-voltage (UHV) transmission lines can be a good option to reduce losses and hence improve electricity trading across greater miles. The commerce in fossil fuels now amounts for roughly 15% of total merchandise trade. Renewable energy technologies and electricity, rather than fuels, will account for a higher part of the remaining energy-related trade if less fossil fuel is exchanged. Exceptions may include hydrogen (made with both renewable and conventional energy), synthetic fuels, and biomass. As energy-efficient technologies are less geographically concentrated, countries are concentrating their efforts on areas where they have a competitive advantage, such as technology transfer, adaptive pricing, and transportation costs. With the frequent changes in energy trading maps, geopolitical power play and relations take new form. A single hegemon’s ability to exercise influence through dominating the strategic chokepoints of international water such as the Straits of Hormuz or Malacca will be constrained in a world where energy can be produced practically anywhere. As a result, some marine trade routes will become less essential. Grid infrastructure control is becoming more crucial for ensuring national energy security. Grid infrastructure consists of electricity lines and storage facilities, as well as virtual links that are becoming more prevalent as the industry is becoming more digital.

How Energy-Efficient Applications Create New Energy Markets The transition to energy-efficient applications in household, residential, and transport sectors is already creating new trade patterns in the international energy markets. Cross-border energy trading is increasing with decline in fossil-fuel based technology transfer. Trade in at least three other areas is also growing. Trade in items and technologies connected to renewable energy: Including technologies, such as solar PV panels, smart metering, and batteries, as well as their components (such as wind turbine blades or hydropower water wheels) and related services, such as engineering, procurement, and installation. Because greater interconnections make grids more reliable and resilient, electricity trade is already expanding. Solar and wind energy, for example, are variable renewables (VRE) that require flexible and interconnected power networks capable of balancing supply and demand in real time. Electricity interconnections can be built across neighboring countries, across regions, and even across continents. Renewable energy fuels may also see a major increase in trade. Hydrogen can be produced by electrolysis in areas with abundant renewable energy sources, such as Patagonia or the Australian outback. In addition to hydrogen, renewable electricity can be used to make a range of synthetic fuels such as ammonia, methane, and methanol. Seasonal storage of renewable electricity (which was previously only conceivable with pumped hydro) is now possible with these fuels, while existing infrastructure in natural gas pipelines is being utilized. They have the potential to

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reduce emissions in hard-to-electrify industries including aircraft industry and other industrial processes (International Aspects of A Power-to-X Roadmap, 2018).

Challenges for Smooth Transition to Energy Efficiency for Stabilizing Geopolitics in Energy Market Although there is potential for increased trade, the number of trade disputes involving energy-efficient renewable technology has increased in recent years. Tariffs, discriminatory subsidies, and conflicting technical requirements in different nations may stymie trade in renewable energy commodities and energy-efficient applications. To ensure a level playing field in energy-efficient activities, governance considerations, particularly norms and legislation, will need to be considered in the future. Other major blocking factors are discussed below.

Energy Efficiency Policy Changes Alone Is Not Enough The geopolitical map of global energy resembles a house of cards. Long-standing tensions between heavyweights like China and the USA still exist, but they were significantly reduced at COP26. However, once the transition to renewable energy is underway, there is no guarantee that they would not reemerge. As a result, political leaders must avoid allowing geopolitical interests to obstruct climate initiatives. Otherwise, dealing with climate change challenges will be challenging (Jones, 2021). Although most energy geopolitics is centered on oil and gas, this does not mean that renewables and energy-efficient technologies are unaffected. Green energy is expected to contribute 70–80% of global electricity supplies by 2050, according to the IEA and IRENA. As a result of this expansion, huge energy trade shifts are anticipated to occur (IEA, 2021a; IRENA, 2020c; Tachev, 2021).

Lack of Trust and Warmongering Mentality Building cooperative grid links between governments is hampered by a lack of willpower. During the Oslo peace process, a plan to create grid interconnections between the Arab countries and Israel was proposed to foster confidence. Due to a lack of confidence among the participants, these plans did not materialize. As a result, Israel continues to be referred to as an “electrical island.” Whenever geopolitical tensions have escalated between these two nuclear states, for example, India and Pakistan, the relationship has grown bitter, but both countries have avoided full-scale confrontation. The threat of “Mutually Assured Destruction (MAD)” from nuclear weapons is acting as a deterrent to full-scale war. However, the positive forces need to take the lead in driving peacebuilding in the region as opposed to the negative and destructive ones. What is needed in the region is to put

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in place mechanisms for “Mutually Assured Benefits (MAB),” acting as deterrent to noncooperation and motivations for maintaining peace. In other words, the MAD doctrine needs to be replaced by the philosophy of MAB. This can come in the form of enhanced energy cooperation in the region, resulting in increased prosperity through mutual, positive dependencies. As socioeconomic benefits resulting from power and energy trade increases, the costs of noncooperation will commensurately rise. This will deter conflict, incentivize cooperation, and lay the foundations of lasting peace and prosperity for the region. There also is a clear link between energy security and peace, as lack of energy security can destabilize a country and the surrounding region. Case in point is the situation in Egypt as was pointed out by Middle East Expert Karin Kneissl at the third regional roundtable on the impact of energy on security in the International Peace Institute in 2014. Lack of energy security contributed to social discontent leading to the Arab Spring uprising, while resulting political chaos have now created even greater energy instability. With regional power and energy trade, the rising demands for electricity can be met and energy security can be enhanced through diversification of energy mix. Enhanced energy supply resulting in regional trade and cooperation also contributes directly to poverty alleviation which in turn reduces risk of conflict and insurgency. Thus, to eliminate human poverty, energy poverty needs to be eliminated first (Indrawati, 2015). The reason is simple: access to energy opens many doors for the poor, granting access to information, boosting income, and enhancing efficiency. Real-world examples of mutually beneficial regional power and energy trade abound, meaning countries will have to adopt to what already has been tried and tested. Experts have made it very clear through extensive research and analysis that win-win multilateral cooperation in power and energy exists. Nations linked by energy commerce are far less likely to engage in hostilities, resulting in peaceful, prosperous, and cooperative regional economies (Kammen, 2015). The Baku-Tbilisi-Ceyhan gas pipeline connecting Azerbaijan, Georgia, and Turkey, and the Chad-Cameroon petroleum pipeline are examples of how pipelines can bring more than just revenue to their host countries; they can contribute to the amelioration and even resolution of local conflicts (Ali, 2011). This potential was noted by Balaji Sadavisan, Singapore’s Senior Minister of State for Foreign Affairs: “Pipelines have a real chance to increase peace and security in the region: they tie countries together by making the interconnected costs of conflict unacceptably high” (Sovacool, 2009). Another case in point is the energy relations between Japan and Russia, two countries who are “technically” still at war, as no peace treaty has been signed between them after World War II due to territorial disputes over ownership of the four Kuril Islands. Russia has been occupying the islands since the war ended while Japan still claims ownership. The political leadership of both countries has shown wisdom and maturity in quarantining the geopolitical tensions, and not allowing it to interfere in matters where win-win economic gains can be reaped. Today Russia is a major exporter of crude oil to Japan, and there are ongoing talks to construct an undersea gas pipeline connecting Russia and Japan.

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Bottlenecks in Critical Materials There is a need to investigate the energy transformation’s time and space in greater detail. If we consider country-by-country and region-by-region, as well as what new opportunities and problems arise at various stages of the shift, it all boils down to acquiring a better understanding of the geopolitical implications of renewables, notably solar and wind power, which are rapidly gaining pace. Lack of access to power networks, damming rivers for new hydropower projects, critical material shortages, and the difficult co-development of microgrids and super grids are just a few examples. Difficulties such as renewable technology rivalry, stranded oil assets, and reduced long-term energy dependence are likely to emerge at various stages of the transition. Energy-efficient solutions of renewable technology and batteries require minerals such as lithium. However, it is projected that countries with plentiful supplies of these vital minerals will use them to exert pressure on those who do not. This opinion gained popularity when China banned the supply of battery minerals and others rare earths to overseas buyers in 2008. Markets panicked as China gained control of a large percentage of the worldwide supply of rare earth minerals, causing international prices to skyrocket. However, these resources are abundantly found, but mining and manufacturing them is costly and polluting. This is one of the reasons why the USA has refrained from challenging China’s dominance in rare earth production since the 1990s. Because new mining projects have extensive lead times, it takes time for supply to adjust when demand increases; as a result, prices rise. When demand rises, supply takes time to respond due to long lead times for new mining projects; the longer time causes prices to rise; over expense leads to overinvestment; consequently, a volatile market is created followed by price collapse, and a new cycle begins. The same happened after China imposed export restrictions: as prices soared, investment poured into mining operations, causing prices to plummet in 2012 (Overland, 2019). There are alternative sources to rare earths elements in renewable technologies. Rare earth elements are employed in just a small percentage of wind turbines, and cobalt-free batteries are being created (less than 2% in the USA). Some minerals can be reprocessed, repurposed, and hoarded, further reducing their seeming scarcity (Lovins, 2017). Cartels holding key resources are unlikely to emerge because of these qualities. Building and maintaining cartels is challenging. Oil is the only natural resources that did not face any price hike in the last centuries, despite cartel activity in tin, coffee, sugar, and rubber. Cartelization is further hampered by international trade rules. Finally, the USA, Japan, and the European Union successfully challenged China’s decision to restrict rare earth exports to the World Trade Organization (WTO) in 2014.

Cybersecurity Vulnerability The energy shift is taking place in tandem with another groundbreaking trend: digitization. Digitalization is becoming increasingly vital in grid synchronization.

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It is enabling balanced reaction to electricity demand while blurring the difference between production and consumption. The increase of digitization, however, is raising privacy issues in the absence of a worldwide grid synchronization. For a variety of reasons, including fraud and theft, military and industrial espionage, criminal gangs, terrorists, or hostile country, security agencies may infiltrate digitalized appliances under utilities and grids. In the worst-case scenario, cyber attackers may aim to interrupt, sabotage, or destroy industrial infrastructure, including the power supply. The “internet of things,” which allows consumers to link household appliances, electric vehicles, communications equipment, and energy infrastructure, is expanding and creating additional entry points and targets for cyberattacks. The cyberattack on Western Ukraine’s power grid in December 2015 is a common example. Hackers were able to hack power distribution centers’ computer systems with malware and shut down 30 substations, stranding over 230,000 people for up to 6 hours. This incidence is the example of potential cyberattacks against electricitypowered digital systems (Overland, 2019). While cyberattacks are a serious concern, they must be viewed in context. The threat of cybercrime precedes the energy transition. Systems under traditional electricity grids such as internet banking are vulnerable to cyberattacks. However, by definition, anything connected to the internet of things (IoT) is vulnerable to cyber hacking. Unauthorized access to energy systems is already being addressed by grid providers throughout the world. Companies are becoming more aware of cyberattacks and developing contingency plans, while grid operators have developed rules to secure the grid. New smart grid technologies are being developed with cybersecurity as a top focus. To further reduce the risk, the international community should take decisive steps to adopt shared cybersecurity standards and rules.

Synergistic Technological Innovation The ability of a country to develop and implement energy efficiency is a critical indicator of its resilience in the global energy change. To select a proper, individualized innovation mix for each country, a systematic method is required, combining technology improvements with those in market design, business models, and system operation. The latest IRENA Innovation Landscape research is a critical first step in identifying the wide spectrum of innovations available. These could help accelerate the proliferation of energy efficiency to meet demand and accomplish a worldwide and equitable energy transition. But it is about more than just technological advancement. According to a recent research of Latin American societal elites, corruption, bureaucracy, a lack of international coordination, and significant public-private investments are the most significant impediments to scaling up wind and solar capacity and developing supra-regional power systems. In South Asia, for example, lack of synergistic grid structure results in regional tussle and noncooperation in hydropower sharing. Although Bhutan and Nepal have huge hydropower potential which can be shared with Bangladesh during May–

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September seasons, it is being hampered due to the lack of technical synchronization.

Study Findings and Recommendations The analysis of this work and other literatures reveals that while enough research and literature on energy efficiency, energy markets, and geopolitics covers a substantial academic vacuum, it also has severe flaws and gaps. Although the media can look into the matter of fossil fuels, there is an inherent biasness on oil and producing coal heavy countries such as Australia, China, Germany, Indonesia, Poland, and the USA. There is also a lack of focus on countries specifically on energy-efficient renewable energy technologies that rely heavily on coal power. On the plus side, because the transition to energy-efficient renewable technologies is still in its nascent stages and will not be fully realized for decades, there is still time to address these shortcomings. It is critical to acknowledge that the exploration period is over, and the initial observations have been made. For a long time, energy statecraft has been the practice of employing energy resources as foreign policy instruments. In a world dominated by renewables, energy resources will lose a lot of their value as geopolitical instruments. “No one can ever embargo the sun or prevent its transmission to us,” said the former US President Jimmy Carter (Tolchin, 1979). Dependence on other technologies, such as biofuels or hydrogen may result in new ways of dependency and weaknesses. On more specific level, the following recommendations can be considered as a way to promote more energy efficiency to tackle energy geopolitics:

Increasing Green Investment It is well known that there is no single instrument that can deliver the solution to green finance investment which is the hearth of promoting energy efficiency. Identifying the optimal ecosystem of interventions across regions will require more detailed analysis. However, several promising areas have emerged that can be explored to harvest maximum benefit. In this aspect, some of the key recommendations are: • Green investments will be encouraged if the region can develop proper green investment platforms. They could unite the diverse ecosystem of financial institutions required in more complex transactions. They could also bring together a broader universe of stakeholders, including commercial entities, academia, and NGOs. • It is equally important for the companies to voluntarily disclose environmentrelated financial risks to the investors, insurers, and pertinent stakeholders.

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• Crucial tools and technical knowledge on green finance can be developed and disseminated for the financial market. This may include green asset management, typologies setting, and devising new tools to address the growing environmental issues. • A dedicated green investment portfolio can be developed by aggregating assets, public funds, and including new financial mechanism such as environmental insurance. • Digital finance can be introduced to connect SMEs using green finance. In this way, related costs can be reduced by using mobile or crowdfunding platforms. Green fintech solutions can also help mobilize pools of domestic savings for green investment by harnessing the ability to acquire and process information at greater speed, lower costs, and heightened trust level. • Green finance roadmaps are necessary to facilitate green finance and provide required technical support. The roadmaps should include methodological longterm planning to assess needs, identify challenges, and prioritize actions.

Increasing the Magnitude of Energy Efficiency Savings Overcoming these obstacles necessitates considerable changes in the energy efficiency policy framework and agency governance, in addition to technology innovation and increased market tactics. Changes in how agencies interact with one another and with stakeholders, as well as how they define and track efficiency results, embrace policy standards, and how they use market forces to harness energy efficiency, are all critical. Next, energy efficiency has generally performed a cost-cutting role by lowering overall utility system expenses as well as giving direct customer savings through lower energy bills. As demand is increasing for energy efficiency, this paradigm will be pushed in new directions. Achieving extra energy efficiency from “lower-hanging” and more variable sources of energy may necessitate considerable growth in utility consumer spending and lowering the perceived value of energy efficiency in its conventional position can be done as a cost-cutting technique. Furthermore, the timing of energy efficiency deployment is critical to avoid the construction of expensive marginal generation, even if the products are clean or carbon-free. The interaction of policies, energy, and climate must be analyzed, and the benefits of energy efficiency must be fully valued in comparison to the prices of both supplydemand side resources and other greenhouse gas mitigation initiatives. Savings in energy efficiency are especially important because they cut energy costs for customers and the entire system. The entire cost of attaining carbon objectives rises dramatically if energy efficiency is not improved. At the customer level, supply-side low-carbon grid technology can save significant amounts of energy (and money). In reality, as the entire energy system decarbonizes, energy efficiency’s role switches from emissions reduction to cost reduction.

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Diversifying the Sources of Energy Efficiency Savings It is also needed to diversify our sources of efficiency savings and work on eliminating energy waste, whether it is due to equipment, operations, or human behavior. Indoor lighting measures account for most reported customer-funded electricity savings. Lighting, in advanced economies, continues to be the most popular energy efficiency initiative, accounting for 46.4% of all gross energy savings in California in FY 2013–2014 (California Municipal Utilities Association, 2015). While lighting has traditionally provided the most cost-effective savings (offsetting the more expensive or non-resource programs, ensuring a cost-effective portfolio for utilitycustomer funded programs), building codes and mandates are reducing the “lowhanging” availability of low-cost lighting retrofits for these voluntary efficiency programs. Lighting efficiency, particularly with LEDs, should be pursued indefinitely because there is still a lot of room for improvement. In most cases, non-lighting end uses in buildings account for 78% of the residential sector and 71% of the nonresidential sector. Plug loads and miscellaneous loads are the principal categories of consumption in the residential and nonresidential sectors, respectively (California Energy Efficiency Statistics, n.d.). According to the Natural Resources Defense Council (NRDC), although accounting for two-thirds of the state’s home electric use, plug-in technology accounts for only 12% of efficiency program power savings in California today. Deeper savings also necessitate methodologies that focus on collecting wholebuilding and system-wide savings, which necessitates spanning numerous end uses and examining all potential savings in buildings. Increased efficiencies in building operation, linked to the use of miscellaneous loads and equipment, and an emphasis on all savings in existing buildings, not just from an “above code” baseline, are examples of diversification in the sources of efficiency savings. Existing programs, hindered by cost-effectiveness and other constraints that are not reported and do not value all services delivered, are not substantially exploring these areas.

Valuing Energy Efficiency as Part of Grid The objective of the electric grid remains the same: to ensure that homes, businesses, and industries have adequate, reliable, and usable sources of energy. However, the grid’s approach to achieving this goal is evolving significantly with the integration of energy-efficient technologies. The supply system, grid functions, and the role of customer loads and resources are all changing because of utility decoupling, increased distributed generation integration, carbon pricing, and smart grid technology. It is necessary to change our perspective on energy efficiency and its usefulness to the grid as the system transitions. Demand-side load reductions and flexibility that are properly targeted will assure grid reliability, maximize the utilization of grid investments, and lower grid costs. Energy efficiency can be used here by:

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Putting off investments in transmission, distribution, and generation systems: Energy efficiency, which can be targeted by location and load shape, can help with grid constraints by improving reliability and deferring more costly supply-side expenditures. Adding a lot of renewable energy and intermittent resources to the grid: The electric grid is evolving to accommodate large amounts of renewable energy that can give variable output depending on physical circumstances such as wind and sun which is not offered by fossil fuel energy. To keep prices down and preserve reliability, this growing grid needs to deal with new supply-side intermittency. Understanding the significance and importance of energy efficiency in this case is paramount.

Regularly Measuring and Ensuring the Persistence of Savings As energy efficiency becomes more important in climate change initiatives and the evolution of the evolving electricity system, efficiency savings must be consistent over time for system planning and procurement, GHG reduction targets, and system dependability. The majority of energy efficiency measurement methods only identify predicted savings based on engineering calculations or estimate initial savings. The most obvious method for calculating aggregate savings – creating realistic energy consumption baselines and tracking changes in real time across whole market segments – is also uncommon. Further changes can be seen in building energy usage and the amount and persistence of whole-building savings, as well as analyze changes in consumption across all market categories, thanks to enhanced smart meter data and sophisticated data analytics (Grueneich & Jacot, 2014). Cost and scale efficiencies, as well as faster feedback loops between projects, programs, and utility planning, are all possible with advanced analytics. When actual savings do not track as predicted, customer alerts can send messages via email and mobile. Moving away from claimed savings based on widgets and toward whole-building real-time efficiency monitoring would, however, need a paradigm shift. As a result, general public will have a better understanding of the most effective savings drivers and will be able to apply pay-forperformance energy efficiency solutions.

Formulating a Single International Standard Preparing synergistic standards and guidelines to provide a level playing field in energy efficiency commerce, cyber security, and minerals and metals is also critical. Some considerations are: Fast and effective structural economic support: The fundamental difficulty is to establish a balance between financial and information transfers while maintaining property rights and profits. Exploring WTO’s role in contract standardization and providing a forum for conflict resolution can be a difficult task.

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Norms for preventing cyber-enabled intervention in key energy infrastructure: Existing responsible state and non-state conduct norms that protect important energy infrastructure from cyber-enabled intrusion must be developed and implemented further. In 2015, the United Nations convened a working group to produce optional (legally nonbinding) peacetime norms that countries are encouraged to follow. One of these principles stipulates should not “interfere with key infrastructure” of other countries. Despite the lack of specificity in the language, states usually see their energy infrastructure as “vital.” As a result, multilateral dialogue and collaboration should include energy cybersecurity as a top priority. The global supply chain for metals and minerals should become more transparent because of more systemic and mandatory disclosure regulations. Transparency and accountability have improved because of initiatives such as the Responsible Mining Index (Responsible Mining Foundation, 2022). On the other hand, more public-interest data is needed to help firms create more informed engagement with stakeholders including governments, investors, and civil society.

Common Institutional Frameworks at Regional Levels To facilitate the interchange of best practices, knowledge sharing, and dispute resolution, institutional follow-up is essential. We must progress from exploration and overviews to comprehension and policy. Current energy organizations such as the IEA, IRENA, and OPEC are good candidates to play a “facilitating role.” A global secretariat comprising leaders from politics, energy, economics, commerce, environment, and development may be established in this regard. This should be done in an unbiased and individual capacity, without political and geographical bias.

Integrating Energy Efficiency Outcomes with Carbon Reduction Frameworks Energy efficiency gains and costs are often measured compared to the conventional benchmarks of electricity and natural gas systems, rather than in terms of preventing or reducing CO2 or other pollution emissions. Successful energy efficiency measures are compensated (utility rebates, customer bill savings) based on potential gains to the energy system rather than larger decarbonization targets. When calculating the impact of energy efficiency, gross savings are more important than net savings. The lost savings under a gross savings method may never be accounted for if only net savings are included by understating the impact of energy efficiency in decarbonization. And savings from all energy efficiency measures both public and private should be recorded along with the state-sponsored initiatives. Of course, it is important to avoid double counting, but that is a different issue than missing entire categories of efficiency gains that could reduce state carbon emissions. In fact, utilities, regulations and standards, and private acts that can affect the

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accuracy of carbon reduction calculations from energy efficiency efforts should all use the same methodology for quantifying energy efficiency savings.

Conclusion For more than four decades, energy efficiency has been playing a critical role in lowering consumer and utility bills, creating jobs, and reducing environmental concerns. Only recently, energy efficiency coupled with renewable energy technologies is showing broader daylights that can totally replace the global fossil fuel domination. Most recently, it is being pivotal in avoiding energy and regional geopolitics. As focus is on the critical need to cut GHG emissions and maintain dependable and cheap grid operations, its role is becoming ever more important. In this regard, future study in this sector can now take one of three paths. It can use well-established scenario-planning techniques to educate policymakers on energy policies for energy-efficient era. This can be a game-changing endeavor targeted towards policymakers and the business community. Third, in the long run, appropriate analytical frameworks may be constructed to systematically analyze scenarios in order to increase our understanding and construct an energy geopolitics theory that could be utilized to forecast the geopolitical repercussions of energy efficiency. To harness the maximum benefit of nonzero-sum gains, this would require a blend of long-term industrial and academic effort with equal participation and contribution from politicians, policy makers, government officials, civil societies, and energy experts.

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IRENA. (2020b, October 20). Members reinforce IRENA’s position at the heart of geopolitics of energy transformation. Retrieved from IRENA: https://www.irena.org/newsroom/articles/2020/ Oct/Members-Reinforce-IRENAs-Position-at-the-Heart-of-Geopolitics-of-EnergyTransformation IRENA. (2020c). Renewable energy and jobs annual review 2021. IRENA. IRENA. (n.d.-a). Clean energy corridors. Retrieved from IRENA: https://www.irena.org/ cleanenergycorridors IRENA. (n.d.-b). Collaborative framework on geopolitics of energy transformation. Retrieved from IRENA: https://www.irena.org/collaborativeframeworks/Geopolitics Jones, H. (2021, November 17). COP26: China, the global south, and climate politics. Retrieved from The Africa Report: https://www.theafricareport.com/147016/cop26-china-the-globalsouth-and-climate-politics/ Kammen, D. (2015, April 21). Peace through grids: How smart energy policy can ease conflicts. MIT Technology Review. Lovins, A. (2017). Clean energy and rare earths: Why not to worry. Bulletin of the Atomic Scientists. Marshall, W. (2020, September 20). Geopolitics and the energy transition: Competition or cooperation? Retrieved from Global Risk Insights: https://globalriskinsights.com/2020/09/ geopolitics-and-the-energy-transition-competition-or-cooperation/ Marteka, M., & Slaughter, C. (2018). Global renewable energy trends: Solar and wind move from mainstream. Deloitte Insights, Deloitte. Overland, I. (2015). Future petroleum geopolitics: Consequences of climate policy and unconventional oil and gas. Handbook of clean energy systems, 3517. Overland, I. (2019). The geopolitics of renewable energy: Debunking four emerging myths. Energy Research & Social Science, 36–40. Overland, I., Bazilian, M., Uulu, T. I., Vakulchuk, R., & Westphal, K. (2019). The GeGaLo index: Geopolitical gains and losses after energy transition. Energy Strategy Reviews, 26. Overlanda, I. (2020). Renewable energy and geopolitics: A review. Renewable and Sustainable Energy Reviews, 3. Pascual, C. (2015). The new geopolitics of energy. The Center on Global Energy Policy, Columbia University, School of International and Public Affairs (SIPA). Power Engineering International. (2021, October 22). Energy transition to create 25 million green jobs by 2030 – IRENA. Retrieved from Power Engineering International: https://www. powerengineeringint.com/renewables/energy-transition-to-create-25-million-green-jobs-by2030-irena/ RE100. (2018). Corporate sourcing of renewable energy: Market and industry. International Renewable Energy Agency. Renewable Energy Policy Network for 21st Century (REN21). (2018). Renewables 2018 – Global status report. Renewable Energy Policy Network for 21st Century (REN21). Responsible Mining Foundation. (2022). RMI Report 2022. Responsible Mining Foundation. Roques, F. (2021). The evolution of the European model for electricity market. In J. M. Glachant, P. L. Joskow, & M. G. Pollitt (Eds.), Handbook on electricity markets (p. 312). Edward Elgar Publishing. Sovacool, B. (2009, June). Energy policy and cooperation in Southeast Asia: The history, challenges, and implications of trans-ASEAN gas pipeline (TAGP) network. Energy Policy, 37(6), 2362. Stang, G. (2016). Shaping the future of energy (Brief Issue 24). European Union Institute for Security Studies (EUISS). Stegen, K. S. (2018). Redrawing the geopolitical map: International relations and renewable energies. Springer Nature, 75–95. Sunrise Movement. (n.d.). We are the climate revolution. Retrieved from Sunrise Movement: https://www.sunrisemovement.org/

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Sweijs, T., Ridder, M., Jong, S., Oosterveld, W., Frinking, E., & Auping, W. (2014). Time to wake up: The geopolitics of Eu 2030 climate and energy policies. The Hague Centre for Strategic Studies (HCSS). Tachev, V. (2021, December 29). Geopolitics and the importance of the energy policy environment for the net-zero transition. Retrieved from Energy Tracker Asia: https://energytracker.asia/ geopolitics-and-the-importance-of-the-energy-policy-environment/ Tolchin, M. (1979, June 21). Carter welcomes solar power. Retrieved from The New York Times: https://www.nytimes.com/1979/06/21/archives/carter-welcomes-solar-power.html Tuathail, G., & Dalby, S. (1998). Rethinking geopolitics. Routledge. UN Environment Programme. (2018). Emissions gap report 2018. UN Environment Programme. Urgenda. (n.d.). Landmark decision by Dutch supreme court. Retrieved from Urgenda: https:// www.urgenda.nl/en/themas/climate-case/ Vakulchuk, Overland, I., & Scholten, D. (2020). Renewable energy and geopolitics: A review. Renewable & Sustainable Energy Reviews, 122, 109547. https://doi.org/10.1016/j.rser.2019. 109547 World Health Organization. (2018). How air pollution is destroying our health. Retrieved from World Health Organization: https://www.who.int/news-room/spotlight/how-air-pollution-isdestroying-our-health

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The Geopolitics of the EU-Russia Gas Trade: Reviewing Power in International Gas Markets Francesco Sassi

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Geopolitics of Energy Trade: A Theoretical Review and Methodological Proposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rethinking the Energy-Power-Trade Nexus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Power and Trade: Quicksands in the Midst of Politics and Economy . . . . . . . . . . . . . . . . . . . . . . . Energy Security and International Politics: A Polarized Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One Step Forward, Two Steps Back: Baldwin’s Critique to Realist/Liberal Accounts of Power in IRT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Polarization of the Geopolitics of the EU-Russia Gas Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Realist Case of Power in the Geopolitics of the EU-Russia Gas Trade . . . . . . . . . . . . . . . . The Liberal Case of Power in the Geopolitics of the EU-Russia Gas Trade . . . . . . . . . . . . . . . . A Critical Revision of Power in the Geopolitics of the EU-Russia Gas Trade . . . . . . . . . . . . . . . . . The Critical Revision of the Realist Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Critical Revision of the Liberal Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusions and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract

EU-Russia gas interdependency is today one of the most endurable and largest energy partnerships in contemporary geopolitics of energy. It consistently affects different commodity markets and the stability of bilateral economies, embodying the last bridge standing of the bilateral political dialogue. However, the energy crisis started in 2021 and the fallouts of the Russian invasion of Ukraine threaten the overall stability of this relationship. So far, the geopolitics of the EU-Russia gas trade has extensively influenced the evolution of the energy security and energy geopolitics literatures. At the same time, these continue to be focused on the structural divergences of the two gas institutional models, but refrained from F. Sassi (*) RIE – Ricerche Industriali ed Energetiche, Bologna, Italy e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_2

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systematically approaching the power dynamics within them. So, the chapter reviews the existing literature of the geopolitics of the EU-Russia gas trade within the framework of the evolving academic studies of energy geopolitics. Against this background, the analysis offers a new methodological and theoretical approach to the study of power in energy and specifically gas trade, outside the classical dichotomy between energy producers and consumers. This is the result of a critical revision of the current approaches to power in international politics employing Baldwin’s conceptualization of power as a relational concept. The results offer a new research agenda for scholars interested in the EU-Russia gas interdependency issue area and, more generally, in energy interdependencies. Also, the analysis outcomes are relevant for both researchers and policy makers as they advocate for upending and rethinking many assumptions on the nexus between power politics, great powers, and international energy markets. Keywords

European Union · Russia · Natural gas · Trade · Power · International relations theory

Introduction In 2022, the politicization of the EU-Russia gas trade is so deep that the issue ranks at the top of the agenda of all policy makers, well beyond the European borders. The shocking twist of events following Russia’s invasion of Ukraine and the global political ramifications, paired with a structural crisis of the energy markets and an extended conflagration of energy fundamentals, have determined a dramatic acceleration of outstanding and unpredictable political and economic dynamics. In the last few years, gas consumption in Europe has averaged to slightly less than 500 bcm.1 In parallel, European gas production has been continuously declining, increasing the continent’s dependency on imports. In recent times, they cover around 85% of the total supplies and Russia is the largest source of these imported volumes (Fig. 1). On the average, Russia’s gas makes up between 30% and 40% of the total imports. The massive flows of Russian gas to Europe arrive through a complex web of pipelines (Fig. 2) and around 10% of Russia’s exports turn up in the EU markets in the form of LNG (Author’s calculation based on historical data from BP). During the last decade, a period of relatively cheap gas prices, Gazprom’s exports to Europe have ramped up, peaking at 201 bcm in 2018. Thus, Russian pipeline gas exports were considerably higher in the 2017–2021 compared to the previous 5-year average (Fig. 3). In late February 2022, the international scenario of increasing geopolitical tensions between the West and Russia inflamed by the military intervention in Ukraine 1

Europe here stands for the EU-27, the UK, and non-EU Balkans states. Data do not account for storage injection and withdrawals of natural gas.

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Fig. 1 The share of EU gas imports by source (combination of pipeline and LNG). (Source: EU Commission, DG Energy)

Fig. 2 EU-Russia gas pipelines routes. (Source: S&P Global Platts)

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Fig. 3 Gazprom exports to Europe. (Source: Author’s elaboration on data from Gazprom. Includes all Europe and Turkey)

and the unstable status of the global economy worsened an already progressing structural crisis of the global gas market. Cold spells triggered price spikes in the Northern Hemisphere during the first half of 2021 and these were followed by strong global economic recovery in the first aftermath of the pandemic, lifting gas prices to an all-time record in major importing markets of Europe and Asia. In fact, as the global gas consumption rebounded to 4.6%, doubling the decline in 2020, an overwhelming combination of demand growth and lower-than-expected supply led to an unprecedented market tightness throughout the last quarter of 2021 and the great uncertainties in the course of 2022. The consequences of these market conditions hurt consumers, utilities, and wholesalers, with the lasting effects of this energy crisis projected beyond 2022, damaging both the advanced and emerging economies. As of today, power cuts, industrial demand destruction, and potential food supply issues have become sinister and urgent realities (IEA, 2022a). As a result of the invasion, the EU Commission has presented a bold economic and industrial plan designed to quickly reduce the European dependency on Russia as an energy partner and Gazprom as a gas supplier. Brussels aims at reducing its gas dependency by diversifying imports, also through additional LNG supplies, producing more renewable gas, lowering consumption by increasing energy efficiency, and electrifying the EU energy systems, transitioning towards renewables in the form of new solar and wind energy capacities. According to the REPowerEU plan, the EU Commission intends “to make Europe independent from Russian fossil fuels well before 2030” which implies the ending of any natural gas imports. Moreover, as a reaction to the invasion of Ukraine by Russia’s army, the EU introduced an incremental set of economic and financial sanctions towards the Russian energy sector with the goal of limiting Moscow’s economic and financial capabilities and forcing it to reconsider its military objectives in Ukraine (European Commission, 2022a, b).

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In the EU, all governments became publicly accountable for the energy interdependent relation created with the Russian Federation, through the purchase of massive volumes of natural gas and other hydrocarbons at competitive prices, feeding the EU economies while filling the Kremlin’s coffers. In a fast-track changing scenario destined to witness unparalleled shifts, and to an extremely fast pace compared to the recent past, almost all European governments pledged to phase down gas imports from Russia. At the same time, they scrambled to find additional pipeline and LNG imports. Even though the process appears irreversible, the main Russian gas importers in the EU are now dealing with the tough reality of an energy reliance which cannot be ended in a short time. With only five countries in the EU accounting for two-thirds of the Russian gas imports, their behavior will have a huge influence over the future of the EU-Russia gas interdependence (Fig. 4). As they grapple with the possibility of an EU gas import ban, plainly opposed by some of these, or a unilateral stop of gas flows from Russia, governments face the real possibility of a gas supply shock. This could force rationing energy, shutting some of the European largest factories, provoking a widespread recession. Also, this could permanently damage the competitiveness of Europe’s economy and fuel social unrest; even more if a gas cut is associated with peaking periods of consumption during the cold winter months (Financial Times, 2022). On the other side, the Russian President Vladimir Putin urged the redefinition of the principal tasks of the Russian oil and gas industry. This means ensuring the sustainable energy supplies for the domestic market and consumers; diversifying exports towards growing markets of Africa, Latin America, and the Asia-Pacific by

Fig. 4 Gazprom exports to Europe by country (2020). (Source: Gazprom Export. 2020 data are the latest Gazprom provided about full-year gas exports by single country)

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the means of speeding up the implementation of infrastructure projects such as railways, pipelines, and ports, looking at the promising markets in the South and the East; and developing a deep processing oil and gas industry in Russia, as much as maximizing the import substitution of production equipment. Moreover, Russia established a new method for gas payments to foreign buyers which requires EU companies to open bank accounts by Gazprombank and convert foreign currencies into rubles. De facto, the measure institutes an innovative procedure for finalizing gas payments which puts in jeopardy the existing contractual agreements between the European buyers and Gazprom. This step also counters the Western sanctions imposed against the Central Bank of Russia. Lastly, and above all, the threat to curtail natural gas supplies to Europe has become even more consistent as Poland and Bulgaria became the first countries to see their supplies cut off by Gazprom after they refused to follow Moscow’s new payment method. The move created further havoc on the gas markets, with the EU accusing Russia of blackmail and inducing prices to soar on the possibility of future unilateral stops to “unfriendly” countries amid the increased tensions between gas partners (President of Russia, 2022a, b; Reuters, 2022a). In this emergency context, the prominence of the EU-Russia gas trade issue for the stability of the international order, global security, and energy geopolitics forced the highest diplomatic representatives in the West to swiftly intervene to avoid supply shocks. The efforts mainly targeted a revival of energy diplomacy, putting pressure on all major gas producers to ensure supplementary supplies. Furthermore, the EU Commission President von der Leyen and the US President Biden agreed on a new EU/USA energy partnership which guarantees the shipments of additional American LNG to Europe, up to 15 bcm by 2022 and 50 bcm by 2030. The latter figure would substitute around a third of the EU gas imports from Russia (European Commission, 2022c). On the other hand, just weeks before the beginning of the military operations in Ukraine, Putin and China’s President Xi Jinping signed a new joint statement assessing that the Sino-Russian bilateral strategic cooperation has “no limits” and no “forbidden areas of cooperation.” During Putin’s visit to Beijing, a new gas contract was signed between Russia’s Gazprom and China’s CNPC. The parties agreed on a 30-year contract to supply 10 bcm of gas to China via a new pipeline, sourcing gas from the Russian Far East and conceivably starting within 3 years. These volumes will be added to those shipped through the Power of Siberia pipeline, to plateau at 38 bcm by 2025 and strengthening the emerging Sino-Russian gas interdependency (President of Russia, 2022c; Reuters, 2022b). Given the scale of the challenges for the EU-Russia gas interdependence, these events have no parallel in the history of energy policies and strategies, and they will fundamentally contribute to the reconfiguration of international energy alliances, with far-reaching implications for the global energy systems and the strategies of energy producers and consumers. A stronger transatlantic energy partnership is likely to emerge from this chaos, with the US LNG exporters weighing unforeseen opportunities materializing in Europe, a gas market considered as secondary to the Asian ones, at least until the beginning of the Ukraine conflict. Conversely, Russia will doubtlessly intensify the repeated efforts of pivoting towards Asia for gas and, in general, energy exports.

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Nonetheless, the political diktats surfacing from this scenario could fall short of the governments’ premises. With an energy transition looming in the background and increased volatility on the markets, together with an even more unstable international landscape, state and market actors’ decision-making processes are slowed and muddled. Further complications could push national energy policies and strategies in complete disarray, generating widespread political upheaval and additional turbulence on the energy markets. Consequently, the rampant interest in international energy politics calls for a renewed attempt to deepen the understanding of these dynamics and the preeminent role of gas geopolitics. Theoretically speaking, the generic interaction of geography, politics, and international relations under which geopolitics is normally understood remains a notion very dear to researchers in international affairs. Various interpreters crossed the policy area, presenting geopolitics as the combination of power politics and territoriality, spanning through the history of great powers. Today, energy within state boundaries is a prominent feature of the geopolitical thinking as an object for the struggle over the control of geographical entities and its use for political advantages (Flint, 2021). The field experienced significant developments in the last 20 years. These owe much to the same theorization and academic works on the several EU-Russia gas crises and the increasing attention by governments in ensuring the stability and safety of energy systems, against the background of interconnected economies in a globalizing world. The same has also prompted a major boost to theoretical advancements in the study of energy security multidimensionality. Here, energy trade remains one of the most important dimensions (Esfhani et al., 2021). Even if the geopolitics of energy has surged as one of the subjects of considerable influence and discussion in the public debate, it remains an under-theorized field. Thus, gaps in the understanding of the nature of the EU-Russia energy relations matured, as well as around the key role of natural gas in international relations. By neglecting to build a theoretical bridge between the rather different institutional models of the EU and Russia gas industries, studies have prevalently drawn on structural divergences between energy producers and consumers (Aalto, 2014). Accordingly, the literature thrived along the classical realist/liberal dichotomy in the IR field, producing various shortcomings between theoretical approaches and the reality of daily events on the energy markets. Against this background, the strategic question of how power becomes an issue in energy relations and trade dynamics has become one of the most resourceful research topics, triggering a vivid multidisciplinary scholarly discussion, at the crossroad between international relations, international political economy, international business, public policy, and area studies. The repercussions of this debate are today largely visible in both media and policy makers’ discourses. Only partially, the literature has started to investigate this problem (Siddi, 2018). Power endures as a crucial analytical perspective and its critical reconsideration should clear the way to reframe political dynamics in the chosen issue context, helping to broaden the scope and domain of the studies of the EU-Russia gas geopolitics and sharpen the theoretical premises of a growing literature.

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Methodologically, the chapter reviews the main contributions to the study of the geopolitics of the EU-Russia gas trade in both IRT/IPE. In doing so, it tries to stimulate the debate introducing a novel approach to key factors in determining energy policies and strategies. Also, the chapter sheds light on several questions which have been largely dismissed by the traditional literature: how did scholars approach the issue of power in energy and gas trade? How did these approaches influence their studies because of their theoretical affinity with a particular school in IRT/IPE? Finally, how future investigations could improve the current theoretical gaps and better refine the vast research agenda? Facing these questions, the chapter tries to offer both a theoretical guise and pragmatic explanation on how to approach energy trade as a political and economic activity between commercial partners. To do so, it also reviews to a significant extent energy geopolitics literature, secondary literature on power in international politics, and the way power is approached in the existing literature along the classical neorealist/neoliberal dichotomy. From this point of view, the main contribution is a theoretical revisitation of the EU-Russia gas geopolitics, and a more general and up to date revision of the role of power research within the gas and energy geopolitics.

The Geopolitics of Energy Trade: A Theoretical Review and Methodological Proposition Both energy and geopolitics are tricky terminologies. While the former is recognized as part of the history of physics as much as a social science subject, it assumes an objective sense only through various social, political, and economic activities given by a specific social and geopolitical context. Högselius labels this conundrum as the “messy complexity” union of energy and geopolitics, requiring a systemic methodology to bring analytical order and discern its most influential patterns (Högselius, 2019: 4–11). In this perspective, human and societies’ interactions are key components of an ever-changing relation between producing and consuming countries, where “energy interests, especially under tight international market conditions, affect the mapping of geostrategic interests,” influencing and influenced by politics (Shaffer, 2009: 30). From this standpoint, a pure realist/reductionist definition of the geopolitics of energy reflects poorly the transnational and local phenomenon of energy, understood as an output of social relations, economic activities, and ultimately political power. As Lehmann points out, given the ubiquitous role of energy in every social and hierarchical relationship, nearly any energy resource could be developed. Still, this requires an uninterrupted flow of capital investment, as much as infrastructural development and governmental commitments. So, energy outcomes are the result of different variables shaped by commercial and state actors (Lehmann, 2017). Peculiar kinds of power in play, either coming from the grand strategy of state actors and the policies aimed at reordering entire energy systems through specific mixes of energy endowments and technologies, make the drawing of a single new global

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energy map an impossible task. Rather, it is the dynamic nature and constant changing of the same map the distinctive feature of the new geopolitics of energy, further complicated by the disruption of globalized value chains inflicted by global events such as the COVID-19 pandemic (Yergin, 2020). Overall, the trade component emerges as the pillar of an interdependent and evolving global energy geopolitics. However, theory comes short of withstanding the pressure of reductionist/realist accounts about the primacy of politics over the economy and the consequential secondary importance given to trade dynamics associated with energy movements. Beyond recognizing those tools and policy interventions strengthening energy security, we should not divorce energy geopolitics from the study of energy markets. In fact, specific markets create regional variants per se, such as setting prices on supply and demand relationships or managing the risk perception. In this sense, neither energy markets and trade nor foreign policy are static or fixed elements in time and space (Pascual, 2015). To grasp their intersections, it is paramount to comprehend the dynamics between the two. Furthermore, a new Anthropocene geopolitics era discloses the new challenges faced by transitioning towards a low-carbon international energy society and the need to update energy geopolitics’ corollaries. The intertwining between the traditional fossil fuels and the growing role of renewables determines a new structural transition from an energy model to another one. The radical reconfiguration of the way energy is produced, distributed, and consumed around the world, complicates the nexus between the transfer of economic strength from the developed to developing countries and the dynamics between future energy demand and investments. This is also underscored by the absence of adequate global governance managing the transition from fossil-fuel based economies and the risks stemming from an overaccelerated process (Rayner, 2021). The energy transition also requires a research agenda addressing the issues of power and justice affecting energy geopolitics in broader terms, recognizing how inequities of race, income, and gender affect the marginalized strands of the society. The same would also bring a spatial understanding of the representations and strategies amid the transformation of power relations between actors, or the emerging conflictual representations about the meanings of “sustainable transition” (Palle, 2021). Within the context of multifaceted and interconnected challenges of transitioning energy systems complicating its already intrinsic messy complexity, the same geopolitics of natural gas is affected. Expanding threats for the economic and industrial stability of energy importers and exporters, rising volatility in the energy markets, and emerging systemic challenges to the liberal international order are some of the most important elements of this changing map. With most of the gas traded through pipelines built between the EU and Russia, also its physical dimension is a non-secondary factor. As Bouzarovsky explains, gas pipelines “embody the spatial enmeshing of international relations of power, since the matter they carry cannot be transferred from producer to consumer without a direct physical connection fixed in space.” (Bouzarovsky, 2010: 176).

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As new complexes of the transition are ascending, including the accelerating growth of trade in gas, both via pipelines and LNG, a significant redefinition of the corollaries of the geopolitics of natural gas are required. In this sense, the trade issue seems not only central for the same reason that natural gas is a valuable energy commodity, but also because the same market is undergoing global developments such as: increasing gas-to-gas competition; expanding interconnections; growing basket of sellers and traders; de-linking from oil prices; and witnessing the end of regional monopolies. These are having huge implications for the reality on the ground of the gas geopolitics and a growing body of literature is integrating them within a geopolitical perspective of the mutating relationship between power politics and territoriality, states and markets, actors and agencies, technology and production (Grigas, 2017; Sassi, 2022; Sassi & Frassineti, 2021). For Grigas, the geopolitics of gas “reflects how gas supply, demand, dependence, and transit can determine bilateral relations between importing and exporting states and cause power shifts in specific regions and in the international system as a whole.” It also “reflects how power shifts in the international system, in regions, and in bilateral relations affect gas supply, demand, dependence, and transit.” (Grigas, 2017: 14). The methodological paths for those approaching energy geopolitics from a sound theoretical perspective are treacherous waters. Scholars have tried to offer multi-permeated and ecumenic definitions of it, encompassing the study of interactions and influence among all the actors involved in a specific energy scenario, together with the multiple variables of the complex energy system, such as technology, geography, production, and trade related to the decision-making process at political, economic, military, and social levels. Some have adopted a regionalized focus (Siddiky, 2021) or engaged with the geopolitics of a specific energy source from a global perspective (Kim, 2020; Van de Graaf et al., 2020). Others mixed the two, binding them to a specific geopolitical context (Barnes & Jaffe, 2006; Bhandari, 2021). Consequently, this chapter undertakes a regionalized and specific political context approach – the EU-Russia relations – and an in-depth and peculiar energy-source approach – natural gas – adding a further element to the analysis which the author considers fundamental in assessing the importance of the object of study. This is the comprehension of the role of trade and market as an intersection of major political and economic power interests. This means transcending the classical international perspective based on state-to-state interactions prevailing in the traditional literature over the EU-Russia gas trade (see section “The Polarization of the Geopolitics of the EU-Russia Gas Trade”) and appreciating the same as a human activity providing an “objective sense” to natural gas in a social, political, and economic sphere. Indeed, this could be helpful for future research on the geopolitics of energy and provide an additional leeway to its theorization in the IR/IPE field. A subject of increasing academic and policy interests, which is in the need of a deeper theoretical foundation in the face of the growing challenges stemming from the volatility of global energy markets and the transition towards a low-carbon energy society.

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Rethinking the Energy-Power-Trade Nexus Power and Trade: Quicksands in the Midst of Politics and Economy Where the literature assumes that “energy markets were means to depoliticise energy supply and thus make it less vulnerable to the types of politically motivated disruptions that shaped the earlier thinking on energy security” (Cherp & Jewell, 2011: 205), this chapter adopts an alternative perspective and looks at the politicization of a specific energy market – natural gas – and the intrinsic power dynamics. In doing so, it reviews the existing research on trade throughout the two main schools in IRT, both from an economic and political perspective. When trade activities and patterns inside Europe and between European states and their colonies expanded during the sixteenth century, the relationship between governments, trade policies and their manipulation came to represent a unicum of military power and state wealth under the doctrine of mercantilism. Thomas Hobbes encapsulated this formidable bond in the postulate “Wealth is power, and power is wealth.” Fast-forward into the contemporary neoliberal era of globalized trade, highly institutionalized international regimes, and the rise of new states with a heavy political agenda attached to trade schemes, it is a commonly accepted idea that the risks stemming from international trade allow no government to pursue an entirely hands off approach. Despite the influence of Ricardo’s theorization of comparative advantages in goods’ production, the high level of politicization of international trade is recognized as an evidence and empirical challenge, even by neoclassical economics supporting free trade policy agendas (Martin, 2015). Just as political scientists are liable to underestimate the importance of markets, the weakness of traditional economics is the difficult experience in modelling the political processes and the embedded importance of power. In this regard, the ongoing transformation of natural gas trade calls those interested in the study of its geopolitical contours to elaborate more sophisticated approaches to operationalize intrastate and interstate trade dynamics. This has also meaningful consequences on the conceptualization of the domestic power dynamics of gas producers and exporters, enforced among institutional and political actors (Sassi, 2022). Within the IRT field, which will serve as the bulwark of the literature in the next section, we still live in the aftermath of the 1970s and 1980s polarization between liberal institutionalists and structural realists. The former, long-time supporters of the international regime theory and complex interdependence model of IRT are opposed to those assuming state’s concerns over the unequal gains from trade and the focus on balance of power, relevant for determining power position changes in structural terms. It is from the observation of how states behave in the international system that neorealists assert that relative gains and cheating make international cooperation rather difficult. Trade becomes an enormous task in a world made of nations fearing for their survival as independent actors. Consequently, behaving as unitary-rational agents in a world of scarce resources, where conflicts over the wealth redistribution

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are constantly emerging, states are the primary actors in world politics. In this context, the more powerful an agent is, “the stronger get their way—not always, but more often than the weaker.” (Waltz, 1993: 77–78). Cooperation fails to provide security “when the final arbiter of things political is power” and “[a]ll moral schemes will come to naught if this basic reality is forgotten.” (Gilpin, 1986: 304). Coercion, a legacy of military force preponderance among the statecraft’s instruments, lies at the bottom of the neorealism power identification. In this sense, “Power is the currency of great-power politics, and states compete for it among themselves. What money is to economics, power is to international relations.” (Mearsheimer, 2001: 17). On the other hand, trade regimes exist on the beliefs and principles that trade is good for state coffers and free trade promotes peace, offering better options to partners than centralized control. This theoretical interpretation sees trade regimes as the “implicit or explicit principles, norms, rules and decision-making procedures around which actor’s expectations converge.” (Krasner 1983: 2). So, in summary, the regime’s higher level of predictability makes it more profitable. From this rationalist perspective, liberal institutionalists see states and firms to mutually adjust their behavior because of the possibility of absolute gains. When rules are written down and institutionalized, states make sense of abiding by them, and this prevents self-interest behavior (Keohane & Nye, 2012). Asymmetries in an interdependent relation are most likely to provide power resources as “dependance means a state of being determined or significantly affected by external forces.” (Keohane & Nye, 2012: 8). For this reason, power goals within interdependent relationships are more complex than in realism and they also include economy and environment, downgrading the relevance of power and security as states’ main objectives. Still, power maximization continues to be paramount, but it varies across different issue areas. Soft power, as opposed to the realist coercive hard power, defines “the ability to affect others through the co-optive means of framing the agenda, persuading, and eliciting positive attraction in order to obtain preferred outcomes.” (Nye, 2011: 20–21). These means of attraction are culture, ideology, and institutions, reframed as techniques of statecraft and property concepts of state’s possession.

Energy Security and International Politics: A Polarized Field These tensions between the two main strands of literature in IRT, namely the idealist/ reductionist accounts of the neorealist school and the reflectivist/rationalist approaches of the neoliberal school, frequently only implicitly appear in the general framework of the authors’ background literature (Dannreuther, 2017). Drawing from structural realism in IRT, the realist school dominates the popular and scholarly debates on energy politics by linking the resource scarcity to their importance for the economic and military state apparatuses. The dependency on foreign resources reduces state independence and increases the threats for national security. Au contraire, producing states, largely dependent on energy resources for their budget revenues, utilize energy as a coercive tool of their inter-state energy

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politics. Energy and the status of countries as exporters or importers could directly affect interstate conflict and war, becoming the source of aggression or the cause for domestic instability, spreading across borders or financing insurgencies in other states (Colgan, 2020). Moreover, this perspective considers climate change as furthering chaos and interstate conflicts. Armed forces, vulnerable populations, and fragile states are equally threatened by the consequences of climate transformation and the impacts on their energy security. For realists, anthropogenic climate change poses a severe danger to the future of nations, even bigger than the one represented by great powers to each other (Lieven, 2020). Thus, the energy transition could change not just the international geopolitical perspectives, making renewables’ champions the dominant players of tomorrow, but also alter the domestic power equilibrium between central governments and peripheral regions (Criekemans, 2018). Coincidentally, a renewed interest for synthetic approaches of mixed conventional and renewable energy until 2030, at the earliest, makes the geopolitics of gas and renewables strictly connected. Opposed to the logic of energy autarky stands the idea that energy security is best achieved through cooperation. For the liberal school, interactions in the production, transportation, and consumption are far more influenced by the “functional (inter) dependence than by mathematical independence.” (Nance & Boettcher, 2017: 3). Energy cooperation could always happen, even in most contentious political contexts. Rather than bilateral agreements, shared regulations and policy tools supporting free trade affect a pool of international actors, including those not even abiding to that regime. At the same time, an integrated and interconnected market reduces participant states’ vulnerability to external shocks, attracting other players. In addition, energy is considered as a pure commodity having public goods characteristics. Whatever issues might emerge between market participants, they should be solved in terms of market behavior and agreed sanctioning regimes. In this sense, international rules inspired by global governance theory serve to level the playing field for importers and exporters by fostering free trade and commitment to international law. Authorities beyond the state boundary are supposed to resolve the tension between the imperative towards cooperation in a globalizing world and the desire by states to keep an autonomous policy-making in strategic sectors (Herranz-Surrallés et al., 2020). An energy transition brought to an extreme end signifies, more than anything, massive electrification. By the means of achieving high standards of efficiency and deep levels of interconnectivity between grids through investments and regulatory frameworks, including the emission-cycle of wind turbines and PV, we might even witness the emergence of “grid communities” made of “prosumer countries” where electricity cut-offs would be less of a concern. As a consequence, some go as far as to suggest that the geopolitics of climate change and the environment should be separated from the geopolitics of renewables (Vakulchuk et al., 2020). Still, even from this perspective, grid interconnection and cooperative governance between great powers remain highly problematic. Eventually, partners could always be drawn into competitions and therefore, the relative novelty of the energy transition poses new theoretical challenges also to those interested in the effects of these structural processes on complex and interdependent energy systems.

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One Step Forward, Two Steps Back: Baldwin’s Critique to Realist/ Liberal Accounts of Power in IRT Given the dominant and quintessential nature of power in IRT, it is beyond belief that power accounts experienced an extensive lack of theorization. As Morgenthau reveals that, “whatever ultimate aims of international politics, power is always the immediate aim,” he admits that “the concept of political power poses one of the most difficult and controversial problems of political science.” (Morgenthau, 1997: 31). For the purpose of this study, any enhancement on the understanding of how power works in the international energy markets would not just be confined to the academic realm. A deeper comprehension of power clears the way of “random effects” in the study of international energy affairs. Power becomes an indicator of a distinct political agency, and it could have positive and far-reaching effects on the way political practitioners are aware of the current dynamics in the geopolitics of the EU-Russia gas trade. For Guzzini, the identification of power lies “at the core of politics and political morals” (Guzzini, 2017: 741), as it becomes an indispensable explanatory concept supporting the awareness about the origins and mechanisms of domination. This is also directly connected with the idea of responsibility, in the sense that only those able to do something could be held accountable for it. Now, taking two steps back, the concept of power suffers from a “conceptual anarchy” reflecting a “muddy thinking” which often implies scholars not even stating which interpretation of power are employing. This leads to an operationalization of the classic definition of “A has power over B to the extent that he can get B to do something that B would not otherwise do” presumably to be “designed to meet the needs of a particular research problem” and “likely to diverge from one another in important ways.” (Dahl, 1957: 202–203). Against this background, Baldwin’s seminal work on the conceptualization and critique of power2 in IRT becomes a useful tool for reviewing the international affairs literature and researching the role of power in the geopolitics of the EU-Russia gas trade (Baldwin, 2016). First of all, Baldwin considers power as a relational concept and not a property per se. This implies its existence only in an actual or potential relationship between actors. Therefore, only in contingent and clearly defined situations, properties become power resources. Secondly, power is considered multidimensional, as it could increase on one dimension while simultaneously decreasing on one another.3 Thirdly, power analysis requires consideration of counterfactual conditions. This means that the researcher should deal with the observation of what could have been

2

A central focus of Baldwin’s remarking studies is the interchangeability between the terms “power” and “influence,” which distinguishes his approach compared to other scholars. 3 Power has at least eight dimensions, namely: scope, domain, weight, base, means, costs, time, and place. These are precisely defined by Baldwin. At the same time, almost anything can be a power resource in some context or another. But what functions as a power asset in one situation may be a liability or irrelevant in another one.

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done in the absence of the power relation, thus distinguishing between an event and the outcome of an influence relationship (Baldwin, 2016: 49–59). Around 12 main problems in power analysis are discussed by Baldwin in analytical ways. Of particular interest for this chapter, he refers to the following six problems, namely concepts’ theory dependence and zero-sum game, potential power, fungibility, intentions and power, and reciprocal power. Regarding the concepts’ theory dependence, Baldwin asserts that the concept of power should not derive its meaning from theories in which it is used. Instead, the conceptualization of power employed in any analysis should be explicitly stated as a fundamental issue related to the study of international politics. Another problem raised by Baldwin in power analysis refers to the relation between zero-sum perspective and power. In fact, the scholar states that this defies both the logics of security and economy, without distinction. In fact, pure cooperation and pure conflict are more heuristic devices than proper representation of real-world situations. The exercise of power by A should not always be detrimental to the interests of B, but gaining relative to one’s own value system, which is not relative to the adversary’s one. Moreover, possessing and exercising power are to be considered in separate ways. As such, the causal concept of power does not equate power with its exercise, encapsulated in what Baldwin refers to as the potential power problem. Intentions and capabilities matter in power relations, and they should be specified in scope and domain. Additionally, the fungibility problem means that power resources in one area could be used in other issue areas. Hence, power is situational, and this raises the point of determining with precision which power resources are at work in each situation. Also, the analysis should specify the use of a given amount of a power resource in a specific timeframe. In addition to this, power could have unintended effects in international politics. In essence, it could be beneficial not just for those exercising it, but also playing according to the interests of those affected. Excluding them from the concept of power does not mean that these actors and agencies are not relevant, nor that it is implied they should not be studied. This brings on the importance of distinguishing between intentions and power. Lastly, Baldwin highlights how reciprocal control, one of the most common forms of influence, goes unnoticed in international relations. Indeed, a transaction could still count as an instance of power if the powerwielding subject lost something it cared about or B gained in its system’s value. In the following sections of his work, Baldwin looks at the role of the concept of power in the principal strands within IRT. Given the predominance of realism and liberalism in the study of the geopolitics of EU-Russia gas trade, I will focus on his revision of these as a useful instrument for the analysis of power relations. Although realist thinking remains the most influential field in IRT, neorealism has for long focused on the underlying prevalence of military power over other elements of national influence. For Baldwin, this makes neorealism unable to appreciate the multidimensional nature of power in international affairs. Likewise, neorealism misses the possibility of measuring through standardizations, as normally no specification of this kind is presented. The relational concept of power is rejected as capabilities are considered comparable to attributes of units and the same concept of power “depicts capabilities as potential relationships rather than as properties of a

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single state or unit.” In this context, the question of “capability to get whom to do what?” is simply begged and the fallacy of power as a resource is accepted (Baldwin, 2016; 132). Other than that, neorealism calls for ambiguous definitions of power when scholars recur to: relational and causal propositions; the denial of the structural nature of intra-subjective actions in which these are embedded into; the avoidance of inferences about the results power actions might get; the reliance on a non-unit-based property, but rather the capacity of one actor to be more incisive than one other – which still implies a relational causality (Baldwin, 2016; 130–135). Compared to the realist one, the neoliberal school of thought relies on a far-reaching relational concept of power, understood as the “ability of an actor to get others to do something they otherwise would not do (and at an acceptable cost to the actor).” (Keohane and Nye, 2012: 11). As Baldwin observes, the same school asserts that the less dependent actor located in an asymmetrical interdependence is provided with a power resource, an assertion based on two concepts: the first being the causal inference of dependence, made of situations in which effects are contingent on or conditioned by other elements; the second being the subordination in which one social event is supported by other factors or rely on one another element for the fulfilment of a need. This is defined as vulnerability and its origins are to be found in intellectual contributions offered by classical thought. According to Baldwin, it is this latter concept which suffers the most in the neoliberal conceptualization of power. In fact, a poor understanding of how interdependence works in terms of mutual benefits curbs the intellectual contribution of this school. Of particular importance for Baldwin, the values of the parties become essential as they convey “the likely effects on those values of breaking the relationship.” (Baldwin, 2016: 161). Indeed, if no effects of the breakup exist, or either the parties would be better off, the relationship should not be described as interdependent. Agreeing with the neoliberal challenges to realism4, Baldwin points out that the real modernization of the neoliberal agenda leans on the analytical framework offered to power researchers, rather than each of the school’s topics taken in isolation. Furthermore, Baldwin criticizes the concept of soft power presented by Nye as failing to provide a clear distinction between the instruments of foreign policy (those that Nye refers to as techniques of statecraft) and the power resources determining whether they succeed or fail. As power remains a relational concept, such a resource could only be identified by the means of a reference to the value system of the other party. Still, as these techniques are property concepts possessed by one actor, this consideration makes no reference to the other party involved (B subject). Instead, “policy makers are often described as ‘employing’ or ‘using’ their power resources as if they were possessions of the state.” This makes soft power “an outcome rather than an undertaking” (Baldwin, 2016: 168–169), as any other policy instrument could be 4

Baldwin highlights Keohane’s and Nye’s innovations compared to realism about the insulation of different issue areas for power fungibility and the antagonism to zero-sum game. Also, he explicates his support to the neoliberal, challenging the conventional wisdom in terms of multiplicity of goals, complex hierarchical priorities against military force, and maximization of power related to foreign policy goals.

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used to make influence attempts. Reversely, only the state’s power bases determine their success. This is actually the only way in which power analysis could distinguish between foreign policy undertakings and foreign policy outcomes.

The Polarization of the Geopolitics of the EU-Russia Gas Trade The traditional literature of the EU-Russia gas trade in the IRT/IPE field has for long lived in a largely polarized theoretical environment between those observing the opposing forces of geopolitics of producer states and multilateral cooperative governance of those favoring an institutionalization of market governance. The contrasting storylines along which the energy systems develop, meaning Markets and Institutions and Regions and Empires, translate into the former symbolizing a continuation and intensification of multilateral relations and globalization processes and the latter embodying the dismemberment of the international system into competing blocks, engaged in rivalry over the control of energy resources and markets (Correljé & van der Linde, 2006; Westphal, 2006). The consequences of this polarization are several, and the literature’s review in the next section gives a comprehensive overview of how gas trade is seen as instrumental in both schools’ assessments of power dynamics in the EU-Russia gas relationship. Yet, it also highlights the intrinsic contradictions emerged in the face of volatile market conditions and transforming gas trade relationships.

The Realist Case of Power in the Geopolitics of the EU-Russia Gas Trade By large margins, the energy weapon or gas weapon literature has been the most influential power representation in the realist field, casting an extensive influence in shaping the debate on the nexus between Europe, Russia, and gas trade. According to the authors employing the energy weapon conceptualization, gas trade greatly influences the totality of EU-Russia relations. Besides that, it is Russia that has repeatedly employed natural gas trade as a means for converting its energy resources into political power. On these terms, the energy weapon literature focuses on only one country, Russia, swaying EU single members of the entire economic bloc through gas trade. Essentially, the literature bases its premises on Russia regaining control over state assets and gas transit routes after a period of crisis in the aftermath of the demise of the Soviet Union. This is done through the adoption of diversified sets of strategies, including gas disruptions and manipulations, in conjunction with significant weather events, sabotage, technical problems, or price hikes. Punishments are the basics of this form of coercive diplomacy, implemented for non-obedience through the revision of prices to “market” levels. According to the literature employing the gas weapon concept, commercial strategies are only secondary to the attempts to influence the domestic and foreign policies decisions of European customers through the

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modification of gas trading conditions. A carrot and stick logic of selective accommodations, where discounts have been given to sympathetic governments. In order to dismantle the political unity in external energy security issues, Russia pursued wedging strategies with the most powerful actors in the EU. Arguably, rather than integrating with the European energy system, Russia’s realpolitik focuses on gas as a wedging tool in a diversified portfolio of power resources (Collins, 2017; Henderson, 2016; Högselius, 2013; Smith Stegen, 2011). The influence of the energy weapon literature on the current debate regarding the mounting tensions between the EU and Russia and the bilateral gas trade is indisputable. The European energy crisis and the risks of Russia cutting off supplies reignited the debate, with policy makers, energy agencies, and policy analysts urging to quickly reduce the dependence on Russia’s gas (IEA, 2022b). Whereas the literature is paying attention to multiple events that occurred in the long history of EU-Russia gas geopolitics and finds its roots in shared considerations, the same energy weapon literature has largely failed to provide a suitable definition of power in gas geopolitics. Undeniably, if many have employed this as a narrative tool, few attempted its theoretical systematization. One of the main authors suggesting a way forward in clafirying power dynamics of the gas weapon is Smith Stegen. Yet, despite the power issue being central to the author’s comprehensive analysis, its definition remains fuzzy. While Smith Stegen makes no direct reference to IR theory or literature, the author states that the energy supplier “uses its resources as a political tool to either punish or coerce (or sometimes a combination of both) its customers.” (Smith Stegen, 2011: 6511). Basing these assumptions on a realist conceptualization of power, Moscow seeks to “further its foreign policy and national security objectives.” (Smith Stegen, 2011: 6506). In fact, the energy weapon is nominally built and theoretically dependent on the fulfilment of certain “stages that must be accomplished before a state can be considered to have transformed energy resources into political capital.” Again, it holds on the “recognition that, for a state to wield energy supply as a weapon, several conditions must be satisfied.”5 (Smith Stegen, 2011: 6506). Comprehensively, this approach clearly relates to the realist prominence of energy ownership in a world of resource scarcity. Power theorization of the energy weapon abides under the shade of a realist-vague conception of international affairs, not just linked to a property of a unit or state. Instead, “to implement an energy weapon, an energy supplier must not only control energy resources and delivery, but also intend to convert its power into political gains.” (Smith Stegen, 2011: 6508). On his hand, Collins questions the practicability of the gas weapon as a form of “psychological reality” which would inhibit big Western EU gas partners to intervene in the case of a political aggression to a smaller partner, preventing them from sanctioning Russia or target enemies in the partner’s political spectrum (Collins, 2017).

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The four phases of the energy weapon model presented by Smith Stegen to transform the energy resources in one country into political leverage are: (1) State consolidation of resources, (2) State control over transit routes, (3) Implementation of threats, price hikes, and disruptions, and (4) Target state acquiescence and concessions.

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Doubts related to the energy weapon have been expressed by different scholars. Rather than the supposed ability by Russia to use its energy weapon, Posaner emphasizes the role of political cleavages among national political parties to seriously impact conditions for bilateral gas trade. Accordingly, elements such as single EU members’ approach to energy security or the state-ownership level of utilities shaped much more the way importers and exporters agreed on prominent features, such as gas prices (Posaner, 2020). Instead, Henderson explains that the energy weapon should weigh the overall scenario in which it is situated. For instance, the globalization of the gas market could mutate the power balance in buyers’ or sellers’ favor (Henderson, 2016). For Orttung and Overland, Russia’s use of its “energy power to maintain a sphere of special interest” (Orttung & Overland, 2011: 75) originates from the opportunity to maximize political gains on the international environment, likewise revenues. However, the analysis indicates the limited tools available to Russia for imposing decisions to policy makers in its so-called Near Abroad.6 More than that, when political and economic goals clash with each other, the result is a tradeoff affecting Russia’s international behavior and decreasing the effects of the gas weapon. Mišík and Prachárová analyze the pointlessness of the energy weapon in the overtly gas-dependent Baltic States. This is explained through the study of the role played by transit countries for the Russian enclave of Kaliningrad (Mišík & Prachárová, 2016). Against this background, the energy weapon’s true nature continues to be largely misunderstood. On the point, Högselius suggests broadening its interpretation to reach “beyond the much-debated nightmare of politically motivated supply disruptions” from Russia7 as the energy weapon “can be so much more.” (Högselius, 2013: 7). To be approached, the gas weapon should include relational practices such as the dumping of gas, the divide and rule strategies, and the utilization of rhetorical practices to strengthen Moscow’s role on the international arena.

The Liberal Case of Power in the Geopolitics of the EU-Russia Gas Trade Close to mirroring the prevalence of the focus on Russia in the realist field, the neoliberal side has mostly concentrated on the EU capacity of projecting power through its distinctive capacities. Gas security has appeared in the main policy debate as soon as the European enlargement of 2004–2007 started to integrate a larger variance of energy systems and, at the same time, the disruption of gas supplies amid the Ukraine-Russia tensions impacted the industrial and residential sectors in the whole EU. With policy makers fully aware of the risks of an over-

6

In the literature, this is another way of defining the Post-Soviet space, especially when Russia is considered pivotal in the analysis. 7 As a matter of fact, Högselius concentrates his efforts on the Soviet era and rather than the Russian one.

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dependence on gas imports of diversified energy systems, the gas security issue turned into a hot topic for the EU Commission in pushing harder on energy integration and a captivating jargon for the media. The issuing of the Third Energy Package in 2009 surged as a main attempt for gas policy integration and harmonization of the EU gas governance, but soon enough it became increasingly evident that EU members’ perception and interpretation of energy and gas security differed much. These divisions are not just between old and new member states, but they cut across political and geographical regions, making it even harder to present unified resolutions. On the internal side, the freedom of singular members allows them to reap the benefits of conducting trade in larger markets. On the other hand, this increases the possibility to influence external suppliers beyond the EU borders, causing their more passive or aggressive responses. In general, a fragmented policy landscape allows foreign players to instil and gain from asymmetrical dependencies with singular EU members (Szulecki, 2018). Throughout the last 30 years, the understanding of EU-Russia relations swung between the asymmetrical interdependence in favor of the EU and the overdependency of the EU on Russia’s energy resources. Studies over natural gas trade have proposed several criterions to be qualitatively and quantitatively evaluated, conducive to understanding the degree of interdependence achieved by the parts and built with the aim of classifying and operationalizing the threat stemming from this gas interdependency (Casier, 2011). Against the background of a more heterogeneous scenario among the supporters of a liberal approach to the geopolitics of the EU-Russia gas trade, the interpretations of power from this tradition are more complex and elaborated, providing a scattered outline compared to the dominant position of the so-called “energy weapon” in the realist case. When concerned with the role of gas interdependency between EU and Russia, power becomes a craftier and indirect object to be analyzed. This path takes into the account various international actors, including energy companies and markets, other than consumers and environmental agencies. The first interesting neoliberal analysis of power in the EU-Russia gas relations is provided by Proedrou. Drawing on both sensitivity and vulnerability concepts from Keohane and Nye, Proedrou uses the neoliberal frame to “highlight the position, leverage and room for manoeuvre each side has and explain their actions” (Proedrou, 2007: 348), in a continuous swinging between cooperation and conflict. Elaborating its interdependence prism through different works, Proedrou considers the strategy of bilateral deals made by Russia in the Eastern Europe and Gazprom’s capacity to expand downstream and renewing contracts with Western European partners as consolidating Russia’s dominant position and power in the region. The same unveils its fragmented, uncoordinated, and weak EU capacity to form an external common stance. Also, this limits the possibility of facing internal controversies. Here, the EU strategy oscillates between interdependence and diversification, protesting Gazprom’s policies while contemplating protectionist measures to limit Russia’s power. In essence, “this absence of viable alternatives for both sides forms the cornerstone of their gas trade.” (Proedrou, 2012: 78).

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As such, Russia is obliged to bank on the EU gas markets “in order to avoid imposing a serious burden on its economy.” (Proedrou, 2007: 344). Conversely, the Central and Eastern EU members would rather suffer from any disruption of Russian gas because of the lack of supply for such volumes from alternative sources and the high costs of LNG from distant countries. Despite the frequent tensions and as long as these conditions persist, the EU-Russia relationship is considered interdependent and cooperative. The EU is receiving energy that it needs, and Russia is earning hard currency. After reviewing the role of gas played in the Russian economy, the author analyses the Kremlin’s sensitivity and aim and scope of its twofold strategy. On one hand, Gazprom’s prime goal is to maintain the take-or-pay contracts, the traditional form on which the EU-Russia gas trade relation has been based. On the other, Moscow wants to take advantage of the liberalization measures implemented in the EU gas market. These two are complemented by strategies to control gas flows to Europe and circumventing rival transit states constructing new export facilities. So forth, Russia’s energy security could be solidified only “if transit dependency is eliminated” (Proedrou, 2012: 82), directly linking Russia to the EU and locking up the demand of key consumer members. Furthermore, Russia exploits energy ties in other sectors to earn political concessions and influence both the security and foreign policy of other states. In its Near Abroad, this means gas becomes a “reminder of those states’ ultimate dependence on Moscow” (Proedrou, 2007: 338), slowing the integration with the West, as it has been the case of Ukraine, Belarus, Georgia, and the Baltic States. Switching the focus, Proedrou investigates the EU measures and poor results in reducing its sensitivity. First and foremost, Russia has not been lured to accept the EU regulatory settings. The EU also initiated a liberalization process of the internal market to protect itself from Russia’s assertive behavior, while seeking to differentiate imports and lower Gazprom’s share of the EU gas market. Notably, Proedrou highlights the EU initiative to pressure Moscow in the direction of liberalizing its gas industry. In a later analysis, Proedrou takes some distance from its neoliberal framework by mixing elements of soft power with the notion of structural power. According to him, the latter is the capacity to “capture the evolving dynamics of the contours of relationships that define actors’ space for action, alternatives, and eventual policies” and disclose the full-range of “co-constitutive and interactive processes that make up power relationships and define the outcomes in the international scene.” (Proedrou, 2018: 86–87). Russia’s coercive geopolitical and economic actions have in fact yielded few results in its Near Abroad and Eastern Europe, complemented by insufficient soft power in Western EU. Instead, the creation of an integrated energy market, setting “new rules that went against the logic and substance of the ones underpinning EU-Russia gas trade in previous decades,” has showed the EU structural capacity to reshape “the rules of the game according to its ideological preferences and energy needs.” (Proedrou, 2018: 80–81). This has taken the shape of favoring long-term contract revisions, prices fluctuation on demand and supply balance, the buildup of interconnectors, destination clauses ban, crisis-mitigation regulations, and solidarity clauses. Russia’s response could be summarized as one of reluctant compliance, pursuing a market-share defense policy, prioritizing budget

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revenues and price competition, implicating the acceptance of the EU market rules because of the scarce capacities to influence its regulations. Besides this, Russia experienced a deterioration of its position because of the unsuccessful capacity to adapt to the changes in global gas markets and the failure to make up for the loss of bargaining position in the EU by diversifying towards Turkey and China. Nonetheless, for Proedrou, Russia retains many assets in the form of business-to-business ties in the EU, the possibility to reinvigorate its export strategy through a recombination of domestic and Asian supply dynamics or playing along with the EU energy transition and gain from emerging global carbon markets. A neoliberal approach has been taken also by Romanova, which focuses her analysis on the imposition by the EU of the Third Liberalization Package8 (TLP) on Russia. The same has been deemed to increase the EU bargaining power with gas suppliers and to lessen their ability to force internal members to accept unfavorable political conditions or to impose high energy prices. The EU authorities have hedged “against abuses of the market or political power” while betting on the competition and liquidity of markets (Romanova, 2016: 863) These measures challenged Gazprom’s ownership of pipeline assets, limiting its capacity to operate networks, restraining the use of infrastructures, and hindering new pipelines construction with the final aim of driving prices down. Simultaneously, the initiative hit Russia’s propensity for oil-indexed, long-term gas contracts compared to spot pricing. In response, Romanova asserts that Moscow resorted to a “geopolitical approach,” based on a selective approach of EU members and diversification of exporting routes – the abandonment of the South Stream project for the Turkish Stream and new gas projects to China. In the attempt to harmonize a series of power models in the EU-Russia gas trade developed through the years,9 Goldthau and Sitter offer a methodology to

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The Third Liberalization Package is a set of legal and technocratic instruments introducing greater competition into the energy business. Through this package, approved in 2009, the European authorities have transformed the environment in which Russian companies, and Gazprom in particular, had to operate in the EU. In particular, the provisions impose the unbundling of vertically integrated energy companies into upstream/midstream/downstream entities. At the same time, the package has been prompted in order to bolster the development of a network of energy infrastructure, including pipelines, within the EU borders. 9 The authors have developed a largely influencing literature over the power dynamics within the EU-Russia gas trade relations. Mostly, these works focus on the EU capacity to drive the relation through regulatory and legal frames, a market approach to steer Russia away from self-interested behaviors in the gas market. Other than the articles directly quoted in the chapter, some other of these works had an important influence over the geopolitics of the EU-Russia gas trade literature: Goldthau A., Sitter N. (2014) A Liberal Actor in a Realist World? The Commission and the External Dimension of the Single Market for Energy, Journal of European Public Policy 21(10):1452–1472. doi:10.1080/13501763.2014.912251; Goldthau A., Sitter N. (2015) A Liberal Actor in a Realist World. The European Union Regulatory State and the Global Political Economy of Energy. Oxford University Press, Oxford; Goldthau A., Sitter N. (2015) Soft Power with a Hard Edge: EU Policy Tools and Energy Security, Review of International Political Economy 22(5):941–965. doi:10.1080/09692290.2015.1008547; Andersen A., Goldthau A., Sitter N. (eds.) (2017) Energy Union: Europe’s New Liberal Mercantilism? Palgrave Macmillan, Basingstoke.

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approach power capacities through an illustrative variety of policy tools and options located on the continuum from soft to hard power. In particular, they provide the core elements of different types of EU power tools stemming from a neoliberal conceptualization of international politics (Goldthau & Sitter, 2019). As the softest approach, the EU normative power intends to neutrally foster its values by attracting all market-oriented global players. This power is embodied in the competitive regime and the creation of a market “proper functioning through strong enforcement mechanisms” (Goldthau & Sitter, 2019: 30) influenced by global governance regimes. Regulatory power is considered as a passive use of power extending the reach of the EU’s rules and regulations as “the rules that it emplaces internally have external effects and change the behaviour of external actors.” (Goldthau & Sitter, 2019: 32). A “take it or leave it” offer to access the EU markets so that Russia needs to fall in line with competition policies biased towards gas consumer interests. In line with this, Moscow followed the EU indications by removing destination clauses from contracts and abjuring the oil-indexation, receded from its discriminatory pricing practices, and accepted EU internal gas reselling. Going on, the notion of market power represents a form of economic hard power “targeted at a selected actor” – Russia – which “applies its regulatory rules selectively” as a coercive means driven by geopolitical motives (Goldthau & Sitter, 2019: 34). This time, Goldthau and Sitter define aims and intentions of this type of power as involving elements of both means (regulation) and goals (correction or mitigation of market failures), but qualify this as distinct from economic power,10 by focusing on the different means by which the EU asserts its interests in the world of energy. In this context, the introduction of the “security of supply risks” in the TLP as a legitimate cause for European transmission operators to halt certification processes of non-EU companies supported preferred supply route options (e.g., SGC to South Stream; Ukraine transit over Nord Stream 2) and aimed directly Gazprom. Moreover, this preserved the security of Polish and Baltic states in the context of increasing tensions between Moscow and Kiev, furthering the “security of supply” objective among those of the Energy Union. Lastly, it emerged the possibility of the EU employing its economic power as a foreign policy tool. This strategy is assembled as a mix of realist and interventionist approaches, envisaging policies explicitly linked to energy geopolitics with the aim to “twist the Kremlin’s arm (i.e. Gazprom)” and plan “to change its foreign energy policy behaviour.” (Goldthau & Sitter, 2019: 40). Generally speaking, faced with the need to strongly respond to Russia, the EU increased its foreign policy options and selectively deployed its market power. Still, the authors recalled the possible consequences of this transformation, potentially endangering the strategising of the EU regulatory frameworks, and triggering new coercive responses by Russia.

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For Nye, hard power consists in the use of threats or inducements (means) within the economic, regulatory, or political sphere, to make an actor pursue/not pursue a certain course of action.

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A Critical Revision of Power in the Geopolitics of the EU-Russia Gas Trade The Critical Revision of the Realist Case Starting from the realist field and the conceptualization of the energy weapon, Smith Stegen’s work raises two major considerations. Firstly, in line with other realist authors, power is clearly intended as an attribute of a unit and as a potential relationship, which materializes only whenever the stages exemplified by the model are fulfilled. In the attempt to enhance the methodological application of the energy weapon model, its stringent categorizations fix the same model application to a handful of events in which Russia and Gazprom have adhered to the described phases, making it a theoretical dependent power concept. Truthfully, the Smith Stegen’s energy weapon could not shed light on power wielded outside Russia’s Near Abroad, as it is contingent with the limitation of its methodological approach of physical control of gas export routes. Secondly, the power relations exemplified in this energy weapon model have no direct reference to the dimensions of scope and domain, time and place to which Baldwin gives much emphasis. Instead of being analytically precise, the energy weapon model refers to “the timing” (emphasis added) of gas “supply and price manipulations” covert by their association with random events, such as sudden weather changes or technical problems. Yet, although admitting that these actions could also be “commercially justifiable,” the author asserts that they “may indicate political motives” as customers receive different treatments (Smith Stegen, 2011: 6508–6509). These causal and relational propositions seem rather inconsistent, as it appears the structural nature of the surrounding environment where the actions of subjects take place has no role in determining the way sudden events play out in a complex scenario. Reversely, no reference is given on how events could smooth power fungibility in other issue areas for Russia. When considering the way B subject in power relations emerges in the analysis – whether it is a Baltic state, Ukraine, Belarus, or Georgia – it is all the more evident that the energy weapon narrative of “punitive or coercive” disruptions presents a model of zero-sum game, without any proper determination of the differences between the possession and the exercise of power. The fickleness of the energy weapon holistic representation of power as a static, realist, and modular instrument is exemplified by Mišík and Prachárová analysis, for which the unique mutual dependency given by the geopolitical relevance of Soviet-era gas infrastructures creates a situation in which even in Russia’s Near Abroad energy security safety nets exist. While almost zeroing the effects of clearly asymmetric gas relations, it becomes important to evaluate the willingness to execute the country’s energy will and physical abilities. This adds up to the analysis at the structural dimension to which the B subject is embedded into. This does not stop to the infrastructural element but, as an example, it has much to do with the domestic perception of elites and the “Russia skeptics” and “Russia advocates” cleavage (Mišík & Prachárová, 2016; Posaner, 2020). Furthermore, whenever it becomes useful, Smith Stegen recurs to the relational and causal proposition of Russia “using price as a reward” and a leverage (Smith

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Stegen, 2011: 6509). Still, the same assertion implicitly calls for a recognition of B power and its capabilities to influence the other party, gaining something from a transaction which falls into its system’s values. The potentials for reciprocal control in power relations are evident and they would need to be further elaborated in future uses of the energy weapon model. For all these reasons, the energy weapon also perfectly fits the narrative of Russia as an energy superpower, but it operates well as a descriptive device rather than an analytical tool. Paradoxically, “when used for political leverage” it is the same Smith Stegen to state that “the gas weapon had limited or no impact,” linking the outcome to the possibility by the targeted countries “to benefit from strategic alliances.” (Smith Stegen, 2011: 6510). Somehow, this complicates even more the theoretical elaboration of the energy weapon as an exemplification of power relations within an energy dyad. Indeed, the assertion underlines the structural nature in which power actions take place. On one hand, the approach reflects only the contingencies postSoviet countries came to face in a long timeframe, spanning from the early 1990s to the late 2000s. Other power relations are excluded because of the model nonfungibility. Also, this does not support any causal inference about the motivations for which Russia was not able to assert its own power ingrained in the energy weapon. Essentially, this casts shadows on the ability of the same model to assess the seriousness of energy threats and guide policy makers’ decisions. By connecting Moscow’s failure to assert its interests because of the benefits from strategic alliances does not make it easier for scholars to understand either the B strategies in dealing with Russia or their power capabilities. Besides this, it completely avoids the controversy of how B gained in the issue area according to its value’s system. Ultimately, the fact that the energy weapon has not been successful, or that Moscow might not be following the rulebook of the presented model, makes it no less interesting to research power originating from Russia’s status of being a gas supplier. The Orttung and Overland study provide a useful kit to deep dive into the analysis of the handling of energy in foreign policy. Against the background of the inadequacy of realist measures and standardizations of power in international politics, this is a rather noteworthy step forward in both conceptualizing power standards in energy relations as well as in the geopolitics EU-Russia gas trade (Orttung & Overland, 2011). In many ways, this study facilitates the way scholars of Russia’s use of the energy weapon would be greatly supported by differentiating intentions and capabilities, thus avoiding the simplistic assumption that Moscow has power in international energy affairs just because of its extraordinary energy endowments. Furthermore, the toolkit provides a resourceful method for causal inferences about the results power actions might get. In the same way, it benefits researchers by potentially revealing the production of unintended consequences resulting from the state’s energy capacities. This notwithstanding, given the focus on instruments, rather than the core values of the gas system, the toolbox leaves unresolved questions regarding the true nature of Moscow’s energy policy and strategy as embedded in a wider structural nature of intra-subjective actions. On one hand, these continue to be central in the way studies should assess the A power capacities, but they should also be complemented by analytically researching the way Russian energy partners have

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responded to Moscow’s attempts to use them. In the end, the toolkit emerges as a valuable instrument for both neorealist and neoliberal scholars and additional discussions and implementation could support its wider application, even outside of the EU-Russia gas trade context. Continuing the discussion over the energy weapon model, Henderson stresses that “any power with which this ‘weapon’ has been armed has been based on commerce and contractual obligation” (Henderson, 2016: 481), agreed by the country purchasing natural gas and then exploited by Gazprom to create political and commercial disputes. Interestingly, this shows that the energy weapon should be understood as a structural and relational concept. In this relation, the B party carries its interests and could retaliate through a different set of instruments including, as an example, energy diversification. For Högselius, the striking wide range of scholarly conclusions reflects the nonexistence of the energy weapon as an objective fact. Instead, the energy weapon could be widely recognized only as a social construct. Indeed, it narratively penetrates energy power relations “only to the extent that it is believed to exist,” placing “perception rather than objective reality at the center.” (Högselius, 2013: 221). Under this light, gas trade elicits power dynamics, though this happens by means of more subtle and indirect practices than the threat of gas disruptions. Therefore, Högselius explicitly calls for a reframing of the overall energy weapon as a relational concept where the B subjectivity is indispensable for the investigation of foreign policy undertakings and outcomes through the gas weapon. For Tsafos, the misuse of the energy weapon in the public discourse is today at odds with the events connected with the current crisis between Russia, Ukraine, and the West (Tsafos, 2022). Therefore, most of the old inferences about the energy weapon, or in this case it would be better to say the gas weapon, demand further theoretical elaborations in order to be applied in the context of the geopolitics of the EU-Russia gas trade.

The Critical Revision of the Liberal Case Among the liberal approaches to the power dynamics in gas interdependencies, Proedrou stands as one of the finest in terms of theoretical elaboration and logical argumentation. Even so, a first critical observation is the low profile given to the EU vulnerability, resonating in the same Baldwin’s observations about the neoliberal school in IRT. According to Proedrou, the European economic bloc main challenges include: the high import dependency on unstable and potentially problematic gas-rich states; the increased competition by the developing world in accessing energy sources; the consequent squeezing of the energy security margins and the preeminence of energy diplomacy at the forefront of national interest, weakening the EU unity over external energy policies; the increasing high prices due to market imbalances; and the contradictions emerging between the EU energy transition goals and the continued use of fossil fuels to avert supply shortages. To these, the EU gas deficit and decreasing production come forward as elements negatively influencing the other vulnerabilities (Proedrou, 2012: 41–58). Nevertheless, the role of natural gas in both the Russian and the EU economies is only marginally considered in the analysis. Mainly, the issue arises when the author

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examines the Eastern European countries’ vulnerabilities and Moscow exploiting its power position. The analytical consequences are that the author conveys the impression that Western EU and Russia are not gas interdependent, which would counter the same crux of the matter and logic of his investigation. By extension, the analytic prism employed by Proedrou could distort the environment in which power dynamics are occurring by focusing on measures to reduce sensitivities by Europe and Russia. Still, by briefly sketching the role of gas in both economies, this limits the identification of several vulnerabilities of both actors and the limited options available in terms of reducing their gas interdependence. Likewise, a deeper investigation of the European vulnerabilities would likely indicate the differences existing in the value system underpinning the energy sector of Eastern and Western EU countries. This is not a secondary element, as these could become a further problem when asymmetrical interdependence comes in and Russia attempts to use its energy lever selectively, versus singular EU members. Another important consideration is that Proedrou holds all Russian energy companies as “arms of the Kremlin’s foreign policy” due to the reinstating of “control of the energy sector and forces the energy business to adjust its policies to serve the state’s goals” (Proedrou, 2007: 333) Yet, as it is difficult to object that “some of the Gazprom’s actions may seem obscure and irrational unless we take into account their political rational and underpinnings” (Proedrou, 2012: 80), in fact Proedrou does not stick with the neoliberal interest into transgovernmental and transnational actors in international politics. De facto, this approach assumes that the state and market actors within Russia have parallel goals throughout their whole policy and strategy agenda, inferring Gazprom’s subsidiarity to the Kremlin’s will and dismissing the growing importance of this topic in Russia’s gas sector (Sassi, 2022). Finally, Proedrou’s innovative blending of structural power and soft power conceptualization provides one of the most interesting advancements among the neoliberal scholars of power in gas relations. The indication of the EU ability to swiftly impose Russia its regulatory policies through a mix of hard and soft power capacities reveals the potential of interdisciplinary approaches to differentiate the causality of power and its exercise. Contextually, the same Proedrou asserts Russia has only adjusted its policy to the EU market and kept its political imperatives and geopolitical goals strictly aligned with its own value system. Accordingly, the EU structural power is contingent to the time and place dimensions. The same should be proved against the changing tide of the energy markets as the EU’s regulatory framework has been implemented “in the context of highly favourable conditions for gas importers.” (Proedrou, 2018: 83). This also leaves the door open to future investigations about the reciprocal control problem of measuring structural power in the dynamic environment of the global gas market. Regarding the considerations made by Romanova that Russia employed a “geopolitical approach” in response to the EU regulatory initiatives, these add nothing to the discussion of how the power of A (EU) has challenged B (Russia) value system. As a matter of fact, both Ankara and Beijing have developed economies in need for gas imports. Those markets were already interesting from Moscow’s perspective, even before the EU actions. As such, the agreements made with these countries

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could not be deemed a direct outcome of the EU power initiative. If anything, the acceleration of the negotiations regarding the gas deals has been an unintended consequence of the EU power regulations. Neither Gazprom’s attempts to respond through technocratic and legalistic ways to the TLP initiative say anything other than the state-owned enterprise’s (SOE) acknowledges that interdependence has costs and that the company is willing to pay them according to its own value system. To this analysis, it is more interesting Romanova’s focus on the establishing of a dialogue platform such as the Gas Advisory Council (GAC). Here, Russia sought to prevent the undermining of its infrastructures’ ownership scheme, contracts’ legality and open access to pipeline capacity, spotlighting B’s responses to A’s attempts of influencing its decisions. An investigation about the EU and Russia ability at future negotiating tables could be fruitful in terms of understanding relational power capacities. Furthermore, Romanova’s non-unitary representation of Russia as a monolithic energy actor leaves space to investigate Gazprom’s elaboration of legalistic reactions to the TLP. Romanova underscores the company’s acceptance of technocratic and legal instruments, enhancing transgovernmental and transnational interactions while reviewing contractual specifications, accepting more flexibility in price indexation and take-or-pay obligations in long-term contracts as significant actions (Romanova, 2016: 868–871). These last points are of interest as they are associated with a liberal approach to power, treated as the ability of an actor to get others to do something they otherwise would not do. While it is intelligible to question whether Gazprom would have changed such long-established conditions of gas trading in the EU, no space in the analysis is left on the problematization of how these changes would hurt the company’s value system. Is Gazprom attempting to just defend its position in the EU gas market, including its strategy as a global gas player, or does its posture come from a sociological and cultural predisposition to state-centered and controlled-market approach? Moreover, the research does not explain why such conditions have been so welcomingly implemented in such a short timeframe by the same Gazprom, after being rejected for so long. So, how the company moved away from its value system for the sake of maintaining its gas interdependency working? Conversely, what has the EU lost in its interaction with Russia? This last point is relevant in order to identify the fungibility and reciprocal control problems in power analysis. Another point which should be raised following Baldwin’s theorization is weighting the unintended consequences of these contractual changes. Witnessing the unfolding energy crisis in the EU and besides the heated discussion over where the responsibilities over this crisis lie, the answers to these questions have become crucial. After the review of the approach to the power argument made by Goldthau and Sitter, the authors quite surprisingly assert that they do not wish to “add another concept to the power debate” but their principal goals are “(1) to conceptualise the core elements that distinguish each type of power for the case of energy, (2) to theorise on the role of regulation in this context and (3) to explore the implications for EU leadership in international energy governance.” (Goldthau & Sitter, 2019: 29). First of all, it seems rather contradictory in terms of their initial attempt to approach distinct core elements that distinguish each type of power when the same

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authors, despite the vast literature cited in section “One Step Forward, Two Steps Back: Baldwin’s Critique to Realist/Liberal Accounts of Power in IRT,” refuse to provide any definition of what power is. As a matter of principle, how could you become a good carpenter if you do not deal with the form and substance of wood? Essentially, the analysis shows that Goldthau and Sitter frequently recur to the common fallacy in the liberal case of creating analytical frameworks which generate self-fulfilling approaches to power dynamics between actors. Yet, they basically focus the analysis over the A subject – in this case the EU – capacity to exploit the vulnerability of B – Russia – though holding an agnostic position in terms of the latter’s value system. In fact, their only approach which could reveal some additional understanding of power dynamics in gas trade, namely the normative power, is liquidated by the scholars as not working very well because of “Russia does not find the free trade model particularly attractive.” (Goldthau & Sitter, 2019: 42). This assertion’s consequences are largely underestimated, not just by Goldthau and Sitter, but from the whole literature of the EU-Russia gas interdependence and to a certain extent, today’s EU gas crisis derives from this misunderstanding. In general, as Goldthau and Sitter major focus remains on the legal and regulatory terms of gas trade, the lack of any reference to both Russia and Gazprom relational capacities within these realms thwart the overall analysis. In this sense, they do not offer any provision of analytical answers to what power entails in these approaches, whereas the same authors state that there is a clear-cut evidence that the EU normative and regulatory initiatives have provoked legal counteractions by Russia. The investigation of these actions and goals could reveal much more on B’s value system than the simple observation of a legal contestation. In essence, what has really Gazprom been defending through these proceedings? Continuing the analysis, the assumption that the EU demands to Gazprom “to either ‘come and play’ on the EU market (with the obligation to abide by the full set of legal rules) or lose its prime export market” (Goldthau & Sitter, 2019: 33) appears incompatible with the neoliberal theory in IRT. As a matter of fact, this would imply the EU would be seriously imposing the complete and sudden interruption of gas imports from Russia. Actually, this would suggest a complete misalignment with the existence of an interdependence between the parties, rejecting the overall theoretical assumptions of the liberal school. Going on, no references are given on the effects a complete shut off would have on the EU value system after having broken the gas relationship, nor the economic and political consequences of such a decision on the European gas market and the interest of single members. As a matter of fact, even in the face of the Russian invasion of Ukraine in early 2022, the EU main governments and Russian gas importers – Germany and Italy – opposed such a decision, yet with nuanced differences (Bloomberg, 2022; Reuters, 2022c). Therefore, a reconsideration of the EU capacity in this sense would be a welcome advance in the study of power relationship in the geopolitics of the EU-Russia gas trade. In general, while explicitly referring to the interdependent notion of power lying in the neoliberal IRT, Goldthau and Sitter provide only a scant attention to Gazprom’s interests in continuing its gas trade with the EU as its main destination market, exposing this weak spot in their analysis, in line with other neoliberal

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approaches. Another proof of the limited power conceptualization is the final reconsideration of a geopolitical approach made with the proposition of the so-called economic power. This is nothing more than a switch to a coercive vision of power in gas trade relations which “erases borderline between energy geopolitics and the security aspect of geopolitics” (Goldthau & Sitter, 2019: 40) and renegades any neoliberal assumptions made through the previous analytical frameworks. In the following article, Goldthau and Sitter return to the images of regulatory and market power not as related to “whether the EU has the power and authority to use regulatory policy tools, as the purpose for which the EU should wield its power.” (Goldthau & Sitter, 2020: 112). As it seems, these are the most likely forms of power applied by the A subject (EU), they are both identified as techniques of states or a property described as a possession by a supranational entity like the EU Commission. As observed before, there is no reference to the single European member states’ system values. Also, only general hints are made to Eastern EU states as being more concerned with national security than the market-oriented and liberal Western members. Again, while the same authors assess that an “‘irresponsible’ use of power might undermine the EU’s authority in the long term” (Goldthau & Sitter, 2020: 124), they completely neglect any reference to the B subject (Russia) value system. Once more, this confirms the scholars’ non-relational theorization of power amid the conceptual anarchy surrounding the study of power in gas and international energy markets.

Conclusions and Policy Recommendations Overall, the study of the geopolitics of the EU-Russia gas trade unveils a fragmented and swiftly developing scenario of methodological and theoretical insights on how to deal with the interests of energy actors involved in a dyadic and multilayered relationship. The issue of power is frequently associated with one of the two main strands in IRT. And, to a great extent, power analysis aims to untangle the complexities stemming from the growing politicization of gas trade between the world’s largest exporter and the world’s single leading import market of gas. From the analysis, two major considerations emerge. The first one is the noticeable under-theorization of power as part of the comprehensive analytical framework offered by the literature over the geopolitics of EU-Russia gas trade. On one hand, the chapter displays the enduring of a theory concept dependency in both neorealist and neoliberal fields. The neorealists set the attention on power as attributes of units and capabilities as potential relationships as they consistently neglect the B subject value system in the power relation. On the contrary, the liberal case presents various inefficiencies in responding to the critical role of vulnerability in the interdependence theory. In a relational conceptualization of power, this has a key role in determining and shaping both the EU and Russia values, policies, and strategies. Therefore, future research should be aware of these deficiencies, providing an explicit definition of how the realist and liberal cases

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define power, with the aim of coherently and logically following through their different perspectives. On the other hand, the methodological choice of applying Baldwin’s criteria over the six problems of power analysis in IRT has revealed noteworthy results, as much as different controversies. All of them point to the same direction, meaning the rich prospects to improve forthcoming investigations on the geopolitics of the EU-Russia gas trade. In this sense goes the exploration of potential power and fungibility issues in gas trading, as much as a deeper comprehension of scope and domain of power wielding, and the way power resources are used in other issue areas in order to obtain alternative goals. In light of the current situation in the geopolitics of the EU-Russia gas trade, this research agenda is of growing relevance for both academics and policy makers, while it seems full of opportunities to improve power theory conceptualization and methodological application in the study of international energy markets. Ergo, the aforementioned problems necessitate researchers to systematically deal with the structural nature of the intra-subjective actions in which gas and energy trade is embedded. Also, the chapter shows that reciprocal control and intentions and power problems are frequently associated with the realist case – the former – and the liberal case – the latter. There is an urgent call for these schools to reframe their methodological settings and approaches to power. On the point, it should be analyzed the B subject confidence in its own relational capabilities to exert a corresponding power over the counterpart. In like manner, scholars must deal with the consequences of the power pouring from the original intentions of the A subject and influencing previously unimaginable circumstances. Besides this, the author acknowledges the existence of alternative theoretical approaches to the study of the geopolitics of the EU-Russia gas trade. Other researchers have elaborated different and interdisciplinary methods and this chapter does not intend to demote their absolute value. Still, the review of the neorealist/ neoliberal polarity makes it highly effective because of its outstanding relevance for academia and among political practitioners. Observing the unfolding events over the EU-Russia gas interdependence, I believe that a reconsideration of the core ideas about gas geopolitics and a new analytical awareness of how norms and values play a fundamental role in these dynamics could be much more revealing than previously thought. In this regard, the analytical investigation of power conceptualization becomes an asset for both scholars, interested in its application into contemporary IRT/IPE, and for all those researching energy diplomacy and trade. This chapter proposes different opportunities for expanding the research agenda on the geopolitics of the EU-Russia gas trade, clarifying, and refining the way power occurs as a relational capacity, manifesting itself only in an actual or potential relationship between actors. Other than this, a processed and thoughtful notion of power would be more than helpful, well beyond the field’s intellectual development. The structural crisis of the global gas market and its socioeconomic implications, now spiraling out of control in Europe and beyond its borders, urge policy makers to unravel the dilemmas behind the energy policies and strategies of main players in global gas geopolitics.

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Besides that, much could be done in the field by applying power conceptualizations to the challenges posed by the energy transition. The ambivalent position of gas in the overall process and the availability of low-carbon gases options complicate the strategies of exporters and importers. The structural nature in which new interdependencies are now emerging will also dictate future power capabilities of state and business actors, including in the context of the geopolitics of the EU-Russia energy trade. In the end, we are stepping into the unknown of multiple new maps of energy geopolitics amid increasingly volatile energy markets, the uneven progress of the global energy transition, and the increasing turbulent relations among world’s great powers. This calls for a new and large-scale initiative to account for power acts and capabilities in international energy affairs.

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Part II Policies to Achieve Energy Security

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Energy Convergence and Regional Energy Security: Policy Implications Ehsan Rasoulinezhad, Farhad Taghizadeh-Hesary, and Lilu Vandercamme

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Importance of Energy in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Security in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Convergence in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conceptual Framework of Energy Convergence and Security in Asia . . . . . . . . . . . . . . . . . . . . . . Energy Security Analysis in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regional Aspect of Energy Security of Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resource Abundance Role in Energy Security of Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . . Government Effectiveness Role in Energy Security of Asian Countries . . . . . . . . . . . . . . . . . . . . Income Level Role in Energy Security of Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Green Energy, a Potential Gateway to Energy Security and Convergence in Asia . . . . . . . . . Neo-mercantilism Approach to Energy Security and Convergence in Asia . . . . . . . . . . . . . . . . . Conclusion and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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E. Rasoulinezhad (*) Faculty of World Studies, University of Tehran, Tehran, Iran e-mail: [email protected] F. Taghizadeh-Hesary School of Global Studies, Tokai University, Hiratsuka, Japan TOKAI Research Institute for Environment and Sustainability (TRIES), Tokai University, Hiratsuka, Japan e-mail: [email protected] L. Vandercamme School of Global Studies, Tokai University, Hiratsuka, Japan Faculty of Economics, Keio University, Tokyo, Japan e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_3

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Abstract

Energy security and its relationship with the energy convergence of Asian countries is an important issue in moving toward long-term sustainable development in Asia. This chapter discusses the concept of energy security and energy convergence in Asian countries. The 4As framework in energy security is employed and energy security patterns in 2010, 2015, and 2018 are analyzed in this chapter. This is used to discuss the similarity of patterns and long-term convergence between different Asian countries based on government effectiveness, income level, and role in the energy market. The main concluding points of this chapter reveal that the position of Asian countries in energy supply and demand affects the pattern of energy security. The pattern of energy security in importing countries, unlike exporting countries, has improved. Government effectiveness is another important factor in shaping the energy security model of Asian countries. The income level is fundamental in the energy security model of Asian countries. Asian countries with high per capita incomes have improved their energy security dimensions over time, while in Asian countries with low per capita incomes, the pattern of energy security has become more unfavorable. The major policy implications of this chapter are an emergency implementation of reforms in the structure of government and government-affiliated institutions in some Asian countries and convergence of national interests of Asian countries in the field of energy. Keywords

Energy security · Convergence · Asian economies · The 4As framework

Introduction For several centuries, energy has become one of the most important inputs of national production, the subject of bargaining between countries, and even the emergence of war and political tension in the world. The development stages of human societies have been influenced by exploration, extraction, transmission, trade, and energy consumption in different historical periods. In some countries with vast energy resources, energy commodities have been the main source of government revenue. In countries that use energy in industrial production, it has meant the development of the industrial sector. Figure 1 illustrates the increased movement of worldwide energy consumption over the last centuries. Since 1800, energy consumption has increased sharply, particularly after World War II, and due to the economic flourishing of BRICS economies (China, India, Russia, South Africa, and Brazil), the energy has been consumed sharply since the beginning of the twenty-first century. It is no exaggeration to say that all countries need energy input to survive their national economy. All sectors of an economy, such as industry, agriculture, and services, need to benefit from energy input in various forms. Figure 1 shows that

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200000 180000 160000 140000 TWh

120000 100000 80000 60000 40000 20000 0 1800

1850

1900

1950

2000

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2019

Global total energy consumpon

Fig. 1 Total energy consumption, 1800–2019, terawatt-hours. (Source: Authors’ compilation from BP Statistical Review of World Energy (2021))

over time, the world economy has become more dependent on energy, and energy resources are now defined as an important subset of the national security of the world. The fact that countries are trying to develop a long-term plan in the field of energy is due to its importance in all different sectors of the economy. It may even be said that a country with a safer energy sector (higher energy security) is politically stable. However, it should be mentioned that the large contributions of this sharp movement in energy consumption are based on fossil fuels resources. These resources, with their unique characteristics in the development of transportation (rail and sea) and their role in promoting the industrialization of European countries, have found a special place compared to other energy sources two centuries ago. Table 1 represents the contributions of different energy sources to the total energy consumption trend from 1800 to 2019. It can be seen that over time, oil has become the dominant source of total global energy consumption with a clear movement of consumption of renewable energy sources like wind and solar, which highlights the goal of energy transition in countries. The high environmental costs of crude oil and the threat of climate change have led to efforts by various countries to develop renewable energy projects and reduce the consumption of fossil fuels, especially crude oil, in recent decades. In this way, the price of crude oil is very impressive. For example, high fossil fuel prices are good for clean energy transitions. Consumers can be encouraged to switch to less fuel-efficient or electric vehicles, have fewer flights, and replace their oil-fired boilers. The same is true of public sector policymakers and behavior change. When oil prices rise too much, oil-consuming countries adopt

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Table 1 Contributions of energy sources to total global energy consumption, 1800–2019 Energy Traditional biomass Coal Oil Gas Hydropower Nuclear Wind Solar

1800 5556 97 – – – – – –

1850 7222 569 – – – – – –

1900 6111 5728 181 64 44 – – –

1950 7500 12,603 5444 2088 872 – – –

2000 12,500 27,417 42,897 24,000 7367 7169 87 3

2010 11,667 41,997 48,087 31,606 8958 7219 903 88

2019 11,111 43,849 53,620 39,292 10,455 6923 3540 1793

Note: Numbers are in terawatt-hours Source: Authors’ compilation from BP Statistical Review of World Energy (2021)

policies to stay away from oil. However, clean energy development has only slowed fossil fuel demand growth. As replacing fossil fuel-consuming infrastructure takes time, this development has not yet led to a significant reduction in oil consumption in most countries. For example, in Norway, as a leader in using clean energy, 65% of cars sold in 2021 were electric, but Norwegian oil demand has decreased by less than 10% compared to 2013. The existence of important roles of energy sources as a production input in the national, regional, and global arenas has led to the lack of a single and accepted definition of energy worldwide. It should be mentioned that a simple definition of energy does not exist because it has multidimensional functions in physics, economics, politics, and social and international relations. From the perspective of different sciences, energy has different definitions. For example, the definition of energy as “the ability to do work” in physics to “a resource to produce different commodities” in economics and “a tool of negotiation/war/tension among countries” in international relations is addressed in textbooks. In economic sciences, energy as the main resource to produce different final goods or intermediaries has a vast range of topics such as energy markets, energy forecasting, energy balance, climate change, energy accounting framework, energy pricing, and energy security, which are discussed under energy economics (Schwarz, 2018). Each of these topics has different dimensions, schools of thought, and characteristics. One of the most important and debatable energy economics topics is energy security, which has been highlighted since the 1970s oil price shocks when global oil prices soared due to events such as the Yom Kippur War (1973) and the Islamic Revolution of Iran (1979), and major consumers of this energy source, mostly Western industrialized countries, were shocked by rising oil prices. Even energy security has found a different definition in fossil fuel-producing countries, which is “the existence of a stable demand for fossil energy produced.” During that time, energy security, as the availability of energy at reasonable prices, entered the field of academia and research. Over time, energy security included various aspects such as energy geopolitics, energy geoeconomics, energy and environment, transfer of energy technologies, green energy and energy transition, global and regional

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energy pricing, and feasibility study of energy projects. Nasr Esfahani et al. (2021) express that energy security is a multifunctional issue of countries related to all economic players of households, enterprises, investors, and governments. In an interesting paper, Ang et al. (2015) reviewed 104 earlier studies from 2001 to 2014. They concluded that the definitions of energy security have evolved, and the adjusted definition of energy security contains several socio-economic issues like environmental protection and climate change, which are global. Linking energy security issues to global issues is one manifestation of globalization and regionalism of countries. There is a perception that energy convergence between countries will be a better guarantee for the integration of energy policies, more dynamic energy markets, regional joint ventures in energy projects, and ultimately regional and global energy security. The energy convergence concept discussed in economic growth models mentions that countries can reach convergence in the long term. In fact, convergence is essential for countries to have reliable energy security. This is because under the energy convergence, countries will have consistent energy consumption patterns, trade, financing, and technologies. In other words, “convergence” means “similarity” can be interpreted. Energy convergence has created similarities in the structures, institutions, and mechanisms of the energy market of Asian countries, which in turn will increase energy security, energy trade relations, and technical and scientific cooperation in the field of energy between Asian countries. The necessity of study of energy security and energy convergence for the Asian countries can be highlighted by the following. On the one hand, the earlier studies (e.g., Alekhina, 2021) found that energy security significantly impacts the economic growth of Asian nations, which are considered the main growth drivers of the world economy. On the other hand, energy integration and convergence can ascertain energy sustainability in Asia and promote regional cooperation and energy security – two wings of Asian economies’ success. The issue of energy security in Asia has also become more important due to global external shocks in recent years, such as the outbreak of COVID-19 and the Russia-Ukraine war. When external shocks worldwide are considered, it means the imbalance of economic markets, weakening economic interactions, the occurrence of economic recessions, shrinking capital accumulation and increasing the risk of national security. Since late 2019, the outbreak of coronary heart disease, which began in an Asian country (China), has spread rapidly across Asia. To control the spread of the disease, Asian governments imposed restrictions on urban travel, reduced tourist arrivals and departures, closed geographical borders, quarantined cities, and closed physical markets. All of these policies led to a reduction in energy consumption and a severe recession. On the other hand, the start of Russia’s war with Ukraine on February 24, 2022, is a threat to the global energy and food market. As an energy producer and exporter, Russia is embroiled in intense political tensions and Western economic sanctions, which have reduced its capacity to play a role in the global energy market. This in turn leads to an increase in the risk of energy security in countries around the world, especially in East Asia.

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In this chapter, it is sought to study the interconnections between energy convergence and energy security in selected Asian regions. Further expanding on extant studies such as Akram et al. (2020), the chapter contributes to the literature from the following aspects: i. This book chapter discusses and explains the concept of regional energy security in Asia to identify various aspects and key success factors in the effectiveness of regional energy security. Regional energy security in Asia is one of the new and important concepts. Especially in the Corona and post-corona eras, it is especially important to pay attention to this. Because with the loss of energy security of a country, the countries of that region will also suffer economic losses. ii. Attempts are being made to interpret energy convergence as an important and influential factor in regional energy security in Asia. This chapter also seeks to address the issue of energy convergence, which is rooted in economic growth models analytically and interpretively in different parts of Asia. Energy convergence has a significant impact on promoting regional energy security in Asia. Because Asian countries have many economic, social, religious, cultural, and political commonalities, it is possible to achieve energy convergence that leads to sustainable economic growth and significant development in Asia. iii. Analyzing the relationship between regional energy security and energy, convergence in Asia under the data panel econometric model is considered in this chapter, which will have the results and practical policy proposals for policymakers in Asian countries. The following organization is employed to prepare the chapter’s materials: First, the mainstream literature is discussed, and energy convergence and security in Asian regions are explained. Next, data description and model specification are reported. Subsequently, a brief discussion on the empirical results is presented. Lastly, concluding remarks and policy implications finalize the chapter.

Literature Review In this section, the related mainstreams of literature are discussed based on energy security and energy convergence in Asia, leading to clarification of the literature gap that this chapter seeks to close.

Importance of Energy in Asia The continent of Asia contains giant energy consumers and providers worldwide. Such a situation could allow us to call Asia the beating heart of the world energy market. A large share of world energy production and consumption is allocated to Asian countries, which will increase in the future. According to the IEA, Asia will be

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the top primary energy consumers in 2020 (China, India, Japan, Iran, South Korea, Saudi Arabia, Indonesia, and Thailand). Table 2 reports the information on top energy consumers in 2020. Asian countries depend more on energy for significant economic movement, development, and investment for future generations. Regarding energy supply, the Key World Energy Statistics 2020 (IEA 2020) proves that Asia contributed approximately 30.07%, 35.39%, and 50.11% in 1990, 2000, and 2018, respectively. The important point is that contrary to other regions, the shares of Asia in the global primary energy supply have increased over the past decades (Fig. 2). Among Asian countries, Saudi Arabia (560 Mt), Iraq (234 Mt), China (92 Mt), United Arab Emirates (189 Mt), Iran (146 Mt), and Kuwait (144 Mt) are among the top oil producers in 2020. At the same time, Iran (232 bcm), China (178 bcm), Qatar (168 bcm), and Saudi Arabia (98 bcm) stand as the giant gas producers in 2020 (IEA, 2020). It should be mentioned that the importance of energy is not consistent among all Asian nations. Some of them, like China and India, as the emerging markets, consider energy sources as the main driver of commodities production and the blood for industries. Li et al. (2011) determined that the factors of urbanization, population, and economy are the important causes of the high dependency of China on energy resources. Musa et al. (2018) declare that energy (fossil fuels) for China’s economy is essential. It can help the industries produce more commodities and help the power stations generate more electricity. Liu et al. (2021) believe that China’s rapid economic growth since early 2000 caused a sharp increase in energy consumption, household and transportation use, and power generation. Regarding India, Rohit et al. (2017) and Sarangi et al. (2019) express that Indian industrial-based economic growth has made the country dependent on energy resources. For a range of Asian countries (Central Asia and West Asia) that have energy resource-abundant situations, energy is the main item of the government budget. Hence, energy-export

Table 2 Top primary energy consumers in the world, 2020 Rank 1 2 3 4 5 6 7 8 9 10 12 18

Country China USA India Japan Canada Germany Iran Brazil South Korea Saudi Arabia Indonesia Thailand

Continent Asia North America Asia Asia North America Europe Asia South America Asia Asia Asia Asia

Source: Authors’ compilation from IEA (2020)

Energy consumption in exajoules 145.46 87.79 31.98 17.03 13.63 12.11 12.03 12.01 11.79 10.56 7.63 5.12

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2018

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% of global energy supply Oceania

Africa

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Fig. 2 Regional energy supply, 1990–2018, percentage of global primary energy supply. (Source: Authors’ calculation based on Key World Energy Statistics 2020 (IEA 2020))

revenue is vital for their expenditures and future investments. Farzanegan (2011) explored the relationship between oil revenue and state spending in Iran. He found out that oil revenues are an important element of the political economy in the country, and any changes in this revenue item can significantly change security and social expenditures. In another study, Junxia (2019) focused on the issue of investments in the energy sector of Central Asia and concluded that any increase in investment in energy projects in Central Asia might lead to higher long-term state revenue in the region, meaning better economic welfare and income distribution for societies of the region. Tagliapietra (2019) expressed that MENA primary energy producers rely heavily on energy revenues as the main source of investment, public expenditure, and national security. In a new study, AlKhathiri et al. (2020) argued that oil revenues for Saudi Arabia are crucial and vital, impacting household utility and the level of the welfare state in the country. For these countries, efficient energy sector management is the source of economic development (e.g., see Alshehry & Belloumi, 2015; Afsharzadeh et al., 2016; Hdom & Fuinhas, 2020; Shokoohi et al., 2022). Otherwise, improper management of revenues from energy exports may lead to unbalanced growth in various sectors, inflation, unemployment, and recession in the country referred to as the concept of “resource curse,” “paradox of plenty,” and “poverty paradox,” or “Dutch disease” in the literature of energy economics, which means easily as unfavorable impacts of a country’s natural resource wealth on socioeconomic well-being (e.g., see Coxhead, 2007; Rahmati & Karimirad, 2017; Naseer et al., 2020; Rahim et al., 2021).

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Energy Security in Asia Energy security has been defined as one of the most important national security subsectors of the world in recent decades. Countries around the world are constantly striving to improve their energy security indicators and try to have this variety of production inputs with ease. Some countries are even willing to go to war with the disruptive country to avoid disrupting their energy security. Because energy security disruptions have dominically reduced other subsectors of national security, such as food security and economic security, the overall security of that country will be jeopardized. As a polysemic concept, energy security has become an emerging issue of attention for Asian economies. In its traditional definition, energy security for an importer and an exporter is defined as “reliable energy supplies at reasonable prices” and “assuring sufficient energy demand” (Bollino & Galkin, 2021), respectively. By the time, many scholars expressed that the traditional definition of energy security is not operational and comprehensive; therefore, countries need to consider a wider and more practical definition of energy security that contains different aspects of social, economic, political, and interconnections of countries worldwide. One of the most popular multidimensional definitions of energy security is the 4As (availability, affordability, accessibility, and acceptability). There is no clear history of the 4As; however, the availability and affordability were addressed in the classes in energy security schools, while the rest As (accessibility and acceptability) were mentioned as two major elements of energy security in the Asia Pacific Energy Research Centre (APERC) report in 2007. Such a complete definition of energy security, on the one hand, helps to better interpret the state of energy security in a country or geographical area and makes the concept of energy security comparable and calculable, which is of great importance for countries and policymakers. Regarding Asian economies, few earlier studies consider comprehensive energy security studies. Taghizadeh-Hesary and Mortha (2019) used the 4As a concept to evaluate energy security in Asia and Europe. The major findings revealed the necessity of simultaneously improving all four dimensions of energy security in Asia. Malik et al. (2019) sought to analyze energy security in Pakistan by applying the 4As framework and found out that Pakistan’s energy security has decreased from 2011 to 2017 despite significant investment in energy infrastructure. Therefore, the country needs conservation efforts and the usage of green energy solutions to increase the level of energy security. Fang et al. (2021) studied China’s sustainable energy security (CES) and concluded that availability is the most important dimension of CES.

Energy Convergence in Asia First, the definition of energy convergence should be clarified. The simple definition of this concept is that the gap between Asian economies (poor and rich) in energy policies, infrastructure, investment, among other domains, has decreased over time.

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This definition is based on convergence in the neoclassical growth model, declaring that economic growth in the long-term experience a steady-state, meaning that there is convergence among economies (Desli & Gkoulgkoutsika, 2021). In the energy field, convergence may occur through energy interconnections among countries. For example, Aalto (2014) believed that in the case of East Asia, energy market integration needs appropriate institutional and legal frameworks. Using a dynamic principal component analysis (PCA), Zhang et al. (2015) investigated energy market integration in East Asia from 1995 to 2011. The empirical results of this research depicted the important roles of energy trade liberalization and investment. Nangia argued that regional integration is key to Asia’s future energy security. However, regional energy integration in Asia needs institutional reforms and efficient policies. Shi et al. (2019) focused on regional power connectivity in Southeast Asia and highlighted the important point of convergence in political and economic aspects. Liu and Lee (2020) expressed that the convergence of global energy use depends on whether a country is an importer or exporter and the level of the country’s income. Wang et al. (2021) studied the Northeast Asia energy interconnection, and they found that energy interconnection in the region has many advantages leading to better circumstances for energy security. In another new study, Li and Chang (2021) attempted to evaluate the energy market integration legal issues in Northeast Asia. The major findings proved that any increase in energy cooperation (investment and trade) in the region – which is called the primary factor in creating energy convergence – positively affects the complex energy security of the region.

Conceptual Framework of Energy Convergence and Security in Asia The aforementioned literature mainstreams can help us draw a conceptual framework to study Asia’s energy convergence and energy security. To this end, the following points can be highlighted: • The previous literature study showed that the degree of importance of energy for different Asian countries is different; hence, to study energy security, a more specific division than regional divisions in Asia is needed. • Using the concept of multidimensional energy security (e.g., the 4As framework) helps to better and more effectively analyze the situation of this variable in different Asian countries. • The three factors of income level, governance, and the country’s role in the energy market (exporter or importer) are the best criteria for dividing the statistical population of countries in Asia to examine energy security and convergence. • The meaning of energy convergence in energy security can be studied in terms of whether the energy security situation of Asian countries in different groups (based on income level, governance, etc.) becomes similar. In case of similarity, different Asian countries can implement the same policies in energy security. With nonsimilarity, the type of executive policies should be different between countries.

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First sample group is based on regional aspect: Central Asia, Eastern Asia, South-Eastern Asia, Southern Asia, and Western Asia The UN Geoscheme classification

Research population

Second sample group is based on the role of country in energy market: fossil fuels importer, fossil fuels exporter Key Energy Statistics 2020 (IEA)

All Asian countries (based on the United

Third sample group is based on good governance: high government effectiveness (>70), low government effectiveness (F ¼ 0.7798

Log of NSDP (Non-clean fuel impact) Prob>F ¼ 0.7152

Description Omitted Variable Test (RAMSEY RESET Test) Multicollinearity (Mean VIF) Specification Error  2 Yb

LPG Prob>F ¼ 0.1183

Firewood Prob>F ¼ 0.1182

2.26

2.26

2.54

2.50


0.44

0.34


0.75


0.98

Heteroscedasticity (Breusch-Pagan Test)

Prob>χ 2¼ 0.66

Prob>χ 2¼ 0.66

Prob >χ 2 ¼ 0.80

Prob >χ 2 ¼ 0.72

Source: Authors’ Own Estimates

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is worthwhile to mention that in India, energy poverty eradication is largely driven by the central and state government initiatives and the private sector has been largely absent because the fuel sector (cooking as well as non-cooking) is heavily regulated by the governments. The private sector participation is limited to the distribution/ supply chain and refining activities. Further, the private sector contribution can also be seen in terms of corporate social responsibility (CSR) activities which are limited to cooking fuel energy literacy and creating awareness about climate-friendly cooking fuels but the scale of such CSR activities is negligible. Therefore, this study contributes to understanding the relationship between policy reforms, their implementation, and the role of different institutions in the implementation of the policies, especially at the central government level which has been attempting to bring about sustained change in cooking fuel usage in India. The study focuses on policies on state-level from the perspective of rural low-capacity users as is evident from NSSO surveys and NFHS-5 survey which indicated that various state governments have been actively pursuing the adoption of clean cooking fuel usage in their respective states/UTs which can also be verified using % change in cooking fuel usage across states/UTs using NSSO, Census of India and NFHS 4 and 5 surveys. This study also brings into account states/UTs-specific socio-economic and spatial characteristics in the adoption of clean cooking fuel usage in India. This study also underlines that higher female economic productivity and education levels would bring down energy poverty in India. So, in the long run, the sustained efforts on the part of the governments to target higher female literacy and their more involvement in economic activities can address the energy poverty issues. It also underscores that energy poverty eradication is the function of many initiatives that include non-energy policy-related initiatives too so a combined effort rather than a standalone approach is adopted. The regression results from the present study conclude that access to resource endowment (here forest coverage %) impacts the clean cooking fuel adoption in India especially when it comes to rural regions of India. While the affordability can be tackled, behavioral change for the clean cooking fuel adoption becomes a daunting task for the policymakers especially when the accessibility to resources (here forest coverage %) is easy, especially in the rural regions and resource-rich states/UTs of India. This requires an effective and workable policy solution to address energy poverty in India. This study also illustrates the future scope of research. One area for further research could indeed be an in-depth analysis of the economic and social-cost benefits of the various possibilities in India. This study did not focus on the economics of renewable energy options for the cooking sector in India. Similarly, it did not focus on the social impacts as well as a gender-disaggregated assessment of access to modern energy at the household level in India. A second promising area for further research is to undertake a detailed socioeconomic and political impact assessment of energy pricing in the context of policy reforms. Such an analysis is essential if one is to provide rural low-capacity end-users with access to modern energy carriers within the overall policy context. It would identify more nuanced ways of pricing energy and policy instruments that could be used to provide subsidies and entitlements. The third area for future research would be at the policy

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level in the context of emerging environmental concerns over climate change and address how access to modern energy carriers in developing countries, for purposes of energy poverty alleviation, can emerge as an alternative to the prescriptive arguments for a low-carbon development advanced by industrialized countries.

Conclusion and Recommendation This study has specifically focused on patterns and usage of clean and non-clean cooking fuel, the factors affecting clean and non-clean cooking fuel, and incentive/ support structure by policymakers to achieve and tackle energy poverty with a clear focus on switching to cleaner cooking fuels in India. The findings from the study suggested that socio-economic characteristics and spatial factors are an important set of factors that affect the adoption of cleaner cooking fuels in India. One of the findings from the concerned to rural India mostly reliant upon using firewood and chips (67%) for cooking purposes which was also evident from Consumer Expenditure NSSO Survey 2011–2012. Gupta and Gunnar (2006) emphasized that availability and ease of use are the factors that affect the choice of fuel. Narshimha and Reddy (2007) further examined that fuel choice decision differs for urban and rural households, the findings from the present study also confirms this proposition. Similarly, this study also looked at cooking fuel among social groups (SCs and STs) and found a statistically significant and affirmative relationship with non-clean cooking fuels. The NSSO Survey on Consumer Expenditure 2011–2012 also confirmed that for rural India firewoods and chips were used by 87% of STs households while 69.8% of SCs households too relied on the same cooking fuel option. For urban India, the figures stood at 51.6% and 56.8% respectively. The regression results are also indicative of a strong causal relationship existing between cooking fuel choices and social groups existing in India. Jan et al. posited that households demonstrate inter-fuel switching resting upon their socio-economic conditions and income may not be the only determinant affecting fuel choice as alternative energy sources and consumer preferences also play a key role respectively. The fuel choice of a household also rests upon opportunity costs involved in the fuel used by the household and the pattern of fuel uses, energy spending, and extent of fuel switching is also affecting fuel choice. The results of the study declared that income is not the only factor affecting fuel choice (Heltberg, 2005). Using BPL data as a proxy indicator for income group classification, the study has found a negative association of BPL with access to clean fuel (LPG). The NSSO Consumer Expenditure 2011-12 has also reported that for rural households, non-cleaner cooking fuels (firewoods and chips) usage is more than 70% for the lowest seven percentile classes and as income increases, this figure falls steeply. For the urban Indian population, non-clean cooking fuel usage falls flatly from 59.3% in the lowest fractile to merely 1.2% in the 11th fractile class, respectively. The regression results also demonstrated that affordability remains a key factor in the adoption of clean cooking fuel in India. One of the key findings from the study was the positive impact of enhanced FLFPR and literacy in the adoption of clean cooking fuels in India and that also highlights how

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aware and educated households/individuals may help in achieving the goal of switching to cleaner cooking fuels in India. Increased FLFPR would strengthen women’s empowerment in terms of a higher share in the decision-making power of the household along with enhanced economic strength with better bargaining power and possibly better affordability of cleaner cooking fuels with the households. The sustained adoption of clean cooking fuel choices can be instrumental in affecting the productivity of Indian households (based on dimensions defined-health, cost, time, and environmental outcomes). Household energy choices are a function of household characteristics and most of the studies agree with that. Farsi et al. (2007) argued that socio-economic factors like gender and education too play an important role in fuel choice and use of fuels in the household. Model 2 wherein the paper discussed clean and non-clean cooking fuel impact on economic growth also showed the statistically significant positive and negative causal link of clean and non-clean cooking fuel with the economic growth of states/UTs in India. Herein Model 2 we also observed that FLFPR Literacy was having an affirmative outcome on economic growth, along with BPL population % in states/UTs hurting the GDP of states/ UTs. This is understandable as poverty-struck states/UTs lag in economic growth while a higher share of FLFPR and literacy will spur economic growth. Barnes et al. stated that government can affect and influence the fuel utilization of households by using two channels-price and accessibility. In the case of India, on the affordability aspect the government has been very active by providing subsidized LPG cylinders and free LPG connections to the economically weaker population however accessibility aspect is scantly discussed as the LPG supply chain is complex and LPG availability is critically dependent upon gas fuel imports and global gas prices. To summarize, the regression results exhibit that affordability, social class, demographic characteristics, and spatial/locational factors are key in understanding and switching to clean cooking fuels to remove energy poverty for the cooking sector in India.

Cross-References ▶ Policies to Alleviate Energy Poverty: From Fundamental Concepts to a Practical Framework in the New Era ▶ Towards the Sustainable Development Through Energy Transnationalism: Study of Integrated Energy Markets in Asia

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Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conceptual Map of Energy Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions and Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drivers and Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clusters and Literature Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Key Findings on Global Energy Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Global Distributions of Energy Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COVID-19 Pandemic and Energy Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Policy Framework for Tackling Energy Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Achieving Omni-Directional Collaborations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Setting Multiregional Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Making Multi-Layered Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Building Multidimensional Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outlook on Monitoring Energy Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusions and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross-References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract

Currently, energy poverty has gained increasing attention from communities around the world. A growing body of literature has attempted to advance our understanding of energy poverty, verify its causes and driving forces and determine possible solutions. However, there exists a gap between, on the one hand, the policy implications drawn by scholars and the pledges announced by policymakers and, on the other hand, the progress toward energy poverty eradication. Moreover, the arrival of the COVID-19 era and the emergence of a new global energy economy have placed extra strain on a system attempting to transform into an affordable and clean energy system. Therefore, there is an J. Li (*) College of Economics, Sichuan Agricultural University, Chengdu, China © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_8

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urgent need to implement policies to alleviate energy poverty. Despite the complexity of addressing persistent challenges, this chapter aims to bridge theoretical concepts with political practices and hence establish a comprehensive policy framework to tackle the multifaceted nature of energy poverty. Specifically, this chapter provides reviews of fundamental themes, visualizations of frontier directions, and the global distribution of the subject of energy poverty. Then, this study matches the latest country-level data on electricity access with a broad range of socioeconomic indicators since COVID-19. The results show that energy poverty appeared to amplify the adverse pandemic-related shocks to education, food safety, and self-protection in social contact. Most importantly, this research promotes applicable policies and highlights up-to-date recommendations with regard to both short-term solutions and long-term targets to propose an anti-energy poverty pathway. The implications drawn from this chapter focus on providing an evidence-driven picture for the policy sphere to recognize the energy poor and on enabling the ability to monitor this particular form of poverty. Keywords

Energy poverty · Energy policy framework · COVID-19 pandemic · SDG7 · Data-driven evidence · Systematic review

Introduction Energy poverty has increasingly become one of the global challenges involved in meeting United Nations (UN) Sustainable Development Goal (SDG) 7, i.e., the goal of achieving “affordable and clean energy.” The social and political concerns over energy poverty have undergone a long history from formulating the concept of fuel poverty (Lewis, 1982) to the current agreement on its multifaceted nature (Zhang et al., 2019). Some recent studies have stated that further efforts to monitor energy poverty are required to retain meaningful indicators regarding a specific country scenario and to implement efficient policies accordingly (Betto et al., 2020; Farrell & Fry, 2021). Given the importance of the subject, the target of relative research and its policy significance show a trend of increasingly tighter connection. In the literature, the debates over the key themes of energy poverty are mostly related to its concepts and effects. Nevertheless, an increasing number of scholars are seeking to provide practical solutions based on the evidence uncovered by their research, and rare academic arguments have shed light on the feasible policy significance of reducing energy poverty in practice. Pachauri and Rao (2013) stated that progress toward energy poverty eradication has been observed to be remarkably slow. Moreover, according to the International Energy Agency (IEA) (2020) and Shyu (2021), realizing SDG7 by the targeted year of 2030 will be impossible without the intervention of timely policies. Under the conditions of the COVID-19 crisis, new discussions have recently arisen regarding the impact of the COVID-19 shock on global energy systems and, in

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particular, energy poverty; for example, see Hoang et al. (2021), Ambrose et al. (2021), and Carfora et al. (2022). These studies demonstrated that the adoption of clean energy and the effectiveness of related policies have been hindered since the COVID-19 pandemic (Ravindra et al., 2021; Carfora et al., 2022). COVID-19 has even intensified the severity of energy poverty across different economies. These negative effects are particularly strong in rural areas and among energy-vulnerable groups (Abu-Rayash & Dincer, 2020). Moreover, global efforts have been made to deal with climate change by making ambitious commitments, such as meeting the targets of net-zero emissions (IEA, 2021) and the 2015 Paris Agreement. In this case, investment in fossil fuel is considered to be strictly restricted, resulting in ignorance of basic energy needs and a burdensome energy transition for less developed regions (Ramachandran, 2021). The social and environmental innovations above, along with advanced technology and rapid globalization, are stimulating the shaping of a new global energy economy. On the one hand, this new energy economy is likely to lead to considerable progress in the adoption of sustainable energy; on the other hand, this new trend could also generate variability in energy markets, for example, allowing electricity prices to rise, which would exacerbate energy poverty for those who cannot afford the cost of energy. On this basis, advocating ongoing policies by using the current socioeconomic settings is complicated but important. Despite the dilemmas in carrying out the most effective policy responses noted above, mitigating energy poverty is a crucial topic of discussion in the policy sphere, as energy poverty has been proved to cause widespread negative effects on the environment that generate indoor air pollution and further deteriorate human wellbeing in areas such as health and education (Imelda, 2020; Oum, 2019). In parallel, establishing a specific policy framework might be beneficial for pursuing the simultaneous success of multiple SDGs that are closely related to the subject of energy poverty, including no poverty (SDG1), good health and well-being (SDG3), affordable and clean energy (SDG7), and climate action (SDG13). Considering the themes above, the main objective of this chapter is to formulate a policy framework and to integrate a prospective roadmap regarding energy poverty eradication. This chapter contributes to existing studies by combining the wisdoms of the academic literature and today’s circumstances, and furthermore, it draws on the collected data to present the associations between energy poverty and the socioeconomic implications of the COVID-19 pandemic. Notably, the study aims at tackling the potential challenges and navigating appropriate policy measures to address the issue of energy poverty. In summary, this chapter presents evidencebased measures revealed by multiple scales, aspects, and phases that manifest the multifaceted nature of energy poverty. The structure of this chapter is as follows: section “Conceptual Map of Energy Poverty” begins with a conceptual map of energy poverty. It summarizes several key concepts, measurements, drivers, and consequences emerging from the literature. Based on the fundamental themes, this section attempts to discover the sources of the slow progress in mitigating energy poverty in practice, and hence, it refers to a visualized direction for inferring policy implications for further discussions. In section “Key Findings on Global Energy Poverty,” this study provides the core

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findings on energy poverty. It also matches data on energy poverty with the latest COVID-19 survey to illustrate the linkage between energy poverty and the socioeconomic consequences amplified by the recent pandemic shock. Notably, section “A Policy Framework for Tackling Energy Poverty” draws inspiration from the most recent studies to formulate a practical framework to tackle energy poverty. Section “Outlook on Monitoring Energy Poverty” provides a roadmap for addressing this problem over three phrases in 2030, 2050, and 2060. Finally, this chapter presents the conclusions and policy discussions in section “Conclusions and Policy Recommendations.” The research framework is illustrated in Fig. 1.

Conceptual Map of Energy Poverty Definitions and Measurements In a broad sense, energy poverty refers to any energy-related form of poverty. Lewis (1982) was the pioneering study that defined energy poverty as a situation that depends on traditional solid fuels for cooking and heating. Since the publication of that study, the concept of energy poverty has continuously received attention from academia and society alike. Liddell and Morris (2010) conceptualized energy poverty or fuel poverty as the inability to maintain adequately warm housing. To date, no universally acceptable definition of energy poverty has been reached because of the complex and multifaceted nature of this concept (Sadath & Acharya, 2017). Similarly, there is no one dominant indicator in measurements of energy poverty. Specifically, there exist the following three classic categories for measuring energy poverty, namely, expenditure-based indicators (i.e., the 10% indicator and the low-income high-cost indicator), minimum energy requirements (MERs) and consensual-based indicators (Hills, 2011; Barnes et al., 2011; Churchill & Smyth, 2020). Each of these indicators has certain apparent limitations as a result of which they ignore the multifaceted features of energy poverty (Yip et al., 2020). Meanwhile, a series of comprehensive indicators has been proposed by scholars,

Fig. 1 Research framework of this chapter

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such as the energy for development index (EDI) and the multidimensional energy poverty index (MEPI) (IEA, 2010; Nussbaumer et al., 2012). However, academic debates over energy poverty measurements have persisted. Pachauri et al. (2004) argued that the EDI is not suitable for microlevel analysis or trans-period comparison. Lin and Wang (2020) stated that the MEPI is not accurate based on the average values. To date, some new approaches have consistently thrived, such as adding the dimension of energy efficiency to the MEPI (Pelz et al., 2018), applying machine learning technology in construct big data (Wang et al., 2021) and developing the hidden energy poverty index to better identify local specifics (Betto et al., 2020).

Drivers and Impacts Energy ladder theory implies that a lower level of social-economic development directly leads to energy-poor conditions (Hosier & Dowd, 1987). In particular, the driving forces of energy poverty are mainly energy unaffordability and energy inaccessibility. For instance, households are threatened by low incomes and growing electricity prices, and they have no choice but to adopt solid fuel (Zhang et al., 2019; Lin & Wang, 2020). Because economic factors cannot sufficiently explain the causes of energy poverty, a growing body of research recognizes that social issues, in part, play crucial roles in determining the transition toward cleaner energy (Lin & Kaewkhunok, 2021). Following this direction, more recent studies have investigated whether gender, social norms, and religiosity have significant effects in relation to energy poverty (Pachauri & Rao, 2013; Ampofo & Mabefam, 2021). Not only is consideration of these social factors important in terms of understanding the formation of energy poverty, but it also sheds light on a potential pathway to alleviate it. Additionally, other demographics and external variables are drivers leading to energy poverty, such as a series of family characteristics and socio-political systems (Rademaekers et al., 2016; Pelau & Pop, 2018). Rademaekers et al. (2016) emphasized that policy interventions are a key aspect in protecting vulnerable individuals from energy poverty, which suggests the importance of combining the theoretical foundations in research with policy guidance in practice. Growing evidence has demonstrated a wide variety of negative effects of energy poverty on the socioeconomic aspects of humans, such as people’s physical and mental health status and household members’ education (Zhang et al., 2021; Oum, 2019). Additionally, energy poverty is inversely associated with the broader society, including development and the environment (UNDP, 2005; Zhao et al., 2021). Notably, the negative impacts of energy poverty can cause additional harm to vulnerable groups, such as children, women, minorities, senior citizens, and those who live alone. Hence, policy should be implemented to take the most immediate actions to protect such groups (Hills, 2011; Pachauri & Rao, 2013; Pelz et al., 2018; Stojilovska et al., 2021).

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Clusters and Literature Trends To shed light on anti-energy poverty policies from the extensive literature, this study searches the Web of Science databases for publications from 1985 to 2022 that include “reducing energy poverty” and “policy” as keywords. The results identify three main clusters, and 561 publications fall into the field of the research area considered. VOSviewer software is used to create Fig. 2, which illustrates that the top three most frequent terms extracted from the titles and abstracts of the selected papers are “energy poverty” (appearing 44 times), “policy” (appearing 30 times), and “household” (appearing 23 times). The circles of these three subjects appear with larger sizes, and they are mainly distributed in the centre of the map. Comparatively, other terms located at the edge have less co-occurrence in the selected publications. For instance, “rural household” appears only four times. Figure 2 is informative, as it shows three clusters and their networks based on the keyword co-occurrence analysis. Specifically, the cluster with red dots mainly concerns the effects of energy poverty based on the application of microlevel/ panel data, and the related analyses seek to explore the problems/consequences of energy poverty with regard to, for example, health and education. The blue cluster quantifies energy poverty. As shown, the key aspects in measuring energy poverty

Fig. 2 The visualization of clusters and keywords in the Web of Science databases, during 1985–2022. Source: Author’s plotting by employing the VOSviewer. Note: Sizes of the circles represent frequencies of the co-occurrence of these terms

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Fig. 3 The visualization of trends and keywords in the Web of Science databases, during 1985–2022. Source: Author’s plotting by employing the VOSviewer

include energy prices, expenditures, and effectiveness. Green terms explore policy significance and some challenges related to energy poverty. For instance, enhancing household income and achieving energy affordability are crucial challenges in the policy sphere. Hence, the nexus among the three clusters is revealed: the blue cluster is fundamentally concerned with research on energy poverty measurements. On this basis, the subjects from the red cluster further explore the channels and impacts of energy poverty. Finally, the green part seeks to shape feasible policies to escape the energy poverty trap. Figure 3 notes some important directions of the most recent publications. Over the last 5 years, panel data have become popular in energy poverty reduction studies to allow for a better understanding of the dynamic changes occurring in households and to propose policies accordingly. Second, some emerging economies, including China and Ghana, are of growing interest in the literature. Furthermore, wider socioeconomic effects, such as gender, investment, and education, have been developed at the centre of the current focus of research. In general, studies before 2016 mainly described the concepts and challenges of energy poverty, whereas the most recent papers are more diverse by applying data and revealing the underlying mechanisms. Interestingly, the emphasis in existing research has explicitly shifted from the keywords of “government” and “challenge” to “policy implication.” Thus, based on Fig. 3, timely policies for alleviating energy poverty have become a crucial and specific part of research in the current energy poverty field. Policy designs need to comprehensively use empirical evidence and take broader socioeconomic factors into account.

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Key Findings on Global Energy Poverty This section presents a snapshot of energy poverty by first giving the statistics on and distribution of energy poverty based on the reports of international organizations. Then, this section provides an evidence-driven picture by collecting the latest data and establishing the general nexuses between some social-economic consequences of COVID-19 and energy poverty in the less developed countries. This part of work aims to reinforce the global wave of energy poverty and its negative effects along with the disruption of the pandemic.

Global Distributions of Energy Poverty According to the latest reports of the international institutions, including the World Bank, IEA, UN, and World Health Organization (WHO), there are 2.1 billion people worldwide at risk of falling into energy poverty. Moreover, 3.8 million people die of air pollution annually due to solid fuel use, and women and children account for approximately three-fifths of these deaths. Worldwide, the energy poor are mainly distributed in Sub-Saharan Africa and a couple of less developed countries in Asia and South America. In particular, among the 0.265 billion who are exposed to solid cooking fuels, 0.91 billion, 1.67 billion, and 0.057 billion are from Africa, Asia, and South America, respectively. Moreover, the majority of the people who cannot access a stable electric supply are located in countries in Africa and Asia. The inaccessibility of electricity is the most common deprivation of the energy poor. Sixteen percent of the global population lacks electricity, and approximately three-quarters (0.6 billion) of them reside in Sub-Saharan Africa. According to a forecast made by the IEA, approximately 0.66 billion people worldwide will not be able to access electricity services until 2030. The COVID-19 pandemic increased the number of people living in Sub-Saharan Africa and South Asia without basic electricity services by 25 million. Additionally, the gap in electricity usage between rural and urban areas is notable in less developed countries. For instance, among African countries, 56% of the population can receive electricity services. However, in 2019, this percentage was 81% for urban residents but only 37% for rural residents. In terms of cooking fuel, Sub-Saharan Africa also experiences the most sever energy poverty. In Africa, the percentage of clean energy being applied for cooking increased from 23% to 29% during the 2000–2018 period, whereas 0.9 billion Africans still lacked this ability and continued to be exposed to solid fuels. The IEA has predicted that the population using solid fuel in 2030 could grow to one billion due to the fast population growth in Africa. Moreover, if no actions are taken to deal with the problem of solid fuel adoption, only 72% of the global population will be able to access clean energy for cooking in 2030, which is far from fulfilling the agenda of SDG7 (IEA, 2020).

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COVID-19 Pandemic and Energy Poverty After establishing the fundamental concepts of energy poverty, followed by a brief overview of some key facts, the features of energy poverty are systematically reviewed and globally illustrated. The objective of this chapter is to present up-todate research by formulating practical tools to tackle energy poverty in the new era. Hence, it is crucial to explore data-driven evidence by linking the COVID-19 pandemic, a global crisis, with energy poverty, a global challenge. Here, energy poverty is the first variable of interest. To employ the most recent data to measure energy poverty, this study downloaded the across-country electrification rates from the World Development Indicators (WDI) for the latest available year, 2019. (The data source of WDI accesses from the following website: https:// databank.worldbank.org/source/world-development-indicators/preview/on.) The electrification rate is defined as the percentage of a country’s population with electricity access. This index ranges from 0 to 1, and a higher value indicates that the energy poverty of a particular county is less severe. The other data used, obtained from the High-Frequency Phone Survey (HFPS), reflect the impact of various socioeconomic variables in response to the COVID-19 pandemic on households or individuals across developing countries. (The data source of HFPS accesses from the following website: https://www.worldbank.org/en/data/interactive/2020/11/11/ covid-19-high-frequency-monitoring-dashboard. Although the HFPS data do not have national representativeness, the selected samples were randomly selected through their phone numbers provided by the telecommunication companies (World Bank, 2022).) The data from 29 October 2021 represent the latest available version of the data applied for this research, and they cover 83 countries in total. This study selects three interesting social aspects to build patterns related to energy poverty. The variables can be classified into pandemic shocks to education, health, and social contact. By matching the WDI electrification rate data to the three variables from the HFPS, 57 countries are included in both datasets. These countries are all developing countries with a broader geographic scope and covering five regions (24 countries are in Sub-Saharan Africa; 15 are in Latin America and the Caribbean; 7 are in East Asia and the Pacific; 7 are in Europe and Central Asia; and the remaining 4 are in the Middle East and North Africa). The rates of electrification across these countries are shown in Fig. 4. The countries with lower electricity access were mainly from Sub-Saharan Africa. In 16 out of the 57 countries, less than half of the population could access electricity, which suggests that energy poverty is indeed a notable problem in the least developed countries. Thirty-six of the sampled countries did not have fully electricity coverage in 2019. To explore the potential consequences of energy poverty for socioeconomic variables under the COVID-19 crisis, this study illustrates the linkages of electricity access to children’s informal education after school closures, food safety, and selfprotection in social contact. Figures 5, 6, and 7 reveal the existence of these deprivations due to energy poverty, and the adverse impacts were even amplified by the pandemic.

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Electrification rate (Percentage)

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Fig. 5 The pattern of electricity access and children’s education since school closures during the COVID-19. Source: Author’s plotting based on the related variables by matching the data sources of WDI and HFPS. Note: The size of the bubble represents the GDP per capita of a country with unit of USD in 2020

In Fig. 5, although there were some variations among the samples, children from countries with lower rates of electricity access faced disadvantages in engaging in learning activities due to school closures. The year of data collection was 2020, and the size of the bubble in the figure represents the GDP per capita of a country in that year. As millions of schools have closed since the outbreak of COVID-19, the formal

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Avoid gatherings of more than 10 people (Percentage of respondents)

Fig. 6 The pattern of electricity access and food unsafety during the COVID-19. Source: Author’s plotting based on the related variables by matching the data sources of WDI and HFPS. Note: The size of the bubble represents the GDP per capita of a country with unit of USD in 2020

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Fig. 7 The pattern of electricity access and self-protection in social contact during the COVID-19. Source: Author’s plotting based on the related variables by matching the data sources of WDI and HFPS. Note: The size of the bubble represents the GDP per capita of a country with unit of USD in the corresponding year

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education of a large number of children has been interrupted (World Bank, 2022), resulting in students searching for other forms of education. This figure suggests that energy poverty has led to adverse effects on children’s informal education since the closing of schools. Additionally, countries with higher levels of economic development appear to have larger percentages of electricity access. Notably, as the available respondents were those who owned phones and could communicate, the actual negative effects of energy poverty might be even larger than those illustrated by Figs. 5, 6, and 7. Importantly, Fig. 6 explains that healthy food was more prevalent in countries with less severe energy poverty during the COVID-19 pandemic. Indeed, living in a country with a higher electrification rate resulted in being more likely to eat healthy food in the last 30 days. This figure is from the perspective of food safety, demonstrating that electricity access is crucial in determining the health status of citizens, particularly during the global wave of health emergencies. The size of the bubble represents the GDP per capita in 2020, and apparently, a lower GDP per capita imposed burdens of a country’s energy poverty and food insecurity during the pandemic. To shed light on the pandemic’s impact on social contact, this study employed a record for whether the respondents of a country, on average, avoided gatherings of more than 10 people. In this code, a larger percentage suggests that the respondents were exposed to less risk of being infected with COVID-19. Figure 7 generally illustrates that for those living in countries with higher rates of electricity access, residents were less likely to gather. This evidence also suggests that energy access is crucial in affecting human lifestyles and social habits. Clearly, this social contact behaviour is less likely to result in COVID-19-related suffering. Again, GDP was a significant factor in simultaneously determining clean energy access and selfprotection in social contact during the pandemic. Similar to Figs. 5 and 6, the association between energy poverty and social contact has some exceptions. For instance, the electrification values for Chad, Madagascar, and Sierra Leone were below 30%; however, their average percentages of people avoiding gathering were above 75%. This sort of variation in an association indicates that despite the energy-poor situation, some countries do not correlate with worse results under the pandemic situation, because self-protection behaviors during the pandemic can be affected by some other factors, such as social norms and the stringency of lockdown measures. Conversely, some countries were less likely to keep social distancing during the COVID-19 pandemic, such as Myanmar and Sudan, and they had higher electrification rates than those of Chad and Sierra Leone (see Fig. 7).

A Policy Framework for Tackling Energy Poverty As previously proven, discussions on policies for mitigating energy poverty are to a large degree becoming prevalent, but some blind spots remain. To the best of our knowledge, there exist a large number of policies related to social tariffs and direct

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payments. However, in the context of energy poverty, the effective implementation of policies is always a complex task given the multifaceted nature of energy poverty, socioeconomic circumstances, and technological systems. Accordingly, this section formulates a holistic practical framework by revealing up-to-date political measures that attempt to target energy poverty alleviation. This section is in the context of today’s challenges and is firmly rooted in theoretical concepts. The structure of the policy framework contains four parts, namely, achieving omni-directional collaborations, setting multiregional targets, making multi-layered contributions, and building multidimensional systems (see Fig. 8). Under each of the categories above, there will be elaborations to reflect a more manifold snapshot, which should be meaningful for different actors to take timely actions. Subsequently, this section aims to unfold a roadmap regarding the recognition of energy poverty and then facilitate institutions/actors in addressing the problem with coping strategies by applying technologies and regulations.

Fig. 8 The structure of the practical framework

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Achieving Omni-Directional Collaborations As the COVID-19 pandemic has accelerated global inequality in obtaining clean energy and basic energy services, the global crisis intuitively calls for mutually supportive policies (IEA, 2021). Hence, global cooperation/coordination is becoming an immediate response in terms of effectively tackling energy poverty. By reviewing research on energy cooperation/coordination, this subsection presents the benefits and complementarities of global actions and international networks to reflect on the challenge of energy poverty from a global perspective. By keeping the local specifics of each single country in mind, cross-country/cross-regional analysis and cooperative development are more likely to address the issue of energy poverty in a broader context.

The Cooperation of International Organizations A series of international organizations play central roles in alleviating global energy poverty. For example, in facing the COVID-19 pandemic and its consequences, the IEA, International Renewable Energy Agency (IRENA) and World Bank have increased their investments in energy transition and energy efficiency projects, triggering cooperative actions among governments, companies, and individuals to engage in building a modern energy system (IEA, 2020; IRENA, 2022). In Particular, international organizations are inclined to aid developing countries in energy poverty mitigation strategies. According to the records of the IEA, the percentage of annual international investments in the solar energy industry of developing countries increased from 4% in 2010 to 50% in 2018. A large number of recent studies have suggested that the multilateral policy packages implemented by some multinational institutions and intraregional organizations contribute to reducing energy poverty as well. Holstenkamp (2019) reviewed and compared a couple of cooperative electrification approaches in the Global South, where 95% of the population lacks access to modern energy. Zhao et al. (2022) provided policy implications based on active participation in a cooperation of the renewable energy industry between Asia and Europe. This study proposed that countries should simultaneously strengthen their networks and consider local conditions to mitigate energy poverty across the global. Meng and Serafetiin (2020) advocated regional clean energy cooperation in Northeast Asia. Other international platforms and organizers also promote the effectiveness of the energy transition, such as the G20 and the Belt and Road Initiative (Liu & Hei, 2022). In facing the challenge of energy poverty, a couple of studies indicate that international cooperation should not be limited to the subject of energy. Chaudhry and Shafiullah (2021) suggested that multinational cooperation should extend to the technology field, which is another pathway for achieving unified cross-border policies on energy poverty alleviation. Similarly, the IEA (2021) mentioned that international collaborations in knowledge and technology spillovers support the implementation of energy transition policies (Liu & Hei, 2022).

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Cross-Regional Coordination In addition to the significant role of organizations or countries in international cooperation, national/regional coordination is crucial for achieving a clean energy transition and for meeting SDG7. Compared with the cooperation strategy, the reason for considering coordination in addressing energy-related problems is that the mechanism of coordination is mainly based on principles of fairness and reciprocity that to some extent avoids the distribution of unequal interests among different participants (Liu & Hei, 2022). Some works have emphasized the importance of adopting a coordinative approach in energy policies. For example, Herrera et al. (2019) proposed the term “collaborative governance” and applied it to political decisions on the renewable energy chain. Evans et al. (2018) stated a need to better understand the coordination between the governments of nations and cities to improve the energy efficiency of buildings. Bistline et al. (2020) found that a higher level of international and regional coordination is useful in decreasing renewable policy costs. In addition, cross-border coordination is drawing increasing attention from policymakers, such as those in the European Union. Neuhoff et al. (2016) explored the advantages and incentives of cross-border coordinated strategic reserves in the European energy transition.

Setting Multiregional Targets Different countries and regions face a full diversity of situations in terms of their economies, resources, and technologies. Although energy poverty is a global challenge and countries are encouraged to take cooperative actions, well-developed regions have promised to undertake greater responsibility to address energy-related problems. Thus, different countries tend to carry out different policies to fulfil their pledges. Most notably, a growing number of existing studies recognize that with regard to energy poverty, there are significant disparities between well-developed and less developed countries/regions (Lin & Wang, 2020; Zhang et al., 2019). Specifically, due to high energy prices, well-developed economies mainly suffer from unaffordability and inefficiency in energy consumption, whereas emerging economies are even threatened by the inaccessibility of clean energy. Similarly, the severity of energy poverty shows a great deal of variation between urban and rural areas. Hence, it is important to formulate heterogeneous policies regarding different local specifics and ultimately narrow the energy-poor gap between different regions.

Developed Versus Developing Countries As mentioned above, due to different local conditions of energy poverty, developed and developing countries should apply different measures accordingly. The heterogeneous policies between developed and developing countries also involve two aspects. First, well-developed countries are responsible for offering extra assistance in their policy designs to less developed countries to address the serious energy-poor problem among these countries. Second, well-developed countries are expected to

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achieve more ambitious goals in regard to net-zero emissions and energy poverty eradication alike. Therefore, during the policy design process of developed countries, policymakers cannot merely focus on solving the energy poverty problem. Instead, it is crucial to determine the interlinkage between a couple of climate and energy targets before implementing policies. Specifically, Che et al. (2021) proposed that well-developed countries need to focus on the renewable energy transition and further promote energy efficiency to control unnecessary energy consumption. In facing climate change and economic crises, energy poverty has become prominent in some parts of developed countries as well. Therefore, addressing the energy poverty issue requires policies to assist the most vulnerable groups with persistent improvements in energy efficiency and financial capability. To enhance the energy efficiency of developed countries, promoting low-carbon development (LCD) is essential. Comparatively, the primary task for developing countries is to satisfy citizens’ primary energy needs by first providing stable and clean energy services. In doing so, governments should broaden the channels of energy imports and improve basic energy infrastructures (IEA, 2020, 2021). Additionally, encouraging residents to install clean energy equipment and restricting the use of pollution-causing energy are commonly implemented policies in use (Bonatz et al., 2019). Meanwhile, in developing countries, supporting households with basic living standards is a core issue in their clean energy adoption once households have physically access (Che et al., 2021).

Urban Versus Rural Areas Pollution-causing energy is still common in rural regions. According to the IEA, almost one billion people and one-third of the rural population worldwide do not have access to electricity. Furthermore, due to income inequality and housing disparities, energy poverty in urban areas cannot be ignored. Broadly speaking, policies for solving energy poverty in urban areas should make strong efforts in old building renovation, which is beneficial in terms of improving energy efficiency and keeping housing warmer in winter (Rao et al., 2022). Notably, attention to clean energy services is also essential in urban areas, as the rapid urbanization process and growing urban population lead to a declining percentage of clean energy use for cooking (IEA, 2021). For rural areas, first, raising awareness about the existence of energy poverty should involve political strategies. Second, household income can be enhanced by accumulating human capital, i.e., through the education and training of farmers, as this channel is always crucial for alleviating energy poverty in the long term. Third, since the spread of COVID-19, the rural areas of developing countries have experienced major interruptions in their steady energy supply, and these areas have suffered the most from the uneven recovery from a series of COVID-19-induced recession. Accordingly, ensuring the recovery of electric network is an immediate response for rural areas (IEA, 2021). Furthermore, for some remote regions where natural gas pipelines are disconnected, progress toward access to alternative energy, such as biogas and solar energy, should subsequently be implemented. In addition, as

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explained in the literature review, to tackle energy poverty, particularly in less developed rural regions, other socio-cultural dimensions cannot be ignored. Hence, institutions should take the local specifics and appropriate social norms into account when implementing policies and guide the village households to adopt clean energy.

Making Multi-Layered Contributions During the transition of energy sources, potential policy choices are made not only by national and local governments; other social groups, including enterprises, communities, households and even individuals, are able to participate in policymaking. This subsection seeks to reveal the potential roles of actors in energy poverty mitigation. Nevertheless, this section cannot fully separate the understanding of actors from enabling energy poverty alleviation, and the success of a greater engagement of each participant is essential.

Governments Undoubtedly, governments are the leading force in supporting the process of energyrelated programs. Meanwhile, from the governmental perspective, taking advantage of public spending to mitigate energy poverty could be successful (Nguyen & Su, 2022). The following four core aspects in terms of alleviating energy poverty are what governments generally promote. First, governments normally provide relief to residents who are experiencing different sorts of hardship. Specifically, it is particularly important to recognize the income level, living environment, household type, and energy consumption of households, and then, the government can implement relevant policies, i.e., providing a basic living allowance or modern energy service, to aid energy- or income-poor households accordingly. Governments are also empowered to impose regulations to discourage or even punish extreme energy usage, such as setting a multitier pricing system for residential electricity consumption (Bonatz et al., 2019; Chen et al., 2020). Second, the primary task of governments is to maintain the good functioning of energy services, particularly under some emergent circumstances. This functioning is important to cope with energy poverty, as it not only prevents some vulnerable households from falling into energy poverty but also guarantees the steady growth of clean energy adoption, particularly in developing countries. Third, Nguyen and Su (2022) discovered that the effect of governmental spending on energy poverty shows an inverted U shape. This study also found that economic growth and income inequality are two channels of the effect above. Hence, governments must cautiously decide the amount and channels of public spending on monitoring energy poverty. Fourth, governments take the lead in implementing action plans that subsidize high energy-efficient technologies (Mustapa et al., 2021) and require heavily polluting industries to move away from the centre of cities. In summary, governments are

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expected to implement adequate interventions to prevent countries and residents from experiencing long-lasting damage from energy poverty.

Companies This part first describes two types of companies and/or industries that more directly contribute to reducing energy poverty. Then, it explains how general companies are capable of making efforts to address the problem. The first company type consists of energy-related companies, and the second type consists of information technology enterprises. For companies with a high level of energy intensity, it is essential to accelerate the transition toward clean energy through financing (IEA, 2021). By doing so, such companies should be equipped with a distinct political framework in terms of attracting investment (Cicek et al., 2021). Meanwhile, it is necessary for the regulations within companies to strengthen financial security and control potential risks. Thus, investors will be more willing to invest in clean electrification and energy research and development (R&D) projects. In addition, raising funds is another channel for energy-related companies to provide a steady energy supply to society, particularly when under serious financial stress (IEA, 2021). Regarding information technology enterprises, as digital technology is one crucial aspect in shaping the global new energy system, this type of company, i.e., Google, Apple, and Huawei, is digitally connected with the rise of electricity and mobility networks, which are more likely to promote energy-efficient policies and environmentally friendly social values (Chaudhry & Shafiullah, 2021). In addition to the two types of companies mentioned above, other companies can contribute to achieving the goal of sustainable development and fighting against energy poverty. For example, some companies publish reports regarding low-carbon operations in each step of their production. Others tend to remind customers to choose recycled tableware. These cases are good examples of generating environmental spillover effects on society. In summary, there is great diversity in how to formulate a safe, efficient, and green energy system for companies to create energysaving production and instruct consumers to shift to lower-carbon consumption patterns. Communities Exploring coping strategies of energy poverty from a community standpoint is becoming a popular measure. Communities have several potential functions in promoting policies that address energy poverty, and community engagement has been proved to be beneficial in dealing with energy-related problems. The most common function of communities is to allow for more communications between governments and households. For instance, communities are responsible for conveying the energy requirements of residents to local governments. Second, not only is community engagement a crucial channel in terms of providing interactions among different actors, but it also has the advantage of helping residents understand up-to-date policies. By being informed of energy-related policies by their communities, residents are more likely to adjust their energy

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consumption to the current policies, and hence, the policies could be well consolidated in practice. Furthermore, Wang et al. (2020) found that increasing policy cognition is more effective than just informing residents of energy-related policies. Hence, communities are crucial in helping residents analyse related policies in depth and ensure that they recognize the benefits of these policies. Subsequently, residents have a larger motivation to take the initiative to make the right decisions by avoiding being exposed to energy poverty or being overwhelmed by high energy consumption. Importantly, Lennon et al. (2019) found that a greater level of social acceptability in communities can further strengthen energy transition policies. Third, communities prioritize guiding residents toward energy-efficient attitudes by organizing a wide variety of activities, including posting notices and giving lectures. Forth, communities can offer technological and educational consultations to residents with energy-related problems. For example, the literature has discovered that living in a harmonious community is helpful in eliminating the mental burden of the energy poor (Lennon et al., 2019). Therefore, the energy poor will have a higher chance of receiving assistance from their neighbours. Consequently, they will be more likely to escape the energy poverty trap. Furthermore, Leonhardt et al. (2022) showed that with the growth of “community energy,” which is a new way of providing and managing energy within communities, local participation in providing self-sufficiency and affordable energy services is achievable.

Households Demand-side management is one of the most efficient ways to enhance energy efficiency and reduce unnecessary energy consumption (Mustapa et al., 2021). Households are capable of adopting various coping strategies in a given circumstance (Stojilovska et al., 2021), which will determine the degree of energy poverty of a society in the long term. Hence, this subsection seeks to recommend strategies that households can take to monitor energy poverty. Simcock et al. (2021) indicated that raising awareness of energy poverty and its negative consequences for health and education is the first step in addressing the energy poverty problem at the household level. Once households well recognize the energy poverty issue, they will be more likely to avoid the frequent usage of solid fuel. A good recognition of energy poverty can call for more political attention to this issue. Subsequently, governments, companies, and other agencies/institutions will make more contributions to implementing related policies to satisfy the wishes of end-users. Then, transferring the above awareness and knowledge into behaviors, such as applying efficient electrical appliances, keeping housing warm, and cultivating low-carbon habits, is the most complex step in alleviating energy poverty in practice. Based on the theory of planned behavior (TPB) (Ajzen & Fishbein, 1977), there exists a gap between awareness and behavior. This theory indicates that energy poverty can be better handled if the “awareness and behaviour gap” is filled. Therefore, more regulations and strategies should be planned to strengthen residents’ motivations to use clean energy. Indeed, the potential pathways for guiding households to become energy nonpoor are in need of further studies and policies grounded

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in practice. That is, governments and societies should always make contributions to providing modern and stable energy services. Third, on the one hand, households have to rely on the existing infrastructure and technology supports to deal with energy poverty. On the other hand, they can set personalized energy strategies based on their living environment, energy preferences, and practical situations (Stojilovska et al., 2021). For instance, when facing gas pipe blockages, households can use an electric stove as a substitute for a nature gas stove for cooking. Apparently, this alterative strategy causes households to stay in a situation of energy security. The phenomena of the rebound effect and energy waste cannot be ignored once households satisfy their basic energy needs. In the long run, low-carbon behaviors are always beneficial for society as a whole to achieve SDG7, and they facilitate the most vulnerable groups in escaping energy poverty. Policies with regard to abating the rebound effect should soon be considered, as rapid urbanization brings an increasing number of households to adopt adequate clean energy.

Building Multidimensional Systems An emerging body of literature has shown that energy poverty has a multifaceted nature (Zhang et al., 2019; Lin & Wang, 2020); thus, its policy significance should be formulated with a multidimensional snapshot. Existing studies have also emphasized that the existing policies for addressing energy poverty have not led to significant progress (Pachauri & Rao, 2013). Moreover, human beings are facing energy poverty, which is one of the most significant challenges in approaching the SDGs (IEA, 2020). Therefore, there is an urgent need to further facilitate policy actions by exploring multidimensional tools. Accordingly, this subsection aims to provide inspiration by covering five aspects of building practical tools by both reviewing existing strategies and exploring new channels.

The Economic Perspective Broadly speaking, economic policies are the most direct way to alleviate energy poverty because the inability to pay the energy bill is one of the most prominent problems suffered by the energy poor in both developing and developed countries. Particularly since the outbreak of the COVID-19 pandemic, regulators around the world have adopted economic aid in keeping residents out of energy poverty (Mastropietro et al., 2020). Existing financial policies mainly include two measures: controlling energy price increases and subsidizing low-income households (Okushima, 2016; BienvenidoHuertas, 2021). However, it is difficult for the setting of energy prices and the selection of subsidy recipients to meet environmental targets such as mitigating climate change and alleviating energy poverty. For this reason, such policies cannot simply control the energy price or provide financial subsidies arbitrarily, as doing so would generate a large amount of energy waste and result in a high burden on state budgets and energy suppliers. Nevertheless, such modes of economic support might

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temporarily diminish the rates of energy poverty, but they could also aggravate carbon emissions and even destroy energy markets. Accordingly, a large stream of theoretical and empirical literature studies the topic of setting energy prices based on the circumstances of different countries and local energy markets. Furthermore, when applying any economic support, seeking out the real energy-poor group and implementing assistance plans based on the features of this group are important. This aspect of practical policies is tightly connected to the theoretical concepts of academia regarding energy poverty measurements. It is well known that the financial support for monitoring energy poverty mainly comes from authorities, platforms, and programs. Recently, economic support can be further developed from new business patterns. Brown et al. (2022) explored energy service business models (ESBMS) to reduce energy demand, which guarantees energy savings and mitigates carbon emissions. This pattern shifts from a traditional way of supplying energy, i.e., public departments, to a novel concept, i.e., offering energy services directly to end-users.

The Social Perspective As noted in section “Conceptual Map of Energy Poverty,” energy poverty is not a purely economic issue; it is also shaped by social, historical and cultural factors. In facing the severity of energy poverty, policy recommendations should also extend to various aspects, such as taking advantage of social norms to eradicate energy poverty. Furthermore, the outcomes of economic policies are heavily dependent on the current economic situation, and hence, they may turn out to be weak or even invalid under sudden economic shocks. In this case, combining financial policies with social policies is more likely to formulate cost-saving and effective strategies to cope with energy poverty. In the context of the literature, the topic of social norms, such as the cultural dimension, lifestyles, and gambling, in determining energy poverty has attracted growing concerns (Churchill & Smyth, 2020; Farrell & Fry, 2021). The policy recommendations of research vary by focusing on the effects of a particular type of social norms in alleviating energy poverty. Gender equality has been found to trigger environmental spill over effects (Li et al., 2019), which have the potential to be a powerful tool for monitoring energy poverty. To alleviate energy poverty, policies to enhance gender equality include the following channels. First, it is essential to encourage women to work and even play a leadership role as decision-makers in energy corporations and engineers in energy-related fields. Second, more opportunities should be offered to women by providing professional training on strategies to tackle energy poverty. Some international organizations, such as the Global Women’s Network for the Energy Transition (GWNET), have held an annual program to energize women to advance the energy transition. In addition to the social norms of gender, the most recent literature has examined the negative association between religion and energy poverty (Ampofo & Mabefam, 2021; Li & Li, 2022). Based on the findings, related policies should take the norms of religion into account and simultaneously improve the financial well-being of

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religious groups to reduce energy poverty. The examples of gender inequality and religion suggest that social norms should be considered in policy design. In addition, cultivating low-carbon and environment friendly social norms/values can make a potential contribution to advancing the clean energy transition and, subsequently, decreasing energy poverty. These social norms further enhance residents’ understanding of the environment and their consciousness with regard to energy poverty, narrowing the gap between attitude and behavior.

The Legislative Perspective Of course, the strong support of laws is important for transforming the findings of research and announced pledges into something of practical significance. One of the key legislations in dealing with energy poverty is the “right to energy,” which is a fundamental human right. This right in legislation is more advanced in developed countries. For instance, the law in Europe has called for a firm statement of a right to energy. In contrast, in developing countries, energy rights largely appear in policy targets only, and hence, there is a long way to go for this right to become a legally based right (Shyu, 2021). Similar to the “right to energy,” SDG7 emphasized that in the process of ensuring affordable and clean energy, no one should be left behind. The UN appealed that the rights to electricity and other adequate living conditions should not involve any discriminations (Leckie, 1989). The development of legislation is crucial for triggering more policy actions. Shyu (2021) explored the concept of the “right to energy” in the policy sphere and presented a foundation for this concept in terms of solving issues such as the lack of energy democracy, energy injustice, and energy poverty. This study stated that policymaking associated with the “right to energy” should include social actors in the process of energy legislation. In the United Kingdom (UK), Ambrose et al. (2021) referred to two pieces of legislation to monitor energy poverty: the first is a target of achieving a lower rate of energy poverty by 2030, and the second is the requirement of energy-efficiency standards for private rented housing. Similar to the legislation of the UK, the laws of the United States, Greece, and India record residents’ rights to access electricity and satisfy their basic energy needs. In summary, legislations worldwide have attempted to protect the energy poor. Notably, the application of related laws must connect well with the energy markets and economic regulations of the local areas; otherwise, overprotection due to legislation could turn out to have unfavourable results. The Climatic Perspective To date, some climatic challenges are threatening human beings, which is another notable reason to make the design of energy poverty eradication policies complex. Due to climate change, the rising global temperature is leading to growing incidences of energy poverty; thus, policy recommendations for handling energy poverty should understand the consequences and mechanisms of climate change (Feeny et al., 2021). Specifically, with the incidence of extreme weather, residential electricity and heating expenditures will certainly rise due to the frequent usage of air conditioners

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and fans (Barreca et al., 2016). In this case, the implementation of policies to assist the energy poor could be less significant if policymakers do not take climate change into account. For instance, even though some households are in developed regions, such as some parts of the UK, Germany, and Italy, they are not classified as being energy poor based on an evaluation of their household income. However, some of these residents are suddenly being threatened by extremely hot summers and even lack cooling appliances or are unable to pay their booming electricity bill. Accordingly, policies must be designed from a climatic perspective before households fall into a deep energy poverty trap. Those policies include controlling the energy price, providing clean heating, enhancing the energy efficiency of housing, and organizing artificial rainfall during the dry season in the event of a decline in agricultural output, which could further shrink incomes and lead to energy poverty for farmers (Zhao et al., 2021; Feeny et al., 2021). Second, strengthening the energy system to handle the challenges of climate change is crucial. According to the IEA, a quarter of the electricity networks worldwide are in danger of being destroyed by a hurricane. More than 10% of oil refineries and power generation plants are likely to be threatened by floods (IEA, 2021). To maintain energy security and control the rates of energy poverty, policies from the climate side regarding communication infrastructure, disaster warning systems, contingency plans, and financial reserves should be further implemented.

The Technological Perspective Technologies are broadly applied in energy sectors. Financial policies regarding a large amount of investment in clean technologies are quite common worldwide. Since 2020, public spending on energy technologies has continued to grow, and low-carbon technologies, such as carbon capture, use, and storage (CCUS) technologies, account for the majority of public spending. Other new energy sources, including solar photovoltaic (PV) and wind, are also becoming popular in power generation that takes advantage of clean technologies (IEA, 2021). In addition to clean technologies, digital technologies are well adopted in the global new energy system. Different energy sectors/sources are integrated into one complex platform, and the good functioning of the platform is ensured through the involvement of new players and actors (IEA, 2021). Digitalization also lead to smart energy transition technologies. Sareen (2021) found that digitalization in the electricity and mobility sectors enables equal opportunities for society to make the energy transition. In practice, digital technologies are meaningful for sensor and unmanned aerial vehicle (UAVs) to maintain the operation of electricity network. Similar to digital technologies, other advanced technologies, such as machine learning technology, have been adopted by linking to microlevel surveys to construct big data to estimate energy poverty (Wang et al., 2021). Additionally, the Internet and web apps are helpful and have been integrated into the administration of questionnaires. Due to the enhanced data and methodologies, more policy insights will be enriched after the energy poor are accurately identified.

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Outlook on Monitoring Energy Poverty Based on the policy framework for tackling energy poverty formulated in section “A Policy Framework for Tackling Energy Poverty,” this section goes one step further by proposing three phases to navigate a roadmap for realizing energy poverty eradication, including a short-term solution, a mid-term goal, and a long-term target (see Fig. 9). The design of the three phases comprehensively considers existing development targets and climate pledges, including the UN SDGs and net-zero emission commitments. The outlook phases attempt to provide a benchmark for assessing progress in energy poverty alleviation. Specifically, the general achievement of UN SDG7 by 2030 is a relatively nearterm solution that asserts the basic energy needs of human beings without any discrimination against any disadvantaged groups. Nevertheless, the challenges involved in fulfilling SDG7 are significant, but ongoing actions can make a difference. SDG7 is closely related to the issue of energy poverty eradication, and its partial achievement would be a milestone and an opportunity to focus on marginalized populations and make efforts to systematically assist them in the near future. In doing so, more targets are expected to be proposed during the coming decade, including strengthening the construction of infrastructure, achieving the adoption of renewable energy, and developing breakthrough technologies in the energy sectors, as explained in the practical framework section. Second, this study aims to determine a mid-term goal for 2050. This goal mainly targets the eradication of energy poverty in developed countries. The year in which this goal will be fulfilled coincides with the announced pledge of net-zero emissions made by more than 50 developed countries. By 2050, on the one hand, international cooperation and coordination should be further consolidated, and thus, developed regions will be able to offer more assistance to less developed regions to deal with the energy poverty problem. On the other hand, developing countries should establish comprehensive laws to protect the energy rights of citizens. In this context, achieving the mid-term goal will narrow the energy poverty gap between heterogeneous regions around the world. The long-term target aims to end the global challenge of energy poverty by 2060. Accordingly, this study proposes achieving both energy poverty eradication and carbon emission reduction worldwide. This long-term target is at the global scale and involves both international and local efforts, and it emphasizes the importance of clarifying the linkage between energy poverty and carbon emissions before

Fig. 9 Three phases for approaching global energy poverty eradication

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implementing any specific policies. Based on the literature, the target of energy poverty mitigation might involve some compromises to reduce carbon emissions (Ramachandran, 2021). In contrast, Zhao et al. (2021) empirically found that energy poverty mitigation is beneficial to constrain carbon emissions. Indeed, understanding the inherent tensions or interlinkages between the goals will guarantee effective actions. For instance, Bonatz et al. (2019) suggested a win–win pathway to achieve low-carbon development and energy poverty reduction: enhancing energy efficiency and expanding renewable energy. In summary, by considering the nexus of different environmental goals and other frequently shifting situations, related policies can be profoundly designed in the event that these two goals are mutually exclusive.

Conclusions and Policy Recommendations By taking into account the COVID-19 pandemic and the new global energy economy, this chapter explores a holistic practical framework with multi-layered strategies and multidimensional aspects for monitoring the multifaceted nature of energy poverty at a global scale. This study is inspired by the slow progress of energy poverty mitigation in practice and the challenges involved in achieving UN SDG7. Accordingly, it draws support from theoretic concepts and the keyword co-occurrence analysis of the academic literature as well as the latest data-driven evidence to recommend promising policies and pledges. Specifically, this chapter defines energy poverty to advance the understanding of its complex features. Then, it reviews why energy poverty occurs and its consequences. This part of the work emphasizes the importance of mitigating energy poverty and sheds light on the pathways for tackling it. Subsequently, this chapter visualizes the clusters and trends of energy poverty reduction studies from 1985 to 2022 by employing VOSviewer software. In this context, this part systematically analyzes the underlying networks and frontier directions of research on this subject and establishes policy designs that should take the latest statistical evidence into account. Thus, this study presents an overview of the rates and distribution of global energy poverty by referring to official reports from a series of international organizations, i.e., the IEA, World Bank, UN, and WHO. These reports state that the least developed regions, including Sub-Saharan Africa and some parts of Asia and South America, suffer the most from energy poverty. This chapter also draws on crosscountry data collected by matching the latest electricity access rates of 57 developing countries to data collected by the HFPS, conducted during the COVID-19 pandemic, to establish the linkages between energy poverty and the socioeconomic consequences amplified by the COVID-19 crisis. The ongoing results are meaningful for understanding the additional deprivations of energy poverty in the new era. Based on the previous analyses, this study formulates a multidimensional policy framework that covers four categories and 13 subcategories. This framework includes a wide variety of subjects and their actors, such as the heterogeneous policies across regions, the incentives of cooperative and coordinative strategies and the role of technologies in energy programmes. It seeks to establish comprehensive tools to

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effectively address the energy poverty problem. Next, the outlook phrases are designed to set benchmarks for energy poverty eradication based on short-term solutions, mid-term goals and long-term targets. The core findings and the policy discussions of this chapter involve four main aspects. First, the results suggest that energy poverty brings additional disadvantages/risks for education after school closures, food safety, and self-protection in social contact during the COVID-19 pandemic. Therefore, the associations between energy poverty and the socioeconomic consequences caused by the epidemic are revealed based on an up-to-date snapshot. These negative effects are expected to extend to the post-crisis phase. The findings provide rich implications for policies to combat energy poverty: on the one hand, monitoring energy poverty is urgently necessary, particularly in less developed countries in which the pandemic has had a long-lasting duration, as it is adversely correlated with the well-being of humans in terms of health, education, and self-protection behaviors. With the onset of the pandemic, policies are therefore required to ensure access to electricity, particularly in developing countries. On the other hand, by observing the variations in the patterns plotted in Figs. 5, 6, and 7, a lower rate of electrification is not the only cause of the worst socioeconomic consequences. Hence, in addition to covering electricity access for all, other aspects of energy poverty alleviation, such as financial capability, clean facilities, energy-efficient buildings, and low-carbon behaviors, should be comprehensively considered in policy formulation and implementations. This part of the investigation explores a series of consequences of energy poverty under a global crisis with the latest matching data. Hence, policy designs are more likely to be grounded in data-driven evidence, which has been demonstrated to be feasible in the visualized literatures of section “Conceptual Map of Energy Poverty.” In addition, according to the visualizations of the clusters and trends among more than 500 publications published over the last three decades, this section discovers three clusters of research based on the keywords “reducing energy poverty” and “policy.” These clusters specifically illustrate the construction of the research field: one cluster concerns energy poverty measurements, the second addresses the effects of energy poverty, and the third cluster focuses on challenges and policies. Additionally, the extensive literature guides future research to extend the field. Among the frontier topics, policy implications have become a prevalent subject in the field of energy poverty. Thus, Fig. 3 confirms that policies to alleviate energy poverty are worth exploring in depth, which is the key subject of this chapter. Third, although a comprehensive policy framework for alleviating energy poverty is constructed in detail, directly implementing the relevant policies does not always go smoothly. The debates over the contradictions among different targets must be considered in policy implications, such as the potential trade-offs or win–win situations among the goals of energy poverty eradication, net-zero emissions, and climate change mitigation. Therefore, before implementing policies to combat energy poverty, current situations/shocks should be comprehensively recognized. This sort of debate in energy-related policies is not rare. For instance, alleviating energy poverty could contribute to an unequal development of the energy poor, i.e., ignoring nutritional intake and their living environment. Moreover, the

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marketization of the electricity price leads to the good operation of the energy market, but it may also lead to more households failing to afford their energy bill. Additionally, a compulsory energy transition could even deepen energy poverty because even though energy-poor households may be equipped with clean appliances, they may not be able to afford the expensive bill due to the energy consumed by these appliances; furthermore, such households may not be allowed to use their original inefficient equipment, which may result in even lower energy consumption. Apparently, these potential contradictions in energy policies make designing appropriate policies to combat energy poverty more difficult. Fourth, the outlook phases are established to fulfil the global target of energy poverty eradication. This outlook presents a roadmap for examining the effectiveness of the policy framework. Based on various development levels and goals, it proposes three stages, from partly achieving SDG7 by 2030 to eradicating energy poverty in well-developed regions by 2050 and to ending global energy poverty and achieving carbon neutrality by 2060. This part also indicates that policies should target different timings. Some policies are beneficial for diminishing energy poverty in a short term but might results in long-term problems. Hopefully, the recommended policy framework will be able to facilitate energy poverty reduction; however, further research can be conducted based on the following: first, it is important to tighten the connections and consider the feasibility by combining theoretical innovations, empirical results, and policy intentions with effort to mitigate energy poverty. Second, we could employ big data analysis with a wide variety of socioeconomic factors to verify the effects of COVID-19 on energy poverty. Third, it is also essential to tackle the existing energy-related policies and emerging modes by assessing their effectiveness and performance. Subsequently, recommending promising policies for wider regions remains to be addressed in the future research. Hence, to face the challenges and opportunities emerging from the current situation, this chapter demonstrates the importance, dilemmas and barriers in the process of monitoring energy poverty worldwide. In brief, policies, laws, technologies, and collaborations are the things most needed to defy the odds and enter a sustainable future. Furthermore, motivating diverse actors to make efforts in energy poverty eradication projects and empowering communities, stakeholders, and end-users to participate in the establishment of energy supply and/or energy demand regulations are guarantees of feasible policies. Finally, in dealing with any reversals of progress in energy poverty alleviation, this research attempts to trigger more thoughtful interpretations instead of laying blame on the complexity of the energy poverty problem itself.

Cross-References ▶ Effective Factors and Policies in Electrical Energy Security ▶ Energy Security in a Resource-Rich Economy: Case of Iran ▶ Policies to Alleviate Energy Poverty in the Cooking Sector in India

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Acknowledgments This chapter is supported by the National Natural Science Foundation of China (Grant No. 72104166) and Ministry of Education of China, Youth Foundation Project of Humanities and Social Sciences (Grant No. 19YJC790059).

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Part IV Energy Trade and Integration Policies

8

Role of Electricity Trade in South Asian Energy Security Hemlal Bhattarai

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Scenario in the South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Trade and Energy Security in South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Rationale for Regional Energy Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SARI/E and SARI/EI Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SAARC Energy Ring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Asia Subregional Economic Cooperation (SASEC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation (BIMSTEC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Opportunities and Challenges for Energy Trade in South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Key Aspects of the Power Sector of South Asia Member Countries . . . . . . . . . . . . . . . . . . . . . . Power Procurement and Power Tariff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Power Purchase in Case of Bhutan and India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Power Purchase in Case of Nepal and India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Some of the Key Benefits of Regional Power Trade in South Asia . . . . . . . . . . . . . . . . . . . . . . . . Some of the Key Opportunities for Energy Cooperation in the Region . . . . . . . . . . . . . . . . . . . Some of the Key Challenges to Energy Cooperation in the Region . . . . . . . . . . . . . . . . . . . . . . . Power Grids and Their Interconnection in South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gradual Transition to Trilateral Cross-Border Power Trade in South Asia . . . . . . . . . . . . . . . . Future Plan for BIMSTEC Power Grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross-References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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H. Bhattarai (*) Department of Electrical Engineering, Centre for Lighting and Energy Efficiency Studies (CLEES), Jigme Namgyel Engineering College, Royal University of Bhutan, Dewathang, Bhutan e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_10

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Abstract

Energy is a building block of socioeconomic development. The role of energy consumption and trade is a considerable indicator of the economy. Most Asian countries have substantial dependencies on their energy requirements through imports in one form or another subjecting to import-dependent economies. On the other hand, many of these Asian countries due to their geographical advantages have enormous potential for energy export (especially electrical energy) and can place a better and more balanced sustainable economy. Countries like Bhutan and Nepal have options to explore more hydropower and contribute to the regional power grid. There is a need for exploring the potential of renewable energy, the sustainable harnessing of renewable energy, and meaningful trade between Asian Countries for a holistic development model in South Asian countries. There is a growing demand for electric energy in the region that has potential for renewable energy generation for meeting electricity demand in the region. This requires favorable policies and regulations, support, and bilateral commitments that will create win-win situations between South Asian countries for regional energy trade and energy security. Bhutan and Nepal are two critical countries in the region having promising potential for hydropower as clean energy for meeting domestic energy demand and promising export. The crucial development happening in the field of energy in the region mostly pertaining to energy trade and power security in the region should be materialized with systematic collaboration within the regions with supportive regulations resulting in better prospects for energy trade and power grid security of the region. Keywords

South Asia · Energy potential · Electricity · Renewable energy · Policies · SAARC · BIMSTEC · Cross-Border Electricity Trade · Power grids · Power security and interconnection

Introduction South Asia region is of crucial importance while discussing in the domain of energy potential and trade. The countries that are in South Asia are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka which account for around 22–23% of the global population and 4% of the world’s total surface area (Ray & Jain, 2017). These ten countries in South Asia are mostly developing countries where energy is a building block of socioeconomic development (SAARC Energy Centre, 2020) (Fig. 1). The region has seen a growth in population by 0.73 billion in the last three decades. This trend would certainly have an equal share of energy demand and the need for energy demand in the region is always expected to increase. Not only the population growth, but in the developing regions the expected growth in energy demand is certain.

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Fig. 1 Population growth in SAARC countries in the last three decades. (Source: Shrestha, 2021)

The South Asian region has been quite good in the distribution of energy resources which are in the individual country as well as across countries. Pakistan has been mostly producing natural gas whereas India on other hand has been producing coal. As the region has been experiencing substantial population growth, the deficit of energy resources is felt in the region regularly, especially in meeting the electrical energy demand in the region. But the region also has great potential for hydropower from countries like Nepal and Bhutan and these potentials are beyond the requirements of these countries in current times. Countries like Bangladesh have been significantly reliant on rapidly dwindling natural gas sources whereas biomass, petroleum, and hydroelectricity are the main sources of energy in Sri Lanka. Because the Maldives’ domestic resources are essentially biomass, the country is severely reliant on diesel, which is largely imported. It is quite significant to understand the potential of each country in the region in the energy domain (SARI/EI, 2017). The role of energy consumption and trade is thus a considerable indicator of the economy as these indices reflect the overall energy to trade behaviors. Most Asian countries have substantial dependencies on their energy requirements through imports in one form or another resulting in an import-dependent economy. On the other hand, many of these Asian countries due to their geographical advantages have enormous potential for energy export (especially electrical energy) and can place a better and more balanced sustainable economy. South Asia is one such region that does have greater potential for renewable energy which is yet to be explored. Various initiatives and measures were thus felt necessary in the region in coordinated actions on meeting the growing electricity demand which is backed by increased population as well as the socioeconomic development in the region. The South Asian economy is mostly a developing and underdeveloping economy where the thirst for electricity

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demand for developmental activities is substantial. So, the evolution of the “South Asian Association for Regional Cooperation (SAARC)” from a fundamental concept in 1905 and a formal declaration of SAARC in 1983 followed by its actual establishment with the charter formally approved in 1985 (globalEDGE, accessed 2022). Since then, SAARC has been quite instrumental and handy in realizing the mutual corporation in various aspects including trades in the region. Bhutan is one of the developing countries in South Asia which has its strength and weakness in terms of its energy situation. On one hand, Bhutan has substantial potential for harnessing electricity from hydropower which is clean and green energy, there is no significant exploration done as of date. The country today has executed almost 7% of its technically feasible hydroelectricity generation capacity but a major chunk of these energies is being exported to India. Bhutan accounts for almost 80% of its hydroelectricity exported to India in a year which accounts for around 27% share of the country’s revenue. The promise seems enormous when the country manages to execute more of its feasible hydropower project for which there are a couple of high capacity are in mid-construction at the current time. The cases of Nepal are also quite similar to that of Bhutan in terms of hydropower. This chapter covers the overall energy scenarios of the South Asia region highlighting the potential of renewable energy that can be crucial in realizing the regional energy trade. The global as well as regional renewable energy growth is discussed along with its appropriate patterns for better understanding. The understanding and prospect of energy trade and energy security focus on the rationale for regional energy trade, South Asia Regional Initiative for Energy (SARI/E) and South Asia Regional Initiative for Energy Integration (SARI/EI) program, South Asian Association for Regional Trade (SAARC) energy ring, South Asia Subregional Economic Cooperation (SASEC) initiative, and Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation (BIMSTEC) which all are essentially initiatives that have been happening in the South Asian region pertaining to energy. Opportunities and challenges for energy trade in the South Asia region are then discussed, including key elements of the region's power sector, the fundamentals of power procurement and power tariffs, a case study of a regional power purchase (in the cases of Bhutan and India, and Nepal and India), key advantages of regional power trade, and key prospects for energy cooperation in the region. The power grids and their interconnection in the region which emphasizes Cross-Border Energy Trades and the initiatives have been covered. The plan and prospects for power grids in the region are introduced for overall understanding and are key coverages of this chapter.

Energy Scenario in the South Asia Energy is the backbone of every country and that is true in the case of South Asia too. South Asian countries are quite advantageous in terms of their potential energy sources and also have a greater capacity for renewable energy. The thirst for electrical energy to meet the growing demands is substantial in the region as a result

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of growth and economic developmental activities which are seen as the fastest growing economy (Khan, 2019). Thus, meeting the electrical power demand for socioeconomic development is one of the key requirements in the region. The energy potential of the South Asian region as shared in the document of Asian Development Bank (ADB) 2012 is shown in the following Table 1. The data as shown in the above table and also the publication of SAARC Secretariat, 2010 clearly shows that the South Asian region has quite a good potential for renewable energy (especially hydropower) followed by biomass reserves too (ETEnergyworld, 2018; ADB, 2017). Also, the above report highlighted that the potential energy trade in the region could grow up in the region by 60,000 MW by 2045 making the prospects quite encouraging in the region. It can be one promising aspect that the region can explore and progress in collaborative actions in meeting the regional energy demand that is spiking at a regular pace along with growing concern for climate change. Despite the region’s ability to generate enough electricity from indigenous resources to meet demand, the SAARC member states have been suffering from acute electricity shortages. Such concern has drawn the leaders in the regions to identify the measure in meeting these challenges in the region. As a result, in January 2000, SAARC established a technical committee on energy, recognizing the necessity for regional cooperation in the energy industry. ADB has come in quite handy in the region with various measures and actions like “Preparing the Energy Sector Dialogue and SAARC Energy Centre Capacity Development,” the “South Asia Economic Integration Partnership” program, the “SAARC Renewable Energy Task Force,” the “SAARC Regional Energy Trade Study (SRETS),” the “SAARC Regional Power Exchange Study,” “Energy Trade in South Asia Opportunities and Challenges,” and several other initiatives were among the ADB’s contributions to SAARC in the energy sector (ADB, 2017). A center for the regional energy initiatives known as SAARC Energy Centre was established in 2006 and is funded by the member countries in the region. The eight key mandates of this center are as follows (SAARC Energy Centre [Presentation], 2020): Table 1 Energy resources potential in South Asia

Resources potential Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Region Total

Biomass Million tonnes 18–27 0.08 26.60 139 – 27.04 – 12 223

Hydropower Gigawatts 25 0.33 30 150 – 83 59 2 349.33

Data Source: ETEnergyworld.com. (2018, November 2)

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(i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

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Boost South Asia’s ability to deal with energy concerns as a group Facilitate intra-regional energy trade Encourage energy conservation Encourage the use of renewable energy sources Act as a clearinghouse for regional energy data Strengthen regional energy development and management expertise Encourage private sector energy investment and engagement Implement programs to attain the above mentioned objectives

A report from SAARC Secretariat, 2018, highlighted that several problems are with SAARC nations’ energy sector (SAARC Energy Outlook – 2030, 2018) as highlighted below: (i) (ii) (iii) (iv)

The fuel basket diversification is lacking The focus on renewable energy is minimal The focus on imports is quite high There is a scarcity of intra-regional energy trading

These are some of the key aspects that needed to be addressed collaboratively in the region so that they have electrical power networks that can have holistic benefits in the region. One of the key initiatives initiated was the initiation of the SAARC development fund on 28 April 2010 with its secretariat in Thimphu, Bhutan. The SAARC Development Fund (SDF) was critically identified as the nodal financing institution of the region which takes care of projects in SAARC. The SDF will take care of the overall welfare of people in diverse aspects of socioeconomic development in the region (SAARC Energy Centre, 2020). Though the funding mechanism in the SAARC region has been initiated in 1996 in the framework of the SAARC Fund for Regional Projects (SFRP). So it has become the starting point for initiating a centralized SDF in the region. There are critically three primary objectives of SDF that are as follows (SDF Secretariat, accessed 2022): (i) To promote the welfare of the people of the SAARC region (ii) To improve their quality of life (iii) To accelerate economic growth, social progress, and poverty alleviation in the region Hence with this the focus is given on to its three funding windows which are social window, economic window, and infrastructure window. This three-funding window covers all aspects of Sustainable Development Goals (SDGs) of the region with a record maintaining that currently there are over 90 projects ongoing in these three windows frameworks within the SAARC region. This certainly draws attention in the region to understand its energy potential, and realize the potential of member countries in the region, capitalizing on the potential of renewable energy utilization for meeting the growing energy demand of the

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region. The approaches thus have to be focused on meeting the secure and reliable energy with sustainability through the initiation of energy trade so that cost-effective energy can be materialized for the overall socioeconomic development of the region. It is noted in recent decades that the South Asian area is undergoing an economic revolution, and it is transitioning from low to rapid growth. The economic growth in the region is quite significant. As the energy demand and growth are intertwined, the region of South Asia is expected to see a significant increase in energy demand to maintain its progress (SARI/EI, 2017). The region should strategize measures to meet this growing energy demand in the region regularly as rapid industrialization and urbanization are taking place. Promising sources of renewable energy sources especially hydropower will be quite handy in meeting the ever-growing energy demand in the region (Vaidya et al., 2021). The potential of hydropower in the region is as high as 388,775 MW with a study in 2016 recording only 13% of the potential has been used making it a significant prospect to explore the other 87% of untapped hydropower generation potential in the region. The hydropower potential in the region is highest in India with 150,000 MW which is followed by Pakistan with a capacity of 100,000 MW, Nepal with a capacity of 83,000 MW, Bhutan with a capacity of 30,000 MW, Afghanistan with a capacity of 23,000 MW, Sri Lanka with a capacity of 2000 MW, and Bangladesh with a capacity of 775 MW (SAARC Energy Centre, 2016). Though the techno-feasible potential of the hydropower generation in the region will be slightly lower, still there are enormous potentials that can be tapped within the region through the meaningful corporation. Studies also highlight that there is huge potential for extraction as the installed capacity of each country in the region stands at 333 MW for Afghanistan (2019), 230 MW for Bangladesh (2018), 2334 MW for Bhutan (2019), 50,411 MW for India (2020), 1129 MW for Nepal (2019), and 9900 MW for Pakistan (2019) amounting to an overall installed capacity of hydropower generation in South Asia to approximately 64,337 MW. This amounts to the overall installed capacity of around 21% in the South Asia region statistics of installed capacity range from as low as 1% of its potential capacity to a maximum of 34% of its installed capacity shown as of 2018–2020. The installed capacity of the hydropower generation of around 1% for Afghanistan, 12% for Bangladesh, 10% for Bhutan, 34% for India, 3% for Nepal, and 17% for Pakistan from its overall techno-feasible potential capacity of 300,273 MW (Vaidya et al., 2021). So, biggest prospect of hydropower generation from countries like Afghanistan, Bhutan, Nepal, and Pakistan is seen as possible in driving the approaches toward meeting the sustainable renewable energy in power sectors of the South Asia region. In reality, a country like Bhutan is heavily dependent on the export of electricity from hydropower to its neighboring country India in the region by meeting the growing demands of electricity of India which is one of the great consumers of electrical energy in South Asia region. Exploiting South Asia’s large renewable energy potential, particularly the vast hydropower resources in Afghanistan, Bhutan, Nepal, and Pakistan (especially Nepal and Bhutan), is critical in the electricity industry’s efforts to meet the region’s rapidly growing demand at the lowest possible cost, with the least possible impact on energy security and environmental emissions (Wijayatunga et al., 2015). The

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electricity demand, especially in transport and industry sectors, is a major sector having significant demand for electricity in the region. It is also pointed out that countries like Afghanistan, Nepal, and Bhutan have greater than 75% of electricity generation from hydro with Bhutan as 100% from hydro. This is followed by Pakistan and Sri Lanka having just above 25% electricity generation from hydro. The share of hydro for electricity generation is quite low for India and Bangladesh as there is heavy dependence on coal as a fuel for electricity generation in India which amounts to almost 75% and gas as fuel for electricity generation in Bangladesh which accounts for almost 75% (Shrestha, 2021). So, the role of Nepal and Bhutan hydropower is substantially crucial in meeting the growing demand for electricity in India and Bangladesh where these countries can take advantage of meeting their electricity requirement from clean energy sources from their neighbors and offset their fossil fuel–based electricity generation. Similarly, Afghanistan can have the potential to supply to Pakistan or other member countries and also the option of Pakistan to focus more on hydro for its electricity generation for domestic consumption as well as for export within the South Asian region. It is quite interesting to learn that a country like Afghanistan imports around 77% of energy from neighboring countries due to its low installed generation capacity and meeting its growing energy demand. As the region is also seeing great potential for clean energy where the focus needs to be given to supportive policies and regulations on these aspects for meeting the growing energy demand in the region (SAARC Energy Centre, 2020). As of 2019, access to electricity in South Asia stands at 94.4% with the following statistics of the countries in the region. Countries like Afghanistan stand at 97.7%, Bangladesh at 92.2%, Bhutan at 100%, India at 97.8%, the Maldives at 100%, and Nepal at 89.9% (World Bank, accessed on February 2022a). Thus, it is clear that the access to electricity in the South Asian region is quite good with the lowest being at almost 90% and the highest at 100% but the issue as shared earlier is the types of fuel that are used for the generation of electricity and meeting the growing energy demand of the region. The present installed power generation capacity of different countries in South Asia are worth to be looked into at regular interval to have an overall understanding of the power capacity in the respective regions that can be critically strategized for further exploration to venture more into cleaner energy sources. This will also force the planner to understand the requirements and demand for electricity within each member country of the region. There is always a need for exploring the trends of the growth in installed capacity as well as energy mix in the region along with its overall generation and demand. In many countries in the South Asian region where data have shown that the demand for electricity stands at 935,540 GWh whereas the generation of electricity stands at 1,116,229 GWh with almost all the countries having excess generation than demand except the case of Afghanistan, the electricity demand is more than that of generation (ADB, 2017). It should be noted that the source of fuel used for electricity generation, the supply and demand situations during lean and peak seasons (especially for hydropower-dependent countries) and the overall fuel mix can make a significant difference in this number which are changing at regular intervals.

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It is also important to explore the capacity of renewable energy which is a clean energy source in the region as the thirst and requirements for clean energy are a priority at the current time when the entire globe is under the critical threads of climate change. The basic ideas of renewable energy in terms of its potential, scopes, and viability for exploration will be handy in materializing the initiatives and measures in overall investment in renewable energy sectors in the region. Options for renewable energy are seen as promising in the region including the hydropower (Li et al., 2021). Despite that, it is also evident that much penetration in renewable energy sectors has not happened in the region. The following table shows the total installed capacity of renewable energy in the world followed by that of Asia and South Asian countries for the last decade. The growth of renewable energy is picking in current time as each country across the globe is focusing on its actions to combat climate change through inclination toward clean sources of energy. The energy sectors happen to be one of the leading contributors of the “Green House Gases (GHG)” that have significant impacts on health and the environment, thus measuring to shift from fossil fuel–based electricity generation to renewable energy based. The graphical representation of the renewable energy growth trends of the world and Asia is as in Table 2 above is shown as below (Fig. 2). It is noted from the figure above that the renewable energy growth pattern of the world and that of Asia is in a similar pattern in the recent decade. The renewable energy growth between 2011 and 2020 is double its capacity in 2011 for the world, whereas the growth pattern for Asia is triple within the same period. Thus, it is an indication of Asia is substantially leading in the growth of renewable energy in the recent decade. The graphical representation of the renewable energy growth trends for the South Asian countries except India as in Table 2 above is shown as below (Fig. 3). From the above figure, it is also clear that there is a substantial growth of renewable energy as shown in the trend with almost all the countries in the South Asia region except that of India showing the growth almost double of that in 2011. The graphical representation of the renewable energy growth trends for India as in Table 2 above is shown below (Fig. 4). It is quite evident from the figures above that the renewable growth for India also stands almost a little more than double that in 2011. India happens to be one of the major countries in the region which has a high dependence on coal-based fuel for meeting the electricity demand of the region and has fairly done in the font of renewable energy in the recent decade. In the case of the South Asia region, significant growth trends are seen in three countries (i.e., India, Sri Lanka, and Pakistan). From 2011–2020 the growth percentages are as follows (Table 3). From the table above the percentage growth of renewable energy in the region is as high as 750% for the Maldives (based on the 2011 base) and the lowest being 56.9% for Bhutan. The case of Bhutan is quite worth noting as one of its major hydropower which was targeted to be operational a few years before is yet to be completed due to geotechnical reasons.

Source: Data extracted from IRENA, 2021

2011 2012 2013 World statistics (in megawatts [MW]) World 1,329,886 1,442,763 1,564,390 Asia statistics (in megawatts [MW]) Asia 433,520 478,560 551,893 South Asian countries (in megawatts [MW]) Afghanistan 245 289 294 Bangladesh 267 291 329 Bhutan 1488 1488 1488 India 58,053 60,460 63,488 Maldives 2 3 3 Nepal 713 718 755 Pakistan 7024 7141 7563 Sri Lanka 1471 1688 1729

Table 2 Overall installed capacity of the renewable energy 2015 1,847,258 717,235 303 382 1615 78,477 6 827 8124 1878

2014 1,694,061 628,642 299 356 1488 71,789 6 771 7913 1837

349 399 1615 90,313 8 848 8802 1952

809,264

2,010,005

2016

355 423 1615 105,149 11 993 9217 2049

915,117

2,180,389

2017

355 439 1615 118,053 11 1113 12,196 2163

1,023,688

2,358,749

2018

365 493 2335 128,238 15 1233 12,280 2213

1,118,705

2,538,441

2019

364 540 2335 134,197 17 1363 12,406 2352

1,286,313

2,799,094

2020

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RENEWABLE ENERGY (MW)

Renewable Energy Growth 5000000 4000000 3000000 2000000 1000000 0 Asia

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

433520 478560 551893 628642 717235 809264 915117 1E+06 1E+06 1E+06

World 1E+06 1E+06 2E+06 2E+06 2E+06 2E+06 2E+06 2E+06 3E+06 3E+06 YEAR World

Asia

Fig. 2 Renewable energy growth across the globe and in Asia

RENEWABLE ENERGY (MW)

RENEWABLE ENERGY GROWTH 25000 20000 15000 10000 5000 0

2011

2012

2013

2014

2015

2016

2017

2018

2019

Sri Lanka

1471

1688

1729

1837

1878

1952

2049

2163

2213

2352

Pakistan

7024

7141

7563

7913

8124

8802

9217

12196

12280

12406

Nepal

713

718

755

771

827

848

993

1113

1233

1363

2

3

3

6

6

8

11

11

15

17

Bhutan

1488

1488

1488

1488

1615

1615

1615

1615

2335

2335

Bangladesh

267

291

329

356

382

399

423

439

493

540

Afghanistan

245

289

294

299

303

349

355

355

365

364

Maldives

2020

YEAR Afghanistan

Bangladesh

Bhutan

Nepal

Pakistan

Sri Lanka

Maldives

Fig. 3 Renewable energy growth in South Asian countries except for India

Some of the South Asian countries like India, Bangladesh, and Pakistan are quite larger in their land capacity, population, and gross domestic product (GDP) but are heavily dependent on fossil fuel for energy consumption which is around 93%. On other hand, these countries have huge potential for renewable energy but lack regulation and policy measures (Salam et al., 2020).

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RENEWABLE ENERGY GROWTH 160000

RENEWABLE ENERGY (MW)

140000 120000 100000 80000 60000 40000 20000 0

2011

2012

2013

2014

2015

2016

India 58053

60460

63488

71789

78477

90313

2017

2018

2019

2020

105149 118053 128238 134197

YEAR India

Fig. 4 Renewable energy growth in South Asian countries (for India) Table 3 Renewable energy growth as a percentage

World Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

2011 Megawatt (MW) 1,329,886 433,520 245 267 1488 58,053 2 713 7024 1471

Percentage growth (keeping 2011 value as a base) 2020 2,799,094 1,286,313 364 540 2335 134,197 17 1363 12,406 2352

Megawatt (MW) 110.5 196.7 98.4 102.2 56.9 131.1 750 91.2 76.6 59.9

Some of the target in South Asia for renewable energy expansion includes 175 gigawatt (GW) by 2022 in India, 7.9 GW by 2041 in Bangladesh, 50% generation from renewable energy by 2030 in Sri Lanka, and 16 GW by 2040 in Pakistan (SARI/EI, Panda, presentation, 2020). The cases of one of the major countries in the region are as follow:

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India India is one of the major economies in the South Asia region which is also having a major population in the region. The country has seen rapid economic growth with major electricity sources from coal-based power plants which are of concern (Tripathi et al., 2016). The reference referred from a source (earth.org, 2020) in terms of total primary energy supply over the last three decades clearly shows the energy dependence in the South Asian region is heavily on fossil fuel which accounts for 75%, and also it is seen major increases in the consumption of coal and oil in the South Asian region for total primary energy supply. This is a concern in the South Asian region as fossil fuel dependence is on the higher side that needs immediate intervention in a much planned manner in the region.

Energy Trade and Energy Security in South Asia Energy trade has a substantial contribution in meeting the holistic energy management in the region. There is a need for meeting growing power demand along with the objective to utilize the available resources in meeting the energy demand in the region. Thus, energy trade is a growing topic of discussion that is bagged with concern for energy securities within the region (Wijayatunga et al., 2015). The concept of energy trade and its associated policies/regulations are more subjective to the nature of energy sources being used. Several trades-related policies/regulations for goods and services including the driving regulatory framework of the “World Trade Organization (WTO)” can be critically looked into so that there is best of the best measures in place in realizing the potential of energy trade within the regions and beyond in some cases. The South Asian Association for Regional Cooperation (SAARC) asked the Asian Development Bank (ADB) to conduct the SAARC Regional Energy Trade Study to look into the benefits of regional energy cooperation in South Asia (SRETS) (ADB, 2011). In January 2000, SAARC established a technical committee on energy, recognizing the necessity for regional cooperation in the energy industry. In January 2004, a Working Group on Energy was established, followed by the establishment of the SAARC Energy Centre in October 2005. The SAARC Energy Centre was entrusted with conducting technical, economic, and financial analyses of future energy cooperation efforts, as well as facilitating the creation of energy links within and between neighboring areas. The ADB’s energy assistance to SAARC included “Preparing the Energy Sector Dialogue and SAARC Energy Centre Capacity Development”; the “South Asia Economic Integration Partnership” program; the creation of the “SAARC Renewable Energy Task Force”; and carrying out the “SAARC Regional Energy Trade Study (SRETS),” the “SAARC Regional Power Exchange Study,” “Energy Trade in South Asia Opportunities and Challenges,” and several other initiatives (ADB, 2017).

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Even the recent report from the World Bank shows that there is a prospect of demand for electricity/power to double in the decade whereas the population of South Asia is more than one-quarter of the world’s off-the-grid. Increased regional collaboration is crucial to boosting energy security and overall climate resilience in South Asia, given rising energy demand and a growing emphasis on sustainable energy. Cross-border cooperation and integrated power grids can cut energy prices, increase dependability, and reduce carbon emissions while increasing the share of and synergies among renewable energy resources, especially hydro, wind, and solar. (World Bank, 2022b). Similarly, the focus in the region for climate-smart sustainable development is of focus in the current time where there was the impact of a pandemic. The support of the World Bank for the “Climate Change Action Plan 2021–2025 South Asia Roadmap” is drawn in this document. The overall initiative of this is for climatesmart transition in the region (World Bank, 2021, January 26). A study published by the Asian Development Bank included a set of proposals for putting regional energy trade cooperation into action. The recommendations included creating a “SAARC regional energy trade and cooperation agreement,” harmonizing the legislative and regulatory framework, developing a complete energy database, recognizing private sector participation choices, and strengthening regional institutional capacity. According to the study, a regional energy trade agreement would set policy objectives and create a framework for regional energy trade development, and SACs can learn from the Greater Mekong Subregion’69 program policies on regional energy trade. The following are the policy objectives of the aforementioned program concerning South Asia (Khan, 2019): (i) (ii) (iii) (iv)

Promote efficient SAARC energy sector development Promote opportunities for energy sector economic cooperation among SACs Facilitate the implementation of priority energy sector projects Address technical, economic, financial, and institutional issues relevant to SAARC energy sector development (v) Protect and improve the environment through the adoption of appropriate technologies and plans

The Rationale for Regional Energy Trade There is a substantial win-win situation that can be derived by the member countries in South Asia through widespread regional energy trade. Some of which include: (i) The mismatch between energy demand growth to energy resource endowments: Tajikistan, Kyrgyzstan, Nepal, Bhutan, Myanmar, and Turkmenistan are among the countries with hydroelectric or hydrocarbon resources greatly exceeding their energy consumption. Energy demand growth in the

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(iii)

(iv)

(v)

(vi)

(vii)

(viii)

243

remaining nations (India, Pakistan, Bangladesh, Sri Lanka, and Afghanistan) is significantly outpacing domestic supply, and the demand-supply gap will widen in the near future unless domestic supplies are supplemented by imports. The implication of trade to energy security: By diversifying energy forms and supply sources and lowering the cost of energy supply, relying on energy trade to cover a portion of domestic demand can actually improve national energy security. The substantial benefits to the smaller exporting economies: Energy exports could contribute significantly to the GDP growth of nations such as Bhutan, Nepal, Myanmar, Tajikistan, and Kyrgyzstan, allowing for export-led growth. Bhutan’s electricity exports, for example, are estimated to account for roughly 25% of GDP and 60% of state income in FY 2007. The significant relief from energy constraints to rapid economic growth: This is especially true in India, Pakistan, and Afghanistan, which are importing economies. For example, based on the short-term marginal cost of the Indian system, the volume of unserved electricity in FY 2007 was projected to be 54,916 GWh, valued at $12.1 billion. The value of the industrial production that would have been lost would be several times more. The environment imperatives: This is particularly important for India, which is highly reliant on homegrown coal. Unless low-carbon initiatives are implemented, its carbon dioxide emissions will climb from 4% of global totals now to almost 13% by 2030. Imported hydropower and natural gas could assist to mitigate some of the rises. Climate change imperatives: Carbon emissions are rising, but glacier resources in the Himalayas are dwindling. Trade permits such optimization for the benefit of all. The management of regional water resources and the usage of other primary energy sources must be optimized for the benefit of the region as a whole. Reduction of supply costs: Trade could minimize the cost of system development and allow for lower-cost supply. Optimizing its power system with hydropower sales to India and thermal power imports from India, and Nepal, for example, may drastically cut its power supply costs (compared to trying to satisfy demand with the expensive all-hydro alternative). Trade could minimize the cost of system development and allow for lower-cost supply. By improving its power supply, Nepal, for example, may drastically cut its power supply costs (in comparison to its pricey all hydro-generating options). Electricity system with hydropower sales to India and thermal power imports from the country. Cash flow implication: Often, energy import choices improve the cash flow by allowing lumpy and substantial domestic capital expenditure that needs to be postponed, which would otherwise push out other critical investment demands (the classic make or buy choice).

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SARI/E and SARI/EI Program In the year 2000, the United States Agency for International Development (USAID) launched the South Asia Regional Initiative for Energy (SARI/E) program, which covers eight nations in South Asia. The program’s first three phases focused on raising knowledge of regional energy markets, facilitating transmission interconnections, and boosting capacity. The initiative focused on three main areas to increase energy security in South Asia: Cross-Border Energy Trade (CBET), energy market formation, and regional clean energy development. SARI/E was instrumental in integrating and promoting energy policy and technology links across South Asian countries. The program’s fourth and current phase, known as SARI/EI, began in 2012 and is being executed by Integrated Research and Action for Development (IRADe), a renowned South Asian think tank. Its goal is to advance regional grid integration through Cross-Border Electricity Exchange (SARI/EI, 2019). The key developments in South Asia during the period 2012–2018 as part of SARI/EI (SARI-EI, 2019) include: (i) The commissioning of India–Bangladesh 500 MW HVDC link during the period 2012–2013 (ii) The signing of the power trade agreement between India and Nepal during the period 2013–2014 (iii) The signing of the SAARC framework agreement on energy (electricity) cooperation during the period 2014–2015 (iv) Commissioning of 400 kV Tripura–Commilla transmission line and 100 MW power transfer during the period 2015–2016 (v) Issuing the guidelines for Cross-Border Electricity Trade (CBET) by the government of India, b. Nepal Electricity Regulatory Commission act of Nepal Passed, and c. The national transmission plan for South Asia was updated with CBET link during the period 2016–2017 (vi) Signing of BIMSTEC MoU on grid interconnection, b. India drafting the amendment in Electricity Act – 2003 with CBET provision, and c. Increase in Cross-Border Power Trade by 1500 MW since 2012 during the period 2017–2018 It is visible that the South Asian region is progressively making notable development in the field of CBET and the activities on this matter are gearing more and more in recent times. The South Asian regionals need to look into the following key issues that are essential for enabling the regional power market which is broadly grouped into three broader groups (South Asia Power Market, 2020). They are: 1. Policy and regulations: This section needs to take care of three key issues like laws which are governing trade, the electricity laws, and the regulations pertaining to electricity sectors.

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2. Transmission system: This section needs to address five key issues like the load dispatch and grid codes, cross-border transmission infrastructures, generation capacity additions, cross-border load dispatch, and transmission planning. 3. Power market: This section needs to address the issue related to energy accounting balancing rules for participation in power exchanges, wheeling and transmission charges, and so on. A study carried out by ADB clearly demonstrated that large-scale transmission interconnection capacity would help Nepal and Bhutan develop large hydropower potential, which could then be transferred to India, resulting in a significant reduction in fossil fuel use, power shortages, and carbon dioxide (CO2) emissions in the region (Wijayatunga et.al., 2015). The South Asia Cross-Border Electricity statistics from 2014–2020 as reported in SARI/EI stands at 7705 million units (MUs) in 2014 and raised to 15,672 MUs in 2020 (Table 4). Some of the promising initiatives and interventions that are noticed in the South Asia region in the domain of energy measures include:

SAARC Energy Ring SAARC Energy Ring was initiated by SAARC in 2004 as the member states in the region are deficit in energy and import dependent. The need for regional cooperation can aid in resource optimization, cheap energy availability, and long-term growth. Furthermore, the availability of resources and demand patterns support energy commerce across borders (SAARC Energy Centre, Presentation, 2020, October 14) (Table 5).

South Asia Subregional Economic Cooperation (SASEC) The South Asia Subregional Economic Cooperation (SASEC) initiative brings Bangladesh, Bhutan, India, Maldives, Myanmar, Nepal, and Sri Lanka together in a project-based collaboration aimed at promoting regional prosperity, improving Table 4 South Asia CrossBorder Electricity Trade between 2014 and 2020

Year 2014 2015 2016 2017 2018 2019 2020

Cross-Border Electricity Trade in Million Units (MUs) 7705 9379 10,681 12,304 12,809 13,146 15,672

Source: Data extracted from SARI/EI, Panda, Presentation, 2020

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Table 5 Current power trade between the SAARC regions and expected growth by 2040 Countries Afghanistan-Pakistan Bhutan-India Bhutan-Bangladesh Bangladesh-India India-Nepal India-Pakistan India-Sri Lanka

Current status (MW) 0 2262 0 1160 500 0 0

Expected by 2040 (MW) 5000 17,100 1000 4500 15,800 1000 1000

Source: Data extracted from SAARC Energy Centre, Presentation, 2020, October 14

economic possibilities, and improving people’s quality of life. SASEC members have a vision of increasing intraregional trade and collaboration in South Asia while also expanding connectivity and commerce with Southeast Asia via Myanmar, the People’s Republic of China, and the global market. The cumulative sectorial growth in terms of investments in SASEC is in the field of transportation, energy, and ICT. Major growth was seen in the transport and also the energy sectors followed by economic corridor development (SASEC, 2022). Such promising growth in investment is an opportunity for regional energy integration and meeting the growing energy demand in the region.

Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation (BIMSTEC) Some of the member countries of the SAARC have been grouped with other neighboring countries in the region to establish BIMSTEC. BIMSTEC is a regional organization made up of seven member states which include five member countries from SAARC which are Bangladesh, Bhutan, India, Nepal, and Sri Lanka with Myanmar and Thailand. It was formally established on 6 June 1997 (SARI/EI, BIMSTEC, 2020). The regional group serves as a link between South and Southeast Asia and helps to strengthen ties between these countries. So, this network furthermore enhances the probable collaboration in the region for exploring enhanced participation in realizing the shared potentials of technical as well as economic growth in the region. The regional energy corporation among the members of BIMSTEC is limited and mostly has few through this limited capacity in the form of bilateral basis. BIMSTEC has a rich resource of renewable resources (mainly solar, wind, and small hydro) which amount to 1117 gigawatt (GW) and the hydro of 328 GW. As a result, the prospect of Cross-Border Energy Trade (CBET) in the region with a focus on renewable energy and hydro is seen worth exploring through regional energy corporation expansion so that the region can achieve synergies in resource utilization. The member countries like Nepal have 78%, Bangladesh 95%, and Myanmar 50% of access to electricity as of 2019 July, June, and December

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respectively. These three countries in the region have low access to electricity and such offers the potential for regional energy corporations in form of importing power from the other member countries in the cases of power deficit, extending the grid from other member countries in the case of difficulties inaccessibility in border areas, and access financial assistance from other member countries in the case of financial difficulties. Hence in the case of energy corporations in the BIMSTEC region (SARI/ EI, BIMSTEC, 2020), the following factors need to be critically looked into: (i) (ii) (iii) (iv) (v) (vi) (vii)

Access to electricity Demand and supply gap Cheaper cost of electricity High and growing dependence on fossil fuels Demand diversity and resource complementarity Climate change and the need for sustainable power sector development Synergies in system development and operation, renewable energy integration, and grid balancing (viii) Energy technology transfer (ix) Energy technology research and development (x) Regional stability and peace So, to further take the regional energy cooperation in the energy sector within BIMSTEC, three key developments were initiated. They are: (i) The decision to commence with BIMSTEC Grid Interconnection Master Plan Study, 2010 (ii) Establishment of BIMSTEC Energy Center (BEC) for which Memorandum of Association (MoA) was signed in 2011 (iii) Establishment of BIMSTEC Grid Interconnection for which Memorandum of Understanding (MoU) was signed in 2018 and it is in force since 7 April 2019 Benefits of Regional Energy Trade are meeting energy demand, better energy security, diversity in natural resources access, leveraging advantages of regional energy potential, developing supply and demand-driven market within the region, the potential for trade and revenue generation, and many more. There are numerous advantages to having a regional power market, including efficient use of energy resources, reduced investment in new generation capacity, lower electricity costs due to market competition, reduced overall environmental impact, and an outlet for energy resource–rich states to export their electricity (Khan, 2019). India already has two national power exchanges (India Energy Exchange and Power Exchange India Limited) that facilitate bilateral and competitive electricity trade. The Indian power exchanges can serve as a venue for regional electricity commerce by connecting energy producers and consumers from other SACs to the Indian electricity system.

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Opportunities and Challenges for Energy Trade in South Asia South Asian region is having a substantial gross domestic product (GDP) growth making the region the fast growing region in the recent past (SAARC Energy Centre, presentation, 2020). The growth in GDP is an indicator of socioeconomic development where electrical energy becomes the crucial parameter of the process indicating the region is facing the increased energy demand simultaneously. One of the critical challenges and the realities is that the region is tested with limited natural resources reserves and there are still substantial groups of people without reliable energy sources as well as access to electricity in some cases (Dutt, 2006). Regional energy trade, according to a 2008 World Bank study provides a win-win situation for all parties and is a logical and pragmatic public policy choice for a variety of reasons, including the following (ADB, 2017): (i) Addressing the mismatch between energy demand growth and energy endowments of different countries (ii) Energy security concerns (iii) Significant benefits to smaller exporting countries, such as Bhutan and Nepal (iv) Environmental and climate change imperatives, such as reducing reliance on coal (v) Reduction of supply costs (vi) Cash flow implications, where large domestic capital investments are not required immediately

Key Aspects of the Power Sector of South Asia Member Countries The region has its strength and weakness along with its stands for power sector which will be the essential indicators for realizing cleaner energy sources and also exploring opportunities for Cross-Border Electricity Trade within the region and beyond. Some of the key aspects for the SAARC countries in its power sectors areas are listed below (SAARC Energy Centre, Ahmad, presentation, 2019) (Table 6): The SAARC Framework Agreement on Energy Cooperation (Electricity) was signed in Kathmandu, Nepal, on November 27, 2014. The goal was to allow CrossBorder Electricity Trade voluntarily, according to the respective member states’ laws, rules, regulations, and agreements. The Framework Agreement must be implemented smoothly (SAARC Energy Centre, 2019): (i) The most important prerequisite is an enabling environment (ii) An assessment of current rules and regulations (iii) Alignment of laws and regulations in each member state concerning CrossBorder Electricity Trade Furthermore, the report also shared that according to a market maturity analysis of SAARC member states, only India is developed enough for CBET, while the rest of

Declining gas reserves prompting a shift to coal, oil, and LNG Limited RE potential in a gas-dependent midsize power system

Low-energy usage

Potential for renewable energy

High electricity imports

Limited access to clean and inexpensive energy Hydro and oil dominant

Bangladesh Rapidly growing energy demand

Afghanistan Very tiny power system

Energy use per capita is highest in South Asia

Hydropower potential is high

A large amount of hydroelectric power is sent to India

Bhutan A very low-power system

Table 6 Aspects of power sectors in SAARC

South Asia’s hub for electricity trade

High potential for renewable energy Coaldependent economy

India Extremely huge power system Constantly increasing energy demand The isolated nation with limited connecting possibilities Heavily reliant on diesel

Maldives Fragmented and tiny power grid

There is a lot of hydro potential and new hydro projects in pipelines

Hydropower is the primary source

Net electricity importer with the potential to export in the future

Nepal Small power system

High renewable energy potential

Gas supplies are depleting

Pakistan Power generation is reliant on gas, oil, and hydro Liquified natural gas (LNG) imports are rising Energy consumption is rising

Renewable energy targets of up to 12% of total production by 2030

Importation of oil and coal

Difference between peak and off-peak demand

Sri Lanka Hydro and thermal generation

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the countries must focus their efforts to attain the optimum level for a mature CBET market. This agreement is a significant step toward encouraging SAARC member nations to expand Cross-Border Electricity Trade and Exchange. Articles 4 and 13 of the Agreement specify the taxes and duties, as well as the facilitating agencies, i.e., the buying and selling companies, as a point of focus for this study. This agreement commits the member states to gradually move toward a zero-tax regime for CrossBorder Electricity Trade. The same is examined in this research from the perspective of the region’s many existing agreements as well as the individual member states’ current laws and regulations. Making the climate conducive by easing the purchasing and selling entities is a crucial step toward building a regional electricity market. Despite the Agreement’s lack of explicit reference to Cross-Border Electricity Trade, the following clauses directly or indirectly affect Cross-Border Electricity Trade and Exchange: (i) Assistance in the collection of taxes or revenue claims (ii) Sharing of tax policy between member states (iii) Conflict of Interest, which states that in the event of a conflict, an Agreement signed at a later date will take precedence (iv) Taxes covered, which lists the then-current taxes to which the Agreement applies

Power Procurement and Power Tariff The South Asia region has come up with a power procurement policy which is divided into broader two terms namely short/medium terms whereby the short term is for less than one year and for medium term it is between one to five years, and long term is basically 25 years for thermal and 35 years for hydro. The procurement model is also divided into long/medium terms which is based on actual cost with possible negotiation for hydro, competitive bidding with negotiation for thermal, and short term which will be basically on a competitive basis. Each member country in the South Asian region has its power procurement system. Accordingly, the tariff structure for the long/medium term followed the two-part tariff for thermal, a singlepart tariff for hydro, and for short term it is a single-part tariff and prevailing practices (SARI/EI, 2017). Furthermore, the tariff across South Asian Countries (SACs) should address the following: (i) (ii) (iii) (iv)

Promote efficiency Attract investment Ensure financial viability Be simple and transparent

The core guiding principle for the determination of tariffs in the region includes:

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(i) Sustainability: Tariffs should cover the cost of the service as well as a suitable return on investment. (ii) Equity: Tariffs should be equitable, transparent, and encourage competition and open access. (iii) Allocative efficiency: Tariffs should encourage the efficient use of limited resources. (iv) Productive efficiency: Tariffs should encourage cost cutting and improvement in QoS Electric utilities in other South Asian countries are either vertically integrated or somewhat unbundled, with the exception of India and Pakistan, where they are unbundled into generating, transmission, and distribution services. The records are as follows (SARI/EI, 2017): (i) Vertically integrated (a) Afghanistan (DABS) (b) Maldives (FENAKA) (c) Nepal (NEA) (d) Sri Lanka (CEB) (ii) Partially unbundled (a) Bangladesh (separate transmission utility) (b) Bhutan (separate generation utility) (iii) Unbundled (a) India (separate generation, transmission, and distribution utilities) (b) Pakistan (separate generation, transmission, and distribution utilities)

Power Purchase in Case of Bhutan and India Since October 2002, India has imported surplus power from three projects: Chhukha (336 MW) at a rate of Rs 2.25 per kWh, Tala (1020 MW) at a rate of Rs 1.98 per kWh, and Kurichhu (60 MW) at a rate of Rs 1.98 per kWh. The power generated by these plants is distributed to Eastern and Northern Indian states in accordance with the allotment decided by the Indian government through Power Trading Corporation of India Limited (PTC India Limited). The same protocol is being used to build three more Inter-Governmental (IG) model Hydro Electric Plants (HEPs): 1200 MW Punatsangchu-I (funded at 40% grant and 60% loan at 10% interest by the Government of India), 1020 MW Punatsangchu-II, and 720 MW Mangdechhu (both funded at 30% grant and 70% loan at 10% interest by the Government of India). Four further HEPs (totaling 2120) have been agreed upon at the intergovernmental level signed in 2014. Additional two HEPs with the 2560 MW Sankosh Reservoir project and 2640 MW Kuri Gongri Reservoir project are at a discussion stage (SAARC Energy Centre, 2019).

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Power Purchase in Case of Nepal and India Currently, there are three power-sharing agreements between the two countries (SAARC Energy Centre, 2019): (i) Koshi Treaty: Bihar’s Katiya exports 50 megawatts to Nepal for border electrification. Despite the fact that Nepal is entitled to 50% of the power generated by the Koshi plant, it only uses 10 MW due to technical issues. (ii) Border town power exchange: In the 1970s, Nepal and India signed a power exchange agreement to deliver power to border towns from the other country’s grid. This is done under the terms of a bilateral intergovernmental agreement. The PEC meets on a regular basis to examine and fix tariffs, payments, taxes, and settlements. (iii) Mahakali Treaty: A treaty for the integrated development of the Mahakali River, which includes the Sarda Barrage, Tanakpur Barrage, and Pancheshwar Project, under which Tanakpur Hydro will provide 70 MUs of free electricity.

Some of the Key Benefits of Regional Power Trade in South Asia Technical, operational, environmental, financial, economic, and social benefits can all be included in regional power trading. The following are some of the most important advantages (ADB, 2017): (i) System operational benefits: (a) Optimal use of natural resources to meet growing energy demand (b) The concentration of various types of energy resources in different countries (c) Economies of scale (d) Improved energy security and reliability (e) Optimized transmission network (f) Increased economic efficiency in system operation (g) Reduced adverse environmental impact (h) Reduced spinning reserves in the case of electricity generation (ii) Economic and financial benefits: (a) Increased industrial productivity (b) Increased trade and industry revenues (c) Increased gross domestic product growth rate (d) Increased foreign exchange earnings for exporting countries

Some of the Key Opportunities for Energy Cooperation in the Region Multiple opportunities are there in the SAARC region that can be realized for better energy cooperation in the region. Some of those include (SAARC Energy Centre, Ahmad, Presentation 2019):

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(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)

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Trade shifts from bilateral to trilateral Transmission projects using high-voltage direct current Imports of LNG and coal, as well as related enterprises CBET projects based on renewable energy generation and RE/hydro Competitive electricity markets are being developed CBET is a commercialized version of CBET that involves the private sector Ancillary services market development (trade of grid balancing services to improve grid stability, minimize RE intermittence, and so on) Infrastructure and oil refineries are being improved Projects to improve energy efficiency New infrastructure projects are being developed Net metering and renewable energy Mobility/electric transportation Energy access and microgrids AI and GIS mapping Cooking technology that is environmentally friendly

Some of the Key Challenges to Energy Cooperation in the Region (i) (ii) (iii) (iv)

Technological Institutional Financial Political

These four issues have been critically figured out in many of the documents on energy trade pertaining to South Asia (Ferdousi and Mostaque, presentation; SARI/ EI, Panda, presentation, 2020). Hence the same presentation (Ferdousi and Mostaque, presentation) also highlighted: (i) The need for continuing the bilateral cooperation where India is a major country in the region can create a major role. (ii) The political will for energy cooperation in the region has to be enhanced by engaging think tanks, civil society organizations (CSOs), and other international bodies. (iii) Address the trust deficit by engaging more in intra-regional trade and people-topeople connectivity. (iv) Initiating and starting the energy cooperation in the region from the least controversial area through proper feasibility studies, research, and manpower development. Regional power trade, without a doubt, has numerous advantages and benefits for SAARC member nations. Meeting energy demands through commerce should be a priority in an area where millions of poor people lack access to electricity. However, the SAARC members must overcome a number of obstacles and problems in order

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to expand regional trade beyond the current bilateral and trilateral agreements (ADB, 2017).

Power Grids and Their Interconnection in South Asia Energy (electricity) extraction, generation, and trade are faced with numerous challenges that need to be addressed critically. It is key to have a nexus between energy, environment, and sustainability as these there linked very closely (Bhattarai, 2020). The energy challenge of the twenty-first century includes the nexus between energy security, energy equity, and environmental sustainability. In the sustainability ranking from the sustainable development report – 2020, the South Asian countries rated against the Sustainable Development Goals (SDGs) 7 – Affordable and Clean Energy, Maldives is marked as green, Bhutan is marked as yellow, Bangladesh and Afghanistan are marked as orange, and rest of the countries like Pakistan, Sri Lanka, Nepal, and India are marked as yellow. The color green reflects that the goal is achieved, whereas yellow reflects those challenges remaining, orange reflects significant challenges, and red reflects major challenges (SARI/EI, Panda, presentation, 2020). Furthermore, the same report also highlighted that with rapid expansion foreseen in the region there will be 43.8 gigawatt (GW) of Cross-Border Grid Interconnection by 2036/2040 which is a notable plan and prospect in CBET. The CBET and the shared power grids thus need to address these so that power grids and their interconnection in the South Asian region become more efficient, reliable, secure as well as sustainable. The regional countries need to work more on bilateral as well as multilateral initiatives on Cross Border Electricity Trade. The advantages of interconnecting electrical grids in South Asia are numerous. The “energy trilemma” confronts national policymakers, who must balance energy security, affordability, and sustainability. Greater connectivity may be able to help resolve this trilemma. It can help to: (i) (ii) (iii) (iv) (v)

Increase the supply of electricity Improve energy efficiency Cut costs through arbitrage and economies of scale Tap into underutilized resources by diversifying supply hydropower Enable for higher usage of variable renewable energy through the use of energy resources such as hydropower

An integrated grid that spans the subregion is critical for the development of power-producing infrastructure and cross-border electricity trading. Power grid connectivity will provide the foundation of a subregional delivery system for low carbon energy, easing the transition to renewable energy, and will therefore become a regional public good for South Asia, with the correct combination of national complementing policies. Without accounting for social and environmental advantages, full power grid connectivity may save $9 billion per year in direct savings and reduce greenhouse gas (GHG) emissions by more than 9% per year compared to

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business as usual. Given substantial reductions in renewable energy technology costs and increasing estimates of renewable resources in countries like India and Pakistan, future analysis is anticipated to considerably modify the emissions reduction benefits upward (United Nations ESCAP, 2018). SAARC Energy Ring (Power) is currently grouped into the following (SAARC Energy Centre, Ahmad, presentation, 2019): (i) (ii) (iii) (iv)

(v) (vi) (vii) (viii)

Bhutan–India and Nepal–India India–Bangladesh and India–Myanmar India–Sri Lanka Pakistan–India–Nepal and India–Pakistan Along with this, the following ring is within some member countries of SAARC and the neighboring countries Kyrgyzstan–Tajikistan–Afghanistan–Pakistan (CASA 1000) Turkmenistan–Uzbekistan–Tajikistan–Afghanistan–Pakistan (TUTAP and TAP) Iran–Afghanistan Iran–Pakistan

The following are the few existing interconnections in South Asia areas (Table 7): In addition to the foregoing, bilateral energy trading agreements and infrastructure exist between Pakistan and Iran, as well as Afghanistan and Central Asia. In addition, India-Pakistan and India-Sri Lanka linkages are in the planning and proposal stages, respectively.

Gradual Transition to Trilateral Cross-Border Power Trade in South Asia There are several plans to strengthen the trilateral cross-border power trade in the South Asia region (SARI/EI, Panda, presentation, 2020) which are as follow: (i) 404 MW Nyera Amari Hydro Power Project in Bhutan which is expected to sell the electricity to India and Bangladesh. (ii) 1125 MW Dorjilung project which is on Detail Project Report (DPR) phase and the DPR is approved by the Royal Government of Bhutan. (iii) Bangladesh Master plan envisaged importing 1 gigawatt (GW) of electrical power from Bhutan and 3 GW of electrical power from Nepal through India. (iv) Bangladesh will import 500 MW of electricity from 900 MW Upper Karnali in Nepal at the rate of 7.72 cents/unit for 25 years. The commercial CBET in the region stands at 0 MW in 2010 but it has grown into 1256 MW by 2020 with Bhutan–India of 126 MW, India–Bangladesh of 790 MW, and India–Nepal of 350 MW which is not in G-G negotiated CBET.

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Table 7 Existing interconnections between SAARC countries

Existing links 22 links at 132/33/11 kV

Volume traded ~150 MW imported from India by Nepal

India-Bhutan

400/220 kV D/C Links

India-Bangladesh

400 kV HVDC backto-back asynchronous links

Import by India from 3 HPPs, dry season support to Bhutan. 5644 MU import to India in FY2017 500 MW imported from India by Bangladesh

India-Nepal

Power Purchase Agreement/ Power Supply Agreement (PPA/PSA) Medium term, commercial transactions

Intergovernment Agreement

Long- and medium-term PPAs

Expected links 400 kV AC D/C lines by 2016 initially charged at 220 kV Grid reinforcement with new hydro projects addition Up-gradation of 500 MW link to 1000 MW

Source: Data extracted from SAARC Energy Centre, 2019

Future Plan for BIMSTEC Power Grid There are several plans to strengthen the power grid within the BIMSTEC region for CBET as listed below (SARI/EI, BIMSTEC, 2020) (Table 8): There are several benefits of the BIMSTEC regional power grid such as technical and operational benefits (this takes care of access to a wider range of generation resources, seasonality of generation in hydropower-dependent countries, and optimum alignment of transmission lines), economic and financial benefits (this take care of access to cheaper power sources, foreign exchange revenues, utilization of surplus generation of one country in another, and an economic extension of the grid), renewable energy and environmental benefits (this take care of potential for largescale hydropower in the region and sharing of variable generation source at regional level), regional energy market development (this take care of enabler of regional market development), and mobilization of investment in the BIMSTEC region (this take care of cross-border investments).

Conclusion Energy is seen as a key element of GDP and there is a strong association between energy and GDP ratio for any country. The race of development and growth with urbanization account for greater demand for energy (especially electricity) and continuously provide stresses on the existing limited electricity generation potential.

400 kV new Butwal – Gorakhpur

Jigmeling – Alipurduar, 400 kV D/c: 198 km Alipurduar – Siliguri, 400 kV D/c line and Kishanganj – Darbhanga, 400 kV D/c

400 kV evacuation line for export-oriented hydropower plants such as Arun – III and Upper Karnali

Nepal–India Upgradation of Dhalkebar – Muzzafarpur line to 400 kV (currently charged at 220 kV)

Bhutan–India Punatsangchu HEP – Alipurduar, 400 kV Double Circuit (D/c): 170 km

India–Bangladesh 765 kV Bornagar (India NER) – Parbotipur (Bangladesh) – Katihar (India ER)

Table 8 Plans to strengthen the power grid within the BIMSTEC region India–Sri Lanka Undersea HVDC cable or overhead transmission line, from Madurai in India to Anuradhapura in Sri Lanka, with a planned capacity of up to 1000 MW

Thailand–Myanmar Depends on the progress of the below generation projects: Mai Khot – Mae Chan – Chiang Rai (369 MW) Hutgyi – Phitsanulok 3 (1190 MW) Ta Sang – Mae Moh 3 (7000 MW) Mong Ton – Sai Noi 2 (3150 MW)

Bangladesh–Myanmar Cox’s Bazar – Myanmar (500 MW)

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As South Asia has seen a fast growth rate in recent times, the need for holistic cooperation within the region and beyond becomes crucial in realizing the potential of clean energy within the region and participating in cross-border electricity trade. South Asian countries have constituted several mechanisms as well as initiatives to realize the needs for energy trade within the region and beyond in recent times. These timely interventions and regular reviews have helped the region in remapping the potential as well as benefits of member countries together realizing the benefit of clean energy at a cheaper rate within the region and beyond. Several initiatives and future plans for cross-border electricity trade within SAARC and BIMSTEC have been highlighted in this chapter so that further understanding of regional as well as its strength can be researched at regular intervals. Key challenges that have been realized for cross-border electricity trade in the South Asian region include issues related to construction (geographical as well as cost factor), transmission (bilateral as well as trilateral/quadrilateral cooperation needed), pricing measures, and policies, and the security of power grids. The region so keeps on enhancing its policies and regulations to support and facilitate measures on these key issues if the region needs to reap the benefits of electric potential as well as trade within the region and beyond.

Cross-References ▶ Determinants of Energy Transition in Asia ▶ Energy Convergence and Regional Energy Security: Policy Implications ▶ Energy Efficiency (EE) for Climate Action: Evolution of India’s EE Policies and Way Forward ▶ Policy Dilemmas and Solutions to the Successful Energy Transition ▶ Towards the Sustainable Development Through Energy Transnationalism: Study of Integrated Energy Markets in Asia

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Towards the Sustainable Development Through Energy Transnationalism: Study of Integrated Energy Markets in Asia Akanksha Singh

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy as a Geopolitical and Diplomatic Tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Towards the Single Market: Energy Transnationalism: European Story . . . . . . . . . . . . . . . . . . . . . . . Asian Energy Demand Scenario and Cross-Border Energy Trade in the Region . . . . . . . . . . . . . Comparative Analyses of Institutional Frameworks of Southeast Asia and South Asia . . . . . . Energy Connectivity Initiatives in Southeast Asia and South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . SWOT Analyses: Integrated Energy Network in South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract

This chapter aims to apply a transnational energy approach—how an integrated energy market can boost the economy, enhance regional integration and reduce carbon emission. In this direction, the first section of this chapter analyzes the importance of energy transnationalism to foster international cooperation using geopolitical and diplomatic lenses. Integrated energy connectivity initiatives can be of strategic geopolitical significance to bridge the current and future energy gaps. Presently, there are varying degrees of integrated power systems globally, ranging from bilateral power systems to fully integrated energy markets at the continental level. This chapter focuses on sub-regions of South Asia and Southeast Asia. Taking inspiration from the successfully integrated energy markets of the world, this chapter analyzes the progress and prospects of integrated energy networks in South East Asia and South Asia, where this chapter compares the role of institutional frameworks and development dynamics of both regions. After the comparative study of both areas, in the latter section of the chapter, a SWOT analysis is proposed to evaluate the Strengths, Weaknesses, Opportunities, and A. Singh (*) Institute for Global International Relations, Tokyo, Japan e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_11

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Threats of an integrated energy network in South Asia. Through this research, the author aims to foster regional cooperation in Asia, placing energy security at the center of cooperation. Considering Asia’s vastness, subregional connectivity initiatives can act as a building block towards the vision of Pan-Asianism. This study looks forward to the expansion of multilateral synergies available from collaboration for the sustainable and zero-carbon future. Keywords

Energy security · Energy policy · Geopolitics · International cooperation · Energy trade

Introduction Energy touches almost all facets of life and strongly influences any state’s economic, social, and political development by ensuring people’s socio-economic development and well-being. Today, when we talk about our sustainable future and fulfillment of Sustainable Development Goals (SDGs), it is energy that has a direct or indirect impact on each of the SDGs. The last few decades witnessed the rapid evolution of global energy trade, demand-supply chain vulnerabilities, integration of economies to world markets, and terrorism. Today states desire energy security in the same way as they desire economic and military security. Due to the climate change challenges, energy transition based on the pillars of renewables, electrification, and energy efficiency has been advocated by governments and academia worldwide. Furthermore, there will be a significant shift in the geopolitics of energy in consequence of energy transition affecting suppliers, buyers, and geopolitical alliances. While discussing energy, it is imperative first to understand the concept of energy security and its various dimensions. Different scholars have defined energy security in terms of scope, temporal scale, and critical assumptions. For example, Barton et al. define energy security as a “condition in which nation and all or most of its citizens and businesses have access to sufficient energy resources at reasonable prices for the foreseeable future free from serious risk of major disruption of services” (Barton et al., 2013). Adding the economic, social, technological, environmental, political, and national security dimensions to the concept of energy security, Alhajji (2013) elucidates energy security as “the steady availability of energy supplies that ensures economic growth in both producing and consuming countries with the lowest social cost and the lowest price volatility” (Alhajji, 2013: 131). Although, all these above dimensions are interdependent and complementary to each other, disruption in one would create a chain of disruptions in others as well; thus, a balance must be sought to sustain continual energy supply around the planet. Rooted in different academic disciplines, Cherp and Jewell (2013) provide three perspectives of Sovereignty (Political Science), Robustness (Engineering), and Resilience (Economic) on energy security accountable to specific threats, responses,

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and resilience strategies. The sovereignty perspective is about the control over energy resources and energy systems and therefore focuses on the “configuration of interest, power alliances, and spaces for maneuver.” Threats of this perspective can be attributed to international embargoes, acts of terrorism, and malicious practices of market power; these risks can be minimized through energy diversification, import-substitution, and political/military control over energy systems. The robustness perspective caters to the need for energy supply and energy infrastructure innovation. Mismatch in energy demand and supply, depleting energy reserves, aging infrastructure, technical failures, and natural accidents are critical threats that must be minimized through research & innovation in energy technologies and upgrading infrastructure. Finally, the resilience perspective focuses on increasing the ability to withstand energy demand and recover from supply disruptions, which occur due to economic crises, regime change, disrupting technologies, and climate change uncertainties, risk minimizations of these threats lies in diversity, adaptability, and flexibility (Cherp & Jewell, 2013). When energy security concepts are discussed under a defined framework, the associated challenges can be operated more efficiently in terms of time frame, region, and policy regulations (ibid). The following section explores the role of energy in maintaining and shaping the interstate relationships.

Energy as a Geopolitical and Diplomatic Tool Geopolitics of energy can be attributed to the mismatch between energy supply and energy demand and the concentration of energy resources in a few countries or regions. It is the unequal distribution of energy across the planet which provide the energy a strategic resource status, and the ability to transport it across the borders postulate it as a critical factor in the foreign policymaking of states, as a basis of diplomatic and foreign economic relations (Verrastro & Ladislow, 2013). While on the one hand, energy can enhance stability by generating interdependence between energy exporting and energy importing countries; on the other hand, it can create profound insecurities among sovereign and commercial actors; parallelly, reshaping geopolitical chessboards at the core and the periphery. Therefore, constructed into the framework of prevailing state infrastructure and ever crucial for international political economy, energy security has developed as a foreign policy issue and instrument that states manipulate to pursue their national interest. Amelia Hadfield (2016) elaborates political and economic concerns of states while formulating their foreign policy. Here she states that “economic concerns are about maintaining supply and demand between exporters and importers respectively, and they therefore attempt to minimize any energy disruptions or shortages on the premise that such energy shocks could undermine their economic well-being, and political concerns are about the potential leverage exercised by exporter states over both importer states and transit states” (Hadfield, 2016: 455). These concerns are strongly interwoven to each other with cause and effect. When states pursue balance in demand and supply of their energy resources, they cannot afford disruption, conflict, or disagreement.

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Per Hogselius (2019) provide five scenarios where states can manipulate energy as a foreign policy tool in the following manner: (1) To manipulate cross-border flows of energy through various kinds of sanctions – in this case, pressure is exerted on foreign governments to change their policies and actions mostly unrelated to energy. In 1973, the Arab oil embargo forced many countries to shift their political stance on the Arab-Israeli conflict. During that time, Japanese industries were wholly dependent upon Arab oil, due to the embargo, with no other solution available; Japan had to prioritize its relationship with OPEC countries, and for the first time after World War II in its foreign policy split with the United States, Japan endorsed Arab position in the Yom-Kippur War. In a vice-versa scenario, energy can also play a role to mend the relationship of political rivals; after the Arab oil embargo, Japan was looking for alternative options to reduce its dependency on Arab oil. In 1978, the Sino-Japanese war came formally to an end when the Japanese and Chinese governments signed a “peace and friendship agreement.” This agreement paved the way for the oil deal between countries where Japan imported 348 million barrels of oil from China between 1978 and 1982. (2) To manipulate energy flows through radical price shocks— in this case, both high and discounted prices are used to achieve desired political gains. (3) To manipulate system-building activities – through possible interventions by reshaping the ongoing projects, governments manipulate energy-related activities and agreements to gain political influence abroad. During the Cold War in Western Europe, a proposal to construct an electricity transmission line across the iron curtain was initiated; however, despite being economically viable, this proposal was disapproved by the NATO (North Atlantic Treaty Organization) member states under pressure from the United States. (4) To manipulate ownership and control – in recent times, foreign acquisitions of energy projects have been perceived as a threat to the national security interest; it is argued that these investments are linked to foreign governments’ hidden agendas to gain political motives. (5) To manipulate discourse – states utilize energy-related crises as a tool to shape their political differences in the international arena. Most of the time, energyrelated disputes are non-political about technical issues, agreement clauses, timeframe, and energy transport; however, foreign policymakers deliberately politicize debates over these issues to fulfill their political agendas. Today renewable energy investments and discourse about sustainability are being used by governments as verification of their responsible environmental thinking to foster their international reputation. According to Global Energy Assessment, the “core of energy security concern is the vulnerability of nationally vital energy services without which modern states cannot function” (Cherp & Jewell, 2013). Thus geopolitics of energy plays an essential role in formulating diplomatic relations between various states, as it keeps checks and balances on any state from becoming authoritative. Further, it allows smaller states strategically located and with energy potential to bargain in favor of their national interest. But, most importantly, the geopolitics of energy is not only about the carbon reserves present on planet earth; it is about places where energy is produced, refined, and consumed, and it is also about the movement of energy – pipelines and transmission lines.

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Towards the Single Market: Energy Transnationalism: European Story Energy has the potential to create a new regional and international cooperative framework. In today’s interdependent world, no country can fulfil its energy needs on its own. Energy security will be contingent to states’ external relations, either bilateral or within multilateral frameworks; that is why energy security will be a key player in the foreign policy formulation of any state (Yergin, 2013). Energy connectivity via multinational cooperation opens the doors of energy diversification to countries through more energy reserves. There is scope for developing countries to strengthen their capacities by transferring and applying technologies (Singh, 2022; UN ESCAP, 2017). The transnational infrastructure allows energy-deficient countries to collaborate with energy-sufficient countries and access energy reserves. This dependency gives birth to competition, conflict, cooperation, and collaboration. There is a need to analyze the intricate pattern leading to the cooperation between states in the geopolitics of energy. In the nineteenth century, French Philosopher Claude Henri de Saint Simon argued that “it was only by becoming industrial that Europe would be able to solve its crisis and finally unite.” In the twentieth century, this idea was supported by the architect of European unity Jean Monnet who noted, “that economic forces can play an important role in the unification of Europe and that the harmonization of particular interest demands a higher standpoint from which they can be judged” (Swedberg, 1994). The notion to utilize natural resources, energy, and infrastructure as a soft power tool to nurture a peaceful world order can be attributed to the above philosophical traditions, which indirectly indicated to “transnational infrastructure as an important means for creating interdependence between countries in a way that would make future wars virtually impossible” (Hogselius, 2019: 155). In the present time, while addressing environmental concerns have become the utmost priority for each nation in the world, governments cannot function in isolation to formulate energy policies and energy market mechanism. Hence, international cooperation becomes even more crucial in the given scenario to respond to environmental concerns and energy issues. During the nineteenth century, the Saint Simonian notion encouraged the growth of inter-connected railways and waterways in Europe. The advent of the twentieth century brought immense technological development and the wrath of two World Wars. These wars left whole Europe wretched in terms of economy, human capital, inter-state relations, and energy scarcity. In the post-World War II period, to set up a common foundation for the economic development of European states and enhance cooperation between them, Robert Schuman recommended a declaration for then most rival states, France and Germany (Singh, 2022). On 9th May 1950, Schuman Declaration proposed that “Franco-German production of coal and steel as a whole be placed under a common High Authority, within the framework of an organization open to the participation of the other countries of Europe.” Drawing influence from Saint Simonianism, Schuman noted that to make war “not merely unthinkable but materially impossible between France and Germany,” it was essential to setup up a

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production unit in consensus with both states with the basic elements of industrial production on the same term. Thus, the European Coal and Steel Community (ECSC) was proposed to avoid further resource control conflict (Hogselius, 2019; Alter & Steinberg, 2006; Milward, 1984). The plan intended to set up a single European market for “community development” of coal and steel where raw material consumers would be approved free access to production sources (Sethur, 1952). Under the “Schuman Declaration,” France and Germany agreed to pool their coal and steel resources under a cooperative framework, resulting in the formation of ECSC, making the European integration process practically feasible (Singh, 2022). Pan-European visionaries inspired by the “Atlantropa” vision of Herman Sorgel recognized the electricity system as a means for strengthening transboundary solidarity and securing peace among European nations (Vidal, 2014; Hogselius, 2019). To meet the energy demand of rapidly growing industries, make available energy more cost-effective, and achieve optimum resource allocation, European leaders considered building an internal power grid system in various regions of Europe. With this intention, in 1951, a collaborative organization was formed by France, West Germany, Italy, Belgium, Netherlands & Luxembourg, Switzerland, and Austria to coordinate the construction and functioning of cross-border power interconnections. Termed as the Union for the Coordination of Production and Transmission of Electricity (UCPTE), by 1958, UCPTE started to realize the synchronous operation of interconnections and presented itself as a representative of future European countries electricity transnationalism (Hogselius, 2019). In 1964, Portugal and Spain also joined the UCPTE via double looped circuits. Subsequently, the next decade brought the former power grids of Yugoslavia and the Greek Republic in the admission of UCPTE. Soviet disintegration in 1990 shattered the geopolitical settings of Eastern Europe, and majority of former communist states dissociated themselves from the former Soviet Union. The power grids of Czech Republic, Poland, Hungary, and Slovakia were synchronized with UCPTE (Hogselius, 2019; Liu et al., 2020). During the same time, the introduction of the Single European Market and the liberalization policies brought a call from the European Union (EU) commission, challenging the dominant role of UCPTE and other power organizations. Furthermore, the commission cited that new challenges and threats owing to liberalization policies would require a high level of coordination among European states. The commission was capable of providing that leadership umbrella to forge European unity. Eventually, all stakeholders settled on the ground to preserve the system reliability of interconnections with the utmost priority as these systems emerged as a synonym for “pan-European integration.” Ultimately in 2009, all associations were integrated, and UCTPE and other power pools transitioned into an European Network of Transmission System Operators for Electricity (ENTSO-E), which took over all operational tasks for the management and transmission of electricity (ibid). Today ENTSO-E constitutes a group of 35 countries and manages the largest interconnected electrical grid in the world. The recently published Ten-Year Network Development Plan 2020, by ENTSO-E, mentions that “ensuring the security of the

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interconnected power system in all time frames at the pan-European level and the optimal functioning and development of the European interconnected electricity markets, while enabling the integration of electricity generated from renewable energy sources and of emerging technologies” would be a long-term mission of European community. There have been consistent endeavors by European states for decades to develop transnational power grid interconnections. Equal contemplation was given to the energy structure of each state while analyzing energy strategy. To maintain a secure electricity supply network in Europe, a risk management framework focusing on – optimal resource allocation, diversification, flexibility, responsiveness, and impact reduction was adopted (Cherp & Jewell, 2013). With the ongoing thrust on energy transition and clean energy development, European states are committed to become the “climate-neutral continent by 2050.” Expansion of effectively integrated power system that is “secure, sustainable and affordable” will certainly contribute toward the goal of clean energy transition (Liu et al., 2020; TYNDP, 2020). The geopolitics of energy is very much about defining the conditions under which the necessary long-distance movements of fuel and electricity may occur. In particular, it is about assessing the technical, economic, and political feasibility of different transport routes (Hogselius, 2019). Making the impactful transition in energy production would require long-term and substantial investment in technological advancement and infrastructure development. Energy policymaking is a complex procedure; most of the time, these processes are much longer than the election cycle of any country; thus, policymakers must plan for the distant future rather than reacting to current crises or problems. In this direction, to formulate energy policy, leaders should prepare better for the possible future problems and need to learn from lessons from the past (Verrastro & Ladislaw, 2013).

Asian Energy Demand Scenario and Cross-Border Energy Trade in the Region It has been predicted that there will be a power shift, and the twenty-first century will be an “Asian Century.” There will be rapid developments and growth of population and energy consumption. Mckinsey Global Institute predicted that by 2040, Asia would account for 50% of the world’s total GDP and 40% of the world’s energy consumption (Tonby et al. 2019). This growth would certainly intensify the competition in energy markets of the Asia-pacific region. Thus, to ensure the security of available energy resources, it becomes imperative for Asian economies to realize the importance of regional cooperation and transnational towards sustainable growth and a sustainable future. The Asian Infrastructure Investment Bank has recognized that “Asia has a huge untapped potential for renewables, and regional networks could help develop more capacity, boost access and support stronger economic integration. Whatever the eventual time frame, what is clear is that further (crossborder) connections within Asia are likely, making regional power grids one more of

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the many options to reach our global climate and sustainable development goals” (Vautibault & Vanhove, 2021). Therefore, in this direction, this section of the chapter focuses on the sub-regions of south-east Asia and South Asia to examine the transnational energy development in these regions. US Energy Department’s National Renewable Energy Laboratory (NREL) published a report to assess the inter-state power trade coordination among South Asian states. A senior researcher at NREL, David Hurlbut mentioned that “Crossborder electricity trading represents the nexus between technical potential and political reality. There is an additional level of complexity in harmonizing the sovereign decisions of different countries so they can be on the same page with respect to things like cost recovery, foreign exchange, investment risk, and the distribution of benefits. It’s about consensus which requires vision and fair processes along with good technical information” (NREL, 2020). According to International Energy Agency (2019), Southeast Asia’s power consumption would be double by 2040. Since the beginning of the twenty-first century, electricity demand growth in Southeast Asia has been one of the fastest in the world at 6% annually. This demand has been fulfilled mainly through coal-based power generation followed by natural gas and hydropower. Presently, the share of electricity in the final energy consumption is 18% and would enhance to 26% by 2040 (IEA, 2019). In this scenario, it would be of utter importance for SE Asian states to diversify their energy supply expand energy consumption into renewable to fulfill commitment towards a zero-carbon future.

Comparative Analyses of Institutional Frameworks of Southeast Asia and South Asia ASEAN Plan of Action for Energy Cooperation (APAEC) Towards the goal of integrated ASEAN region, Southeast Asian leaders recognized energy as that vital thread that has the capacity to move region towards greater integration and adopted energy cooperation framework. To foster the multilateral energy cooperation in the region, APAEC acts as a guiding lantern for policymakers of the ASEAN region, providing policy documents for feasible cooperation under the ASEAN Economic Community (AEC) framework within the specified phase (Zamora, 2015). The key initiatives under this framework involve multilateral electricity transmission via realization of the ASEAN Power Grid (APG), augmenting gas connectivity by escalating development of regasification terminals, and widening pipeline reach under Trans-ASEAN Gas Pipeline (TAGP). It also intends to promote Clean Coal Technologies (CCT) to support carbon-neutral energy transition. Furthermore, to attain Energy Efficiency and Conservation (EE&C) for the infrastructure, industry, and transport sector, energy-efficient technologies will be adopted to reduce the 32% energy intensity by 2025. Furthermore, ASEAN focuses on increasing the Renewable Energy (RE) share in its energy mix to 23% through installing renewable energy in power systems by 2025 (ACE, 2020a, b).

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The first APAEC 1999–2004 adopted the energy cooperation agenda as prescribed by the Hanoi Plan of Action (1998) ministerial meeting involved the participation of all ten ASEAN member states; this phase laid the foundation for policy frameworks and implementation modalities for energy cooperation. The next phase adopted the agenda of “Vientiane Action Plan under the ASEAN Vision 2020,” various Memorandum of Understanding (MOU) were signed to ensure the efficiency and management of APG. This phase witnessed the replacement of “Regional Energy Outlook, Energy Policy, and Environmental Analysis” by “Regional Energy Policy and Planning” expanding its role in policy implementation. APAEC 2010–2015 adopted the Civilian Nuclear Energy Programme to enhance ASEAN’s nuclear technology and power generation capabilities in its third segment. This phase adopted the agenda of AEC Blueprint 2015, and there was the expansion of ASEAN’s partnership with international organizations. ASEAN Secretary-General signed MOU in 2011 with International Energy Agency (IEA) to conduct an annual Energy Dialogue (ACE, 2020a, b; Zamora, 2015; Shi & Malik, 2013). The current fourth phase, APAEC 2016–2025, has been built on the building blocks of previous plans achievements, with the vision of “Enhancing Energy Connectivity and Market Integration in ASEAN to Achieve Energy Security, Accessibility, Affordability and Sustainability for All” along with “Accelerating Energy Transition and Strengthening Energy Resilience through Greater Innovation and Cooperation,” to promote sustainability and energy security of the ASEAN region (ACE, 2020a, b). Institutional Support At various levels, the soft infrastructure of cooperation is active to provide implementation assistance towards the completion of projects. ASEAN Minister of Energy Meeting (AMEM) focuses on critical matters of common interest for all ASEAN member states and sets policy guidelines under the AEC framework. In the 18th AMEM+3 (China, Japan, and Korea) meeting held on 16th September 2021, members reiterated their deep commitment to the implementation of APAEC Phase II: 2021–2025 programs and support ACE in facilitating and implementing the ASEAN+3 energy cooperation programs to accelerate the energy transition in the region. It was noted in the meeting that “it is important to continue information sharing and strengthen regional cooperation on energy security policies, measures, and best practices among the ASEAN+3 towards a low-carbon economy” (AMEM, 2021). To smoother bureaucratic procedures, the Senior Official Meeting on Energy (SOME) is conducted annually to advise APAEC strategies and regulate the implementation priorities. This body reports the annual progress of projects to AMEM and sets the engagement with dialogue partners, international organizations, and private sector investors (ACE, 2020a, b). For the top to bottom penetration and implementation of energy programs, there are subsector networks and specialized energy bodies such as “Heads of ASEAN Power Utilities/Authorities (HAPUA), ASEAN Council on Petroleum (ASCOPE), ASEAN Forum on Coal (AFOC), Energy Efficiency and Conservation Sub-sector Network (EE&C-SSN), Renewable Energy Sub-sector Network (Re-SSN)” and others (Zamora, 2015; ACE, 2020a, b). To provide all bodies mentioned above a common umbrella, ASEAN Center for

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Energy (ACE) was founded as an intergovernmental organization in 1999. This institution serves as a common platform for all ten member states to interact on energy matters. ACE has played a critical role in catalyzing the integration process of the ASEAN region by facilitating multilateral collaborations via joint and collective activities on energy. ACE provides technical support and administrative assistance to expedite the implementation process and policy analysis. ASEAN Secretariat is the core body accountable for all inter and intra-regional coordination (ACE, 2020a, b, Zamora, 2015). HAPUA, as a specialized energy body, collaborates with ASEAN Energy Regulator Network (AERN) involving ASEAN energy regulators and the ASEAN Power Grid Consultative Committee (APGCC) and other international organizations “to harmonize the legal and regulatory practices, technical standards and to identify possible financial models, including the review of the recommendations of the ADB Study to establish the APG Transmission System Operator Institution (ATSO) and the APG Generation and Transmission System Planning Group Institution (AGTP) to support the realization of APG” (ACE, 2020a, b). Furthermore, HAPUA, along with other regulatory bodies, correspondingly concentrate on research publications, capacity building, and policy exchange to provide guidance on various dimensions associated with APG program such as – credit finance, infrastructure, taxation, cross border trade, public-private participation, and others towards the effective implementation of projects (ACE, 2020a, b). Furthermore, to explore multidimensional possibilities, ACE and HAPUA conducted a series of ASEAN Interconnection Masterplan Studies (AIMS) to evaluate the CBET potential, regional cost, and fulfillment of renewable energy targets in the region (Utama, 2020). In one of the studies, HAPUA recommended public-private partnership financing to APG projects to lower the financial burden on the monetary accounts of participating states (Chang et al., 2019). SAARC Framework Agreement for Energy Cooperation Learning from ASEAN’s experience, SAARC leaders also recognized the role of energy as a critical tool that can enhance cooperative collaboration in South Asia, leading to enduring harmony in the region. Consequently, in 2005, SAARC Energy Center was created under Dhaka Declaration with the objective “to have a regional institution of excellence for the initiation, coordination, and facilitation of SAARC programs in energy” and realize the vision of “Energy Ring in South Asia.” This body caters to the energy demand of the South Asian region under the SAARC energy cooperation program (SEC, 2021a, b). Following objectives – strengthening south Asia’s collective capacity and expertise on energy issues, facilitating cooperative energy trade through electricity grids and pipelines, promotion of efficient energy use and energy transition, keep reliable energy data, resourceful development of hydro and solar power, and encouraging private sector participation in energy initiatives of the region. In addition, there is inclusive involvement of academic experts, high officials, and environmentalist for the effective regulation and implementation of projects (ibid).

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Lately, bilateral energy trade agreements have been more prevalent in the SAARC region; however, it was noted that “relying exclusively on bilateral agreement is not recommended, due to requirements such as allowing power trade between non-neighboring countries and reducing the time taken for negotiation and finalization of agreements in the absence of standardization” (IRADe, 2018). There have been several cases of multilateral power cooperation where institutional mechanisms have been adopted to promote multilateral energy trade. The outcomes of these successful initiatives have shown that institutional mechanism plays a crucial role in the functioning of these frameworks, such as EU in Europe, AEC in ASEAN, ECOWAS Regional Electricity Authority in West Africa (ERERA), and Regional Commission for Electric Interconnection in Central America (CRIE) (UN ESCAP, 2018). South Asian economies have been struggling with intraregional political and border issues for a long time. As a result, there had been difficulties in formulating regulations accepted by all parties involved, making the functioning of institutional framework even more difficult. That is why due to the absence of a key regional framework, there had been absence of intra-regional energy trade in the region (IRADe, 2018). Therefore, recognizing the need for multilateral power cooperation, “SAARC Framework Agreement for Energy Cooperation (Electricity)” was signed by all SAARC member states in 2014 with the objective to facilitate the functioning of integrated power grid across the SAARC region and effective utilization of available energy resources where energy deficit state can benefit from energy surplus state through cross-border energy trade (Ministry of Power, Government of India 2021). This agreement is targeted to facilitate Cross-Border Electricity Trade (CBET) as per the rules and regulations of the SAARC countries, where the development of proper structure, institutional mechanism, and channel to solve regulatory issues is obligatory for all member states. To foster multilateral energy trade in the region, this agreement highlights that CBET leads to “optimal utilization of regional electricity generating resources, enhanced grid security, and electricity trade arising from diversity in peak demand and seasonal variations” (IRADe, 2018). Following are the salient features as mentioned in the policy document: “(a) Non-discriminatory access to transmission grids (b) International coordination in transmission interconnection planning system operations, and energy accounting (c) Promotion of information sharing between Member States (d) Encouraging member states to undertake power sector reforms in their respective jurisdiction, to promote competition (e) Member States shall towards exempting the cross-border electricity trade from export/import duties/levies” (SEC, 2020). In 2016, the second meeting of the energy regulator recommended the formation of the “SAARC Council of Expert of Energy Regulators (CEERE) in cooperation with Asian Development Bank.” This council would aim to facilitate enabling regulatory environment to realize “SAARC Energy Ring” (SEC, 2020). In 2018, “the SAARC Council of Experts of Energy Regulators- Electricity (CEERE) approved the engagement of South Asia Regional Initiative for Energy Integration

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Table 1 APAEC vs SFAEC ASEAN plan of action for energy cooperation Adopted under Hanoi Action Plan, 1998 ASEAN energy center- regulatory body Geographical limitations for implementation Systematic, long term planning Full-fledged power system Strong institution and governance model

SAARC framework agreement for energy cooperation Adopted in 2014 SAARC energy center- regulatory body Geographical suitability for implementation Struggling with proper functioning, lack long term planning Work in progress to build power interconnections In the process of institutionalization

Source: Compiled by author

(SARI/EI) to provide the technical support to assess and review the suitability of a set of electricity regulators for the implementation of SAARC Framework Agreement to advance electricity trade in South Asia” (IRADe, 2018). For the effective implementation of framework agreement and solve the associated regulatory and legal issues – “the Office of the General Counsel of Asian Development Bank (ADB) and the South Asian Association for Regional Cooperation in Law (SAARCLAW)” decided to collaborate together to review and identify areas which require policy reforms. Their long-term objective is to “examine the energy (especially electricity) laws and regulations of the member states to help identify and overcome the impediments that can or have the potential to hamper regional energy cooperation and to support the implementation of the said agreement. The SAARCLAW, as a regional body of the legal fraternity of SAARC countries and recognized by SAARC as an apex body, can play an important role in the implementation of the framework agreement, particularly in using its legal and regulatory expertise to promote electricity trade in the region” (ADB, 2017). The main institutional differences between Southeast Asia and South Asia have been summarized in Table 1. Although the SAARC initiative is relatively new at the temporal scale from ASEAN, it must learn from its fellow counterpart about the implementation of a systematic institutional and governance model.

Energy Connectivity Initiatives in Southeast Asia and South Asia Due to the increasing awareness about SDGs, demand for clean power has been increasing persistently; however, demand destination and energy supply resources are unevenly placed. Areas that can harness a large volume of renewable energy are located in remote locations such as deserts, mountains, arctic, and equatorial regions. Therefore, there is a need to improve irregularity and randomness associated with renewable power through optimum resource allocation and construction of transregional and transcontinental power interconnection. In this context, the power grids’ role in transporting electricity to the remotest locations would be really essential (Zheng, 2021). On the one hand, building transnational energy networks

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can provide numerous benefits; on the other hand, it can be very challenging to build and maintain them since different regions and states offer different business environments, bureaucratic regulations, geopolitical scenarios, and political cultures (Hogselius, 2019). According to the International Energy Agency report (2019), “regional power system integration is vital to facilitate growth in renewable source of generation, particularly from wind and solar photovoltaic. The integration allows access to a larger and more diverse pool of flexible resources on the supply side (from sources such as hydro or gas-fired power) and the demand side. Interconnecting with neighboring grids also reduces the system variability of wind and solar output, which is smoother when individual plants are aggregated over larger geographic areas” (IEA, 2019). ASEAN Power Grid (APG) Started in 1997 as the cross-border bilateral power connection initiative, APG was commissioned to ensure efficient resource distribution and maintain the region’s energy security. Over the years, APG has grown into a sub-regional initiative that aims to integrate the whole Southeast Asian region and presently interconnects the power system of Singapore, Thailand, Lao-PDR, Malaysia, Indonesia, Myanmar, Philippines, and Brunei through 3 systems: Northern, Eastern, and Southern connections. The Northern system operates in the upper ASEAN peninsula and includes interconnections linking Thailand, Lao PDR, Myanmar, Cambodia, Thailand, and Malaysia. The Eastern system comprises power links between Indonesia (West Kalimantan), Malaysia (Sabah and Sarawak), Brunei Darussalam, and the Philippines. Lastly, the Southern system operates throughout southern Indonesia, Malaysia, and Thailand (Wisuttisak, 2019). The strategy of policymakers had been to “encourage interconnections of 15 identified projects, first on cross-border bilateral terms, then gradually expanding to a sub-regional basis and, finally to an integrated Southeast Asian power grid system” presently, many of the proposed interconnections have been commenced and begun to showcase bilateral interconnectivity between participating states (ACE, 2020a, b, Zamora, 2015) (Table 2). In this direction, the first multiparty trade of power commenced under the “Lao PDR-Thailand-Malaysia-Singapore Power Integration Project” (LTMS-PIP) acted as a leading move to strengthen cross-border electricity trade across neighboring borders to realize the APG. By August 2020, almost 30.2 gigawatt-hours (GWh) of electric power had been transacted under LTMS-PIP phase I & II (ACE, 2020a, b). The success of power interconnections has developed a conducive and favorable environment for cross-border energy trade in the ASEAN region. Presently, eight out of ten ASEAN members are engaged in some or the other kind of power interconnection. However, these engagements have been bilateral limited to unidirectional power trade and infrastructure transmission via long-term agreements for power trade (IEA, 2019). A strengthened electricity network would foster market integration and development via reduced energy prices, power shocks, supply shortages, and efficient use of available resources, thus facilitating sustainable development goals (Silitonga,

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Table 2 Power Interconnections between ASEAN states Countries Indonesia (West Kalimantan) Cambodia Lao PDR Malaysia

Export (to) Malaysia

Import (from)

Thailand Cambodia, Malaysia (via Thailand) Thailand

Thailand, Lao PDR, & Vietnam Thailand and Vietnam

Thailand Singapore

Cambodia, Lao PDR

Vietnam Myanmar

Cambodia, Acts as an interconnector for Lao PDR, Thailand

Thailand, Lao PDR (via Thailand), Singapore Lao PDR, Malaysia Malaysia (bidirectional, non-financial exchange) Lao PDR

Source: Compiled by author from South East Asia Energy Outlook 2019, IEA, 2019

2018). As the ASEAN region consists of large, medium, and small economies, and it is challenging for small economies to develop such large scale infrastructure on their own, thus APG is expected to reduce the regional gap by supporting more cross border trade, as well as promoting profitable investment in renewable energy (ASEAN Energy Outlook 2020). Cost-cutting, improved connectivity, and favorable trade conditions have boosted intra-regional power trade more than five times in the last 15 years (Utama, 2020). AIMS II, in its report, has predicted that energy efficiency achieved through APG interconnection would bring the saving of US$ 1.87 billion by 2025 to the ASEAN region. Besides monetary saving, electric power trade also promotes renewable energy production, hence contributing to zero-carbon targets of ASEAN member states (ASEAN Energy Outlook 2020; Chang et al., 2019). Moreover, growth in the shares of renewable energy through electric power generation tends to reduce wholesale electricity prices owing to their low-cost power plants based on renewable energy and consumer preferences for renewable and low-cost energy (Chang et al., 2019). So far, APG has not only benefitted the region in terms of energy connectivity and economic integration but it has also strengthened the ASEAN’s influence in the global economy. There is a proposal for multilateral power trade from Lao PDR to Thailand to Malaysia to Singapore; also, there are plans to construct interconnections connecting the top three economies of southeast Asia— Indonesia, Malaysia, and Singapore. Three transmission lines, each 600 MW connecting Singapore to Malaysia, Batam to Singapore, and Sumatra to Singapore have been proposed. These options intend to induce and enhance renewable energy share in the region’s top economies (Chang et al., 2019). According to the latest ASEAN Energy Power Updates (2021), “more than 60% of the newly installed capacity up to 2025 will be coming from the renewables, this will mean a 37.6% share of renewable energy in 2025, which is 2.6 unit above the regional targets.”

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SAARC Power Grid The advent of the twenty-first century brought the bundle of rapid growth for South Asian economies in terms of industrialization, urbanization, and population growth. Constituting 3% geographical area of planet earth, these states contribute 21% to the world’s population and 4.21% to the world’s economy (World Population Review, 2022). Cumulative GDP growth of 4.8% has boosted the economic development activities, purchasing power parity as well as per capita electricity consumption of these states, thus to meet the growing energy demand and fulfill energy targets under SDG-7, these states require efficient energy transition and enhancement of their energy capacity (SEC, 2021a, b). The preceding scenario has motivated South Asian leaderships to consider cross-border interconnections, unconventional energy resources, i.e., renewables, and off-grid possibilities to fill the existing demand and supply chain gap to ensure the region’s energy security (SEC, 2018). Subsequently, the “SAARC Energy Ring” was envisioned by the SAARC leaders in the areas of electricity, renewable energy, oil, and natural gas and technology transfer, to enable energy interconnection and cooperation within the region at the 12th SAARC Summit in 2004 (SEC, 2020). The South Asian Association for Regional Cooperation (SAARC) was founded on 8th December 1985 with the aim of “promotion of welfare of people, improvement of quality of life, acceleration of economic growth and social progress.” Out of many thrust areas, towards the fulfillment of SAARC objectives, access to affordable and uninterrupted energy sources was a critical one. However, many of the SMSs suffer from electricity deficit and demand-supply mismatch in the region, leading to incidences of acute shortages even today (IRADe, 2018). In 2012, occurred the biggest power stoppage of the decade of the region on 30th and 31st July when all eight northern states – Uttar Pradesh, Rajasthan, Punjab, Haryana, Jammu and Kashmir, Uttarakhand, Haryana, Union Territory of Chandigarh, and national capital Delhi fell in to complete darkness due to the collapse of the northern grid (Tortajada & Saklani, 2016). There was another severe power failure on a consecutive day for the next 72 h, which affected more than 50% of the population in almost 20 states, interrupting essential services, such as metros, hospitals, water supplies, offices, and schools. During this critical time, the Indian government approached Bhutan for assistance to meet its power deficit. The emergency power obtained on an urgency basis was used to electrify the Delhi Metro, the Prime Ministers’ residence, and major hospitals (ibid). Such occurrence became the motivating force towards the gradual evolution of cross-border energy trade in the region. This region is endowed with a range of natural resources, i.e., huge coal reserves in India, natural gas potential in Bangladesh and Pakistan, solar and possibilities in India, Sri Lanka, Maldives, and Pakistan, and huge hydropower potential in Bhutan and Nepal (IRADe, 2018). South Asia’s first-ever bilateral electricity interconnection commenced in 2013 between India and Bangladesh. It was the political will of both governments and the power shortage of Bangladesh which became the driving force towards power trade between both states (Wijayatunga et al., 2015). As mentioned in ADB working paper series, “this interconnection allowed Bangladesh to access the power market in India

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for a capacity of 250 MW through a commercial agreement while the remaining 250 MW is supplied through a set of Government of India owned power plants” and the possible technical difficulties were swept away by the sequent high voltage direct current system, enabling self-regulating control of both governments over the electric network (ibid). Thus, this network connects the eastern electrical grid at Bahrampur in India to Bheramara in Bangladesh (UN ESCAP, 2018). According to the UN ESCAP Report (2018), “Grid interconnections in South Asia can generate direct economic benefits for all participating countries through both exporting and importing electricity. For the hydropower-rich least developed countries (Bhutan and Nepal), power exports to their neighbors can generate stable long-term export revenue as well as fast track their graduation from least developed countries status.” As of now, CBET in South Asia has been connecting Nepal-India, Bangladesh-India, Bhutan-India, and Bhutan Bangladesh (via India, utilizing existing interconnections) (UN ESCAP, 2018). India being placed at the heart of South Asia would play a crucial role in the realization of the regional power grid through the effective utilization of resources and acting as a transit state for adjoining states. India’s power generation mainly depends on thermal power plants exploiting coal as a primary resource. As of 2021, coal accounts for a 67.5% share in the power generation of India (IEA, 2021). Such acute dependency tends to cause frequent supply shortages during peak hours, and the economic cost of available electricity during such shortage is extremely high. Similarly, Bangladesh and Sri Lanka will also face energy supply shortages due to increased energy consumption and power interconnections. Furthermore, it has been evaluated that approximately 1000 tonnes of carbon dioxide is released in the atmosphere for every GWh of coal-based generation in India (Wijyatunga et al., 2015). As of 2018, South Asia accounts for 8% of global carbon emission which could increase to 12% by 2030. On the other hand, it has been predicted that this region can grow as a charioteer of climate change mitigation efforts if it can harness its renewable energy potential (UN ESCAP, 2018). Presently there are several completed, ongoing, and proposed projects for bilateral exchange of hydropower, the integration of which would form the basis of SAARC Power Grid: Nepal-India: Presently, 700 Megawatt (MW) of electricity is supplied to Nepal through existing intermission lines. Both countries are connected through 11 kV, 33 kV, 132 kV, and 220 kV lines on numerous locations. A 400 kV transmission line has been constructed between Dhalkebar (Nepal) and Muzaffarpur (India) for the bulk power transfer. To broaden the energy cooperation between both states, following lines, i.e.,
13 kV D/C Nanpara (India)-Kohalpur (Nepal), 400 kV D/C Butwal (Nepal)-Gorakhpur (India), 132 kV Raxaul (India)-Parwanipur (Nepal), 400 kV D/C Sitamarhi (India)-Dhalkebar (Nepal) and 132 kV Kushaha (Nepal)Kataiya (India) have been agreed for future construction. The government from both states has signed an agreement for the transaction of 150 MW power from Nepal for 25 years once the proposed transmission links are established (Ministry of Power, Government of India 2022). India-Bhutan: India import around 2000 MW of power through 132 kV, 400 kV, and 220 kV transmission lines from Chukha HEP

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(336 MW), Tala HEP (1020 MW), Mangdechu HEP (720 MW), and Kurichu HEP (60 MW) centres in Bhutan. The present capacity would be enhanced to 4200 MW by 2024–2025 via the commissioning of Punatsangchu-I and Punatsangchu-II HEPs. Electricity import and export between Bhutan and India is dependent on seasonal flow; in summer, India buys electricity from Bhutan, whereas vice versa in winters (Thakur et al., 2021; ibid). Bangladesh-India: These two states have constructed high-capacity power interconnections through the Baharampur-Bheramara 400 kV D/C line and Surajmaninagar-Comilla 400 kV line, which cumulatively transfer 1160 MW of energy from India to Bangladesh. In 2021, during the visit of Bangladesh PM to India, leaderships from both states agreed to construct a 765 kV Double Circuit cross-border electric interconnection between Bornagar (India)-Parbotipur (Bangladesh)-Katihar (India) to expand the power trade between both states (ibid). Myanmar-India: Governments from both countries are currently working to establish a bilateral high-capacity link between both states. Presently India a transporting 3 MW of power through the Moreh-Tamu 11 kV line to Tamu town in Myanmar. India-Sri Lanka: Scope of cross-border electricity power trade of 1000 MW is in negotiation procedure between both countries. India-Sri Lanka 400 kV HVDC grid interconnection between Madurai and Anuradhapura has been proposed and under consideration (ibid; UN ESCAP, 2018). Furthermore, there is vast potential for power trade between Pakistan-India in solar and wind and CASA 1000 and India-Pakistan 400 kV link, to cater to electricity need during peak generation; however, there is very little progress in this direction yet due to this political frictions. (UN ESCAP, 2018; Wijyatunga, 2015). In the recent development, Bangladesh and Nepal are also set to sign energy cooperation; Bangladesh would import around 700 MW of power from Nepal to cater to its energy demand and export surplus electricity of Nepal to other countries (The Financial Express, 2021). In addition, Bhutan-India-Bangladesh trilateral energy cooperation is also under consideration to export energy excess from Bhutan to energy-deficient Bangladesh via India. Figure 1 illustrates a snapshot from the UN ESCAP report (2018) of power interconnections across the South Asian region. The figure shows that the northeastern region of South Asia presently has a majority of power interconnections involving Bhutan, India, Nepal, and Bangladesh. Moreover, the seasonal difference in energy demand creates a conducive environment for energy trade, such as Nepal exports energy to India in its wet season and importing from India during its dry season (UN ESCAP, 2018). ADB working paper series examines economic benefits of intra-regional energy trade through selected six projects in South Asia, i.e.,
“India-Bhutan grid reinforcement, Nepal-India 400 kV link, India-Sri Lanka HVDC link, India Bangladesh HVDC link, India-Pakistan 220/400 Link, CASA 1000 and India-Pakistan 400 kV link” through comparative analyses of investment cost and economic benefit. The study analyses that the above projects can harness a total benefit of over US$ 4 billion with just one-tenth of total investment cost (Sen et al., 2017; Wijyatunga, 2015).

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Fig. 1 Power Interconnections: South Asia. (Source: Courtesy to UN ESCAP Report 2018)

SWOT Analyses: Integrated Energy Network in South Asia This section uses the SWOT Framework analyses to evaluate the prospective Strengths (S), Weaknesses (W), Opportunities (O), and Threats (T) towards the cross-border energy trade in the SMSs region. In this framework, Strengths and weaknesses are the internal factors that can help an area to understand that which of its resources and capabilities are likely to be sources of competitive advantage and which can act as barriers on the path of growth. On the other hand, Opportunities and Threats shed light on external environmental factors which a region or state may attract from other states or regions (Gurel & Tat, 2017; Singh, 2022) (Fig. 2). The author aims to develop a model with common organizational and environmental factors that influence bilateral and multilateral decision-making through this methodology. This SWOT analysis is based on the primary literature review of the reports published by the United Nations, International Energy Agency, SAARC Energy Center, Word Bank, and Government Websites. Strengths Regional geography, renewable power potential and quality, and costeffectiveness have been opted-out as potential strengths to nurture cross-border electricity trade in the region. The majority of South Asian states share land borders

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Fig. 2 SWOT Framework Analyses: Cross Border Energy Trade, South Asia. (Source: Compiled by author from open-source information provided by: UN ESCAP, 2018, SAARC Energy Outlook 2030, IRADe, 2018, World Bank, IEA)

(as shown in Fig. 1); this interconnecting geographical feature and short transmission interconnection distances offer opportunities to construct hassle-free inter-state power grids (UN ESCAP, 2018). Also, the physio-graphic condition bestows this region with one of the best quality of renewable power and huge potential to harness this power. Also, the advancement in renewable energy technologies, particularly in solar and wind power, will multiply the already abundant resource potential of the region. For example, the estimated hydropower potential of South Asia is 348 GW, of which only 18% has been tapped so far. Similarly, solar power potential has been estimated to 938 GW, of which only 3.8% has been exploited yet and out of 967 GW of wind power only 4% has been developed yet (IRADe, 2020). Due to the immense technological advancement in renewable energy sector, cost of energy generated from wind and solar energy has declined by 70% and 89%, respectively, narrowing the gap between power generated from fossil fuel and renewable, hereby making renewable power more cost-effective (Chen, 2021; UN ESCAP, 2018). CBET in South Asia can yield direct economic benefits for both importing and exporting countries. For electricity surplus states such as Bhutan and Nepal, it will become a source of foreign exchange revenue; on the other hand, it will enable energy deficit states such as India, Bangladesh, and Pakistan to revitalize their industrial sector as a result of improved availability, affordability, and accessibility of energy supply (ibid). Weaknesses Political contentions, infrastructure lack, and rising energy demand are internal factors that can hinder the progress of cross-border power trade in the region.

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Political rivalries create an atmosphere of uncertainty which further impedes the investment and prospective economic benefits of any region. According to World Bank (2016) report, “experiences of cross-border power trading arrangements from various sub-regions of the world, showed that trust-building through electricity is possible even between countries with a history of conflict. Border-free trade arrangements among countries can generate the trust required to expand regional power cooperation. Traditionally disparate localities within countries that are linked together by power can also experience such as trust-building and its positive consequences.” On the other hand, the lack of essential infrastructures such as grids connectivity, highways, power plants, information technology, and communication impedes the power trade by enhancing the operating cost and delaying the project completion. Thus, essential infrastructure is crucial to facilitate and expand power trade in any region (USAID, 2004). SMSs require huge efforts in this direction to harness their renewable power potential and power trade. It is evident that the South Asian region is facing a huge crunch in its power sector due to the ever-increasing energy demand; cross-border energy trade provides a solution to balance the growing energy demand from the deficit region to the surplus one. An integrated grid allows states to be both producers and consumers during different seasons and times depending on their demand and supply (UN ESCAP, 2018). Opportunities Resource diversification, greenhouse gas reduction, regional economic development are external benefits that this region offers upon adopting intra-regional collaboration. The energy basket of each state in South Asia varies heavily from each other such as India is dependent on coal, Bangladesh and Pakistan on gas, and Bhutan and Nepal on hydropower. An integrated energy network would facilitate the opportunity of resource diversification for these states from fossil to renewables and from surplus to deficit leading to optimum utilization of resource generation (IRADe, 2018). According to UN ESCAP (2018) report, “without policy intervention, fossil fuel will continue to dominate (85–88%) the energy mix with significant adverse impacts on the environment and other SDGs,” indicating the need for resource diversification. In this direction, cross-border energy network would play a crucial role in increasing the renewable share in the energy basket of the South Asian region. It has been estimated that an integrated renewable energy network in South Asia could reduce carbon emission by 8% relative to the baseline between 2015 and 2040, mainly due to the substitution of coal with hydropower (Timilsina et al., 2015). Carbon emission decline would allow states to increase their Nationally Determined Contribution (NDC) or transact their spare carbon units under a flexibility mechanism with states over their targets (UNFCCC, 2022). Cross-border trade has the potential to reduce internal stress regional disparity enabled by electricity supply, and induce trust through the establishment of better governance. Hence, to fully exploit their renewable energy capabilities, there is the opportunity for South Asian states to move ahead collectively by ensuring that proposed energy development projects do not get embroiled in political uncertainties (SEC, 2018). Thus,

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CBET offers prospects to overcome sustained political frictions and facilitate regional economic development in the region. The most important economic impact of CBET will be upon small and medium-scale industries by improving their productivity through better energy affordability. “In addition to enhancing their operational efficiency through a reliable and steady supply of electricity, the lower cost of supply will enable these industries to advance their price competitiveness. Better market penetration, export earnings, and job growth can be therefore triggered by CBET” (UN ESCAP, 2018). Threats Security concerns, regulatory uncertainty, and price volatility have been identified as threats to the growth of the integrated energy market in SMSs. Political instability, terrorist attacks, and insurgencies have restrained the regional economic development of South Asia for long (UN ESCAP, 2018). There is a huge threat for the safety of infrastructure of the project running across the conflict region, most of the time such project costs very heavily on the pocket of the exchequer due to safety uncertainty and project delays. Due to the perpetual political tensions between some South Asian states, cross-border power trading can end up stranded in legal, policy, and regulatory regime uncertainties. The associated uncertainties further filter down as commercial risks in the form of taxes, transaction costs, exchange rates, and project earnings (Wijayatunga et al., 2015). Consequently, there is negligible regional coordination among SMSs towards the realization of the “SAARC Energy Ring.” For example, despite the favorable geographical conditions, infrastructure, and renewable resource availability, India and Pakistan have not been able to link their grids due to the political confrontations and skeptical behavior towards each other. Owing to the mistrust, there is a lack of coordination among governments leading to the neglect of the regulatory framework provisions for implementing CBET projects in the region. Advocating the significance of regulations with transparency David Hurlbut says that, “the more clarity and transparency you have within regulatory guardrails, the more private investment can happen. Any degree of regulatory uncertainty will have a chilling effect on investment,” which eventually hampers the growth and development of energy projects (NREL, 2020). To realize the vision of the SAARC Power Grid, it would require intensive multilateral planning; presently majority SMSs are involved in early-stage bilateral energy engagement. The absence of a long-term Master Plan for the implementation of CBET projects can act as a potential threat for the whole vision, as it will jeopardize the investment prospects of the projects. It has been learned from other regional initiatives that long-terms power generation and transmission master plans are advantageous to carry out projects systematically and are more investment-friendly (IRADe, 2014). For example, the West African Power Pool and Southern African Power Pool failed to deliver the desired output in the absence of a long-term master plan for transmission arrangements and differing expectations of electricity prices by buyers and sellers (Singh et al., 2015).

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Conclusion and Policy Recommendations To safeguard the future of people and the planet, humankind needs to cooperate altogether to a new level to achieve sustainable development. Placed as the number 7 Sustainable Development Goal, Energy can catalyze mutual cooperation based on bilateralism and multilateralism. Thus, to foster international cooperation idea from Saint-Simonianism, which says, “energy, natural resources, and infrastructure can be mobilized for a peaceful world order,” is more crucial than ever. Moreover, when cross-border projects are based on mutual benefit, they provide the opportunity to build trust and understanding among people from different nationalities and strengthen political stability by nurturing the trusting affinity among geopolitical rivals. The first section of the chapter explores the various theoretical dimensions associated with energy affordability, energy efficiency, and energy supply. This section provides insights on energy security perspectives through sovereignty, robustness, and resilience; political and economic concerns; and throws light on various scenarios through which energy can be manipulated. Such classification of energy security aspects helps acquire a systematic scientific understanding of challenges associated with energy security and assists policymakers in decision-making. The geopolitics of energy plays a vital role in formulating diplomatic relations between various states, as it keeps checks and balances on any state from becoming authoritative. Further, it allows smaller states strategically located and with energy potential to bargain in favor of their national interest. Therefore, energy security has developed as a foreign policy issue & instrument that states manipulate to pursue their national interest. While discussing the role of energy as a geopolitical and diplomatic tool, this chapter identifies energy interdependence at the core of energy politics. This chapter takes inspiration from the concept of Transnationalism and uses it to foster cooperation in the energy interdependent world. To formulate future policies, it is always advisable to learn from past experiences. In this direction, the European case has been discussed to analyze the role of energy transnationalism from the historical aspects. Hence, in the direction of policy-oriented output, it can be derived that there have been consistent endeavors by European states for decades to develop transnational power grid interconnections and equal contemplation was given to the energy structure of each state while analyzing energy strategy. To emerge as the leader in the coming decades of the twenty-first century, Asia must strengthen its regional cooperation and collaboration. The study identifies energy as that nexus that can obligate Asian states to come together and cooperate. The second section of the chapter analyzed the regional transnational initiatives and the cross-border energy trade development in the sub-region of Southeast Asia and South Asia. ASEAN reflects positive growth and development of Transnationalism in the region. ASEAN Plan of Action plays a crucial and effective role in coordinating the hard and soft connectivity of the region. Due to the renewable energy production under APG, the share of renewable energy would increase commercial energy consumption, reducing the region’s dependency on fossil fuels. At present, most APG interconnections are bilateral in nature; however, to realize its full potential, efforts are required in the direction of multilateral power trading.

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Like its cultural diversity, South Asia’s energy sector also showcases substantial diversity in terms of energy production, energy sources, production pattern, and demand pattern (based on the seasonal differences). This diversity would be beneficial to facilitate cost-effective power trade among the SAARC Member States intra- and inter-regionally. SWOT analyses have been conducted to evaluate possible positive and negative aspects of the internal and external environment and to provide policy recommendations. Weaknesses and threats require attention and actions from governments to realize CBET in the region; under the proper policy measures and practical strategies, threats can be turned into opportunities, and weaknesses into strengths. The study views that there is a lack of governance cooperation among South Asian states and coordination is required between hard and soft connectivity initiatives for the effective realization of CBET in South Asia. Owing to South Asia’s vast hydropower and other renewable energy potential, there is vast scope of resource exploitation in this region. If these states improve their coordination through conducive and non-discriminatory policies and the development of transnational energy infrastructure, there can be a huge jump in the energy trade of the region, which will eventually contribute to the region’s overall regional economic growth. The impactful transition towards carbon neutral energy would require new technologies and capital investment in intellectual knowledge. To fulfil the commitments towards zero-carbon future, each state has a binding obligation to enhance its renewable energy potential and reduce coal usage. In this direction, this study concludes that multilateral power interconnections are cost-effective for energy producers and consumers and contribute towards our sustainable future by facilitating renewable sources of energy. Also, cooperation based on the premise of Transnationalism opens the opportunity of innovation for larger market, where new ideas can be implemented through capital sharing, knowledge sharing, and technological changes. Furthermore, the ongoing Russia-Ukraine crisis has raised economic vulnerabilities for developing and developed economies, which are yet to recover from the COVID-19 economic crisis. This crisis will have a worldwide long-term impact on different economies of the world in different ways especially in the energy and food sector. Russia being one of the largest producer and exporter of oil and natural gas, poses a threat for economies that are dependent on the Russian energy supply. Most of the European countries have been heavily dependent upon the Russian energy supply, and there had been concerns that Russia may use its natural resources as a weapon against the European energy market by reducing energy supply in response to the ongoing sanctions and their support to Ukraine. On the day when Russia attacked Ukraine, the price of crude oil reached $100 per barrel, and within a week, it soared to $113 per barrel. Energy experts predicted that the energy market would intensify in proportion to the situation between both countries. According to Raystad Energy, an energy consulting firm, Brent could mount to $240 per barrel in the coming months if the economic sanctions remain for a longer duration thus impacting worldwide energy prices (Fanzeres, 2022). Hike in the price of crude oil would certainly impact the prices of essential goods, this will eventually increase the cost of daily commodities. This scenario would further induce inflation in economies

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already suffering from the pandemic crunch. If the war goes long, the supply chain crisis would certainly stimulate inflationary pressure on most economies. On the day of the invasion, the global financial market fell sharply, and the prices of many commodities surged around the world. There has been a historical pattern that shows that warfare leads to a prolonged surge in commodity prices and increases the risk of stagflation (Guenette et al., 2022). To protect their consumers from the energy scarcity, price shocks, and for emergency preparedness, governments need to prepare themselves for upcoming financial impediments. Under the Paris agreement, all countries are committed to contribute towards a zero-carbon future; the ongoing crisis provides them the opportunity to harness their renewable potential in full swing. European states have announced to reduce their imports (particularly energy) from Russia. The immediate outcome of this decision would showcase a hike in carbon emission due to the replacement of natural gas with coal; however, this decision may accelerate the green energy transition in the long term. International Energy Agency suggests that adding renewable capacity can reduce Europe’s gas needs by 6 billion cubic meters per year; also, it calculates that turning down the thermostats by 1  C can reduce gas imports by 6% (IEA, 2022). As of now, nobody can predict the duration of the ongoing crisis, and there has been no receding sign from Russia to end military operation despite the global criticism and economic sanctions. In this scenario, countries must prepare themselves for upcoming financial impediments. Predominantly, the European and Middle East economies will be hardest hit by the crisis and they must work out to diversify their fuel dependency and grain imports. Other parts of the Eurasian continent, such as East, Southeast, and South Asia, would be impacted by the rise in international crude oil prices since most economies in these regions are net importers of energy. In the other parts of the world, especially in North America, the impact of crisis would be limited and sensed through slower European growth (Kammer, 2022). Thus, Russia-Ukraine crisis is going to fuel the high inflation, slower the economic growth rate, and surge geopolitical uncertainties, these situations will derail the recovery of already suffering global economy, and thus posing severe challenges for policy makers in the coming time. Governments must learn lesson from the ongoing war crisis that it is high time to reduce dependency on fossil fuels and invest in green energy and balance their national security and economic goals. Also they must invest to foster resiliency of their societies against the global shocks, i.e., pandemics and wars.

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Part V Energy Pricing Policies

Fossil Fuel Subsidy Reform Policy

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Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What Is the Impact of Fossil Fuel Subsidies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overuse and Waste of Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hindering Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inequality of Fossil Fuel Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in Pollution and Carbon Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hinders at the Development and Use of Clean Energy Technologies . . . . . . . . . . . . . . . . . . . . . . What Is the Impact of Fossil Fuel Subsidy Reform? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reforms Could Affect the Economic System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reform Could Affect Social Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reform Could Affect Carbon Emissions and Air Pollution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reforms Could Stimulate Development of Clean Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Specific Reforms in Fossil Fuel Subsidies Need to Be Aligned with Local Conditions . . . Consumers Need to Be Compensated for the Loss of Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Implement Targeted Subsidies for Consumers After the Elimination of Cross-Subsidies . . . Subsidy Shift from Conventional Fossil Fuels to Cleaner Energy . . . . . . . . . . . . . . . . . . . . . . . . . It Is More Effective to End Fossil Fuel Subsidies Gradually Than All at Once . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract

At present, the scale of global subsidies for fossil fuels is still huge, and their energy, economic, environmental, and technological impacts cannot be ignored. This chapter reviews the previous literature to answer three questions: What are the impacts of fossil fuel subsidies? What are the benefits of reforms in fossil fuel subsidies? How can fossil fuel subsidy reforms be successfully implemented? Specifically, subsidies lead to excessive use of fossil fuels, resulting in wasted C. Liu (*) · Y. Xu Institute of Western China Economic Research, Southwestern University of Finance and Economics, Chengdu, China e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_12

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resources, increase the fiscal burden on governments and lead to smuggling of fossil fuels among some countries, are distributed unequally between rich and poor residents, increase emissions of carbon dioxide, and discourage the use and development of clean energy. Reforming fossil fuel subsidies might gradually mitigate the problems caused by subsidies. The increase in fuel prices after the removal of subsidies might enable more efficient use of fuels and affect a country’s gross domestic product, reducing the welfare of residents overall, but with a smaller effect on the interests of the poor than the rich, and affecting carbon emissions and promoting the development of clean energy. In the process of implementing subsidy reform, policymakers should pay attention to the method of reform. It is important to adjust subsidies based on local conditions, using cash transfer and other forms of compensation for residents, shifting to subsidies for clean energy, and gradually reducing subsidies of all types. Keywords

Fossil fuel subsidy · Reform policy · Residential welfare · Carbon dioxide emissions · Clean energy

Introduction Large amounts of carbon dioxide (CO2) emissions lead to global warming, which in turn threatens the environment. In 2015, at the Paris Climate Conference, COP21, 196 countries pledged to reduce CO2 emissions to halt climate change, and the elimination of fossil energy subsidies received great attention. In fact, the majority of worldwide CO2 emissions come from the combustion of fossil fuels. The International Monetary Fund measured worldwide CO2 emissions in 2016 and determined that 34 billion tonnes of CO2 were produced from burning fossil fuel and other industrial sources. The IMF also estimates that, by 2025, effective fossil fuel pricing could significantly reduce global CO2 emissions (IMF, 2021). At their summit in Carbis Bay, UK, in 2021, G7 leaders repeated their pledge to eliminate subsidies for these inefficient fossil fuels by 2025. In its net-zero emissions analysis for 2050, the International Energy Agency reemphasized the elimination of low-efficiency fossil fuel subsidies by including them as part of their policies to address climate change. Fossil fuel subsidies are an essential component of energy subsidies. (Energy subsidies are defined as government regulations or actions that reduce the price paid by energy consumers or increase the income of energy producers (Breton & Mirzapour, 2016; Lin & Jiang, 2011). They mainly consist of subsidies for fossil fuels and various types of renewable energy.) They can be divided into narrowly defined pretax subsidies and broadly defined posttax subsidies. The former reflects the difference between the amount of money consumers actually pay for fuel and the corresponding opportunity cost of the fuel supply, whereas the latter is measured as the gap between the amount that consumers actually pay and how much they should pay for fossil fuels to cover the cost of supplies, the environmental cost, and general

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consumption tax. The subsidies on fossil fuels ultimately create a gap between the reference price for energy and the price that the user actually spends. Based on their target, subsidies can be divided into producer subsidies and consumer subsidies; producer subsidies are more commonly used in developed countries, and consumer subsidies are more commonly used in developing countries and former Soviet republics. International fossil fuel prices are highly volatile, and fossil fuel subsidies control fossil fuel prices and, in turn, domestic inflation. Fossil fuel subsidies also guarantee energy accessibility for low-income residents. However, as a fiscal expenditure, fossil fuel subsidies suffer from multiple shortcomings. First, they increase the fiscal burden on governments. Second, they distort the price of fossil fuels, leading to inefficient use and wasted consumption of fossil fuels. Third, the artificially low prices of fossil fuels hinder innovation in technology with respect to energy use and the development of renewable energy (Ouyang & Lin, 2014). Therefore, reform of large subsidies for fossil fuels is needed to address these drawbacks. In 2020, the IEA measured a decline in both the price and the use of fossil fuels, which drove down the scale of fossil fuel subsidies, estimated at just over $180 billion, to a historic low; it fell approximately 40% from the level in 2019. (Many papers are available about the scale of fossil fuel subsidies, and they mainly use the price-gap approach to calculate the scale of fossil fuel subsidies. However, the results of these studies are controversial. For example, the IMF measured global fossil fuel subsidies at $5.9 trillion in 2020, or approximately 6.8% of GDP, and projected that they would rise to 7.4% of GDP in 2025 (IMF, 2021), which is quite different from the IEA’s estimation. So, in this section, we mainly focus on reform in the fossil fuel subsidies and its impact, not the scale of subsidies.) In terms of the scale of subsidies in 2020, by sector, the power generation sector receives the most fossil energy subsidies, receiving 61% of the coal subsidies and 33% of the natural gas subsidies; by region, the East Asian and Pacific regions accounts for 48% of total energy subsidies; and by country, China has the most total subsidies, followed by the USA, Russia, India, and the European Union (EU) (IMF, 2021). However, a rebound in the price and use of fossil fuels in 2021 and 2022, combined with indecision on price reform, could raise the scale of subsidies again. Reforms of these subsidies have the potential to address the disadvantages of the current subsidies in multiple ways, yielding significant benefits for the climate, the environment, health, finance, macroeconomics, and human welfare. For example, if the price of energy in 2013 had been fully efficient, global CO2 emissions would have been 21% lower. The global revenue gain from energy price adjustments is estimated at approximately $3 trillion, or the equivalent of 4% of the global gross domestic product (GDP) (Coady et al., 2018). Many countries are implementing or planning to reform fossil fuel subsidies. It is meaningful to evaluate the effectiveness of such reforms and reconsider the measures employed. In this section, we review the literature on fossil fuel subsidies and answer three questions: What are the impacts of fossil fuel subsidies? What are the benefits of fossil fuel subsidy reforms? How can fossil fuel subsidy reforms be successfully implemented? The rest of the chapter is organized as follows. First, we introduce the impact of fossil fuel subsidies. Second, we analyze the benefits of fossil fuel subsidy reforms.

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Finally, we offer some policy recommendations and explore how to successfully implement fossil fuel subsidy reforms.

What Is the Impact of Fossil Fuel Subsidies? Overuse and Waste of Resources The goal of government subsidies for fossil fuels is to lower the cost of fossil fuel production and to control prices for energy companies. However, fossil fuel subsidies have large negative externalities, and government-controlled energy prices (fossil fuel subsidies) distort market fuel prices, which leads to the overuse and even waste of fossil fuels (IMF, 2013). As shown in Table 1, global fossil fuel subsidies are substantial on both the production and consumption sides, and these subsidies contribute, to varying degrees, to waste in fossil fuels in individual countries. Subsidies for energy products can encourage consumers to waste energy because subsidized energy prices do not reflect the true cost of energy and the scarcity of Table 1 Production and consumption subsidies in selected countries and regions Type of subsidy Production

Consumption

Countries Saudi Arabia/Russia/Iran South Africa South Africa Germany UK Russia China China China America Canada Tunisia Lebanon/Yemen/ Egypt/Libya/Syria Nigeria Africa India Kiribati

Type of fuel Oil Electricity Coal Coal Coal Heat Natural gas Heating Coal Electricity Electricity Natural gas and electricity Electricity Kerosene Kerosene Liquid petroleum Gas and kerosene Gasoline and kerosene

Reference Moghaddam and Wirl (2018) Baker et al. (2014) Schmidt et al. (2017) Frondel et al. (2007) Sovacool (2017) Sovacool (2017) Zeng and Chen (2016) Lin and Lin (2018) Li and Li (2019) Ritschel and Smestad (2003) Pineau (2008) Schmidt et al. (2017) Fattouh and El-Katiri (2013) Mills (2017) Piotrowski et al. (2010) Gangopadhyay et al. (2005) Peltovuori (2017)

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natural resources, and consumers have access to energy at extremely low prices without any limits on how much they use. Some countries have consumer subsidies in sectors such as coal and electricity. The California electricity market’s subsidy policy for consumers is a retail price regulation that protects consumers from market price signals but leads to energy waste (Ritschel & Smestad, 2003). In emerging and developing countries, more than half the subsidies result in low electricity prices or high consumption of coal and natural gas. In China, 47.03% of the subsidies in the modern coal chemical industry are excessive, and higher coal industry subsidies lead to wasteful use of coal resources (Li & Li, 2019). In addition, heating prices after subsidization do not reflect the scarcity in heating resource and the negative environmental externalities and therefore lead to waste in heating resources (Lin & Lin, 2018). Subsidized natural gas prices distort natural gas markets by encouraging consumption, thereby increasing energy consumption and related emissions (Zeng & Chen, 2016). Subsidies for gas and electricity in Tunisia have also led to energy waste (Schmidt et al., 2017). Countries such as Lebanon, Yemen, Egypt, Libya, and Syria use tariff cross-subsidization, charging commercial and industrial customers higher electricity prices to subsidize the lower electricity prices charged to individual consumers (Fattouh & El-Katiri, 2013). Consumer subsidies reduce the price of energy, which increased the use of fossil fuels, and production subsidies reduce the incentive for raising energy efficiency. In the UK, coal subsidies prevent producers from developing and using better coal pollution treatment equipment; in Russia, heating subsidies have discouraged firms from repairing leaking steam pipes and investing in better building envelopes (Sovacool, 2017). In the presence of fossil fuel subsidies, producers pursue profit, rather than energy efficiency, leading to wasted energy. In major oil-exporting countries, such as Saudi Arabia and Russia, oil subsidies lower domestic oil prices, and low prices lead to increasing demand and continued growth in domestic oil consumption (Moghaddam & Wirl, 2018). South Africa enjoys the lowest electricity prices in the world because of the overbuilding of generation capacity and low-cost coal contracts in the 1970s and 1980s, but this leads to inefficient use of electricity and coal energy (Baker et al., 2014).

Hindering Economic Growth Fossil fuel subsidies inhibit a country’s economic growth in many ways, and subsidies, as fiscal expenditures, add significantly to fiscal burdens (Mills, 2017). In addition, fossil fuel subsidies may crowd out a portion of public sector spending that would promote economic growth, as in some countries, subsidies are larger than spending on public education and public health (IMF, 2013). Germany’s hard coal subsidy policy has significantly raised public debt with no prospect of profitability, and the multiplier effect would be sizeable if the public funds spent on hard coal subsidies were invested in other sectors (Frondel et al., 2007). Subsidies could also lead to the elimination of nonoil consumption, less efficient allocation of labor across sectors, and other disturbances in macroeconomic variables, and the relative price

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distortions caused by subsidies can cause the majority of welfare losses. Furthermore, the main goal of fossil fuel subsidies in most emerging countries (e.g., Brazil) is to promote industrialization by creating advantages for domestic energy-intensive industries. However, the IMF believes that doing so reduces the competitiveness of the private sector (IMF, 2013). A significantly lower domestic price of fossil fuels in one country than in neighboring countries could lead to smuggling of fossil fuels. In India, from 28–50% of the kerosene supply is smuggled to Bangladesh and sold there at four times the subsidized price. Half the kerosene in Senegal is diverted to diesel vehicles, with a corresponding tax loss of $25 million per year. In Brunei Darussalam, approximately B$one million per month is lost due to smuggling, and large-scale cross-border smuggling of fuel occurs in the Middle Eastern and North African (MENA) region, for example, between Syria and Lebanon and between Tunisia and Libya, due to differences in subsidy regimes between countries. Iran has some of the lowest fuel prices in the world and a high incidence of fuel smuggling (Fattouh & El-Katiri, 2013). Kerosene diversion also occurs in the Nigerian aviation sector (Mills, 2017).

Inequality of Fossil Fuel Subsidies As shown in Table 2, the subsidization of fossil energy in many countries involves severe inequity. Globally, inequality in the distribution of fossil energy subsidies is evident across energy types, with 80% of petrol subsidy benefits enjoyed by the richest 40% of households, whereas these higher-income households receive 65% of the diesel benefits and 70% of the liquefied petroleum gas (LPG) benefits. By region, more than 45% of kerosene subsidies in Africa go to income groups in the top 40%. The share of kerosene subsidies is slightly lower in South and Central American countries because they are not dependent on this fuel and can more easily access electricity and LPG (Piotrowski et al., 2010). The benefits of gasoline and kerosene subsidies in Kiribati go primarily to higher-income households (Peltovuori, 2017). In India, per capita fuel subsidy benefits are higher for wealthy families (mainly for cooking) than for poor families (mainly for lighting), and the LPG and kerosene subsidies are ineffective at increasing the welfare of the poor (Gangopadhyay et al., 2005). The same inequality between rich and poor occurs in Gabon’s invisible fuel price subsidies, which predominantly benefit high-income families; specifically, individuals in the top 10% of income earners receive approximately one-third of the subsidies, while the bottom 30% receive only 13% of the subsidies (Leigh, 2006). A measurement of the distribution of electricity subsidies in British Columbia shows that high-income households use more electricity and therefore receive more subsidies than low-income households (Pineau, 2008). Mirnezami (2014) studied electricity energy equality in Canada by plotting Lorenz curves and calculating Gini coefficients for different Canadian provinces and different fuels; he found that, under

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Table 2 Inequality of fossil fuel subsidies in some countries and regions Countries Africa

Kind of fuel Kerosene

Kiribati

Canada

Gasoline and kerosene LPG and kerosene Gasoline, diesel, and kerosene Electricity

Rwanda

Electricity

Pakistan

Electricity

China

Electricity and heating

India Gabon

Unequal conditions More than 45% of kerosene subsidies fall into the top 40% of income groups The benefits of subsidies are lost primarily to high-income households Subsidies benefit richer households more than poorer households The top 10% of individuals receive about 33% of the subsidies, and the bottom 30% receive only 13% Higher-income households use more electricity and receive more subsidies The top 20% of income earners consume more than 90% of the household electricity and receive more subsidies Households using between 300 and 700 kWh receive seven times more subsidies than those using less than 50 kWh Twenty-two percent of the low-income households receive only 10% of the electricity subsidies, while 27% of the highincome households receive 45% of the subsidies

Reference Piotrowski et al. (2010) Peltovuori (2017) Gangopadhyay et al. (2005) Leigh (2006)

Pineau (2008) Mirnezami (2014) IEA (2014)

Khalid and Salman (2020) Lin and Lin (2018)

electricity price regulation, energy expenditure in Canada is distributed unequally, with low-income households spending less on energy than high-income households. This inequity also occurs in developing countries, where overall the richest 20% of households receive, on average, six times more fuel subsidies than the poorest 20%, and the 40% of the population with the lowest income receive only 15–20% of the fuel subsidies (Arze del Granado et al., 2012). In sub-Saharan Africa, electricity subsidies only reach to wealthy users. For example, in Rwanda, more than 90% of household electricity is consumed by the top 20% of income earners, so subsidies mainly benefit higher-income groups. Khalid and Salman (2020) found that Pakistani households with electricity consumption of 300–700 kWh received seven times more subsidies than those with electricity consumption below 50 kWh. China also has inequality in household electricity and heating subsidies, with 22% of low-income families receiving just 10% of the electricity subsidies, while 27% of high-income families receive 45% of the subsidies (Lin & Lin, 2018).

Increase in Pollution and Carbon Emissions A pernicious environmental impact of fossil energy subsidies is that they encourage heavy use of fossil fuels at the expense of renewable energy, capital, and labor,

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thereby impeding the transition to low-carbon energy sources. Energy overconsumption due to fossil fuel subsidies also affects the environment by raising greenhouse gas (GHG) emissions, such as CO2 and sulfur dioxide (SO2), and thus increases local and global air pollution. For example, electricity subsidies may indirectly affect global warming and pollution, and diesel subsidies can lead to overuse of irrigation pumps, which in turn can cause overplanting of water-intensive crops and accelerate groundwater depletion (IMF, 2013). Solarin (2020) measured the impact of increasing fossil fuel subsidies in 35 emerging and developing countries on the ecological footprint using the generalized method of moments and showed that an increase in subsidies results in a larger ecological footprint. Specifically, a 10% rise in fossil fuel subsidies increases the ecological footprint by 0.3–1.5%. Global hydrocarbon-related activities account for approximately 70% of global GHG emissions, primarily through the extraction, processing, and subsequent combustion of hydrocarbons. In 2020, the coal industry received $18 billion in subsidies, and coal is still a major fuel globally, representing nearly 40% of power generation and more than 40% of energy-related CO2 emissions (IEA, 2021b). Frondel et al. (2007) argue that continued subsidies for hard coal in Germany could contribute significant GHG emissions, particularly from methane, which is more than 21 times more contributory to global warming than CO2. More than half of Turkey’s CO2 emissions come from energy combustion, with the largest amount of carbon emissions from energy combustion for power generation. Turkey’s coal subsidies contribute to climate change, by raising the level of GHG emissions. The continuation in coal subsidies in Turkey will lead to further deterioration of the environment (Acar & Yeldan, 2016).

Hinders at the Development and Use of Clean Energy Technologies Technological changes in the energy industry and changes in market conditions may affect the relative competitiveness of subsidized and nonsubsidized energy sources. Fossil fuel subsidies protect the competitiveness of the fossil fuel industry by safeguarding it from more efficient competitors. However, subsidies hinder the development and adoption of new technologies that are more beneficial for the environment. The fossil fuel subsidy stimulates fossil fuel substitution for renewable energy sources, which hinders the development of renewable energy. Renewable energy is more expensive than fossil fuel because the price of fossil fuels does not include environmental externalities. Subsidies for conventional fuels discourage investment in new clean and carbon-neutral technologies. In addition, the existence of fossil energy subsidies can hinder energy efficiency and cleaner fuel choices, such as the development of new and efficient energy that is not subsidized (Mills, 2017). Subsidies for coal generation cause a reduction in the use of a cleaner fuel – natural gas.

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What Is the Impact of Fossil Fuel Subsidy Reform? Many countries have made reforms in fossil fuel energy subsidies. China, the biggest energy consumer, introduced subsidy reforms, such as a pricing mechanism for refined oil products and a fuel tax in 2009. It also implemented an increasing block tariff strategy for natural gas and electricity as a way to redesign the subsidy mechanism. In 2013, the Chinese government eliminated key coal contracts and the dual-track system for coal prices, with the corresponding elimination of coal subsidies (Wang & Lin, 2014; Li & Li, 2019). In the Middle East, many energy producers also reformed oil subsidies. Morocco and Iran have both undertaken liquid fuel price reforms. In 1995, Morocco began to implement price reforms with a price indexation system that linked domestic price changes to corresponding price fluctuations quoted on the Rotterdam market. In 2013, a new pricing system was introduced for gasoline, diesel, and fuel oil that allowed the transmission of international price changes to the domestic market, and in 2014 subsidies on gasoline, fuel oil, and diesel were eliminated (Verme & El-Massnaoui, 2017). Iran began its price reform in 2010, raising the price of liquid fuels to 90% of the border price over 5 years, and eliminating fuel subsidies in 2015 (Moshiri, 2015). Other African countries have pursued similar energy subsidy reform measures. In Tunisia, because of national budget constraints, a strategy to gradually reduce subsidy spending was implemented starting in 2012, causing an increase in the prices of gasoline, diesel, and electricity that year. Then, in 2014, the government established a new automatic mechanism for gasoline prices, allowing domestic gasoline prices to be aligned with international prices. Egypt implemented fuel price reforms in 2014, when the government announced an increase in the price of all fuels except LPG, along with an increase in the price of natural gas and commercial gas. The implementation of these subsidy reforms has eased fiscal pressure on governments and reduced fiscal expenditures on subsidies. The reduction in subsidies has also curbed unnecessary energy consumption and has had a small degree of positive impact on global carbon emissions, though with some negative impacts on consumers.

Reforms Could Affect the Economic System Impact at the Microeconomic Level The elimination of fossil fuel subsidies will raise energy prices, and higher energy prices will have the greatest impact on energy-intensive industries, especially mining, quarrying, oil production, and natural gas; these increased prices will change the structure of energy use (Sarrakh et al., 2020). The increase in oil prices affects the income of members of the Organization of Petroleum Exporting Countries (OPEC), and the higher profitability of oil production expands the total welfare of OPEC countries. In Algeria, Iran, and Nigeria, policies aimed at creating more rational energy use will allow them to maintain stable production capacity while saving

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enough oil to satisfy future growth in demand. Phasing out fossil fuel subsidies reduces the profitability of fossil fuel investment and energy production for mining and energy companies. Overall, the elimination of fossil fuel subsidies has reduced the demand for energy. Phasing out subsidies gives more effective price signals to consumers and stimulates more energy conservation and energy efficiency measures (IEA, 2021a). Higher energy prices have led to lower energy use in the manufacturing sector in 19 member countries of the Organization for Economic Cooperation and Development (OECD) (Steinbuks & Neuhoff, 2014). Solaymani and Kari (2014) used a computable general equilibrium (CGE) model to study the impact of eliminating energy subsidies in Malaysia, noting that doing so also reduced total energy demand. The Asian Development Bank indicated that fuel subsidy reform in Indonesia would reduce final energy consumption more than 10% by 2030 compared to the baseline scenario. Aryanpur et al. (2022) developed an integrated modeling framework and used energy systems optimization model to analyze the impact of energy subsidy reform in Iran. He found that the elimination of subsidies in the electricity sector there could reduce the total electricity consumption by 22% and that the savings in electricity consumption from this reform, combined with a cost-optimal pathway to electricity generation, could save $69 billion. The elimination of fossil fuel subsidies in Iran led to higher energy prices, and higher-income urban families have reduced their fuel consumption more than other families, though the effect on middle-income families in rural areas has been greater (Moshiri, 2015). Hong et al. (2013) constructed a mixed-material energy input and monetary output model based on monetary input–output tables and energy flow analysis in China in 2007 and simulated the mitigation effects of subsidy reforms. The results show that the elimination of the energy subsidy could reduce final demand in different sectors, with a decline in the cumulative consumption of coal, oil, natural gas, and electricity of 17.74, 1347, 364, and 15.82 million ton of standard coal equivalent, respectively. Transportation fuel subsidy reforms in India and gasoline and electricity subsidies reform in Saudi Arabia have raised energy prices, significantly reducing the use of fossil fuels in both countries because of the extreme price elasticity of these energy sources. Bhuvandas and Gundimeda (2020) calculated the prices and expenditure elasticity of fuel consumption in India by focusing on three uses of fossil fuels: cooking, lighting, and transportation. They found that LPG, kerosene, and electricity needs are strongly correlated in terms of relative prices because they are interchangeable for lighting and cooking. As household income and household size have increased, the proportion of the budget for kerosene has decreased, and the proportion of the budget for electricity and LPG has increased. At the same time, transportation fuels have a highly elastic demand price. Thus, the elimination of transportation fuel subsidies in India could effectively reduce consumption of those fuels.

Impact at the Macroeconomic Level Most researchers use CGE models to measure the macroeconomic impacts of eliminating fossil fuel subsidies, and, in most countries, doing so would increase

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the country’s GDP and improve economic efficiency. In contrast, Bazilian and Onyeji (2012) pointed out that ending fossil fuel subsidies in developing countries that lack fuels and resources could reduce business competitiveness and household income, as well as slow economic growth because of higher prices. The IEA has estimated that, globally, comprehensive fuel price reform would generate a net economic efficiency cost of 1% of global GDP but environmental benefits of 3.1% of GDP, resulting in net economic efficiency gains of 2.1% of GDP (IEA, 2021a). The elimination of subsidies in the member countries of the Gulf Cooperation Council (GCC) could have different impacts on their economies; reductions in energy consumption would reduce GDP in Oman, Qatar, and Saudi Arabia, while ending energy subsidies in Kuwait could raise energy efficiency and economic and environmental sustainability. Breisinger et al. (2019), through CGE model simulations, suggest that cutting energy subsidies might hinder economic growth in Egypt in the short run but, depending on policy measures, could improve the prospects for growth and household welfare in the long run. Gaspar et al. (2019) estimated that, by 2025, 121 emerging market economies and developing countries could generate $3 trillion in revenue through comprehensive energy price reform, which is roughly in line with the increased spending needed to achieve the 17 Sustainable Development Goals (SDGs). In Malaysia’s energy sector, eliminating oil and gas subsidies could increase GDP by 0.65% and increase trade and investment (Solaymani & Kari, 2014). In the MENA countries, the end of subsidies and raising gasoline and diesel prices by an average of 20 cents per liter would enable per capita GDP to increase by approximately 0.48% and 0.30%, respectively (Mundaca, 2017a). With respect to electricity, Burke and Kurniawati (2018) studied the impact of energy subsidy reform on electricity use in Indonesia, where the elimination of subsidies reduces electricity use and improves electricity consumption efficiency while releasing resources for additional priorities, such as infrastructure spending. Ending cross-subsidies in the electricity sector in China would have a positive impact on economic performance (Jia & Lin, 2021). In addition, Bangladesh and the Islamic Republic of Iran could boost GDP and benefit their economies by ending electricity subsidies. However, the elimination of coal subsidies might have an adverse impact on the economy. Acar and Yeldan (2016) applied a general equilibrium model with regional differences to Turkey for 2015–2030 and measured the macroeconomic impact of ending coal production subsidies. Doing so would reduce coal production there by 29%, and real GDP would decrease by 0.17%; the simultaneous elimination of subsidies on coal production and investment would reduce Turkey’s GDP by 0.5% by 2030.

Reform Could Affect Social Welfare Impact on Residents’ Welfare Several studies have found that the elimination of fossil fuel subsidies has an adverse impact on public welfare in most countries. Subsidy reforms and rising prices with no mitigation increase the proportion of household income spent on energy (Pacudan

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& Hamdan, 2019). Using a CGE model, Solaymani et al. (2015) studied the impact of ending fossil fuel subsidies in Malaysia, finding that it would reduce total household income, consumption, and welfare, and the results in other countries, such as Nigeria, India, and Mexico, are similar. Rentschler (2016) estimated the welfare impacts of the elimination of fossil fuel subsidies in Nigeria and showed that it causes price increases that can drive nearly poor households into poverty. This leads to an increase in poverty rates, compared to prereform poverty levels, in the more developed states in Southern Nigeria, where poor and nearly poor households are more dependent on energy subsidies. Nationally, the direct elimination of fossil energy subsidies would raise the poverty rate in Nigeria by an average of 3–4%. Acharya and Sadath (2017) used an autoregressive distributed lag (ARDL) model and error correction model (ECM) to quantify the prices and income elasticities of fossil fuel products in India and found that coal, oil, and gas all have high-income elasticity and low-price elasticity of demand. The impact of the expenditure on and consumption of products such as kerosene and LPG are more significant after fossil fuel subsidies are eliminated; specifically, the nominal household consumption of kerosene and LPG falls whereas expenditure rises significantly, which reduces public welfare. Moshiri and Santillan (2018) analyze the effects of fuel price shocks on public welfare by income level due to Mexico’s fossil energy subsidy reform. They quantified the change in utility in the indirect utility functions and found that the increase in energy prices had little impact on the utility of the high-income groups and middle-income groups but a larger impact on the utility of the lowincome group. Specifically, the welfare impact of the price changes on the low-income group is nine times greater than that of middle-income families and 18 times greater than that of higher-income families. In energy sectors, higher prices for natural gas have the largest welfare impacts on the population, followed by the power and gasoline sector, mainly because natural gas is the primary type of energy used by Mexican households, especially for cooking and heating water.

Impact on the Interests of the Poor Fossil fuel subsidies are used to guarantee energy access to the poor, and the elimination of subsidies means the poor lose more than do the rich. Lin and Kuang (2020) used an expenditure structure index, affordability index, and input–output price model to examine the direct and indirect heterogeneous effects of ending fossil fuel subsidies on household welfare in China. In terms of direct impacts, ending subsidies for electricity and natural gas has a larger impact on poor households and ending subsidies for transportation fuels has a larger impact on high-income households. However, wealthy households can more easily afford the higher prices that result from the elimination of subsidies, but poorer families might not be able to afford them, which would have a severe impact on household welfare. In terms of indirect impacts, the impact on households of eliminating fossil fuel subsidies depends not only on the income level but also on the energy consumption level, and phasing out these subsidies has the largest impact on low-income households. Bhattacharyya and Ganguly (2017) used a CGE model to study the impact of the elimination of cross-subsidies in the electricity sector on public welfare in India and

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found that doing so caused inflation, especially in food prices, which could reduce household income; rural households spend on food takes up a larger share of household expenditure, and therefore ending subsidies has the most severe impact on low-income households in rural areas. Gangopadhyay et al. (2005) studied the impacts of ending LPG and kerosene subsidies on public welfare in India, finding a smaller impact from ending subsidies on LPG than from doing so on kerosene. As a fuel, kerosene is of poor quality but has a low price, and 50% of India’s rural households rely on kerosene mainly for lighting. Households that use kerosene for lighting have difficulty obtaining adequate and reliable sources of electricity, so when kerosene subsidies end, these poor rural households suffer a significant economic shock and welfare loss. Overall, although ending subsidies is the only way to curb the rapid growth of fossil fuels, doing so in India has a significant impact on public welfare because it raises the price for fuels on which rural residents depend; the welfare of households at all income levels is affected, but has the most negative impact is felt by poor rural households (Bhuvandas & Gundimeda, 2020).

The Impact of Increasing Block Tariffs on Consumer Welfare The elimination of fossil fuel subsidies often results in a loss of social welfare, especially for the poor. More countries therefore prefer to implement a better subsidy policy for consumers; in particular, a policy called increasing block tariffs (IBT) is widely used, which can improve efficiency and fairness to some extent and reduce energy waste while trying to protect the interests of the poor (who have lower energy consumption) (Pacudan & Hamdan, 2019). IBT, also known as increasing block pricing (IBP), is a type of nonlinear pricing that is commonly used in the pricing of electricity and natural gas (Liu & Lin, 2020). In contrast to the policy of declining block tariffs (DBT), which is typically used for promotional pricing and is suitable for conditions in which costs are declining, IBT is used to discourage greater use and accommodate rising costs. IBT regimes have been adopted worldwide for natural gas and electricity pricing, and, since the oil crisis in the 1970s, the USA, Japan, India, South Korea, and Malaysia have all implemented IBT systems for consumers. The design of residential IBT consists of three parts: the number of tiers, the boundary volume of each tier, and the corresponding tariff for each tier. The design of the number of tier and the division of each tier vary from country to country (region to region) because of differences in income and the level of residential electricity consumption. Theoretically, greater income disparity among consumers should lead to the use of more tiers in order to ensure efficiency in income redistribution. IBT is currently used in some countries or regions with a low level in the first tier and a large difference in electricity prices (Lin & Jiang, 2011). For instance, the residential electricity tariff structure in Florida has three tiers using a ratio of 1:2.5:3.8, the structure in Taiwan has five tiers and a ratio of 1:1.4:1.9:2.1:2.4, and in South Korea, six tiers and a ratio of 1:2.1:3.1:4.5:6.7:11.6. Under certain conditions, IBT could enhance fairness while maintaining revenue neutrality and preserving economic efficiency. In China, which uses IBT for electricity, the relationship between household income and IBT shows that middle-

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income families are more sensitive than high-income families to the price of electricity and use more of it than low-income families; therefore, middle-income households are affected by IBT more than high- and low-income households (Liu & Lin, 2020). At the same time, IBT significantly reduces the total amount of electricity used by high-income groups in China (Hu et al., 2022). Because low-income families are sensitive to increases in the price of electricity, a higher tariff threshold puts a higher burden on low-income families, particularly in rural areas. Therefore, the price of the first tier in developing countries is set at a relatively low price as a subsidy to satisfy demand for basic electricity by the poor, which is also known as a “lifeline” tariff (He & Reiner, 2016). The IBT system enables the redistribution of subsidies across the population, which increases the welfare of most poor consumers and can largely offset the negative effects of subsidies. After the introduction of an IBT policy, welfare losses and electricity expenditures for nonpoor households in Brunei both rose, and IBT protected low-income families from the potential impacts of eliminating the subsidies for electricity (Pacudan & Hamdan, 2019). In China, the adoption of an IBT system to replace the previous single-price system for residential gas was expected to improve the efficiency of the residential gas subsidy mechanism and shift subsidies from high-income to low-income groups, with a reduction in the Gini coefficient from 0.49 to 0.40; this confirms that price reforms have the potential to increase energy equity by reshaping energy consumption patterns (Gong et al., 2016). However, in some countries, IBT policies still leave a gap between rich and poor in terms of subsidies, and IBTs might not reduce poverty. Cardenas and Whittington (2019) measured electricity data in Ethiopia after the introduction of IBT in 2015–2016 and concluded that the richest 20% of families received 37% of the subsidies, whereas the poorest 20% received only 7%. The IBT policy in Mexico resulted in a subsidy allocation that gives wealthy households a larger reduction in electricity expenditures (Hancevic & Lopez-Aguilar, 2019). The IBT used in Pakistan electricity policy, implemented in 2011, mitigated inequity in the distribution of subsidies, but wealthy households still receive more subsidies (Trimble et al., 2011). With respect to energy efficiency in China, a large amount of electricity covered by the IBT policy is designed to be in the first tier with the lowest price, comprising a large share of consumers, which prevents it from being effective for reducing their consumption in the electricity market and offers limited potential for overall energy savings (Lin & Jiang, 2011). However, in the increasing-block pricing mechanism used for natural gas, a large share of the three-tier residential ratio structure encourages an increase in efficient natural gas use and saves energy (Liu and Lin, 2018). In addition, the high pricing block in the IBT restricts only households with higher energy use and has limited energy savings overall Table 3.

Reform Could Affect Carbon Emissions and Air Pollution Fossil fuel subsidies have caused overuse of fossil fuels, which in turn generates significant CO2 emissions as well as air pollution. The IEA projects that raising fuel

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Table 3 IBT policies implemented in some countries and regions Country Brunei

China

Type of subsidy Electricity

Natural gas

Electricity

Ethiopia

Electricity

Mexico

Electricity

Pakistan

Electricity

Policy impacts Increases welfare losses and electricity costs for nonpoor households but protects low-income households Improves equity in energy use by shifting subsidies, which could reduce the Gini coefficient A large share of the three-tier residential ratio structure encourages an increase in efficient natural gas use and saves energy Middle-income households are more likely to be incentivized to save electricity The first block of the lowest price results in a lack of effectiveness IBT significantly reduces electricity use by high-income groups The large amount of electricity and subsidized prices in the initial blocks may lead to oversubsidization The richest 20% of households receive 37% of the subsidy, while the poorest 20% receive only 7% Wealthy households have a larger reduction in electricity expenses Wealthier households receive more subsidies

Reference Pacudan and Hamdan (2019) Gong et al. (2016)

Liu and Lin (2018)

Liu and Lin (2020) Lin and Jiang (2011) Hu et al. (2022) He and Reiner (2016)

Cardenas and Whittington (2019) Hancevica and LopezAguilar (2019) Trimble et al. (2011)

prices to effective levels will reduce global CO2 emissions from fossil fuels by 32% from the emissions level in 2018 (IEA, 2021b). The elimination of fossil fuel subsidies is seen as a path for reducing carbon emissions, but it has had a negative effect in some countries, and carbon emissions have increased, rather than decreased, in others (IMF, 2013). In several cases involving the elimination of subsidies for refined oil products in Ghana, and cross-subsidies for electricity in China, no reductions in carbon emissions were observed. Wesseh and Lin (2017) used a CGE model to measure the impacts of eliminating subsidies for refined oil products in Ghana and found that ending subsidies for refined oil imports there would increase energy use, which in turn would increase the CO2 emissions in the short term. Jia and Lin (2021) use a dynamic CGE model to simulate the elimination of cross-subsidies in the Chinese power market, and the simulation results showed that doing so could have negative impacts on reducing CO2 emissions. Durmaz et al. (2020) measured energy demand among consumers in Hong Kong under electricity subsidies. When the government implemented electricity tariff reduction policies, residential electricity use was unresponsive to changes in electricity prices and household income; therefore, the climate policy aimed at lowering power consumption by increasing electricity prices

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had a minimal impact on reducing carbon emissions. Because China has higher energy subsidy rates for oil and natural gas than for coal, when fossil fuel subsidies are eliminated, more high-carbon coal is used to replace low-carbon oil and natural gas, which leads to an increase, rather than a decrease, in CO2 emissions. In some countries, such as Malaysia, India, and Turkey, the elimination of fossil fuel subsidies has a positive effect on reducing carbon emissions. The ending of fuel subsidies in Malaysia to decrease energy demand and thus carbon emissions is measured with the CGE model, and the elimination of oil and gas subsidies alone can reduce carbon emissions by approximately 1.84–6.63% (Solaymani & Kari, 2014). Acar and Yeldan (2016) applied a general equilibrium model with regional differentiation for 2015–2030 to study employment, investment, welfare, and trade in Turkey, finding that it can reduce its total gas emissions by 5% by ending coal subsidies, without significantly reducing GDP. Lam et al. (2016) estimated that 60% of the PM2.5 emissions in India come from using kerosene for lighting, so energy subsidy reforms there would also reduce PM2.5 emissions. PM2.5 emissions in India would also be reduced by replacing kerosene with solar power. At a global level, the elimination of fossil fuel subsidies is beneficial in reducing CO2 emissions. Mundaca (2017b) estimated that a reduction in gasoline and diesel subsidies of approximately 20 cents per liter would cause huge reductions in CO2 emissions in the MENA region and all over the world. Chepeliev and Mensbrugghe (2020) analyze the impact of subsidy elimination in 25 countries with high fossil fuel subsidies and found that most subsidy providers experienced significant reductions in GHG emissions; the elimination of fossil fuel subsidies leads to a reduction in electricity-related emissions but an increase in other sectors, mainly livestock, trade, and transport, and other services. Sarrakh et al. (2020) measured the impacts of eliminating fossil fuel subsidies in Saudi Arabia on CO2 emissions through an input–output model and found that the full elimination of fossil energy subsidies could decrease Saudi Arabia’s total CO2 emissions by 1.89%, with most of the reduction coming from the removal of fuel oil and natural gas subsidies. For example, eliminating fuel subsidies would reduce consumption by 8.8 million tonnes and reduce carbon emissions by 3.31 billion kilograms, while eliminating natural gas subsidies would reduce consumption by 738.108 million BTU and reduce carbon emissions by 39.9 million tonnes. Coady et al. (2017) estimate that a 50% reduction in oil subsidies alone would cut global CO2 emissions 14–17%. The OECD also suggested that ending fossil fuel subsidies could reduce global GHG emissions 10% by 2050.

Reforms Could Stimulate Development of Clean Energy The elimination of fossil fuel subsidies and the use of renewable energy both aim to reduce carbon emissions and will promote the development of renewable energy technologies. By eliminating distortions in price signals, subsidy reforms could help reallocate resources to the most efficient areas and encourage the development of energy-efficient technologies (IMF, 2013). Diaz Arias and van Beers (2013) used

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data on energy technology patents in OECD countries from 1990–2006 and determined empirically that when subsidies on fossil fuels end, large energy users (e.g., commercial and industrial users) incur higher electricity prices than the residential sector, which can stimulate technology growth for renewable energy, especially solar energy. Reforms in fossil fuel subsidies in higher-income countries could set the right conditions for a steady transition to low-carbon energy, and the revenue from ending these subsidies could be used by governments to subsidize green investment in energy, such as for solar panels, thereby facilitating a shift in investment to the production of low-carbon energy.

Conclusion and Policy Recommendations In this section, we conclude by discussing the impact of fossil fuel subsidies as seen in the previous literature. Specifically, subsidies cause excessive use of fossil fuels, wasting resources, increase the fiscal burden on governments, lead to smuggling of fossil fuels among some countries, are distributed unequally among rich and poor, increase CO2 emissions, and discourage the use and development of clean energy. These impacts are demonstrated by various examples of reform in fossil fuel subsidies. These reforms can gradually alleviate the problems caused by subsidies. The rise in fuel prices after the elimination of subsidies might encourage the efficient use of fuel while benefiting a country’s GDP, reduce public welfare overall while protecting the interests of the poor, and reduce carbon emissions while promoting the development of clean energy. These conclusions enable us to answer the question: How can reforms in fossil fuel subsidies be implemented successfully?

Specific Reforms in Fossil Fuel Subsidies Need to Be Aligned with Local Conditions The method used in one country to reform fossil fuel subsidies cannot be simply replicated in another country because of cross-country differences in economic and other conditions. Examining data on electricity market reforms in 63 countries in 1982–2009, Erdogdu (2011) found that the implementation of electricity market reforms can have different impacts in different countries, which means that the particular approach to reform in one country cannot be applied easily in another similar country; in particular, replicating successful electricity market structures in developed countries might not guarantee positive economic results in developing countries. The diversity in fuel use in the Middle East and North Africa suggests that no single reform can be applied universally to all countries in the region (Fattouh & El-Katiri, 2013). Different sectors (especially the industrial sector, commercial sector, and residential sector) in each country have different levels of elasticity of demand, so the reforms need to be appropriate in each sector, as fully eliminating fossil fuel subsidies is not necessarily the best way. Wang and Lin (2014) used the price-gap

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approach to study consumer subsidies for natural gas in China, in which industrial sectors receive the largest subsidies. The prices of alternative energy sources and their affordability in the sector need to be fully considered when the natural gas terminal price is reformed and the subsidy mechanism for each sector is developed. In an export-oriented economy, cross-subsidies in the electricity market, including subsidies from high-voltage customers to low-voltage customers and from industrial and commercial customers to residential and agricultural customers, should not be eliminated arbitrarily (Jia & Lin, 2021). Examining the prices and income elasticity of electricity demand across four major consumption categories (agricultural, commercial, industrial, and household) for two major power utilities (a public utility and a private utility) in West Bengal, India, the elasticity of electricity demand varies significantly across groups and that complete elimination of the cross-subsidy policy might not be a good option. Fossil fuel subsidy reforms can be sequenced among different energy products to reduce the impacts of fuel price increases on low-income groups. In China, reducing coal subsidies is more feasible than reducing oil subsidies across the board, suggesting that fossil fuel subsidies should be implemented gradually, with cuts first in coal, followed by cuts in oil subsidies. However, the sequencing of energy price reforms is limited because over time large price differences between energy products can lead to inefficient substitution between fuels and fuel adulteration, such as petrol-driven vehicles using diesel fuel and mixing diesel and kerosene (Coady et al., 2018). For example, in Turkey, when subsidies were cut, cars were converted to use LPG, leading to a sharp increase in LPG consumption, so Turkey reduced LPG subsidies more rapidly than planned.

Consumers Need to Be Compensated for the Loss of Welfare One of the roles of fossil fuel subsidies is to guarantee access to energy for poor households. But when fossil fuel subsidies are reformed, energy prices increase, and the fact that poor households might not have the same easy access to energy as before needs to be considered. Therefore, compensating energy users for using alternative sources can mitigate the negative impact on public welfare due to subsidy reform. Direct compensation to consumers along with fossil fuel subsidy reforms could yield a net benefit (Breton & Mirzapour, 2016). This compensation could take the form of a lump sum cash transfer equivalent to the subsidy, which would significantly increase the total welfare. One advantage of adopting targeted cash transfers as compensation for subsidy reform is that they do not limit the scope of consumption by beneficiaries; they do not have to spend the compensation on energy and can use financial assistance as they wish. In addition, cash transfers can avoid wasteful energy consumption. However, implementation of this scheme has limitations because it is difficult for the government to determine the income level of the beneficiaries and to distinguish between rich and poor (Sarrakh et al., 2020).

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Ideally, countries should use a targeted cash transfer program or quasi-cash transfers (vouchers) to reduce the negative impact of fuel price increases on the poor (IMF, 2013). For example, in 2005, Indonesia implemented an unconditional cash transfer program that included 19.2 million families, or 35% of its population, which not only assists poor families but also prevents near-poor families from falling into poverty. The success of the 2005 Indonesian subsidy reform was attributed to the government’s development of specific welfare programs to compensate poor families for rising prices (IMF, 2013). Armenia implemented a targeted cash transfer system, known as the “poor family allowance,” and Iran’s early reform success also owes much to the country’s electronic cash transfer program established before the fuel price hike (Coady et al., 2018). Cash transfers provide recipients with the flexibility to buy the amount and type of energy that best meets their needs and eliminate the need for direct government involvement in distributing subsidized energy to households. In Kuwait, using cash transfers to compensate for the loss of users due to subsidy reductions, where the amount of the subsidy is equal to the total reduction in subsidies, reduces the negative impact on the economy; in addition, CO2 emissions fall, and GDP and household welfare rise (Gelan, 2018). Farajzadeh and Bakhshoodeh (2015) assumed that subsidy reform in Iran would be carried out through the redistribution of all subsidy revenue to households with proportional distribution to families and producers, and they show that eliminating energy subsidies through resource redistribution reduces GDP by at least 15% relative to the initial equilibrium, while inflation tends to rise more than 10% over the initial level. However, redistributing a portion of the subsidy revenue to households can improve total welfare. In addition, transferring cash to the public sector benefits the country’s economy. The elimination of fossil fuel subsidies in Saudi Arabia, along with targeted cash transfers to the social and health sector, would have a positive impact on much of its economy, with the exception of sectors that rely heavily on energy (Sarrakh et al., 2020). Some countries that could not implement cash transfers adopted alternatives to reduce the economic impacts of the increase in energy prices on low-income families are Gabon, Ghana, Niger, Nigeria, and Mozambique, in which targeted social spending programs were implemented during the kerosene subsidy reforms, and Armenia, Brazil, Kenya, and Uganda, where lifeline tariffs were maintained during the electricity reforms while targeting high-consumption households (Coady et al., 2018). The Philippines offers university scholarships to lower-income students, finances loans to convert engines used in mass transit to lower-cost LPG, and subsidises electricity for poor families. In 2008, after the price of oil rose in Mozambique, the government increased budget allocations for a range of social protection programs, including direct social support and community development. Indonesia raised the price of domestic petroleum products in March and October 2005, and again in 2008, more than doubling the total price. During both price increases, the government implemented a temporary cash transfer program, reallocating a portion of the budget savings from reduced subsidies to education,

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health, and infrastructure programs, which increased welfare for middle-income households. At the same time, Indonesia raised the minimum wage and gave one-time bonuses to low-income government employees and retirees. A national safety net program was successfully implemented to improve the welfare of the residents, with the help of the World Bank (Piotrowski et al., 2010).

Implement Targeted Subsidies for Consumers After the Elimination of Cross-Subsidies Energy sectors from heat to electricity generation have received large crosssubsidies, which can be understood as a cross-subsidy between consumers and producers. In many countries, cross-subsidization is used to improve consumer welfare; however, in many countries, its implementation shows that it is inefficient in accomplishing that goal. The subsidization of electricity prices for consumers with industrial electricity prices in India is inefficient and thus suboptimal as a subsidy policy. In 2003, India began to envisage phasing out cross-subsidies, which would mean charging based on the average cost of supply per class of consumers. Doing so would increase the tariffs for individual and agricultural consumers while decreasing them for industrial and commercial consumers. Although China has implemented electricity subsidy reforms, a large amount of residential electricity cross-subsidy remains, which reduces consumer welfare (Lin & Wang, 2020). In addition, China’s electricity cross-subsidies have regional variations, so the distribution of subsidies is not equitable. Cross-subsidies for heating are normal in developing and transition economies. In China, the rich have a larger floor area than the poor, which enables the rich to use more heat and enjoy more in subsidies. Only a minuscule proportion of the urban poor receive a small heating subsidy, and residential consumers receive more subsidies than nonresidential consumers; however, heating subsidy reform can lead to a net loss of economic welfare for poor and low-income households (Lin & Lin, 2018). Cross-subsidization has negative effects. First, it has large distributional disadvantages; richer residents use more energy and receive more subsidies than poorer residents, which leads to inefficiency and inequity in cross-subsidization. Second, cross-subsidization increases the cost of business, as reflected in the primary cost of goods and services. However, the complete elimination of a cross-subsidy decreases public welfare and the benefits for the poor. Eliminating energy subsidies for all households would set the economy and welfare back, but subsidies need to be reformed such that they are differentiated by household income if they are to improve outcomes. If electricity cross-subsidies are eliminated, and targeted subsidies are implemented based on residential electricity consumption, the efficiency of residential electricity consumption will rise, and expenditures on subsidies will decline; both impacts will also help to reduce electricity costs and improve the welfare of socially disadvantaged groups (Khalid & Salman, 2020).

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Subsidy Shift from Conventional Fossil Fuels to Cleaner Energy If the economic value of energy efficiency and emission reduction is considered, renewable energy subsidies might have greater unit economic benefits than fossil fuel subsidies (Ouyang & Lin, 2014). Therefore, shifting subsidies from conventional fossil fuels to renewable or clean energy sources might have more economic, environmental, and social benefit. The Global Subsidies Initiative (GSI) uses the term “subsidy swap” to describe the elimination of fossil fuel subsidies in exchange for subsidizing clean fuels, which it might be more beneficial in many countries. Li et al. (2017) stated that using a subsidy swap would be more effective in China than ending fossil fuel subsidies alone. Countries that have implemented reforms successfully have done so primarily by reducing subsidies for inefficient and polluting fuels, such as kerosene, and shifting to subsidizing cleaner energy, such as LPG. This is the approach taken by Indonesia: Starting in 2007, it phased out kerosene subsidies and slightly increased subsidies for LPG over several years, with a significant shift from heavy kerosene use to LPG as a cooking fuel. Doing so not only reduced the financial burden but also improved energy efficiency and convenience and reduced the cost of fuel for household cooking (Lam et al., 2016). In 2008, the Indonesian government offered consumers a free “starter” kit, consisting of an LPG fuel tank, a stove, and accessories. Throughout the energy subsidy reform period, it employed facilitation measures, which were important factors in the success of the reform. In 2014, the Moroccan government eliminated subsidies for gasoline, fuel oil, and diesel; by January 2015, the only energy subsidy that remained was for LPG (Verme & El-Massnaoui, 2017). LPG subsidies in Latin America have contributed significantly to the shift by households from solid fuels to clean LPG.

It Is More Effective to End Fossil Fuel Subsidies Gradually Than All at Once Phasing out subsidies over time significantly reduces the burden on households compared to sudden elimination, and phasing out subsidies as well as gradually reducing tariffs further reduces the subsidy burden. Moreover, the burden on the poor of subsidy elimination can be substantially reduced if the gradual reduction of subsidies is complemented by progressive liberalization of trade. Since the 1990s, Brazil and Namibia have used progressive reductions in energy subsidies as a form of reform, which helped to defuse public and political opposition. In the Middle East, countries such as Bahrain, Egypt, Kuwait, Iran, Oman, Qatar, Saudi Arabia, and the United Arab Emirates also began reducing subsidies as a part of a program to phase them out (Fattouh & El-Katiri, 2013). India, Indonesia, and Malaysia successfully used a step-by-step approach to price reform. India’s fuel subsidy reform strategy began with the elimination of gasoline subsidies in 2010, followed by a gradual reduction in diesel subsidies via small monthly price increases until the subsidies fully ended in November 2014.

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One factor that hinders subsidy reform is public opposition. When a fossil fuel subsidy reform that permits energy prices to increase in steps over months or even years is rolled out gradually, the public finds it easier to accept price changes and is less likely to create political unrest, thereby guaranteeing the success of the reform (Sarrakh et al., 2020). The gradual elimination of fossil fuel subsidies gives consumers and businesses time to make investments in fuel efficiency to offset the adverse effects of further price increases and reduce the annual inflationary impact of higher energy prices (Coady et al., 2018).

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Fei Wu, Dayong Zhang, and Xiaolei Sun

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Macro- and Microeconomic Foundations of Oil and Gas Market Reform in China . . . . . . . . . . Macroeconomic Theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Microeconomic Theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of China’s Oil and Gas Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The First Stage: Establishment and Initial Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Second Stage: Delegation of Powers and Profit Shifting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Third Stage: Marketization and Pricing System Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Fourth Stage: Continued Marketization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Fifth Stage: Development During the New Normal Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stylized Facts, Challenges, and Options in China’s Oil and Gas Market Reform . . . . . . . . . . . . . Switching from a Traditional Top-Down Reform to a Market-Led Reform . . . . . . . . . . . . . . . Mitigating Oligopolistic Dominance in China’s Oil and Gas Sector . . . . . . . . . . . . . . . . . . . . . . . From Administrative Regulation to Better Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . Immature Price Formation Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pandemic-Induced Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Evaluation of China’s Oil and Gas Market Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Efficiency Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Equality and Social Welfare Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Risk Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Sustainability Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oil Pricing Mechanism: China’s Crude Oil Futures Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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F. Wu · D. Zhang (*) Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China X. Sun Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_13

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Abstract

Crude oil is a key part of modern industry, and the establishment of the oil sector has significantly contributed to economic advances in China. Building from scratch, China established a comprehensive system, serving the massive demand arising from the country’s phenomenal economic growth. The current system is the consequence of a series of reforms and the reforms continue. In this chapter, we review the history of China’s crude oil market, paying special attention to the evolution of pricing policies. The current challenges in China’s oil sector and possible solutions are also discussed, in view of the ever-increasing dependence on the international oil markets and complexity of the global oil system. A systemic perspective is needed in reviewing and evaluating the pros and cons of oil and gas market reform policies. The evaluation should be based on four major criteria: efficiency, social welfare, risk, and sustainability. Although most extant studies focus on only one of those criteria, a sound policy evaluation system should cover all these dimensions and assess major strategic decisions from a systemic perspective. Keywords

China · Oil market · Pricing policy · Reform

Introduction In China, the oil industry plays a critical role in supporting and sustaining socioeconomic development. On the demand side, the rapid growth in China’s domestic economy since the 1990s dramatically increased oil consumption (see Fig. 1). At the end of 2020, oil consumption accounted for 18.9% of total primary energy consumption in China, and this share is expected to grow steadily in the next few decades (Chen et al., 2020). This high and increasing demand for oil requires stable sources of oil supply. To satisfy this growing oil demand, China has become the world’s largest oil importer as well as the seventh-largest producer (Ji & Zhang, 2019b). China faces severe challenges in its domestic oil sector, due to increasing environmental pressure during the transition to green energy, international trade disputes and unsteady international trading relationships, and structural changes caused by the central government’s initiatives aimed at shifting to a “new normal” economy. Over the past two decades, China’s imports of crude oil have steadily grown, and in 2016, it became the world’s largest oil importer. The country’s oil sector has a high level of external dependency, making it excessively prone to the risk dynamics and spillover from the global oil market. Most of the domestic petroleum market is controlled by three major state-owned oil companies under an administrative monopoly, but this market structure has led to a lack of internal competition and severely hindered the market from forming a

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Fig. 1 Total consumption of oil and its share in China. (Source: National Bureau of Statistics, China)

flexible and competitive environment. Excessive government protection may also prevent the large state-owned oil companies from pursuing technological development, as these well-protected state companies usually lack the motivation to reduce costs through technological progress (Wen et al., 2018). Despite the ongoing reforms and policy updates that aim to promote the level of marketization, these critical issues remain unaddressed. China’s oil and gas markets have experienced reforms for decades to address the lack of marketization, and they have become increasingly mature (Ji et al., 2021). The ongoing marketization reform seeks to improve the institutions and mechanisms as well as market access and risk supervision in China’s oil and gas markets, which are susceptible to frequent risk transmission from global market shocks and increasingly severe oil price fluctuations in recent years. For example, China’s National Energy Administration (NEA) issued Measures for Regulation of Fair and Open Access to Oil and Gas Pipeline Facilities in May 2019, which allows third-party users’ “fair and open access” to oil and gas pipe network facilities; this is aimed at providing open access, breaking up the natural monopoly in the midstream oil sector, and further supporting development of a fair regime in China. This chapter focuses on marketization reform in China’s oil and gas sector and discusses the criteria for evaluating the effectiveness of the ongoing market reform and policies. Oil and gas, like other forms of energy, should be considered factors of production and play a significant role in boosting economic development. Therefore, reforms not only concern development and policy design but are essentially an economic problem. It is important to analyze and understand the underlying market characteristics and pricing mechanisms that can improve market efficiency and institutions from both macro- and microeconomic perspectives.

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Central to China’s marketization reform of the oil and gas sector is the reform of energy pricing mechanisms. Previously, the refined oil price was set by a local government, but it has become more linked to the dynamics of international crude oil prices. For example, following the domestic product pricing mechanism reform in 2009, price adjustments in refined oil prices are triggered when the moving average price of international crude oil fluctuates beyond 4% of the established price over 22 consecutive working days. After this time frame was shortened to 10 days, and the 4% band was removed by the marketization reform in March 2013, domestic oil prices in China were allowed to change more frequently. Then, in 2015, China’s State Council released Several Opinions on Promoting the Price Mechanism Reform, which deregulates oil prices in order to link them to intrinsic value and further reduce distortions in energy prices (Li & Lin, 2015), thus eventually resolving the problem of unbalanced oil supply and demand. Prior studies have empirically examined the effects of oil price reforms on China’s economy. Examining oil-related industries in China, Li and Lin (2015) find evidence that the oil price reform mainly affects the transport, storage, and post sectors, and suggest that policy makers should prioritize oil price reform because of its significant contribution to energy savings and emissions reduction, exceeding that of other sources of energy. Lin and Liu (2013) find a rebound effect in passenger transport caused by China’s refined oil product pricing mechanism, but this effect can be reduced through reforms in the pricing mechanism. Wen et al. (2018) focus on the effect of China’s oil price reform in 2013 on stock market aggregate and sectoral returns. They find that financial market uncertainty decreased after the introduction of the market-oriented pricing mechanism, and sectoral stocks have been more sensitive to oil price adjustments since the reform. To ensure that the oil pricing mechanism reform contributes to sustainable economic development, it is necessary not only to empirically study the diverse effects of the marketization reform on the economy but also to critically review and understand the underlying economic theories that have guided and directed the oil and gas market reform, as well as to establish a sound evaluation system of the effectiveness of the policy measures. Few studies, however, have comprehensively reviewed the related theories and applied them to evaluate the design and development of China’s oil market reform. To fill this gap, this chapter starts with a review of macro- and microeconomic theories that laid the theoretical foundations for the design and evaluation of China’s oil market reform. It summarizes the key stages in the development of China’s oil and gas sector and identifies the most critical issues that emerged in each stage. On this basis, this chapter analyzes the major challenges posed in ongoing market reform and proposes measures and criteria for deepening the reform and evaluating the effectiveness of related policies and regulations. We argue that a systematic perspective is needed when reviewing and evaluating the oil and gas market reform policies, mainly based on four key criteria: efficiency, social welfare, risk, and sustainability. Most existing studies focus on only one of those four aspects, but a sound policy evaluation system should assess critical strategic decisions from a systematic perspective. Such a system should be able to offer timely feedback to policy makers. The discussion on establishing and

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improving such a system in this chapter seeks not only to shed light on domestic energy market development but also to be generalizable to other economies, especially emerging markets, as an example for improving the level of marketization and maturity of energy systems in a wider context. The remainder of this chapter is organized as follows. Section “Macro- and Microeconomic Foundations of Oil and Gas Market Reform in China” reviews the dominant macro- and microeconomic theories on oil and gas market reform in China. Section “Development of China’s Oil and Gas Sector” briefly reviews the development of China’s oil and gas sector, highlighting the most critical changes and characteristics in each of the five stages. Section “Stylised Facts, Challenges, and Options in China’s Oil and Gas Market Reform” presents the stylized facts on China’s oil and gas sector and discusses the largest challenges in the process of the market reform. Section “Policy Evaluation of China’s Oil and Gas Market Reform” discusses the criteria for evaluating the effectiveness of reform and policies. Section “Oil Pricing Mechanism: China’s Crude Oil Futures Market” introduces and reviews China’s recently launched crude oil futures contracts and their development. The last section concludes and offers policy implications.

Macro- and Microeconomic Foundations of Oil and Gas Market Reform in China Macroeconomic Theories The earliest discussion of energy pricing from an economic perspective traces back to Hotelling’s rule (Hotelling, 1931), which states that because oil is an exhaustible natural resource, the growth rate of its price should equal the real interest rate (or the discount rate) when the market is in a state of equilibrium. When the growth rate of oil prices is higher than the real interest rate, owners of the resource tend to reduce the speed of extraction and wait until oil prices rise in order to reap greater profits. This reduces oil supplies in the market, and thereafter oil prices rise and growth in oil prices slows. But when the real interest rate exceeds the oil price growth rate, the oil companies accelerate extraction and increase oil supplies. Then, oil prices fall as a result of the increase in supply, which raises the rate of growth in the price. In both cases, the market ultimately achieves equilibrium such that the oil price growth rate equals the real interest rate. This simple principle was not widely recognized by scholars until after the oil crisis in the 1970s (Devarajan & Fisher, 1981). Since then, it has been considered a cornerstone for frameworks that analyze energy and economic growth. Oil shocks, induced by geopolitical events or conflicts, natural disasters, currency risks, or severe changes in supply and demand fundamentals, can lead to excessive volatility in oil prices and significantly harm the broader economy (Frei, 2004). Hamilton (1983) provides the first empirical evidence of the negative impacts of oil shocks on output and employment in the USA. This study attracted wide attention in academia and is one of the most influential studies on oil price shocks. Oil price

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shocks have had profound and far-reaching impacts on Western developed economies and are seen as having directly caused economic recessions, high inflation, and productivity slowdowns in the USA (Kilian, 2014). Macroeconomic theoretical models generally treat oil price changes as exogenous shocks. These shocks can adversely affect economic growth through two potential mechanisms. The first is through lowering household purchasing power and affecting household non-energy expenditures (Hamilton, 2009) as a result of increased oil prices, therefore reducing aggregate demand. The second mechanism is through increasing production costs, thus depressing aggregate supply. In this framework, oil, alongside capital and labor, is treated as an input factor in the production function to calculate its effect on output. For example, Kim and Loungani (1992) incorporate energy input into the traditional business cycle theory model, thereby introducing exogenous energy price shocks to the model. They find that energy prices can explain 16% of output fluctuations under the assumption of constant returns to scale, and its explanatory power can reach 35% under the assumptions of the Cobb-Douglas production function. The economic impacts of oil prices are also exerted through several indirect channels (Kilian, 2014). First, oil price shocks can lead to redistribution of resources across sectors (Hamilton, 1988), as well as changes in consumer preferences and the composition of demand. One example is that oil shocks in the 1970s shifted US consumer demand from standard-size cars to smaller and lighter cars (Bresnahan & Ramey, 1993), which then largely drove rapid development in the Japanese automobile industry. Second, oil price shocks usually induce mounting market uncertainty and therefore affect the investment decision-making behavior of enterprises. Households also tend to increase their level of precautionary savings in the face of oil price shocks and rising uncertainty (Edelstein & Kilian, 2009). The third indirect channel is through monetary policies. Bernanke et al. (1997) propose that the Federal Reserve (the US central bank) adjust its monetary policy to withstand the adverse impacts of oil price shocks, which could exacerbate the negative economic impacts of oil price shocks. Oil price shocks influence the economy in a systematic and far-reaching way. Multiple groups of market participants and stakeholders, which have their own distinct objectives, are vulnerable to the adverse impacts of oil price shocks. Consumers intend to maximize intertemporal utility under budget constraints. Enterprises seek to maximize profits by adjusting investment, production, and labor allocation. Government departments or monetary authorities have the goal of maximizing social welfare by using policy instruments. To account for these diverse goals, the dynamic stochastic general equilibrium (DSGE) model, a classical model in macroeconomic theory, can be a useful tool for characterizing the behavior and decision-making of various economic agents and solving for optimal behavior under their resource and technological constraints through dynamic optimization modelling. Despite the popularity of the DSGE model in macroeconomic research, most existing research employing this model generally treats energy price shocks as exogenous and the target economy as a closed form segmented from the energy

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sector. The energy sector is usually not incorporated into the analysis. The advantage of incorporating energy factors into the DSGE model is that users can systematically characterize market players’ responses to energy price shocks and depict the dynamic relationship between them (Rotemberg & Woodford, 1996; Dhawan & Jeske, 2008). Aminu (2019) constructs a multi-sector DSGE model to analyze the impact of energy price shocks on the UK economy. This study adds a world market to the traditional three-sector structure of a closed economy. In addition, the energy sectors, the oil industry, the public utility sector, and the non-energy sector are added to the corporate sector. This relatively complex framework offers a perspective for studying the reform of market institutions and mechanisms in China’s oil and gas industries under the Chinese central government’s “Dual Circulation” policy design which emphasizes both international circulation (growing exports) and internal circulation (expanded domestic demand powered by rising consumption), with the two reinforcing each other. Similarly, Punzi (2019) studies the impacts of energy price uncertainty on the macroeconomy by adding importers, exporters, and exchange rates to the standard DSGE model to give the perspective of an open economy, which to a large extent reflects the actual state of the energy market. Motivated by these studies, a multi-sectoral macroeconomic model can be built to effectively describe the relationships between several major market players in the reform of China’s oil and gas markets and to account for the dynamics in general equilibrium and the outcomes of the international market games. Under such a theoretical framework, an evaluation system can be built to analyze the short- and long-term effects of the reform, so as to find ways to address potential shocks to the economy from implementation of the reform and to maximize social welfare during profit distribution among multiple agents.

Microeconomic Theories Central to industrial organization economics is the issue of market competition versus monopolization, which is also one of the top concerns during the marketization reform of China’s oil and gas sector. The field of monopolization and antitrust studies was dominated by the Harvard school from the 1930s to the 1970s during an activist era of antitrust enforcement and then revolutionized by the Chicago school in the late 1980s (Piraino Jr., 2007). Harvard economists, such as the renowned Edward Chamberlain, Joan Robinson, and Joe Bain, argued that a firm’s economic conduct in a market is determined directly by the market structure, namely, the number of firms in this market and their relative sizes. Because of product differentiation, manufacturers have a basis for setting prices, and the market is in a state of monopolistic competition. To achieve the optimal allocation of resources, it is not sufficient to discuss the role of the market alone, and therefore the government needs to intervene. Specifically, the structure-conduct-performance (SCP) paradigm proposed first by Edward Chamberlain and Joan Robinson states that the level of concentration in the market directly influences the economic behavior of firms, which in turn affects their market

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performance (Tirole, 1988). Firms in concentrated markets seek monopoly profits by raising prices and setting up barriers to entry. These transactions can increase concentration levels in the relevant markets, hinder technological progress, and cause an inefficient allocation of resources. In such cases, public policies are needed to adjust the market structure and regulate monopoly, so as to maintain healthy market competition, address unfair practices, and protect the interests of consumers. In the 1970s, in the face of stagflation in the US economy, a group of scholars at the University of Chicago articulated a theory in opposition to the Harvard approach. Chicago school academics, represented by George Stigler, argued that the Harvard school misjudged competitive behavior by firms even when they face relatively few rivals, and the markets are likely to correct any competitive imbalances on their own without any regulatory intervention. Because markets are self-correcting in any event, regulators, courts, and enforcement agencies should not intervene in the competitive process in the absence of clear evidence of anticompetitive conduct that harms consumer welfare. Adherents of the Chicago school believed that the economic recession and subsequent stagflation in the USA had been caused by the tough laws and policies addressing anticompetitive behavior advocated by the Harvard school. The Chicago school found the analytical SCP paradigm too simplistic, arguing that market structure, conduct, and performance should form an interactive bidirectional relationship, rather than a simple one-way, cause-and-effect relationship. Whereas the Harvard school opposed market concentration without consideration of its potential for lowering costs and prices and thus benefiting consumers, the Chicago school highlighted the importance and advantages of economies of scale. By expanding manufacturing capacity, firms can deliver quality products to consumers at lower average cost and with a reduction in price, which improves consumer welfare and enhances economic efficiency. Adherents of the Chicago school also argued that as long as potential competitors face no barriers to entry or exit, incumbent firms are constantly constrained and are not free to set prices, and the market should be efficient. They proposed that the level of concentration and the size of a firm should not be used as the sole criteria for judging whether a firm is a monopoly and that antitrust laws should not be imposed on large firms without exception, based on a presumption of illegality of their competitive conduct, as used by the Harvard school, in the absence of sufficient empirical evidence of actual anticompetitive effects. The Chicago approach began to affect antitrust case law in the USA in the late 1970s. It relaxes restrictions on large firms in terms of acquiring and exercising market power and allows the courts and administrative agencies to take a more lenient approach towards those types of anticompetitive conduct (Piraino Jr., 2007). The global petroleum industry has been long monopolized by cartels called the early “seven sisters,” namely, the seven transnational oil companies in the Consortium for Iran oligopoly, from the mid-1940s to the mid-1970s, and, later, the Organization of Petroleum Exporting Countries (OPEC) (Cremer & Weitzman, 1976). In China, the oil industry also has a long history of domination by the oligopoly formed by the “Three Barrels” companies, namely, the China National

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Offshore Oil Corporation (CNOOC), the China Petrochemical Corporation (Sinopec), and PetroChina (the listed arm of China National Petroleum Corporation [CNPC]). China’s reform of its oil and gas system is therefore geared towards establishing a competitive market mechanism, so as to make the oil and gas sector competition oriented and achieve upstream and downstream diversification. Nevertheless, even successful implementation of the reform is not expected to fundamentally change the market structure characterized by monopolistic competition. It is particularly challenging to identify an optimal solution that promotes efficiency and safeguards energy security under monopolistic competition (Cherp & Jewell, 2014). Stiglitz (1976) made an early important contribution to the theoretical models on monopoly versus competitive equilibrium prices in the energy market. Although it was generally believed that oil crises and oil price shocks were usually caused by collusion among oil-producing countries or monopolistic oil and gas companies to raise oil prices to exceed the equilibrium price under perfect competition. Stiglitz’s theoretical model, however, finds that the scope of monopoly power that can be exercised by a monopolist is very limited, and the monopoly prices and competitive equilibrium prices are identical unless they take extraction costs into account. Pindyck (1978) constructs a theoretical model for calculating the optimal monopoly and competitive equilibrium prices for exhaustible resources, such as petroleum. His results partially disprove Stiglitz’s claim and prove that it is possible to gain significant monopoly profits on petroleum products by forming cartels. There have always been different views on the issue of monopoly versus competition in natural resource markets. Benchekroun and Gaudet (2003) extend the static oligopoly analysis framework to dynamic oligopoly analysis to study the nonrenewable natural resource oligopoly and find results that are the opposite of the results from a purely static analysis. Rebelo et al. (2019) estimate a stochastic industry-equilibrium model of the oil industry with two alternative market structures in which either all firms are competitive or OPEC firms act as a cartel. They find that ongoing structural changes in the oil market have a significant impact on the world economy. Fridman (2018) also studies the nonrenewable resource market using a two-stage mixed duopoly model. In this study’s setting, the government decides the degree of privatization of public firms in the first stage, whereas private and public firms simultaneously decide on the extraction paths in the second stage. The results show that when the two types of firms have similar technologies and the same resource stocks, neither complete nationalization nor full privatization is socially desirable. Based on these findings, Fridman argues that the presence of partial privatization, namely, a semipublic firm, could be an optimal solution for improving the intertemporal allocation of a fixed resource stock. If, however, the cost is asymmetric, in which the public firm is less efficient than its private counterpart, the optimal solution is either full nationalization or full privatization. The findings of this research have important implications for the reform of China’s oil and gas market system and mechanisms. However, the economic setting in Fridman (2018) and the status quo of China’s oil and gas sector are notably distinct. In this chapter,

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we borrow and extend the ideas of Fridman (2018), but it is important to seek an optimal path of reform based on the facts in the Chinese market and energy security concerns. Furfari (2020) analyzes the complex evolution of interactions between monopolies, state governments, and the free market in the context of the international oil market. Given the special characteristics of the oil and gas industry, it is hard to determine which market structure best fits the industry. Consistent with the arguments in Fridman (2018), the maximization of social welfare can be achieved only conditional on a sound understanding of the social conditions, market conditions, market environment, and consumers’ needs during a particular period of time. Variations in these aspects can lead to huge differences in the corresponding optimal solutions. To account for the energy security concerns during the reform of China’s oil and gas markets, the actual conditions and constraints that these markets currently face should be fully considered during the process of industrial upgrading.

Development of China’s Oil and Gas Sector Since the founding of the People’s Republic of China, the country’s oil and gas industries have developed from scratch into a complex system, concurrent with economic reform in China that consisted of a transition from a planned economic system to a market economy. China’s gas and oil system is characterized by the participation of multiple agents. The industrial chain in the Chinese gas and oil system is underpinned by multiple channels for upstream resource supply, a unified pipeline network for midstream gathering and transportation, and highly competitive markets for downstream sales, usually referred to as an X þ 1 þ X structure.

The First Stage: Establishment and Initial Development The development of China’s gas and oil markets can be divided into five stages. The first stage is the establishment and initial development of China’s oil and gas sector between 1949, with the founding of People’s Republic of China, and 1977. In 1956, the Ministry of Petroleum held the first National Petroleum Exploration Conference, which set out the direction for the development of the country’s petroleum industry and proposed “to make a comprehensive plan for the oil-bearing areas in the country, to start from solving the fundamental problems, and to carry out exploration in a step-by-step manner.” By the end of the 1950s, four oil and natural gas bases had been initially established in Yumen, Xinjiang, Qinghai, and Sichuan Provinces, and the crude oil output of these four bases accounted for 73.9% of the country’s total output. The discovery and mass production of Daqing Oilfield in 1959 enabled a reverse in China’s oil shortage, and China’s oil industry embarked on its first round of rapid development. During the 13 years from 1966 to 1978, China’s crude oil production

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increased at an annual rate of 18.6%, and annual output exceeded 100 million tons. In 1973, China exported crude oil for the first time.

The Second Stage: Delegation of Powers and Profit Shifting The second stage is from 1978 to the end of the 1980s, covering the initial period of the economic opening up in China. This stage also corresponds to the beginning of reform in the country’s oil and gas economic system, central to which is delegation of powers and profit shifting. The reform focuses on three main events. First, a contract management responsibility system was established to promote profit incentives for oil enterprises to encourage production. In 1983 and 1984, the state instituted and implemented a taxfor-profit (li gai shui) scheme to dismantle the profit delivery system that was in force. In that system, all taxable state enterprises were exempted from delivering profits to the state and were allowed to retain all their after-tax profits after paying the required income taxes. During the second stage of the li gai shui reform, four new taxes (a product tax, a value-added tax, a business tax, and a salt tax) were introduced in place of the industrial and commercial tax to complete the substitution of tax payment for profit delivery by state enterprises. As taxation officially became the primary means of profit sharing between the state and enterprises (Li, 1989), this reform completed the transition from a system of coexistence of tax and profit deliveries to one purely based on corporate income tax. It is accompanied by further decentralization of the management of state-owned enterprises (SOEs). The contract management responsibility system was improved to imbue SOEs with autonomy from production to sales, and these enterprises were restructured through the application of this responsibility system. Oil enterprises that had been government controlled were gradually converted to real enterprises, as the broader oil industry was transformed from being managed by a centrally planned system to one based on the market. The second event in reforms during this stage is the promotion of the “bringing in” policy, which aimed at attracting foreign investment and initiated international cooperation in the oil and gas sector. In the 1970s, offshore oil drilling developed rapidly throughout the world, but China lagged behind because of a lack of equipment and funding for exploration and development. To this end, the government promulgated the Regulations of the People’s Republic of China Concerning the Exploitation of Offshore Petroleum Resources in Cooperation with Foreign Enterprises and related regulations in 1982. The maritime continental shelves were opened to foreign enterprises and were available for open bidding. The regulation allowed the introduction and purchase of advanced foreign technologies and equipment as well as borrowing from foreign sources. The first round of global open bidding was conducted in 1983, after which 18 contracts were signed between Chinese enterprises and 27 oil companies in 9 other countries, setting a precedent for the bringing-in practice in China’s oil sector. Meanwhile, onshore oil resources

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were gradually opened to foreign enterprises, and 11 southern provinces and autonomous regions were opened in 1985. Moreover, during this stage, the administrative and management system in China’s oil and gas sector experienced significant changes and several rounds of reforms. Three major national oil companies were established. The CNOOC was founded in 1982 mainly to promote foreign cooperation and accelerate the development of the offshore oil industry. The China Petrochemical Corporation (Sinopec Group) was founded in 1983, to tackle fragmentation, duplication, and inefficiency during the industrial development through implementing unified management and overall planning for oil refining, petrochemical, and chemical fiber enterprises. In 1988, the Ministry of Petroleum was disbanded, and the state-owned CNPC was founded to handle petroleum-related activities in the country, including the management and operation of the exploration, development, production, and construction of onshore oil and natural gas resources. The establishment of these companies jointly marked the transition of China’s petroleum industry from a government-affiliated industry to an economic one.

The Third Stage: Marketization and Pricing System Reforms The third stage covers the period from the early 1990s to 2000, when a marketoriented management and operation system was created and went into effect, leading to three major changes. The first significant change is that the product distribution system was reformed to be driven by prices. In the 1980s, because of the implementation of a guaranteed annual output of 100 million tons of crude oil proposed by the Ministry of Petroleum, the sales of crude oil and refined oil followed a “dual-track pricing system.” In this system, lower prices were assigned to planned output, whereas higher and more flexible prices were allowed for any extra output produced by enterprises. This dualtrack pricing system was abolished in 1994 by the reform, which significantly changed the pricing system of oil products. The prices of planned output and extra output were merged, and prices generally rose. Meanwhile, the allocation of crude oil and refined oil resources was controlled by the state to rationalize order of circulation. Another round of oil price reforms from 1998 to 2000 established parity between domestic crude oil prices and the cost to local factories of importing crude oil. In the latter case, prices were supposed to be determined through negotiation between trading partners. The price of refined oil products would be recommended by the state based on the price level in the international market, which could be used to anchor retail prices, whereas, for the enterprises, a certain portion of the price was allowed to float. A maximum spread was also imposed between wholesale and retail prices. The second significant change in this stage is the restructuring of the petroleum industry and the listing of major state-owned oil companies, which contributed to the establishment of a modern enterprise system. In 1998, the central government engaged in a major strategic restructuring of the petroleum and petrochemical

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sectors. Through the allocation and exchange of assets, the Petroleum and Natural Gas Corporation and the Petrochemical Corporation were restructured as two large petroleum and petrochemical group companies, to enable the integration of upstream and downstream business operations for production, supply, marketing, and domestic and foreign trade. In 1999, to further address the deeply rooted institutional and structural problems in the petroleum industry and to promote the reform and development of state-owned oil and petrochemical enterprises, PetroChina (the listed arm of CNPC), Sinopec, and CNOOC engaged in internal restructuring and established joint-stock companies, following the government’s guideline of achieving separation between major and auxiliary businesses, inferior and quality assets, corporate and social responsibilities. The third notable change during this stage is increased international cooperation in the oil and gas sector prompted by the “going out” initiative at domestic oil and gas companies. China became a net petroleum importer in 1993. To further promote the oil industry and accelerate the pace of “going out,” the Chinese government proposed strategies for drawing on resources in both domestic and international markets to accelerate the pace of “going out” and promote the petroleum industry. The three major national energy companies made significant breakthroughs in promoting international cooperation. PetroChina started to seek global cooperation in oil and gas exploration and development in 1993. In 1997, it won bids for several projects in Sudan, Venezuela, Kazakhstan, and elsewhere. CNOOC bought 32.85% of the shares of the Malacca oilfield offshore in Indonesia in 1994 and became the largest shareholder of the oilfield, which was CNOOC’s first overseas upstream oil project and marked an important step for the company in developing opportunities in the international market. After 2002, it purchased several oil and gas projects in Indonesia, Australia, and Nigeria. Sinopec also actively engaged in international cooperation in oil exploration and development business with companies in Saudi Arabia, Iran, Russia, and other countries, as well as downstream businesses.

The Fourth Stage: Continued Marketization The fourth stage, between 2001 and 2012, is mainly characterized by the establishment of a multiagent market structure and continued promotion of market-oriented reforms. After China officially joined the World Trade Organization (WTO) in 2001, private and foreign entities increasingly participated in the oil and gas sector. As the markets opened further, the market-oriented reform entered a new stage, focusing on both improving the government’s role in macroeconomic regulation and control and strengthening the role of the market, drawing on the central government’s goal of bolstering a socialist market economic system. Among the market-oriented measures, the oil trading franchise was abolished. Previously, China had only one state-owned oil import and export company, which then became 5 state-owned trading companies plus over 20 that were not stateowned. The existing administrative examination and approval system for investment in significant oil and gas projects was changed into a filing and registration system.

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Entry restrictions for investment were largely lifted, except for the retention of regulatory requirements related to oil and gas mineral rights, foreign cooperation, large-scale pipeline construction projects, and oil trading. The market structure significantly changed with the emergence of diversified market participants, and a market structure dominated by state-owned enterprises but with active participation by various economic components was initially formed. In terms of reform of the administrative system, the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) was established in 2003, which is responsible for managing state-owned assets including the oil and gas industries. The same year, the National Energy Bureau was created under the National Development and Reform Commission (NDRC), which reports to the State Council. The bureau has broad administrative and planning control over the Chinese energy sector. In 2008, the NEA was established to manage the energy sector and guide the direction of development in the energy industry.

The Fifth Stage: Development During the New Normal Era The fifth stage covers the period since China’s economy entered the “new normal” era marked by the eighteenth National Congress of the Chinese Communist Party (CCP) in 2012. In 2014, Xi Jinping, the general secretary of the CCP, proposed a strategy of “four revolutions and one cooperation” in energy security. The four revolutions consist of facilitating a revolution in energy consumption and limiting excessive demand for energy; promoting a revolution in energy supply and establishing a diversified supply system on the supply side; advancing a revolution in energy technology and driving industrial upgrading; and eventually promoting a revolution in the energy system and accelerating the development of energy. “One cooperation” refers to strengthening international cooperation in all aspects to achieve energy security against the backdrop of an open economy. Guided by this strategy, the market system in the oil and gas industries in China experienced a series of reforms and developments, and, according to the Blue Book on China’s Oil and Gas Industry Development Analysis and Outlook Report (2019–2020), a full supply chain has been formed. Specifically, diverse upstream resource suppliers and multichannel supply chains exist, alongside a unified pipeline network that enables efficient midstream collection and transportation as well as fully competitive downstream sales markets. A series of laws, regulations, and policies issued in recent years by the government have further accelerated and deepened these reforms. With respect to upstream reforms, the Guiding Opinions on Coordinating and Promoting Reforms in the Property Rights System for Natural Resource Assets, released in April 2019, explores the potential for establishing a system that integrates the exploration and production rights of oil and gas resources and links the granting of exploration and mining rights with planning. The Special Administrative Measures for Foreign Investment Access (Negative List) (2019) published in June 2019

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also lifted restrictions on foreign investment in oil and gas exploration and development. The midstream oil and gas reform is directed by China’s Oil and Gas Pipeline Medium- and Long-term Network Plan, issued by the NDRC on 19 May 2017 and the NEA on 19 May 2017, which is a comprehensive strategic plan for the development of China’s oil and gas pipeline network for the next decade. The founding of the Chinese Oil and Gas Pipeline Network Corporation (PipeChina) on 9 December 2019 marks a key step in deepening reform in China’s oil and gas system. The major responsibilities of PipeChina include investment and construction of the state’s oil and gas trunk pipelines and some gas storage and peak-shaving facilities; interconnection between trunk pipelines and their connections with public pipelines to construct a nationwide network; pipeline transportation of crude oil, refined oil, and natural gas; operation and scheduling of the national oil and gas trunk pipeline network; regular disclosure to the public of remaining pipeline transmission and storage capacity; and ensuring fair access to energy infrastructure for all qualified users. The downstream sector still has barriers to entry. Entry regulations in the refining and chemical industry should be further improved as production capacity declines. Some progress has been gradually made in the importation process for private enterprises. In terms of sales, PetroChina and Sinopec have both implemented mixed-ownership reforms of their sales companies. In June 2014, Sinopec released a plan on mixed-ownership reform in its downstream oil product sales segment to allow the entry of public and private capital to Sinopec’s oil product sales business and to enable its operation under mixed ownership. The shareholding ratio of public and private capital will be determined according to market conditions, with an upper limit of 30%.

Stylized Facts, Challenges, and Options in China’s Oil and Gas Market Reform After decades of effort and reform, China’s oil and gas industries have generally progressed to be well functioning and serving economic development. Because of ever-changing international conditions and evolution in the energy industry, however, new problems and challenges continue to arise. The “four revolutions, one cooperation” strategy proposed by Xi Jinping stresses the importance of an institutional revolution. The Chinese government accordingly issued Several Opinions on Deepening the Reform of the Oil and Gas System in May 2017, which is considered guidance for this round of institutional reform in the oil and gas markets. Following the release of this document, a subsequent series of measures imposed has attracted great attention in academia. This section reviews the stylized facts and related research and discusses the challenges for China’s oil and gas market reform after the eighteenth CCP congress in 2012.

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Switching from a Traditional Top-Down Reform to a Market-Led Reform The first challenge is to develop and confirm the optimal model for reform in China’s gas and oil sector. At first, the reform of China’s oil and gas industrial system and institutions was “state led,” implicitly emphasizing the decisive role of the state in promoting industrial change. Such a top-down reform model usually leads to “coercive institutional change” and can be conducive to an orderly opening of the market in earlier stages. Excessive administrative intervention and too much regulation, however, are essentially a continuation of the philosophy of a centrally planned economy, which is incapable of effectively capturing the underlying mechanism that drives change in the oil and gas markets. Unlike the top-down state-led reform model, the “market-led” reform model acknowledges the market’s determining role in driving forward China’s gas and oil market reform in recent years. The starting point for such a reform model is to fully understand the inherent characteristics of the oil and gas industries at each stage of development and to promote reform using market mechanisms. However, it would be too idealistic to expect or implement a completely market-led reform, which to some certain extent ignores complex interactions between various market players that may affect institutional changes. An optimal reform model requires in-depth theoretical analysis and fully accounts for the utility of the government, enterprises, and consumers, so as to achieve systemwide general equilibrium and to determine optimal equilibrium.

Mitigating Oligopolistic Dominance in China’s Oil and Gas Sector The second challenge is induced by the deeply rooted monopoly power in the oil and gas sectors in China, which is unlikely to be eradicated. Although market-oriented reforms have been largely implemented in recent years, the oil and gas markets are still dominated by oligopoly. The three large state-owned oil giants (PetroChina, Sinopec, CNOOC) control over 90% of domestic crude oil production and monopolize 95% of China’s natural gas supply (IEA, 2019). In upstream petroleum exploration and development, PetroChina, Sinopec, CNOOC, and Yanchang Petroleum (Yanchang Petroleum International Limited) have been granted franchises for onshore and offshore oil exploration and exploitation. These advantages are further vested and enhanced through transactions with parties related to these companies in engineering technical services, engineering construction, equipment manufacturing, and so on. Also, large and significant infrastructural projects – such as the construction and operation of transport pipelines, long-distance oil and gas pipeline networks, and receiving stations – intrinsically form a type of natural monopoly caused by high start-up costs or powerful economies of scale that give rise to significant barriers to entry. These projects are generally funded and controlled by state-owned oil companies through upstream and downstream integration.

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Although downstream sectors tend to be more open than upstream sectors, the state-owned enterprises control most of the oil and gas resources as well as import and export quotas, and the development of private oil and gas enterprises has thus been held back for a long time. Enhancing energy security and maintaining economies of scale are two major concerns in discussions about developing and reforming the oil and gas industries. They pose challenges theoretically and practically when policy makers seek an optimal solution that can strike a balance between monopoly and competition.

From Administrative Regulation to Better Corporate Governance The third issue that hinders rapid development of the oil and gas industries is the low operational efficiency of China’s large state-owned oil and gas enterprises. These enterprises have been managed mainly through administrative measures and financed by government subsidies, leading to inefficiency in resource allocation and little division of labor. The principal-agent problem is especially pronounced when these enterprises engage in overseas investment activities, generating serious issues with excessive and inefficient investment (Zhang et al., 2016). There is rich evidence in the literature about the corporate governance issues at China’s oil companies and the prevalence of excessive power concentration at these companies (Shi, 2019), which prevents these enterprises from mitigating agency problems. The weak corporate governance caused by an ineffective board of directors and supervisory board as well as inappropriate incentive schemes hinders the companies from fulfilling their corporate social responsibility.

Immature Price Formation Mechanisms Furthermore, the price formation mechanism in energy prices remains problematic. Despite the clear direction of the price reform in China’s oil and gas industries after years of planning and effort, the lag in institutional reform and an imperfect price transmission mechanism still present many challenges. Reforms in natural gas prices started relatively late compared with the market-oriented reforms in other energy sources. Because of the particularities of the natural gas market, it has not yet formed a competitive market structure, and there is still considerable room for further adjustment in the policy design, oversight, and control mechanism.

Pandemic-Induced Risks Finally, the outbreak of the COVID-19 pandemic profoundly affected energy systems in China and around the world (Ji et al., 2020). Oil prices had already fallen 30% since the start of 2020 due to a drop in demand. As coronavirus spread out of control in the Americas, the Middle East, Central Asia, and Russia, the international

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oil and gas market faced mounting risks arising from supply-side shocks. Even amidst the COVID-19 pandemic, in early March 2020, the price of oil fell 65% on a quarterly basis, as a result of an oil price war between Saudi Arabia and Russia triggered by a breakdown in talks between OPEC and Russia over proposed cuts in oil production. Despite agreement between Saudi Arabia and Russia about oil production cuts in early April and June 2020, demand for oil dried up as lockdowns around the world kept consumers inside, and even the production slowdowns resulted in a supply surplus. On 20 April, the US price per barrel of WTI turned negative for the first time in history. The oil price volatility induced by the pandemic had significant adverse impacts on stability in the international energy market. The energy industrial chain is also vulnerable to the influence of the evolving pandemic, which creates severe shocks to China’s energy consumption and production. Therefore, the outbreak of the pandemic should not be simply viewed as an independent event but, rather, as a systemic event that drives the profound changes in the international energy market and poses significant threats to China’s oil and gas sector and the country’s energy security.

Policy Evaluation of China’s Oil and Gas Market Reform Energy security as a systemic and multidimensional concept matters significantly for the well functioning of a state’s economic system, meeting the demand for energy of enterprises and households, and maintaining stable and sustainable development of the broad economy. A systemic perspective should therefore be taken when evaluating the effectiveness of the gas and oil market reform in terms of safeguarding energy security and boosting economic development. The evaluation of public policies should be conducted with diversified groups of stakeholders and with a sound planning and evaluation system. In terms of methodologies, policy evaluation requires a combination of quantitative (Strauch, 1974) and qualitative normative analysis (Robert & Zeckhauser, 2011), as well as joint application of the methodologies derived from both economics and sociology (Dietz, 1987).

The Efficiency Criterion As the concept of energy security encompasses multiple facets, China’s oil and gas market reform, which prioritizes the goal of safeguarding energy security, should also be evaluated with multiple criteria. The first criterion concerns efficiency improvement, which is an initial, important incentive for reforming the institutions and mechanisms in China’s oil and gas industries. One effective way to improve efficiency is by dismantling administrative monopolies in addition to introducing moderate competition and market mechanisms, so as to dismantle the traditional barriers to entry, establish sound performance incentive mechanisms, and optimize the industrial organization and structure. Chinese scholars have produced many studies on the operational efficiency of China’s oil

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and gas sector, which is characterized by an oligopolistic market structure, and they discuss the efficiency issues regarding resource allocation, market structure, scale, and technological innovation. In terms of methodology, data envelopment analysis (DEA) is a widely adopted method for measuring efficiency. Zhou et al. (2008) comprehensively review the application of this method in energy and environmental research. Most studies related to efficiency issues in China’s energy sector focus on the efficiency of energy use in China’s industrial sector, but few studies directly examine efficiency in the oil and gas industries. Some studies that use the DEA framework have empirically investigated efficiency issues in China’s renewable energy sector using microdata (Wang et al., 2013) or adopted stochastic frontier analysis (SFA) to measure efficiency in China’s energy industry (Ouyang et al., 2018).

The Equality and Social Welfare Criterion The second major criterion for evaluating gas and oil market reform comprises fairness and equality, as improving equality and social welfare is a major goal of the reform. In economics and sociology, a long-standing debate exists about the trade-off between efficiency and equality, which has influenced many aspects of economic policy design (Dumas, 1976). An evaluation of energy-related policies should include both efficiency and fairness (Wang et al., 2019a). One common criticism of the government’s subsidy to the energy sector is based on the argument that this type of administrative intervention tends to reduce efficiency, encourage fossil fuel consumption, and therefore increase greenhouse gas emissions (Overland, 2010). Policy makers in some countries, however, also face dilemmas in implementing subsidy reduction policies, as they may reduce social welfare and potentially provoke social discontent and unrest (Dansie et al., 2010). The most popular methodologies for evaluating the level of fairness are computable general equilibrium (CGE) models and scenario analysis (e.g., Liu & Li, 2011). Lin and Jiang (2011) employ a CGE model to study the economic impacts of energy subsidy reforms in China and find that removing energy subsidies can lead to a significant decrease in both energy demand and emissions but also negatively affects the macroeconomy. Counterfactual analysis is another widely used method, and some studies employ micro survey data and traditional econometric models to assess the impacts of energy on social welfare (Zhang et al., 2019).

The Risk Criterion As energy security is a top concern in oil and gas market reform, it is not hard to understand that risk is another key criterion for evaluating the reform, especially against the backdrop of energy market financialization in recent decades, which increases the complexity and risks in the energy market (Henderson et al., 2014; Wang et al., 2019b). An increasing number of papers express concern about

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excessive oil price volatility induced by overfinancialization of the oil market and excessive speculation (Fan & Xu, 2011; Fattouh et al., 2013; Lammerding et al., 2013). The market-oriented reform, especially reform in the price formation mechanisms, should reasonably balance between efficiency improvement and risk reduction. In the energy security strategy proposed by the Chinese government, one of the “four revolutions” seeks in particular to restore the commodity attributes of energy products, through building an effective, competitive market system and establishing market-oriented pricing mechanisms. It is very important to develop the energy commodity market under the guidance of this strategy. It is, however, necessary to consider and measure the risks due to a shift to an open market. Policy measures and instruments should be geared towards effectively regulating and supervising the marketization process as well as building sound legal systems and institutions to curb risk spillovers and potential occurrence of a systemic event. After the onset of the 2008 global financial crisis, techniques for measuring the level of systemic risk quickly developed. One prominent example is the conditional value-at-risk (CoVaR) model proposed by Adrian and Brunnermeier (2016). This approach enables users to measure the level of tail risk in a price series over a specific period by adopting the traditional VaR risk measure. It quantifies the systemic risk contribution of a price time series to the broader system by quantifying the system’s change in its VaR conditional on extreme loss in the price series (Wu et al., 2021). This approach has been widely applied in the literature to the question of risk spillovers in the energy system. It is especially suitable for studying the dynamic risk spillover mechanism in crude oil futures in China. It should also be noted that risks in the oil and gas markets do not derive only from energy prices, nor can it be fully reflected by energy prices. The potential threats from exogenous shocks to energy security and geopolitical risks should also be fully considered.

The Sustainability Criterion The fourth indicator for evaluating the oil and gas market reform is sustainability, namely, whether the reform contributes to boosting sustainable economic development. Considering the escalating pressure on environmental protection and threats posed by climate change, the relevant policies in oil and gas market reform should be designed to meet the needs of facilitating sustainable development of the domestic economy (De Vries & Petersen, 2009). The reforms in energy pricing mechanisms should contribute to ensuring sustainable economic development. Ji and Zhang (2019a) emphasize the importance of developing the financial market, especially green finance in China, to support upgrading in the country’s energy sector. Singh et al. (2009) review the techniques and models used in the literature for sustainability assessment, such as the pressure-state-response (PSR) model and its extensions and the Lowell Center for Sustainable Production indicator framework. Santoyo-Castelazo and Azapagic (2014) propose a decision-support framework for a sustainability assessment of energy systems, which integrates lifecycle costs, scenario analysis, and multi-criteria decision analysis.

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Oil Pricing Mechanism: China’s Crude Oil Futures Market As mentioned in section “Immature Price Formation Mechanisms,” the pricing mechanisms in the Chinese oil and gas sector are experiencing ongoing reforms and have not yet matured. However, more than 4 years have elapsed since 26 March 2018, when China launched the flagship RMB-denominated crude oil futures contract to be traded on the Shanghai International Energy Exchange (INE). The INE futures contract marks the beginning of a new era in the global energy market (Ji & Zhang, 2019b) and strategically seeks to boost China’s pricing power in the global energy market and facilitate internationalization of the Chinese renminbi. The INE contract has several distinctive characteristics (Ji & Zhang, 2019b): Whereas the benchmark West Texas Intermediate crude oil (WTI) traded in New York and Brent crude oil (Brent) traded in London are low-sulfur light crude oil blends, INE is based on a basket of medium and heavy crudes extracted in the Middle East and China, so they have a higher sulfur content. The trading hours of the INE are divided into day trading hours of 9:00–11:30 and 13:30–15:00 local time and night trading between 21:00 and 2:30 (t þ 1) to adapt to the availability of both local and international investors. The daily price change limit is set at 4%. Furthermore, it has a higher transaction fee than most other major oil futures contracts. Introducing an RMB-dominated oil futures contract has mainly three benefits (Ji & Zhang, 2019b). First, it enables RMB-dominated trading and therefore enhances local firms’ ability to hedge against oil price risks in the domestic currency. In the context of the broader Asian region, the absence of an international price benchmark had also led to the long-standing phenomenon of an “Asian premium” in oil and natural gas markets (Zhang et al., 2018). The launching of an RMB-based futures contract by China creates a new petrocurrency and signals the potential for ending the dominance of Western benchmarks. With the successful launch of the INE futures contract, China has outpaced other Asian states that have also attempted to establish their own price benchmarks and significantly increased the importance of the renminbi in international trade. In terms of market acceptance, the INE contract exceeded the daily average trading volume of the Oman contract traded on the Dubai Mercantile Exchange within only 2 months of its launch (Ji & Zhang, 2019b), but its volume remains much lower than that of WTI or Brent. Although the INE contract is specifically designed to attract international investors and has been well accepted in the international market, trading data show that it is increasingly traded during Asian trading hours (9:00–11:30 and 13:30–15:00 local time) rather than Western trading hours, and the volume of trade during these periods increased from 25% of total volume in 2018 to 50% in 2020 (Ji et al., 2021). This implies the increasing popularity of the INE contact in the Asian market. Trading data released by the INE also show that since mid-December 2018, approximately 92% of the trades are made by domestic traders in China (S&P Global Platts, 2019). Since the INE futures contract joined the global energy landscape, scholars and market participants have shown increasing interest in detecting and understanding potential co-movement and lead-lag effects between the Chinese and global crude oil

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futures markets. Based on the first 2 months of trading data of the INE contract since its launch, Ji and Zhang (2019b) perform the first empirical work to provide preliminary evidence of higher return volatility in the INE in night trading, which implies the significant impact of international market participants on China’s crude oil futures. Palao et al. (2020) find that the INE futures have a limited impact on the global market represented by WTI and Brent, and the INE futures price is sensitive only to information flows from Brent, which is the most influential in the oil price discovery process. Using the daily closing prices of WTI, Brent, and INE, Huang and Huang (2020) document that fluctuation in the price of China’s INE futures tends to lag that of international crude oil futures and find that the level of co-movement between INE and international crude oil futures varies over time. Ji et al. (2021) study intraday co-movement between INE futures and international benchmarks. Using high-frequency 5-min data, they depict the dynamic interrelationships among INE, WTI, and Brent, and demonstrate that INE is more integrated with international benchmarks in night trading, when WTI and Brent are actively traded but tend to be more segmented during daytime trading. These findings show increased information spillovers from the international market to the Chinese market during its active trading hours. The existing evidence in the extant literature thus suggests unilateral information flows from the global crude oil futures market to the INE futures market and confirms the dominance of the leading incumbent international benchmarks, Brent and WTI, in terms of directing the information and risk flows across markets. Clearly, China has a long way to go before it can create its own global price point alongside these long-established benchmarks (Zhang & Ji, 2018; Ji & Zhang, 2019b). The current role of the INE futures market as a follower in the transmission of information from leading international benchmarks is argued as mainly arising from the unbalanced trading constraints between the INE market and the international market (Joo et al., 2021). As mentioned earlier, whereas the INE market has shorter, segmented trading hours, the WTI, Brent, and Dubai futures markets have, respectively, 23, 22, and 23 hours of free access to trading every day. The daily price limit on INE futures is set at 4%, whereas the other three have no daily limits. The INE futures market is also the only market that uses the RMB as the trading currency, whereas all other crude oil futures are traded in the US dollar, increasing the currency risk for INE investors. The higher transaction fee for INE futures than for all the other crude oil futures also has a negative impact on the growth potential and global influence of the market (Ji & Zhang, 2019b). The COVID-19 pandemic has had a large impact on the level of integration in the crude oil market. Although the COVID-19 pandemic has induced higher volatility in oil prices in the international energy market and created shocks to China’s energy market fundamentals, China’s crude oil futures market has less co-movement with the international crude oil futures market than in normal periods, which is due to the effects of enhanced local market regulations in response to market turmoil (Ji et al., 2021). This finding not only has practical risk-hedging implications for potential investors but, more importantly, highlights the importance of effective market regulation for increasing market resilience against risks arising from exogenous

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shocks. At the same time, although potential investors can take advantage of the observed lead-lag effect and the unilateral information spillover from the global to the Chinese crude oil futures market to increase the predictability of the INE futures price, they should be aware that the effectiveness of such a strategy may become weaker during the post-pandemic era because of reduction in the integration of the Chinese crude oil futures market into the global market. In addition, further evidence has emerged about the equilibrium relationship between the INE futures price and crude oil spot prices (Daqing, Shengli, WTI, Brent, and Oman crude oil spot prices) (Yang et al., 2020). This equilibrium relationship indicates that the INE crude oil futures price, like crude oil spot prices, reflects the fundamentals in the global crude oil market. Therefore, the equilibrium relationship reveals a stable price mechanism between the INE futures and spot prices, and the INE crude oil futures can also hedge risks for crude oil spot investors.

Conclusion and Policy Recommendations Crude oil is a key element of modern industry, and the establishment of the oil sector has significantly contributed to economic advances in China. Building from scratch, China has established a comprehensive system, responding to the massive demand due to the country’s phenomenal economic growth. The current system is the result of a series of reforms, and reforms are still ongoing. In this chapter, we review the history of China’s crude oil and gas sector, paying special attention to the evolution of price policies. The challenges of China’s current oil sector and possible solutions are also discussed in view of the ever-increasing dependence on international oil markets and the complexity of the global oil system. Our review of the development of the oil industry in China identifies the substantial losses in market efficiency and social welfare as a consequence of administrative monopoly and dominance by the three state-owned oil companies, which were granted privileges and exclusive rights over oil imports, exploration, production, and pipeline networks. The monopoly power held by the three national oil corporations severely limited the flexibility, competition, and impetus for technological innovation in the Chinese oil market. The multiple rounds of oil price reform aim to reduce price distortion and establish a transparent and market-oriented price system for oil products. The price reform has been accompanied by complementary reforms, which are aimed at reducing the privileges of the three state-owned petroleum companies, increasing the level of market openness to private enterprises, and promoting market competition, technological progress, and efficiency in resource allocation. Remarkable progress has been made in China’s oil and gas market reform. In the current pricing mechanism, the prices of petroleum products fluctuate with international crude oil prices, following reforms in the oil product price mechanism in May 2009, March 2013, and January 2016. However, the stylized facts and challenges discussed above imply that unresolved issues remain, such as insufficient pricing transparency (Chen et al., 2020), decoupling of petroleum product prices from the

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domestic market information (Zhang, 2018), and potential negative impacts on the macroeconomy from the oil price reforms. A systemic perspective is therefore needed in reviewing and evaluating the pros and cons of oil and gas market reform policies. The evaluation should be based on four major criteria: efficiency, social welfare, risk, and sustainability. Although most extant studies focus on only one of those criteria, a sound policy evaluation system should cover all these dimensions and assess major strategic decisions from a systemic perspective. Energy security should be a top concern in evaluating existing policies as well as simulating the possible outcomes of alternative policy instruments. Only by employing this approach can policy makers analyze policy feedback and make adjustments in a timely way. The practical information and experience generated from this evaluation can also be added to existing theoretical frameworks to improve the theoretical models, which is conducive to future research and policy design.

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Part VI Energy Finance: Most Recent Developments and Policies

Rethinking Green Finance in Greenfield Investments: The Moderating Role of Institutional Qualities on Environmental Performance

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Rabindra Nepal, Hammed Musibau, Farhad Taghizadeh-Hesary, Tina Prodromou, and Rohan Best

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Asian Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Institutional Quality, Foreign Direct Investment, and Environmental Performance Scenario in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greenfield Investment, Merger and Acquisitions (M & A), and Economic Growth Nexus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environmental Performance and Economic Growth Nexus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data, Model, and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data and Preliminary Data Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimation Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross-Sectional Dependence Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cointegration Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-Term Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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R. Nepal (*) · T. Prodromou University of Wollongong, Wollongong, NSW, Australia e-mail: [email protected]; [email protected] H. Musibau University of Tasmania, Hobart, TAS, Australia F. Taghizadeh-Hesary Tokai University, Tokyo, Japan Keio University, Tokyo, Japan e-mail: [email protected] R. Best Macquarie University, Sydney, NSW, Australia e-mail: [email protected] © Crown 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_14

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Abstract

The sole role of greenfield investment as a source for inducing greater environmental performance is debatable. This chapter investigates the linkages between greenfield investments, economic growth, and the role of institutional quality in environmental performance of all Asian countries between 2000 and 2018. The recently developed Environmental Performance Index (EPI) from Yale University has been adopted in this study as a proxy to measure environmental performance. Newly developed panel data methods based on the Dynamic Common Correlated Estimator (DCCE) that considers cross-sectional dependence across regions were used for the analysis. The study showed that the environmental performance in Asian countries improves when greenfield investments are made by strong institutions. The study also indicated that when good institutional factors are in place, good regulation can moderate the pollution haven hypothesis. Therefore, in the presence of supporting institutions, greenfield investments can be a worthwhile source of green finance. Also, there is evidence of support toward the Kuznets hypothesis given the positive and significant effect of economic growth on environmental performance in those countries. Keywords

Environmental performance · Greenfield investments · Economic growth and institutions · Dynamic Common Correlated Model · JEL Classifications: F65; Q56; and O16 Abbreviations

2SLS AMG ARDL ASEAN BRICS CADF CCE CCE-FE CD CO2 DCCE EKC EPI FDI FMOLS GDP GMM IEA M&As

Two Stage Least Squares Augmented Mean Group Auto Regressive Distributed Lag Association of Southeast Asian Nations Brazil, Russia, India, China, South Africa Cumulative Augmented Dickey Fuller Common Correlated Effects Common Correlated Effects with Fixed Effects Cross Sectional Dependence Carbon dioxide Emissions Dynamic Common Correlation Estimate Environmental Kuznets Curve Environmental Performance Index Foreign Direct Investment Fully Modified Ordinary Least Squares Gross Domestic Product Generalized Method of Moments International Energy Agency Merger and Acquisitions

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NREC OLS R&D REC SAARC SUR TY UNCTAD UNEP VECM WHO

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Non Renewable Energy Consumption Ordinary Least Squares Research and Development Renewable Energy Consumption South Asian Association for Regional Cooperation Seemingly Unrelated Regression Toda Yammato United Nations Conference on Trade and Development United Nations Environment Program Vector Error Correction Model World Health Organization

Introduction Demand for green financing has accelerated the global transition to greener economies as a climate change mitigation policy. Green financing aids better management of environmental and social risks and simultaneously fosters opportunities that provide a return on capital employed, coupled with environmental benefits, and deliver greater accountability (Sachs et al., 2019). Though several studies have tried to identify and explain the causal relationship among environmental qualities, foreign direct investment (FDI), and economic growth, very few empirical works have focused on the link between greenfield investments and environmental performance. For instance, Abdouli and Hammami (2017) confirmed the hypothesis of neutrality for the Environment-GDP link in the case of MENA countries. Jiang (2015) showed the support toward the Environmental Kuznets Curve (EKC) hypothesis across the Chinese provinces. The study by Liu et al. (2018) documented that FDIs had distinct effects on different environmental pollutants and confirmed the pollution haven and pollution halo hypotheses across Chinese cities. A similar study Nasreen et al. (2017) found a negative impact of financial stablity on CO2 emissions in the long run among South Asian economies. Two notable studies in the context of Latin America are the following: Pablo-Romero and De Jesús (2016) which showed that the hypothesis postulated for the Energy-Environmental Kuznets Curve is not supported for the region, and Sapkota and Bastola (2017) that evidenced validity toward both the pollution haven hypothesis and the EKC hypothesis. Shahbaz et al. (2015) studied the global sample consisitng of high-income, middle-income, and low-income economies in showing that the pollution haven hypothesis is validated based on a nonlinear relationship between FDI and environmental degradation. In the case of Malaysia, the existence of the EKC hypothesis is supported by the findings of Shittu et al. (2015). This chapter aims to investigate the dynamic connection between greenfield investments, GDP growth, institutional quality, and environmental performance for a big panel data of 50 Asian economies spanning from 2000 to 2018. We have used a recently developed proxy for environmental performance as well as the latest panel data econometric estimation technique was used. Consequently, the findings are

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important to guide policymakers regarding decisions in terms of greenfield investments, environmental sustainability, and creating strong institutional quality to improve environmental performance in Asian countries (Afghanistan, American Samoa, Australia, Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, French Polynesia, Guam, Hong Kong SAR, China, India, Indonesia, Japan, Kiribati, Korea, Dem. People’s Rep., Korea, Rep., Lao PDR, Macao SAR, China, Malaysia, Maldives, Marshall Islands, Micronesia, Fed. Sts., Mongolia, Myanmar, Nauru, Nepal, New Caledonia, New Zealand, Northern Mariana Islands, Pakistan, Palau, Papua New Guinea, Philippines, Samoa, Singapore, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Tonga, Vietnam, Tuvalu, and Vanuatu). There are four important ways in which this chapter has contributed to the existing body of knowledge: First, several studies have attempted to identify and explain the causality connection among greenfield investments, institutional quality, environmental sustainability, and economic growth, but an insignificant body of studies have examined the dynamic link between the environment and the disaggregated FDI. Therefore, this chapter fills the current vacuum in the existing literature and contributes to the existing findings using disaggregated FDI in terms of greenfield investments to investigate its impact on environmental performance in Asian countries. Second, to address the gap of prior research, the authors use Yale University’s recently developed Environmental Performance Index (EPI) as a proxy for environmental degradation. This proxy measures more robustly and unites environmental health and ecological vitality. Earlier studies mostly consider only CO2 emission in isolation and neglect the broader environmental health such as availability of quality air and water. To the best of authors’ knowledge, there has been very little research in developing regions like Asia using the index. They found a more robust result is realized by disaggregating EPI into environmental health and ecosystem vitality to empirically investigate how greenfield investments and institutional qualities contribute to each of these variables. Third, the study employed a recent second-generation estimator that takes care of the cross-sectional dependence problem in panel data estimations. The Wester Lund cointegration applied in this study allows for cross-sectional dependence among the weakness of their methodology like Pedroni, Kao, to mention a few following a robust unit root test (first-generation and second-generation tests) and after identifying the cross-sectional dependence issue across the panel. Then Dynamic Common Correlation Effect (DCCE) estimation and Two-Stage Least Squares (2SLS) were performed. The usage of these estimation techniques leads to a meaningful conclusion as both take into consideration cross-sectional dependence and heteroscedasticity problem which is the major issue of panel analysis (Chudik & Pesaran, 2015). Finally, although several empirical studies have been done on the causal link amid greenfield investments, institutional quality, environmental sustainability, and economic growth, there has been limited study in the context of Asian economies on the nexus relationships among these variables in Asian countries.

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None of the prior empirical works have been based on investigating the dynamic link between greenfield investments, institutional quality, environmental sustainability, and economic growth nexus in Asia. This chapter illuminates the probable sources and directions of greenfield investments, environmental sustainability, institutional quality, and economic performance. In particular, it answers the following two questions: a) What role do Greenfield investments play in a mitigating malaise in Asia economies? b) Does weak institution cause environmental degradation in Asian countries? The remainder of the chapter is structured as follows. Section “The Asian Context” provides an overview of environmental degradation in the Asian context. Section “Literature Review” is a review of relevant literature. Section “Data Model and Methodology” describes the econometric methodology and data. Section “Results and Discussion” presents and discusses the empirical findings. Section “Conclusions and Policy Implications” concludes the chapter with relevant policy implications.

The Asian Context The majority of countries worldwide are cognizant of climate change impacts and are developing strategies to adapt to its adverse impacts. A key challenge to achieving pollutant reduction targets is to incentivize investment in renewable energy, energy efficiency improvements, and promote low-carbon technologies. In developing regions like Asia, the Asian countries have tried to implement different actions and strategies to resolve the energy and environmental problems, develop green investment, and resolve institutional constraints in their economies. In 2014, developing countries had a total FDI flow of $681 billion. Asia’s developing regions comprising East Asia and Southeast Asia experienced a 10% increase in FDI inflow. The South Asian region experienced a 16% increase in FDI compared to the preceding year. The manufacturing sector has been the primary beneficiary of the huge inflow of foreign capital (Nadeem, 2019). The FDI inflow fosters economic growth, human capital development, and employment generation by transferring management skills, knowledge, and innovative technologies (Ahmad et al., 2018; Anyanwu, 2014; Tülüce & Doğan, 2014). Since 1990, developing economies in Asia have been relatively more successful in accumulating FDI than developing countries in other regions. Vast foreign capital inflows boosted the economic growth of East Asia, Southeast Asia, and South Asia in manifolds (Quazi, 2014; Ullah et al., 2018). From 1990 to 2014, the inflow of FDI to East Asia, Southeast Asia, and South Asia grew sharply from $240 billion, $616.4 billion, and $6.8 billion, respectively, in 1990 to $2886 billion, $1707 billion, and $352 billion in 2014 for each of the regions, respectively (Athukorala, 2014). FDI is a tool for economic growth and employment generation. Host countries that receive FDI are facing challenges, in the form of a worsening of the environmental performance. It can be attributed to polluting industries being transferred to host countries, increased rate of industrialization, increased demand for energy, rising urbanization and economic growth (Osabuohien et al., 2015; Sibanda &

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Ndlela, 2019). According to the sustainability theories, the inflow of investments and trade leads to a decline in environmental quality due to the overutilization of natural resources (Bende-Nabende, 2017). Furthermore, PHHPHH also made assertions that in order to reduce production costs, countries with less stringent environmental regulations are preferred by multinationals from developed countries. Stringent environmental regulations lead to increased production cost due to the extra taxes or controls on the use of some inputs. Pollutants are created and discharged into the host developing countries “environment due to excessive use of natural resources through the investment activities of the multinational companies” (AguileraCaracuel et al., 2012). Conversely, the Porter or the pollution halo hypothesis suggests that the competitiveness of multinational companies increases due to stringent environmental regulations that drive them toward environmentally efficient technologies. Consequently, these multinational companies can positively impact the environment by developing and using proenvironmental technologies (Chakrabarty & Wang, 2013). More recently, further multiple dimensional environmental challenges have developed due to rapid capital flows and anthropogenic activities such as increased use of nonrenewable energy, urbanization, and economic growth across countries (Lieder & Rashid, 2016). Therefore, the world is experiencing greater environmentally related challenges for more than three successive decades. A recent report by the United Nations Environment Program (UNEP) revealed an increase in the surface temperature by 0.89C between 1901 and 2012. This temperature increase has caused the climate to change resulting in the global food supply becoming endangered, and stunted economic growth and humans’ welfare in general (McMichael, 2013). The International Energy Agency (IEA, 2016) found a 150% increase in the total global primary energy supply between 1971 and 2014. A 16% increase per capita of carbon dioxide emissions was recorded between 1990 and 2014. This was due to 82% of this primary energy being sourced from fossil fuels. The energy and industrial sector jointly contributed around 70% to the overall global emission of CO2. From the inception of the industrial revolution, the use of fossil fuel in energy production has contributed about 32GT of CO2 emission in 2014 (Nejat et al., 2015). Consequently, anthropogenic activities have negatively impacted both environmental quality and human health. According to the World Health Organization (WHO, 2016), over 300 million deaths annually have been the direct result of environmental air pollution. Report . Similarly, Lelieveld et al. (2015) found the main cause of infant mortality globally to be the pollution of water bodies. Urbanization also poses a major threat to environmental sustainability. It has the impending consequences of rising demand for clean and stable water supply, high air pollution, disturbance of sanitation facilities, and hiking of the energy demand, leading to higher deterioration in the environment’s quality (Blum, 2016). In 2014, the United Nations found the percentage of urban dwellers globally grew from 30% in 1950 to 54.5% in 2014. The world population grew over this same period from 2.6 billion to 7.3 billion people. This means more people were living in urban areas in 2014 than were alive in 1950. Moreover, projections indicate, by 2050, the proportion of urban dwellers will increase to 66% (Cheng & Tong, 2017).

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Asia is regarded to have one of the most vulnerable environments. Environmental challenges such as air and water pollution, land degradation, deforestation, and biodiversity loss are prevalent in Asia (Jha & Whalley, 2015; Reynolds et al., 2015). China and India are, respectively, responsible for 30% and 6.5% of the total global carbon emissions. This makes them the two biggest CO2 emitters in East and South Asia. Furthermore, from 1990 to 2010, Southeast Asia’s aggregate emission alone is more than the emissions from any other regions of the world. China, India, Indonesia, and Thailand’s per capita carbon emissions rose by 333%, 259%, 184%, and 147%, respectively, between 1990 and 2014 (Phoumin et al., 2018). China globally accounts for two-thirds of carbon emissions which makes it the most polluted country in the East Asia region. The severe increase in CO2 emissions in these regions of Asia presents a detrimental impact on their environmental quality. A serious loss of biodiversity, decline in clean and safe drinking water, decreased agriculture yield, and deforestation due to environmental degradation and climate change have ravaged Southeast Asian countries such as Indonesia, Malaysia, Thailand, Vietnam, and the Philippines. The region is expected to experience a 11% decline in GDP due to environmental degradation by 2100 if no sustainable policies are put into practice (Asuncion & Lee, 2017; Ruben & Lee, 2017). Much of South Asia’s 1.8 billion people suffer from the inadequacy of safe drinking water, clean air, food supply, and sanitation (Facon & Wojciechowska, 2015; Oteng-Ababio, 2017). South Asia has a higher occurrence of diseases related to contaminated water such as cholera, malaria, and dengue. South Asia is home to the world’s most air-polluted cities (Adeel-Farooq et al., 2018). These have been the direct cause of environmental degradation and, consequently, 1.6 million deaths in China annually. It is projected that the region will lose about 1.8% of GDP due to environmental degradation by 2050. The rapid influx of FDI and economic growth overburden the environment with pollution (Lu et al., 2017). Figure 1 depicts the trends in countries’ greenfield investment, urbanization, and per capita income. Environmental degradation and its detrimental socioeconomic consequences in Asian countries make it unavoidable to inquire about these challenges’ contributing factors. Specifically, the role of greenfield investment, rampant urbanization, energy demand, and economic growth should be analyzed empirically to formulate appropriate policies for environmental protection in East Asia, Southeast Asia, and South Asia. The heavy investments in greenfield and environmental quality in this region would have many advantages, such as new job opportunities, subduing the rising CO2 emission, lowering the firm’s transactional cost, sustaining long-term economic growth, and enhancing good institutional qualities among Asian countries.

Institutional Quality, Foreign Direct Investment, and Environmental Performance Scenario in Asia Tax reforms introduced at the end of 2017 in the United States led to large-scale repatriations of accumulated foreign earnings by United States multinational

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Fig. 1 Asian FDI inflows by subregion, 2017 and 2018 (Billions of dollars). (Source: United Nations Conference on Trade and Development (UNCTAD, 2019). World investment report 2019. https://unctad.org/en/PublicationsLibrary/wir2019_en.pdf)

enterprises. This continued the downward slide of global FDI inflows in the first two quarters of 2018. Specifically, the FDI flows to developed economies declined by 27%, the lowest point since 2004. Inflows from the United Kingdom and the United States alone declined approximately 50% (down to $200 billion) and 9% (down to $252 billion), respectively (UNCTAD, 2019). On the contrary, the World Investment Report 2019 by the United Nations Conference on Trade and Development (UNCTAD) shows that inflows to developing countries such as Asia rose by 4%, representing the region with the largest inflow. Asian region remained the world’s largest FDI recipient, absorbing 39% of global inflows in 2018, up from 33% in 2017 (UNCTAD, 2019). Therefore, Asia has experienced substantial economic growth since the 1990s (Sahoo, 2006; Sahoo et al., 2014). Evidenced by the continued dynamism, greenfield project announcements in Asia doubled in value, recovering from their 2017 stagnation. FDI to East Asia rose by 4% to $280 billion in 2018, with inflows to China being the highest ($139 billion). In 2018, foreign investors in China accounted for over 60,000 new greenfield investments (UNCTAD, 2019). This accounted more than 10% of the world’s total, making China the largest developing economy recipient. Similarly, Southeast Asia countries (such as Singapore, Indonesia, Vietnam, and Thailand) experienced a rise in investment of up to 3% to a value of $149 billion. Substantial investment in manufacturing and services, particularly finance, retail, and wholesale trade, including the digital economy was the main driver in growth,

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although FDI inflow in some countries in the region, such as Malaysia and Philippines, also dropped. There was a general increase in the FDI inflows in South Asia and West Asia by 3.5% (to a value of $54 billion) and 3%, respectively. A notable increase is the inflows to Turkey and Saudi Arabia, which rose for the first time in 10 years after a persistent decline (UNCTAD, 2019). FDI has been a prominent feature of today’s global economy (Arshad Hayat, 2019). In the hope of fostering economic growth and improving livelihoods, countries worldwide have opened their economies and created conditions to attract foreign investments. However, there is a strong relationship between a country’s economic growth, the openness of its economy, its governance effectiveness, and its environmental performance (Mavragani et al., 2016; Zhu et al., 2016). While, FDI accelerates economic growth by enhancing productivity, technological diffusion, and employment generation (Abu & Afolabi, 2017; Hassan et al., 2014), it exacerbates the environmental conditions, through increased energy demand, accelerated economic growth, high urbanization rate, and overutilization of natural resources (Baek & Koo, 2008; Kareem et al., 2014). The past decade has seen FDI become an increasingly significant contributor to increased economic activities. This increased economic activity has accelerated all environmental degradation trends, for example, greenhouse gas emissions, deforestation, and loss of biodiversity (Mavragani et al., 2016). Over the next 20 years, flows of natural resource-based commodities and investment are predicted to rise faster than economic output. Governments and investors pursuing narrow economic interests at the expense of environmental and social welfare currently dominate debates on FDI. This competition encourages economic development that is not matched by necessary regulation and investors who do not exercise adequate responsibility (Yerrabati & Hawkes, 2016; Mabey & McNally, 1999). Such under-regulation of the globalization process fatally undermines progress toward sustainable development. This leads to the issue of the institutional quality of the destination countries. A country’s economic growth is greatly affected by the quality of its governmental institutions. Consequently, many studies have critically looked into the role of institutional quality in the inflow of FDI into the country (Ali et al., 2010; Brahim and Rachdi, 2014; and Jude and Levieuge, 2015). Good institutions like the rule of law, lack of corruption, efficient government, and good regulations can create synchronization between the domestic and foreign firms while holding them accountable for sustainable production. On the other hand, bad institutions lead to increased transaction costs and higher risks, leading to lower investment and long-term commitment to environmentally sustainable policies. Corruption measures the extent to which public goods are misused or used for private purposes by individuals. It is one of the important governance measures as it has an important bearing on investments. However, corruption cannot be considered in isolation from other governance-related factors as bad governance is closely associated with corruption. Studies by Gani (2007), Jadhav (2012), Dahlstrom and Johnson (2007), Khamfula (2007), Sadig (2009), Mathur and Singh (2013), Gordon

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et al. (2012), and Jensen (2003) have focused on the effect of corruption on inward FDI. Theoretical studies consistently report a positive effect of FDI on the host country’s economy, while empirical studies still produce conflicting results. Therefore, the FDI-growth relationship is mixed at best (Arshad Hayat, 2019; Gorg & Greenaway, 2004). Carbonell and Werner (2018) found no growth-enhancing impact of FDI in Spain. This implies that institutional heterogeneity is strongly associated with variations in economic performance across countries and regions. Countries with weaker institutions perform poorly, and countries with better institutions tend to perform better. Therefore, it is imperative to assume a significant role for institutional quality in altering the FDI-growth nexus. The mixed results on the FDI-growth relationship have led to the focus of research on the host country’s absorptive capacity. The host country’s domestic conditions, including human capital, economic and technological progress, and openness of the economy, will determine the effectiveness of the FDI-economic growth (Forte and Moura, 2013). Wang and Wong (2009) suggested that greenfield investments are associated with larger growth-enhancing potential. Better institutional quality enables greater FDI spillovers when greenfield investments are encouraged over mergers and acquisitions. This study assesses the interactions between FDI inflow (specifically greenfield investment), environmental performance and institutional quality, and their impact on Asia’s host countries’ real economic growth.

Literature Review There is a remarkable body of literature proving the relations between the environment, foreign capital such as FDI (greenfield investment and merger and acquisition), institutional qualities (control of corruption, government effectiveness, and the rule of law governance), and economic growth. This study divides the relevant literature into subsections as described below to hypothesize these linkages.

Greenfield Investment, Merger and Acquisitions (M & A), and Economic Growth Nexus Foreign direct investment is typically an investment from abroad that enhances both physical capital and intangible assets transfer, such as technology, ideas, and capital accumulation, among the major factors driving economic growth. However, greenfield investment is a form of FDI that has to do with investment into a new entity different from acquiring the existing investment. There is a vast literature that examines the link between FDI and economic growth. Most studies have focused on aggregates of FDI inflows into the host country; however, the empirical results on the disaggregated FDI and growth nexus have been under-researched in the literature. Most especially, greenfield investment may include biofuel investments and

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renewable energy investment that create energy efficiency, thus improving environmental sustainability. Previous studies such as by Zandile and Phiri (2019), Ali and Malik (2017), Abbes et al. (2015), Rehman (2016), and Abdouli and Hammami (Abdouli & Hammami, 2017) hinted that FDI is a significant driver of economic growth. In a similar sense, Zhou et al. (2019) and Roudi et al. (2019) conclude that a certain threshold of human capital matters to FDI to achieve sustainable economic growth in the host country. However, Hanif et al. (2019), Karnane and Quinn (2019), Sokhanvar (2019), Kaulihowa and Adjasi (2018) reported no significant relationship between FDI inflows and economic growth in the host nation. Similarly, Hanif et al. (2019), and Karnane and Quinn (2019), show an adverse effect of FDI and income in the host nation. In this chapter, a scanty research on disaggregate FDI was identified, the greenfield investment was considered as a form of FDI that involves building new facilities and M&As acquiring existing firms in the host country. Arguably, Deng and Yang (2015) suggest that M&As and greenfield investments are not the same but can be perfect substitutes since both encourage technology transfer from overseas. This view is supported by Stepanok (2015), and Ashraf et al. (2016), that nations can expand their export via greenfield investment and M&As. Also, Raff et al. (2012) and Stepanok (2015) conclude that greenfield investments generate the potential for knowledge diffusion in a large scale if encouraged. Although empirical evidence collectively suggested that FDI could play a role in achieving economic growth, political and economic structure available in a host country has a significant impact on their economic performance as articulated by Zandile and Phiri (2019), Ali and Malik (2017), Abbes et al. (2015), Rehman (2016), and Abdouli and Hammami (Abdouli & Hammami, 2017). In conclusion, based on several studies reviewed on disaggregating FDI into M & A and greenfield investment, it was found that very few studies have empirically established the potential influence of M&A and greenfields on growth. Therefore, this present study empirically linked the impact of greenfield investment on economic growth in developing economies of Asia and attempts to fill a gap in the existing literature.

Environmental Performance and Economic Growth Nexus Most of the latest literature on FDI-environment links comprises ample empirical studies on short-run and long-run relationships of various proxies of environmental performance like urbanization, deforestation, energy consumption, and CO2 emission combined with economic growth and FDI. For example, bin Abd Rahman et al. (2009) examined a nonlinear relationship between FDI, income, and population on Malaysia’s environmental quality. They found an adverse effect of FDI on the environment in Malaysia. Using a threshold regression, Chang (2012) concluded that institutional qualities such as corruption moderate the FDI and improve environmental sustainability. Al-Mulali et al. (2015), in the Gulf Cooperation Council (GCC) countries, report that FDI improves environmental sustainability via energy efficiency. They also validated the Kuznets hypothesis, as they established a positive

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relationship in the GCC countries between income and energy consumption and CO2 emissions. Similarly, Acharya (2009) also agreed that FDI matters in India to moderate economic growth and environment in the country. Hassaballa (2013) also used panel estimation techniques to establish a long relationship between FDI and the environment in selected developing economies. The author found mixed evidence in the selected sample that FDI reduces the environmental pollution of some developing countries, and however, it increases pollution in other selected samples. In the Chinese province, Lan et al. (2012) found a nonlinear relationship between environmental degradation and FDI in China. FDI worsens the environment in the low human capital-developed province in China while it improves the environment in provinces with the high human capital. Contrarily, Akhmat et al. (2014) in SAARC countries and Shahbaz et al. (2013) in low- and middle-income countries asserted that FDI harms energy consumption and economic growth in SARRC countries as well as other low- and middle-income countries globally. However, FDI improved the environment in high-income countries by reducing the amount of CO2 consumption. Similarly, in the USA, Menyah, and Wolde-Rufael (2010), employed the Toda and Yamamoto (1995) test and found a negative impact of nonrenewable energy on the environment. The second significant result is the unidirectional causality from CO2 emissions to renewable energy consumption. Lastly, Salim and Rafiq (2012) found that CO2 emissions negatively affect these countries’ economic growth in four emerging countries (Brazil, China, India, and Indonesia). The authors of the current chapter found that evidence is inclusive and mixed in the light of these empirical studies and the most recent studies in the Asian context. For instance, studies by Ansari et al. (2019), Atici (2012), Chandran and Tang (2013), and Mahmood et al. (2019) found evidence of a positive link between environment and FDI in the Asian region. They concluded that foreign investments create energy efficiency in Asian economies. In contrary, a negative association between FDI and environment is documented by Chandran and Tang (2013), To et al. (2019), and Hanif et al. (2019) in the context of Asian economies; Jiang et al. (2018) and Liu et al. (2018) in the context of China; and Tang and Tan (2015) in the context of Vietnam where FDI creates negative externalities in the region. However, Phuong (2018) found no evidence of causality between environmental degradation and external investment in Vietnam. The mixed evidence in previous empirical studies and most studies failing to account for cross-sectional dependency in the region implies that prior results can be misleading. All these weaknesses are addressed in this study. Table 1 presents the pool of literature linking economic growth, FDI, and environmental quality. There is no rigid conclusion on the relationship among income, finance (greenfield and M&A), and environmental performance among the existing studies despite the growing interest in the link between income, finance (Greenfield and M&A), and environmental performance. The causality findings with regard to the direction of their causality are inconclusive. Therefore, the under-researched greenfield investment was analyzed to fill this vacuum in the existing knowledge gap.

Country and period Turkey 1960–2005 Asia 2003–2014

Mediterranean countries (MCs) (1990–2016) Nigeria 1970–2012

Iran (1983–2013)

MENA 1990–2011 Greece 1960–2012

12 Middle East countries 1990–2008 India 1980–2003 BRICs 1990–2010

Year 2009 2018

2018

2014

2016

2013 2016

2013

2009 2014

Author Haliacioglu Adeel-Farooq, Abu Bakar, and Raji Kahouli

Posu

Katrakilidis, Kyritsis, and Patsika Omri Katrakilidis, Kyritsis, Patsika, and Tang Ozcan

Acharyya Cowan et al.

CO2 CO2

CO2

Environmental performance index (EPI) CO2 CO2

CO2

Dependent variable CO2 Environmental performance index (EPI) CO2 emissions

Panel unit root test, panel cointegration method, and panel causality tests OLS estimators Panel causality analysis

GMM (ARDL) approach to cointegration

ARDL bounds test method

Causality test

Methodology VECM, ARDL Fixed and random effect estimators and robust least squares SUR, 3SLS, and GMM

Table 1 Summary of the empirical studies on environmental quality and GDP nexus

Rethinking Green Finance in Greenfield Investments: The Moderating Role. . . (continued)

GDP ! EC ST GDP ! CO2 LT EC ! CO2 LT FDI (1ive) GDP$ELEC Russia, no causality for Brazil GDP$CO2 Russia, GDP ! CO2 South Africa CO2 ! GDP Brazil, EC ! CO2 India

Trade intensity ! environmental quality; FDI ! environmental quality; and gross GDP per capita ! environmental quality and GDP per capita ! FDI Economic growth (+ve) Trade openness (+) Foreign direct investment (+) EC ! CO2 CO2 $GDP Income ! CO2 and infant mortality. Infant mortality(ve) economic growth

Electricity consumption $ CO2, R&D stocks $ CO2 and GDP $ CO2

Results CO2 ! GDP Greenfield investment – EPI GDP þ EPI

12 359

2012

Lan, Kakinaka, and Huang Alshehry and Belloumi

Azam, and Khan Payne Ajmi, Hammoudeh, Nguyen, and Sato

Haseeb, Hassan, and Azam Kasman and Duman

2015

Kasman and Duman

SAARC 1982–2013 US 1949–2009 G7 countries 1960–2010

15 European countries 1992–2010

2015

2015 2012 2015

BRICS 1990–2014

Saudi Arabia 1971–2010

Country and period Developing countries 1970–2005 15 European countries 1992–2010 China 1996–2006

2016

2015

Year 2013

Author Hassaballa

Table 1 (continued)

CO2 CO2 CO2

CO2

CO2

CO2

CO2

CO2

Dependent variable CO2

OLS TY procedure Granger causality

Panel unit root test, panel cointegration method, and panel causality tests

STRIPAT-model/FMOLS

Johansen multivariate cointegration technique

Random effect model/GLS

Panel cointegration method and causality tests

Methodology Fixed effect model/ GLS

EC ! CO2 short-term GDP ! EC short-term GDP$EC long-term GDP$CO2 longterm EC$CO2 long-term Urbanization (mixed results) No causality on REC Mixed findings

EC (+ive) FDI (depend on human capital level) EC ! CO2 EC ! GDP GDP $ CO2 Income(+ive) EC(ive)

EC ! CO2 ST, GDP ! EC ST, GDP $ EC LT GDP $ CO2 LT, and EC$CO2 LT

Results FDI (mixed)

360 R. Nepal et al.

2017.

2014

Belaıd and Youssef Sebri and Ben-Salha

99 countries 1971–2010

OECD countries 1980–2011

ASEAN 1981–2010

CO2

CO2

CO2

CO2

CO2

CO2

CO2

Panel smooth transition regression

ARDL and cointegration approach VECM, ARDL

Pooled mean group (PMG) estimation STIRPAT

Autoregressive distributed lag (ARDL)

ARDL

CO2 $ GDP NEC ! CO2 GDP ! REC Economic growth (+ive) Energy consumption (+ive) urbanization (insignificant) FDI (+ive), economic growth(+ive), and energy consumption(+ive) CO2 ! REC GDP ! CO2 CO2 $ NREC Nonrenewable energy(+ive) Economic growth(+ive) CO2 ! GDP GDP $ REC CO2 $ REC (long term) Real income (positive) energy (negative)

NB: CO2, GDP, REC, and NREC indicate CO2 emissions, Gross Domestic Product, Renewable and Nonrenewable Energy Consumption; $ and !, these signs indicate feedback hypothesis, i.e., cause each other, and unidirectional causality, respectively

2017

BRICS countries 1971–2010

2014

Shafiei and Salim

Chiu

Algeria 1980–2012

2016

Baek

Nigeria 1971–2011

2016

Ali, Law, and Zannah

South Africa 1965–2006

2010

Menyah and Wolde-Rufael

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Data, Model, and Methodology Data and Preliminary Data Analysis The empirical analysis is based on annual time series data from 2000 to 2018 for 33 Asia countries. Data on environmental performance includes variables such as environmental health (air quality and water and sanitation and heavy metals) plus ecosystem vitality (climate and energy, air pollution, water resources, and agriculture, forests, and fisheries) computed by Yale University which is available in the weblink: https://epi.yale.edu/. Data on greenfield investment (GRNINT) is only available from 2003 to 2018 and was obtained from UNCTAD(2021). The data on real GDP per capita (constant 2010 US$) and trade openness (Trade (% of GDP)) are taken from the WDI World Development Indicators. However, a novel institutional quality data retrieved from International Country Risk Guide was employed (Table 3b). A single institutional variable was computed using principal component analysis (PCA) for horizontal summation of all the seven institutional indexes viz: Government Stability, Internal Conflict, External Conflict, Control of Corruption, Religious Tension, Ethnic Tension, and Law and Order. The study utilized data from 33 Asia countries from 2003 to 2018 for greenfield investment (GRNINT) and from 2000 to 2018 for GDP per capita (GDPPC), institutional quality index (INST), foreign direct investment, and trade openness (OPENESS), respectively. The autoregressive distributed lag (ARDL) modeling approach was used to investigate the connection between GDP growth (GDPG), greenfield investment (GRNINT), institutional quality index (INST), and trade openness (OPENESS). Table 2 represents the summary statistics of the series to investigate the impact of greenfield investment (GRNINT), GDP Growth (GDPG), institutional quality index (INST), and openness (OPENESS) on environmental performance in 50 Asian countries. The mean for indicators in the region for environmental health (EH) and ecosystem vitality (EV) (based on the environmental performance index (EPI)), GDP Growth (GDPG), greenfield investment (GRNINT), institutional quality index (INST), and openness (OPENESS) in 50 Asian countries are 67.82406, 44.85388, 4.766427, 11,635.58, 5.934991, and 89.44444, respectively. Table 2 shows the presence of a relationship among the explanatory variable based on a correlation analysis. However, the low coefficient of the variables means a low correlation among the independent variables; as such, the absence of multicollinearity problem was confirmed in this study.

Estimation Approach The relationship between greenfield investment (GRNINT), GDP Growth (GDPG), institutional quality index (INST), and openness (OPENESS) on environmental performance has been recognized and established in both economic theories and empirical studies across the world. However, existing evidences are largely mixed

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Table 2 Descriptive statistics and correlation Mean Std. Dev. Min Max Observations Correlation EV EH GDPG GRNINT INST Trade Openness of GDP (OPENNESS)

EH 67.82406 21.57033 13 100 605

EV 44.85388 20.34278 32.01 90.11 616

GDPG 4.766427 4.692822 33.1008 54.15777 612

GRNINT 11,635.58 20,829.55 0.6 135,363.2 530

INST 5.934991 1.020966 2.59 8.14 627

OPENESS 89.44444 62.45973 19.79813 437.3267 615

EH 1 0.1431 0.0982 0.0226 0.0135 0.0299

EV

GDPG

GRNINT

INST

OPENESS

1 0.0825 0.118 0.4448 0.3665

1 0.1674 0.0607 0.0211

1 0.1124 0.0735

1 0.3602

1

Note: environmental health (EH) and ecosystem vitality (EV) (i.e., the main environmental performance index (EPI) division), GDP Growth (GDPG), greenfield investment (GRNINT), institutional quality index (INST), and openness (OPENESS)

nonconclusively. In this chapter, the causality short-run and long-run causality relationships between greenfield investment (GRNINT), GDP per capita (GDPPC), human development index (HDI), institutional quality index (INST), and environmental performance index (EPI) were investigated. To achieve this goal and enrich the existing empirical literature, the environmental performance index was decomposed into its two distinct components as well: environmental health (HE) and ecosystem vitality (EV), as per the following models specified in Eqs. (1), (2), (3), and (4) as presented below, and carried out the estimations: Model One
 EH ¼ f GDPCG, GDPPCG2 , GRNINT , INST , OPENESS

ð1Þ

EH it ¼ αit þ lnGDPcGit þ ln GDPPCG2 it þ lnGRNINT it þ lnINST it þ lnOPENESS it þ eit

ð2Þ

Model Two
 EV ¼ f GDPCG, GDPPCG2 , GRNINT , INST , OPENESS

ð3Þ

EV it ¼ αit þ lnGDPcGit þ ln GDPPCG2 it þ lnGRNINT it þ lnINST it þ lnOPENESS it þ eit

ð4Þ

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EH and EV denote environmental health and ecosystem vitality, respectively, which are the main two subdivisions of environmental performance according to Yale University and GDPPC, GDPPC2 GRNINT, INST, and OPENESS , GDP per capita growth, GDP per capita growth squared, greenfield investment, institutional quality index, and trade openness, respectively. However, the intercept and slope are represented by βi (i ¼ 0, 1, 2, . . .) and eit is the error term. The subscript refers to countries, and “t” denotes the year. The following econometric modeling steps are performed to explore the dynamics of the relationships between environmental performance index, greenfield investment, GDP growth, institutional quality index, and openness.

Testing Cross-Sectional Dependence The cross-sectional dependence problem remains a crucial concern in panel data analysis, especially in regions where small economies depend on the larger ones. Therefore, this study used various cross-sectional dependence tests based on Breitung and Das (2005), and Pesaran (2015) and Frees (1995) tests. The appropriate unit-root tests are chosen to know the direction as well as the order of the integration. However, the Lagrange Multiplier test (LM) of Breusch and Pagan (1980) is justifiable when the study has a large T more than N. And for robustness purpose, Pesaran (2004) cross-sectional dependence (CD) test is employed. Academic scholars such as De Hoyos and Sarafidis (2006) argued that panel studies are usually faced with cross-sectional dependence in the errors. Also, the popular crosscorrelations of errors as a result of omitted common effects, or common shocks, exist alongside unobserved components (error term), which eventually turn out to be part of the white noise (Baltagi, 2008; De Vos & Everaert, 2016; Ditzen, 2016; Everaert & De Groote, 2016). However, ignoring this cross-sectional dependence of errors may result to serious consequences such as false policy inferences since the estimated results are nonsufficient in making statistical inference. Panel Unit Root Tests As a first step, it is highly imperative to confirm if the variables being examined are stationary, and therefore knowing the order of integration is important in validating the appropriate long-run estimation. Levin et al. (2002) and Quah (1994) investigate the integrated series in panel data devising their own tests. These panel unit root tests have been useful in innumerable research field since these tests are aimed at filling the shortcomings of a panel unit root tests when cross-sectional dependence exists. Therefore, the second-generation panel unit root tests based on the studies by Pesaran (2007), Choi (2006), become important as the common first-generation test such as (Hadri, 2000; Harris & Tzavalis, 1999; Levin et al., 2002) and also become less powerful to test the stationariness of the series in the presence of CD. The second-generation tests care for crosssectional dependence. This study used a very recent cross-sectionally augmented ADF (CADF) test suggested by Pesaran (2007) which assumes the presence of cross-sectional dependence.

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Panel Cointegration Tests The next step in the analysis is to apply the cointegration test once the order of integration of the time-series is determined. When both series are integrated of the same order, cointegration test is justifiable in detecting whether a long-term relationship exists between the variables. For this purpose, the recent cointegration test newly developed by Westerlund and Edgerton (2008) that takes care of crosssectional dependence was used. Estimation of a Long-Term Relationship Philip and Sul (2007) argued that a panel estimator would lead to misleading results when cross-sectional dependence problem occurs in a model. In the light of that, Pesaran identified Common Correlated Effects (CCE) to take care of the problem cross-sectional dependence issues in a panel data, which has been furtherly modified by Chudik and Pesaran (2015). The unobserved factors are correlated with exogenous regressors and independent across countries. Besides, the unit-roots, probable dependence of the observed regressors, and unobserved factors are captured (Chudik et al., 2011). The long-term estimators also account for cross-sectional dependence and are robust in the presence of a limited number of “strong” factors and common nonstationary factors (Kapetanios et al., 2011). Granger Causality Test: Panel Short-Term and Long-Term Causality Test The long-run relationship has been established via the Westerlund cointegration test. As the next step, this study followed Engle and Granger (1987) to determine the direction of causality among variables in the short by Pesaran et al. (1997). In this case, the dynamic panel is specified as follows where e1, e2, e3, e4, and e5 are serially uncorrelated. Σ is the speed of adjustment parameter, and α is the long-run coefficient. Xp Xp Xp α0i þ α EPI i,tl þ α GRNINT i,tl þ α GDPGi,tl l¼1 1li l¼0 2li l¼0 3li Xp Xp þ α INST i,tl þ α OPENESS i,tl þ e1t : l¼0 4li l¼0 5li Xp Xp α GRNINT þ α EPI i,tl GRNINT it ¼ α0i þ 1li i,tl l¼1 l¼0 2li Xp Xp Xp þ α GDPG þ α INST þ 3li i,tl 4li i,tl l¼0 l¼0 l¼0 Xp þ α OPENESS i,tl þ e2t l¼0 5li

ð5Þ

ð6Þ

Xp Xp Xp GDPGit ¼ α0i þ α GDPGi,tl þ α EPI i,tl þ α GRNINT i,tl l¼1 1li l¼0 2li l¼0 3li Xp Xp þ α INST i,tl þ α OPENESS i,tl þ e3t: l¼0 4li l¼0 5li

ð7Þ

Xp Xp Xp INST it ¼ α0i þ α INST i,tl þ α GDPGi,tl þ α GRNINT i,tl l¼1 1li l¼0 2li l¼0 3li Xp Xp þ α EPI i,tl þ α OPENESS i,tl þ e4it l¼0 2li l¼0 4li

ð8Þ

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Results and Discussion The study employed GDP Growth (GDPG), greenfield investment (GRNINT), institutional quality index (INST), openness (OPENESS) and environmental performance to examine the role of GDP Growth (GDPG), greenfield investment (GRNINT), institutional quality index (INST), and openness (OPENESS) toward environmental performance in the Asian economies.

Cross-Sectional Dependence Tests A cross-sectional dependence test is done to check the probable contemporaneous correlation across the units (i.e., countries in authors’ sample) to determine the types of unit root and cointegration tests that best fit their data set. Consequently, the study used several cross-sectional dependencies tests, such as Pesaran (2004), Breusch and Pagan (1980), Frees (1995), and Freidman (1937) tests. The outcome of these various tests is shown in Table 3. In Table 3, the null hypothesis of crosssectional dependence for all tests is statistically rejected at the 1% significance level. It can be concluded that each series contains cross-sectional dependence (CD) confirming the presence of interdependence among Asian economies. Therefore, economic prospect or shock, in any of these countries, seems to be transmitted to other countries within the region. First-generation unit root tests become less powerful for stationarity tests in the presence of CD. To overcome this limitation, several second-generation unit root tests are implemented and account for the presence of CD. Table 4 presents the results from the first and second generation unit root tests based on Breitung (2000), Pesaran (2007), and Breitung (2000), respectively. The table reports that the variables are integrated of the order one (I (1)). All are representatives of second-generation unit root tests due to the presence of crosssectional dependence. The null hypothesis of these unit root tests is that all series contain a unit root. However, the presence of unit root in all the variables gave the validity to process for panel cointegration test.

Table 3 Cross-sectional dependence tests Test RE model FE model

Pesaran CD test 5.347 (0.018)** 4.345 (0.000)***

Frees CD(Q) 4.956 (0.000)*** 3.961 (0.000)***

Freidman CD 52.447 (0.000)*** 82.489 (0.000)***

Breusch & Pagan Chi2 289.86 (0.000)*** 306.561 (0.000)***

Notes: ***, **, and * indicate the test statistics are significant at 1%, 5%, and 10% levels, respectively

3.774**

2.389**

57.08**

40.07**

– – – –

– – – –

– – – –

– – – –

PP-Fisher 41.16*** 4.964 150.01** 75.12*** 106.2*** 1.656

67.89**

– – – –

Second-generation test Breitung (2000) 2.130** 2.462** 3.033** 2.243 1.1941 1.495

121.57**

– – – –

Ng 2004 3.108*** 1.752** 2.541** 2.926*** 1.676 1.668

3.268**

– – – –

Pesaran 2007 2.221*** 1.257* 2.803* 1.944** 2.61*** 0.004

Note: greenfield investment (GRNINT), GDP Growth (GDPG), institutional quality index (INST), trade openness (OPENESS) and environmental performance index (EPI) ***, **, and * denote significance at 1%, 5%, and 10%, respectively. Source: Authors’ computation

EH EV GRNINT GDPG INST OPENESS First difference EH EV GRNINT GDPG INST OPENESS

First-generation test IPS ADF-Fisher 11.06*** 0.004 7.18243 14.80 4.947* 81.32*** 5.117** 45.66** 0.806 2.250** 1.768 0.396

LLC 8.371*** 8365.95 1.08453 4.351** 9.67*** 0.315

Table 4 First- and second-generation panel unit root tests

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Cointegration Tests Given the degree of integration of the variables “order one,” the existence of a long relationship between the variables using the Westerlund (2007) cointegration test was checked, given that the series are integrated of order one (I(1)). One of the major advantages of WesterLund cointegration test is that this technique takes care of cross-sectional dependence in the model. In Table 5, the results of Westerlund’s group and panel test statistics (Gt, Ga, Pt, and Pa) confirm the existence of at least two cointegration relationships between variables. In other words, our variables are associated for the long run suggesting that there is a long-run equilibrium relationship between greenfield investment (GRNINT), GDP growth (GDPG), institutional quality index (INST), and trade openness (OPENESS) on environmental performance in Asian economies.

Long-Term Estimation The results from the long-term cointegration tests suggest that greenfield investment (GRNINT), GDP growth (GDPG), institutional quality (INST)), openness (OPENESS), and environmental performance are cointegrated. The long-term parameters in the cointegration relation of each panel were checked using DriscollKraay standard errors estimator with fixed effects (CCE-FE), Augmented Mean Group (AMG) Estimator, Dynamic Common Correlated Effects (DCCE), and Two-Stage Least Squares (2SLS) to further explore the sustainability condition by taking care of both cross-sectional dependence and endogeneity issues. The results are reported in Tables 6 and 7. The results show a long-run relationship running from greenfield investment, GDP growth, institutional quality, and trade openness to environmental performance in Asian countries. The results from Table 6 show that the economies converge up to 16 long-run percent equilibrium association from greenfield investment, human capital index, GDP per capita, and institutional quality to environmental health in the region. Simply, there is an adjustment of 16% toward the long-run equilibrium relationship between the independent variable and dependent variable – environmental health. Following Table 8 on the relationship between GDP growth, GDPG squared, and environmental sustainability (using environmental health) based on Eq. 1 and 2. The result found that economic growth improves environmental health in all the models

Table 5 Westerlund cointegration test

Statistic Gt Ga Pt Pa

Value 5.812 23.538 18.282 17.362

Z-value 4.282 0.684 6.396 1.116

P-value 0.016** 0.366 0.001*** 0.288

Robust P-value 0.020** 0.080* 0.000** 0.141

Notes: ***, **, and * indicate the test statistics are significant at 1%, 5%, and 10% levels, respectively

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Table 6 Short-run and long-run estimation for the sample of countries as a whole (Model 1)

Variables Lagged EH GDPG GDPG2 GRNINT INST OPENESS

Drisc/Kraay-Std. Err. with fixed effect EV

AMG EV

0.01 [0.262] 0.01 [0.008] 0.0001 [0.000] 13.949 [7.276] 0.001 [0.102]

4.228 [7.684] 0.493 [0.719] 0.002 [0.002] 55.411*** [13.022] 0.231 [0.267]

131.654** [41.746] 511

427.592*** [95.552] 506

LGDPG GDPG2 GRNINT INST OPENESS Cons N

DCCE EV 1.055*** [0.127] 23.639 [19.655] 2.2 [1.744] 0.002 [0.002] 10.703 [10.974] 0.014 [0.242] Long run 0.476 [0.896] 0.03 [0.032] 0.001 [0.000] 5.791 [37.274] 0.354 [0.363] 86.993 [216.170] 506

2SLS EV

0.217 [0.232] 0.015 [0.008] 52.543*** [5.763] 0.687 [1.006] 0.008 [0.016]

12306.513*** [950.711] 511

Note: greenfield investment (GRNINT), GDP Growth (GDPG), institutional quality index (INST), trade openness (OPENESS), and environmental performance index (EPI) ***, ** and * indicate the test statistics are significant at 1%, 5%, and 10% levels, respectively. Source: Authors’ computation

as expected. However, the impact of economic growth on environmental health is more significant when considering cross-sectional dependence and endogeneity problem using DCCE and 2SLS models. The relationship between GDPG squared and environmental sustainability is negative in the Asia region. The indication of both positive and negative coefficients of GDPG and GDPG squared, respectively, in Asia provide an evidence of an inverted U-shaped relationship in the region which is in line with some existing studies (Adeel-Farooq et al., 2016; Katrakilidis et al., 2016; Shittu et al., 2018). The result shows that greenfield investment has positive effects on environmental health, implying that an increase in greenfield investments in Asian countries leads

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Table 7 Results of Granger causality test Dependent variables

ΔEPI ΔGDPG ΔGDPG2 ΔGRNINT ΔINST ΔOPENESS

ΔEPI – (5.99)** (0.077) (0.206)** (5.54)** (2.72)**

Short term ΔGDPG (5.996) – (29.72)** (3.43)** (0.468) (1.942)

ΔGDPG2 (4.575)** (155.9)** – (2.652)** (4.224)** (7.642)**

ΔGRNINT (7.545)** (0.834) (0.022) – (0.967) (0.081)

ΔINST (2.952)** (2.016) (4.246)** (0.882) – (0.038)

ΔOPENESS (0.168) (1.947) (5.396)** (7.135)** (2.610)** –

Note: greenfield investment (GRNINT), GDP Growth (GDPG), institutional quality index (INST), trade openness (OPENESS), and environmental performance index (EPI) ***, ** and * indicate the test statistics are significant at 1%, 5%, and 10% levels, respectively. Source: Authors’ computation

to increased environmental health. It was observed that the greenfield investment coefficient is greater than institutional quality and GDP per capita. The relatively greater coefficient of greenfield investment suggests a unit increase in this factor increases environmental performance in terms of environmental health by 0.002 and a more significant increase of 25.068 when endogeneity was considered in the 2SLS model used for this study. Adeel-Farooq et al. (2018) and Raji (2018) have found similar results, for the developing Asian countries, hinting that greenfield investment produced environmental performance in the Asian region. However, Adeel-Farooq et al. (2018) failed to separate EPI into its two distinct components of environmental health and ecosystem vitality. Therefore, their findings are unable to suggest whether both environmental health and ecosystem vitality improved or one component improved larger than the other component. This study avoids that confusion. A negative relationship is found in all models except 2SLS, regarding environmental health and institution quality in Asia. This leads to the conclusion that institution quality harms environmental performance in terms of environmental health in the Asia region. The authors encourage a policy to improve institutional quality across Asia in order to improve the environmental health of the region. Their result is consistent with the findings from earlier studies by Blomberg and Mody (2005) and Li (2006) which suggested that institution qualities matter in the environmental performance of an economy. The relationship is positive in all models between trade openness and environmental performance in terms of environmental health. The results notably indicate that trade openness contributes positively to environmental health in Asian countries. Specifically, the 2SLS model shows a positive and significant contribution to environmental health in Asian countries. Table 6 shows the relationship between GDP growth, GDPG squared, and environmental sustainability (using ecosystem vitality) based on Eqs. 3 and 4. The result found that economic growth improves ecosystem vitality in all the models as expected. However, the impact of economic growth on ecosystem vitality is more significant when accounting for cross-sectional dependence and endogeneity problem using DCCE and 2SLS models. The relationship between GDPG squared and ecosystem vitality is negative in the Asia region. The indication of both positive and

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Table 8 Short-run and Long-run estimation for the sample of countries as a whole (Model 1)

Variables Lagged EH GDPG GDPG2 GRNINT INST OPENESS

Drisc/Kraay-Std. Err. with fixed effect EH

AMG EH

0.156** [0.068] 0.009** [0.004] 0.0001 [0.000] 5.146** [2.361] 0.072 [0.040]

0.978* [3.455] 0.032* [0.356] 0.001 [0.001] 14.857* [7.045] 0.041 [0.137]

[2.486] 36.881* [25.097] 3.178* [2.068] 0.002 [0.001] 17.817** [12.718] 0.153 [0.303]

139.148** [42.582] 506

Long run 0.682 [0.654] 0.011 [0.031] 0.0001 [0.000] 19.335 [34.252] 0.398 [0.515] 89.084 [222.399] 506

LGDPG GDPG2 GRNINT INST OPENESS Cons N

91.934*** [14.459] 511

DCCE EH 0.163**

2SLS EH

0.573** [0.200] 0.002 [0.007] 25.068*** [5.088] 6.513*** [0.888] 0.084*** [0.014] (continue)

11000.766*** [867.973] 511

Note: greenfield investment (GRNINT), GDP Growth (GDPG), institutional quality index (INST), trade openness (OPENESS), and environmental performance index (EPI) ***, **, and * denote significance at 1%, 5%, and 10%, respectively. Source: Authors’ computation

negative coefficients of GDPG and GDPG squared, respectively, in Asia provide an evidence of an inverted U-shaped relationship in the region which is in line with some existing studies (Adeel-Farooq et al., 2018; Abu Bakar & Raji, 2018; Katrakilidis et al., 2016; Shittu et al., 2018). The coefficient for greenfield investment is also positively associated with ecosystem vitality across Asia in all models. This result implies that an increase in greenfield investment in Asian countries leads to increased ecosystem vitality. The sign and magnitude of the coefficient on greenfield investment suggests that a unit increase in this factor increases environmental performance in terms of ecosystem

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vitality by 0.002 and more significantly an increase of 52.543 when endogeneity was considered as per the results obtained from the 2SLS model. These results are consistent with the earlier findings by Adeel-Farooq et al. (2018) for nine developing Asian countries which found a positive relationship between greenfield and environmental performance. A negative relationship is found in all models regarding environmental health and institution quality in Asia. This leads to the conclusion that institution quality harms environmental performance in terms of environmental health in the Asia region. Therefore, the authors encourage policies toward improving institutional quality in the Asia region in order to improve the environmental health of the region. In the literature, this result is consistent with the study by Blomberg et al. (2006) which hinted that institution qualities matter in the environmental performance of an economy. The relationship is positive in all models between trade openness and environmental performance in terms of environmental health. Our results notably indicate that trade openness contributes positively to environmental health in Asian countries. A bidirectional causal relationship is confirmed between environmental performance and greenfield investment in Asia in line with the findings from earlier studies such as Adeel-Farooq et al. (2018) for 9 Asian countries and Kasman and Duman (2015) for 15 European countries. A bidirectional causal relationship is confirmed between environmental performance and institution quality in Asia. This finding implies that sound environmental policies are the determinants to limit environmental hazard costs in the region. The results are found by Kasman and Duman (2015) and Kahouli (2018). However, a unidirectional causality is confirmed between GDP growth, GDP growth squared openness, and environmental performance in the region.

Conclusion and Policy Implications This chapter explored the dynamic relationship between greenfield investment, economic growth, trade openness, institutional quality, and environmental performance for 50 Asian countries over the period 2000–2018. The study used a recently developed environmental sustainability variable (EPI) by Yale University to fill the empirical gaps in the prior studies and considered cross-sectional dependence issues across the Asia region. The authors’ panel cointegration and causality test found several interesting findings. Their results suggest future policies that encourage environmental quality in the region and political and economic structure to mitigate the malaise from production without environmental consciousness in Asia countries. Their result implies greenfield investment with strong institution improves the environmental performance in Asian countries. This result confirms that the pollution haven hypothesis in the regions can be moderated by good regulation when good institutional factors are in place. The environmental Kuznets’ hypothesis is also validated by the results from this study as the economic growth in Asian economies positively and significantly influences the region’s environment. The

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necessity to invest in boosting institutional capacity in developing economies is underscored by the results of this study especially as developing economies are generally characterized by low levels of institutional environment and endowment. In line with the existing literature, the results confirmed that both greenfield investment and good institutional qualities improve environmental health in Asian countries. Based on these findings, a policy to encourage greenfield investment and sound institutional quality in Asian countries is necessary to improve the region’s environmental performance. Similarly, their findings suggest that the impact of greenfield investment and sound institutional quality improve ecosystem greenfield investment and sound institutional quality of Asian countries. The current study is important and highly imperative as its results can guide the policymakers in developing and emerging Asian economies on the suitable policy to mitigate environmental banes and address environmental problems. Good institutions matter in ensuring the performance of the environment in Asian countries. Additionally, policymakers should encourage strategic policies on greenfield investment, strong institutions in the region for wide Asian environmental sustenance. Acknowledgements The authors thank Prof. Naoyuki Yoshino (Keio University, Tokyo Japan) and Professor Rodrigo Zeidan (New York University, Shanghai, China) for their useful comments and discussions on the previous version of this paper presented at the Asian Development Bank Institute (ADBI) conference on “green infrastructure and finance development in Asian investment, policies and economic impact.” They also acknowledge the comments received from Professor Dayong Zhang which helped in improving the manuscript. This chapter is an adapted version of a research originally published in the Asian Development Bank Institute (ADBI) Working Paper Series as ADBI working paper no. 1077.

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Farhad Taghizadeh-Hesary, Naoyuki Yoshino, and Ehsan Rasoulinezhad

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Green Projects: Problems and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insufficiency of Long-Term Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Existence of Various Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Challenge of the Rate of Return in Sustainable Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policies to Unlock Green Finance and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proportion of NBFIs in Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Establishment of Green Credit Guarantee Schemes to Lower Credit Risk . . . . . . . . . . . . . . . . Spillover Tax: An Efficient Tool to Raise Return Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carbon Tax Collection from Polluting Industries and Investment in Green Projects . . . . . . De-risking of Sustainable Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tools to Promote Sustainable Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Example of Green Finance Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CGSs Approach to Fixed Capital Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Characteristics of Community-Based Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Concluding Remarks and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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F. Taghizadeh-Hesary (*) School of Global Studies, Tokai University, Hiratsuka, Japan TOKAI Research Institute for Environment and Sustainability (TRIES), Tokai University, Hiratsuka, Japan e-mail: [email protected] N. Yoshino Faculty of Economics, Keio University, Tokyo, Japan e-mail: [email protected] E. Rasoulinezhad Faculty of World Studies, University of Tehran, Tehran, Iran e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2023 F. Taghizadeh-Hesary, D. Zhang (eds.), The Handbook of Energy Policy, https://doi.org/10.1007/978-981-19-6778-8_15

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Abstract

Various roadmaps and strategies have been proposed to promote environmental protection in the last few decades; however, this process has not been appropriate. Private investments in green energy projects are hampered by insufficient capital to finance projects, the high risk of investment, low rates of return, and the lack of capacity in the market actors. This chapter seeks to identify the difficulties in addressing the insufficient investment flows in green projects and offer workable strategies for attracting private capital to these endeavors. Establishing a novel instrument for green credit guarantee schemes to lower the risk of investment, adopting an international or regional carbon taxation scheme, increasing transparency in green regulations, establishing community-based trust funds, and enhancing the role of public financial and nonbanking financial institutions (pension funds and insurance firms) in long-term green investments are practical solutions. Keywords

Sustainable development · Green tax · Green financing · Environment-friendly projects

Introduction Owing to governments’ limited financial resources, attracting investments from the private sector or foreign countries has been the priority of the programs and policies of different political and economic systems across the world. However, attracting investments in environment-friendly projects, which are often high-risk and latereturn projects, is more important. Regardless of financial issues and economic profits, the economic activities and projects of countries should be geared toward protecting the environment and fighting climate change and global warming for the planet to be a cleaner place (Phung et al., 2022; Saboori et al., 2022) in the future. The future generation needs clean air and a pollution-free world, which is not exclusive to one person, society, country, or region. This global ideal should be pursued in unity. The COVID-19 pandemic began in late 2019 and early 2020, and the worldwide economic downturn caused a steep decline in capital flows toward green projects. To prevent the spread of COVID-19 (owing to the pandemic, the uncontrollable increase in the number of people suffering from this disease, and the deaths caused by it worldwide), countries worldwide implemented policies such as home quarantine, limitations on urban and international travel, temporary closure of markets and sales centers, and restrictions on foreign tourist traffic. Despite the effectiveness of these policies in curbing the spread of the disease, they had many negative effects on the economic activities and gross domestic product of countries worldwide. The economic recovery plans for 2021–2022 increased the global energy demand,

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resulting in a sharp increase in oil prices and other fossil fuels (the energy insecurity that happened due to the Russian-Ukrainian tension since February 2022 has led to an increase in global oil prices). However, the increase in the price of fossil fuels was unable to spur additional investments in renewable energy and energy-efficiency programs. Private investors are reluctant to participate in the green industry because of several risks and economic uncertainties (Zhao et al., 2022; Taghizadeh-Hesary & Yoshino, 2019; Sachs et al., 2019), which has prompted them to seek safer assets. This lack of interest in renewable energy and green infrastructure poses a danger to the Paris Agreement on Climate Change and the attainment of several sustainable development goals (SDGs) (Yoshino et al., 2021; Taghizadeh-Hesary et al., 2022). Capital inflows to green projects have decreased in the last decade due to the risky climate of investments. This has made green projects risky for investors; therefore, investment flows to environmentally friendly projects have been reduced dramatically. Therefore, it can be pointed out that green projects are currently not attractive to investors, especially in the private sector, and they are considered high-risk assets. Therefore, urgent financial and fiscal policy adjustments are required to bridge this financing gap, given the inadequate green sector investments. Without financial policy reforms, countries will not be able to achieve the goal of green economic development or the vital goal of a zero-carbon economy within the target period. Then, the SDGs of countries will mostly remain slogans and, in practice, suffer from a lack of implementation. The required policies include global or regional carbon taxation, regulations, and strategies for green financing; supporting policies facilitating the issuance of green bonds; establishing a green credit rating to measure the greenness of projects; promoting the digital economy; targeting energy subsidies; reducing direct and indirect subsidies provided for fossil fuels; and introducing public de-risking tools such as green credit guarantee schemes to reduce the risk of green investments. The aforementioned instruments can help countries make the green investment climate more suitable for attracting private investors and foreign investors to finance local green projects. There are two major barriers associated with green energy projects: (a) a lower rate of return compared to fossil fuel projects and (b) a higher risk of investment compared to fossil fuel projects (Yoshino & Taghizadeh-Hesary, 2018). Owing to investment risk, many banks are not interested in providing facilities for implementing green projects. Another reason for the lack of sufficient capital to invest in green projects is that green energy consumers do not participate significantly in the green project implementation process. It is important to note that the cost of production is decreasing owing to advancements in green technology. However, it is a factor that increases uncertainty in green projects; therefore, investors are not eager to participate in this uncertain environment. The more uncertain the future, the more uncertain the future will be in investors’ minds; therefore, their participation in implementing green projects will decrease. Therefore, considering uncertainty as an indicator of investment risk, it is important to reduce financing risks in green projects to the extent that private and foreign financial institutions participate in these projects (Yoshino & Taghizadeh-Hesary, 2018). The mitigation of green financing risks can attract investors to environmentally friendly projects that are essential for the planet. In other words, reducing the

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risk of green financing will attract more private and foreign investors to projects related to developing clean energy consumption, modernizing production technologies, and increasing energy efficiency. An effective policy to reduce the risk of green financing projects is to create financial incentives for nonbank financial institutions (including pension funds or the insurance industry) to participate more actively and competitively in green projects. This solution was proposed by Taghizadeh-Hesary and Yoshino (2020). They pointed out that, unlike banks, nonbank financial institutions have the potential to invest in green projects because they can participate in late-breaking economic projects. Australia provides a fantastic illustration of the function of nonbank financial institutions in promoting different sustainable investments. AGL Energy in the country has established the Powering Australian Renewables Fund (PARF), which seeks to manage the risks of sustainable projects to encourage private and foreign investors to participate in these projects. The fund has between $2 and $3 billion in cash. The fund was founded in 2016 in cooperation with the Queensland Investment Corporation (QIC). As Schub (2015) argues, countries need to expand their funds to promote green investments in addition to the banking industry. Regarding the government’s duties for this solution, the question of political incentives is crucial when there is a clash between the election cycle and the longterm nature of green projects. To address this issue, Gabbi et al. (2016) advocated the construction of a regional network for Europe, specifically the European Sustainable Banking Network (EU SBN). With the establishment of a government cooperation network, on the one hand, the weaknesses of such nonbanking financial institutions will be reduced; on the other hand, international financial synergies will be formed in the direction of developing more green projects. Taghizadeh-Hesary and Yoshino (2019) proposed developing and implementing a green credit guarantee scheme (GCGS) to reduce funding risk. This chapter emphasizes the necessity for developing practical plans for a conservative framework in the banking industry to provide green lending. This is a suitable solution for developing countries where the government lacks the financial power to implement green projects. This chapter contributes to the existing body of research by presenting creative ways for releasing green money and promoting the participation of banks and other financial institutions in sustainable projects. Providing green credit guarantee schemes to reduce financial risk, establishing insurance interactions, lowering nonfinancial risks (Egli et al., 2018), and applying a spillover tax to boost the return rate on sustainable projects are a few of these measures. The major contributions of this chapter can provide new insights and practical policies for countries in the postCOVID era when the risk of the coronavirus pandemic is minimized, and countries can focus on their economic development and growth. This chapter is divided into five sections. Section “Green Projects: Problems and Challenges” provides an argument regarding the potential problems in the development of sustainable projects. This is a crucial point: without knowing the challenges of green projects, it is impossible to choose appropriate policies to solve them.

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Therefore, in this part of the book chapter, the reader will learn about the important obstacles (e.g., high risk and low rate of return) in promoting global green projects. The next section describes the different aspects of green financing. Green financing is an essential and effective tool that can lead to investments in environmentally friendly projects and accomplish the goal of sustainable development faster. Some real cases regarding green financing are reported in section “Example of Green Finance Management,” and the final section provides research conclusions, policy implications, and research limitations.

Green Projects: Problems and Challenges This section discusses major problems and obstacles in promoting different green projects. In general, there are many challenges in the development of green projects. Many are beyond domestic economic issues and have both regional and global origins. Of course, describing all these challenges takes more than just a book chapter. Therefore, in this section, we will only explain the most critical challenges in expanding and carrying out projects related to the green economy.

Insufficiency of Long-Term Financing An important fact regarding green projects is that some of them, such as hydropower projects, are long-term projects and therefore require long-term funding. Therefore, the lack of long-term financing for such projects is a serious obstacle. In most Asian countries, the flow of capital serves the banking industry, and banks are not interested in participating in long-term financing. This is because the risk in such projects is high, and there is a possibility of losing a portion of the investment. Therefore, institutions other than banks should accept long-term financing. Nonbank financial institutions, such as pension funds, can greatly help Asian countries in the field of advancing energy policy by accepting long-term risks and allocating capital to longterm green projects. Figure 1 depicts the contributions of banking loans to financial markets in the selected Asian nations. According to the graph, it is clear that the banking industry is the dominant participant in the Asian financial markets; in fact, it is the vital point of the capital flow chain in these nations.

Existence of Various Risks Investment risk is one of the most important factors affecting the increase/decrease in investment volume in economic projects. As most green energy technologies are new, there are several associated dangers (Hwang et al., 2017), such as mechanical failures of wind power generating gears and shattered solar panels. Potential losses

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Fig. 1 Contributions of the banking industry to financial markets in selected Asian economies. (Source: Data for Lao PDR accessed from: https://www.adb.org/sites/default/files/linkeddocuments/cps-lao-2012-2016-ssa-06.pdf (accessed 5 Aug 2022). Data for Mongolia are from the Financial Sector Assessment of Mongolia; https://www.adb.org/sites/default/files/linked-docu ments/46312-001-sd.pdf (accessed 5 Aug 2022))

might exceed millions of dollars, causing substantial disruptions to businesses and projects. Climate conditions are another important factor affecting the risk of implementing green projects. Natural sources of green energy include water, wind, and sunlight. Given the threat of climate change, the degree and quality of these resources across geographical areas have undergone significant changes. Many justified green projects may lose their efficiency due to climate change. Society’s acceptance of sustainable development is also an important issue that poses a risk to the demand for green energy. Society’s desire to use vehicles with clean fuel is an issue that may not be desirable to the consumer due to associated high prices. This image will negatively affect the consumption patterns of those who demand sustainable development for a long time. Global financial and geopolitical crises and military tensions are other important factors that increase or decrease the risk of investing in green projects. These crises, which are all exogenous and unpredictable shocks, are critical in attracting investors’ presence and active participation in the implementation of green projects. CEMAC (2017) and JBIC (2016) depict trade liberalization as having a positive role in transferring green technologies and renovating old factories. Therefore, green projects are associated with high risk, regardless of the discussion of commercial interactions and the existence of inter-country cooperation networks. This indicates that countries rely on one another to operate green projects; hence, currency rate variations impact final production costs, and exchange rate risk is significant.

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Green projects often pose additional risks. The economic security risk of the host country investing in green projects, the transparency of investment regulations in the host country, the existence of tax exemptions, and the provision of government subsidies to private and foreign investors in green projects are among the factors and risks that hamper the development of green projects.

The Challenge of the Rate of Return in Sustainable Projects Sustainable technologies are largely in the early stages of research and are less financially feasible than fossil fuel technologies, many of which date back more than a century. This makes eco-friendly technologies costlier and riskier. Inaccessibility to regular finance sources raises the cost of debt (borrowing interest rates). Therefore, it can be concluded that green projects generate lesser profit for investors than fossil fuel projects (Leonard, 2014; OECD, 2015; UNEP, 2016; Merrill et al., 2017; Coady et al., 2017) do. According to basic economics, the investor seeks personal benefit rather than seeking to address environmental issues and help improve the future of humanity. The investor expects that the profit obtained from their investments in the implementation of the green project will be significant and greater than other investment options. Countries, especially developing ones, have not yet found a reliable and effective solution to increase the efficiency rate of green projects. They are waiting for a one-time event in the oil market, such as a sharp drop in the price of oil, to justify the price of clean energy, increase demand, and make projects more profitable.

Policies to Unlock Green Finance and Investments This section outlines concrete policies to facilitate green finance in overcoming the obstacles outlined in the preceding section.

Proportion of NBFIs in Investment Institutional investors in OECD nations manage assets worth over $100 trillion. Many institutional investors have implemented climate risk mitigation methods such as portfolio scoring based on green criteria. These strategies reflect the mandates of certain fund managers and the realization that climate concerns might have a measurable influence on business valuations and, consequently, institutional fund performance (Gianfrate & Lorenzato, 2019). Recently, it has become clear that two key investor and regulatory constraints might increase institutional investors’ participation in green initiatives. Environmental concerns increasingly influence investors’ investment decisions. This practice is particularly prevalent – investors at NBFIs desire more stringent environmental, social, and governance compliance.

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An important debate is whether financial institutions’ investment decisions should pay attention to environmental issues in addition to financial profitability issues. One example is the founding of the Task Force on Climate-Related Financial Disclosures by the Financial Stability Board, which suggests that global organizations improve their financial disclosures regarding the possible implications of climate change (Gianfrate & Lorenzato, 2019).

Establishment of Green Credit Guarantee Schemes to Lower Credit Risk Credit guarantee corporations (CGC) are governmental institutions that support organizations that lack access to finance, such as SMEs and start-ups, by acting as guarantors to make it simpler for them to borrow the funds required for their company operations from banking institutions. Credit guarantee schemes (CGSs) have been utilized in various countries and forms for decades to boost the flow of financing to specific sectors and parts of the economy. A CGS increases the attractiveness of lending by absorbing or sharing related risk. As a type of collateral, a CGS can boost the amount of funds it lends to businesses above its collateral limits. A CGS can take on the additional responsibilities of loan evaluators and monitors, thereby enhancing lending quality (Zander et al., 2013). However, there is a cost associated with guarantee funds, which are covered by fees levied by the government or third-party organizations. According to Mankiw (1986), the purpose of a credit guarantee is to offset the inefficient credit allocation induced by knowledge asymmetry between borrowers and lenders. Minimizing information asymmetry is the secondary objective of providing credit guarantees, and the government’s ultimate objective is to offer an appropriate level of loans to SMEs by reducing information asymmetry. CGSs were used in multiple nations, at least in the early twentieth century (Beck et al., 2008). Japan was a pioneer in innovation. In the 1950s, CGSs proliferated throughout Europe and the Americas, followed by Africa, Asia, and Oceania, in the 1960s and the 1970s (Zander et al., 2013). There were 8402 credit guarantee institutions worldwide (ADB, 2014). Historically, many nations, such as Japan, have had full guarantee programs that paid 100% of the default cost borne by borrowers (Uesugi et al., 2006; Yamoria, 2015). However, the Japanese government has recently changed its position and implemented a limited credit guarantee, as a full guarantee creates a moral hazard. When the government covers all default costs and assumes all risks, the lending institution has little incentive to evaluate and monitor the borrower’s health. This could increase the number of nonperforming loans in the banking sector and diminish the effectiveness of public reserves. Consequently, partial CGSs is the best approach. Guarantee financing is an alternative to collateral-based financing. As a result of the Covid-19 pandemic, several governments, such as the government of Japan, established full guarantee coverage to assist vulnerable sectors in their survival.

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Fig. 2 Green credit guarantee systems’ flow of operation. (Source: Author’s depiction)

Taghizadeh-Hesary and Yoshino (2019) theorized that a green credit guarantee scheme (GCGS) might be applied to the green sector (Fig. 2). The GCGS for low-carbon projects will reduce information asymmetry and predict default losses because the green credit guarantee corporation guarantees a share of a loan default (government); consequently, banks will wish to lend money to these guaranteed low-carbon projects. In typical green project financing circumstances, a negative loan supply might be detected as depicted in Fig. 3, by a loan supply curve with a negative slope. Owing to knowledge asymmetry between banks and green projects, banks set a far higher interest rate when lending to green projects than when lending to large businesses; they are also hesitant to provide a significant amount of money for risky green initiatives. This explains the rearward-bending loan supply curve of green projects. However, credit guarantees for green projects reduce information asymmetry and, consequently, the expected default losses, since a portion of loan defaults are guaranteed by the credit guarantee corporation (government); therefore, banks would prefer to lend money to these guaranteed green projects. The dashed line in Fig. 3 depicts the loan supply curve when a credit guarantee scheme exists. The dashed line becomes flatter if the guarantee ratio improves, which means green projects will have easier access to financing because banks will be more willing to lend to them. GCGS facilitates bank financing of green projects because GCGC will pay a significant portion of the lender’s losses if a green project collapses. For instance, if the guarantee ratio is 80%, the bank can collect 80% if a green project defaults. Without a guarantee, the bank may be unable to reclaim any loans (TaghizadehHesary et al., 2021).

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Backward bending loan supply curve

Normal loan supply curve for low-carbon projects with a GCGS

Fig. 3 Green credit guarantee scheme and loan supply curves for low-carbon projects. rGreen lending interest rate for green projects, LGreen loan amount for green projects. (Source: Author’s depiction)

Three issues must be addressed and considered to obtain an optimal GCGS that does not rely on the government’s annual budget and is financially viable. • Initially, what is the best credit guarantee ratio (i.e., the portion of the loan covered by the guarantee) to satisfy the government’s goal of lowering banks’ NPLs for green projects while achieving its goal of supporting green projects? • Second, will the ratio remain consistent regardless of the macroeconomic environment? • Third, should the ratio be the same for all banks, or should it vary based on each bank’s financial health? Taghizadeh-Hesary et al. (2022) answered these questions theoretically and empirically. According to their research, the loan guarantee ratio is influenced by three variables: (i) the financial stability of the lender (bank), (ii) economic climate, and (iii) the state’s policy for financing green initiatives. Economically sound lenders may be eligible for a larger guarantee ratio; however, a more suitable economic climate and government policies may reduce the guarantee ratio. A moral hazard is created if all banks use the same credit guarantee ratio. The appropriate credit guarantee ratio should be different for each country depending on the macroeconomic climate and for each bank or group of banks, based on their financial health (Fig. 4).

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Fig. 4 Optimal credit guarantee ratio based on the creditworthiness of borrowers and lenders. (Source: Authors’ depiction)

Spillover Tax: An Efficient Tool to Raise Return Rate As mentioned earlier, the lack of high and favorable return rates for green projects is one of the main obstacles preventing an increase in investment in these projects. It is almost irrational for investors to be attracted to green projects owing to factors other than financial profit. This is because the investor has tried to accumulate capital and is, therefore, interested in using this capital to generate profits. An important tool for increasing the efficiency rate of green projects is to use the spillover effects of green tax. The accepted principle is that the government often tries to adjust yield rates rather than leave the determination of the rate level to the capital market. This problem causes the financial structure of green projects to depend on government decisions and interventions. Governments generally like low rates of return, which, along with taxes, make private sector investors uninterested in participating in infrastructure projects. To improve the investment environment in green infrastructure projects, governments can benefit from the spillover effects of green taxes and return a part of the taxes received to the investors of projects as the return rate of participation. Government action and policy can lead to more investors from the private sector to participate in green electricity production projects. As a result of this greater participation, the production of green electricity will develop, which will result in more construction, strengthening of the green electricity supply chain, regional development, and the welfare of people. The development of green electricity production can also be beneficial for the government due to associated higher tax revenues as the strengthening of the economy will mean increasing the income and sales tax rate, which will increase government revenues. Yoshino et al. (2019)

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pointed out that this increase in tax revenue from the development of green electricity production should be redistributed to investors in green projects. Suppose this happens, the return on investment in such projects will increase, and it will be a motivating factor to encourage more investment from the private sector and foreign investors. Allocating a portion of the tax revenues from the development of green electricity production will return the benefit from a green project to other green projects, which is referred to as the “waterfall of green tax spill-over effect.” This is illustrated graphically in Fig. 5. The rate of return on a renewable energy project in the first year is close to zero. In the first year, the positive effect of green energy production in the region is insignificant; in fact, the positive effect requires the passage of time for economic and welfare benefits to be generated. The development of green energy production leads to the economic development of the region. During such a time, the government can implement the redistribution of a portion of the green tax income to redevelop green projects in the country. According to Fig. 5, the return on capital and the creation of the tax effect starts from time t. It should be pointed out that if investors from the private sector are satisfied only with the project’s income, the initial rate of return is close to zero, and they should wait for the passage of time for positive effects to develop and the rate of investment return to increase. Therefore, this expectation may not be desirable for private sector investors, and participation in such projects is ruled out based on economic rationality. However, in this chapter of the book, such a proposal was made so that the government could increase the efficiency rate of green projects by

Increased government tax revenue caused by the spillover effect of energy supply Actual return

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