September 24, 2014
Security was the leading theme of a closed expert debate organised by the Polish Institute of International Affairs and its Turkish counterpart – the Centre for Strategic Research of the Ministry of Foreign Affairs of the Republic of Turkey (SAM – http://sam.gov.tr/about-sam/). Inspired by the discussion, and the more unofficial opinions voiced behind the curtain, I have decided to re-visit the issue of energy security, this time from a slightly different perspective.
Not long ago, while discussing the draft of the Polish Energy Policy until 2050, I underlined those aspects of energy security which go beyond physical security and access to energy resources. Energy security is a system centred around policies pursued by individual countries and international institutions. At the same time, it requires policies and a business climate that promote investment, progress and innovation to ensure that adequate supplies and infrastructure will be available in a timely way in the future. Since these two aspects, politics and investment, are interwoven, it is difficult to improve energy security without international cooperation (coordination). However, cooperation alone is not enough, because the problem of energy security resembles a prisoner’s dilemma where mutual trust is necessary to improve the situation for all parties. And trust is based on credibility. The case at hand is about the credibility of one’s economic policy, of which energy policy is an important component.
Can a policy’s credibility be evaluated? Yes, it can, as financial markets demonstrate on a daily basis. How can we do that? Let’s consider a relatively simple example – monetary policy. Using their knowledge of and information on the economy, experienced participants of the market (let’s call them analysts) create models which simulate how the economy is going to develop in the near future. Central banks do the same. In a given state of knowledge and with universal access to information, both analysts and central banks obtain largely similar projections of economic growth, job markets and inflation. Knowledge of economics also indicates how central banks should react to future changes in the inflation rate. The credibility of central banks follows from the fact that they base their decisions on solid factual information which the markets can read. If central banks make surprising decisions which they are not able to justify, risk increases and investors sell off risky assets or demand greater returns.
Despite being much more complex, energy policy may also be evaluated. Suffice to say that any policy is comprised of regulations which the government uses to achieve such results as higher capital expenditures or lower energy consumption per production unit. At the heart of each such regulation lies a cause-and-effect relationship linking the instrument (regulation) to the outcome (desired result). Even if this relationship is highly complex, it should lend itself to a factual evaluation, as the regulator must have connected the effect and cause somehow. Seeing that such a mechanism exists, we may ‘replicate’ it using our economic and social knowledge to verify whether it can deliver the expected results.
This is facilitated by appropriate tools (models), which must be prepared in advance, however – a task which requires systematic and interdisciplinary research. Research into the effects of regulations has an additional benefit in that it allows us to identify areas where our knowledge is imperfect. Discussing the risk emerging when a policy takes a leap into the unknown, Noble Prize winner Edmund Phelps says: “At the simplest level, economics can better show us the consequences of our actions. Less simple are cases in which we don’t have the knowledge to predict the full consequences. Global warming and climate change is an example. Actions that we believe will remedy a perceived problem may in fact lead to an unintended consequence… Generally speaking, global energy systems are so complex that interfering with them will almost certainly lead to unintended consequences” (First Things, Economic Justice and the Spirit of Innovation, October 2009).
Knowing the limits of our knowledge is necessary to evaluate whether policymakers venturing into the unknown are fully aware of the risk or whether they do so because they lack knowledge which is objectively available.
In the first case, where such actions are born of necessity, we must consider a comprehensive spectrum of possible scenarios and then evaluate their outcomes, which will help us identify what risks can materialise when the policy is implemented. This is the approach we chose three years ago when contemplating shale gas projects in Poland. We identified three possible directions in which the sector might develop depending on how current conditions encourage investment, progress and innovation, and then investigated their outcomes.
The second situation should never come to be, and to prevent it from happening in Poland we need strategic, systematic and interdisciplinary research into the energy sector, which should look into strategic aspects of energy and climate policies and into the actions taken by the government/state and companies. Security is one of such strategic matters requiring a systematic approach. Energy security is a public good and as such lies within the remit of the state, which decides how to ensure energy security today and in the distant future. However, the actual ‘delivery’ of energy security is accomplished by companies which, acting within a framework imposed by applicable regulations, ensure uninterrupted energy supplies at an acceptable price. And it is those companies that are first to evaluate the practical cost of the regulations – the cost of security. We should therefore take their opinion into account when researching the energy sector, which should allow us to reduce our ignorance in areas where its cost is the highest.
Improving energy security requires a well-designed and durable strategy, which can only be achieved with appropriate knowledge and interdisciplinary research. It is high time we began working on it.