Foreign Relations & International Law

Hot Commodities: No Plan B

Ellen Scholl
Thursday, December 17, 2015, 4:38 PM

No Plan B

Over the weekend, 195 nations agreed to limit greenhouse gas emissions to whatever extent is necessary to limit global warming to less than two degrees Celsius. This is good news because, as UN Secretary General Ban Ki-moon stated, there is “no Plan B.”

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No Plan B

Over the weekend, 195 nations agreed to limit greenhouse gas emissions to whatever extent is necessary to limit global warming to less than two degrees Celsius. This is good news because, as UN Secretary General Ban Ki-moon stated, there is “no Plan B.”

While the agreement has been lauded as historic, many have also pointed out that actually meeting the two degree target will be a self-fulfilling prophecy. The rub? While the agreement is binding, the emissions reductions promised by the parties—the so-called INDCs—are not, meaning the real work is still to come. As EU Commissioner for Energy and Climate Action Miguel Arias Canete put it in the New York Times, “Today we celebrate. Tomorrow, we have to act.”

To learn more about specific provisions, The New York Times has an explainer for you, while Brookings covers the good, the bad, and the work still to be done. Meanwhile, the Washington Post’s Chris Mooney explains just how difficult meeting the targets will be. For the more visually inclined, Bloomberg has a Carbon Clock showing emissions numbers in real time.

Meanwhile, for those more interested in how the agreement came to pass rather than what it contains, Nick Mabey takes a deep dive into the politics behind the deal. In The Geopolitics of the Paris Talks, Mabey explores how nearly 200 countries entangled and enmeshed in complex alliances made it through--and whether or not they will now uphold their commitments.

In some corners, the agreement has been held up as a triumph of principles over politics and an example of choosing what is right over what is easy. But Mabey argues that ultimately “national interest dynamics, not abstract principles, are the political foundation—strong or weak-- n which the Paris Agreement is built.” In particular, Mabey attributes the shift in US position—from refusing to ratify Kyoto to a member of the ‘High Ambition Coalition’ in just a few short years—to President Obama’s desire to secure climate protection as part of his legacy. And he notes that other major players in the talks had similarly self-interested rationale for pursuing an agreement.

True, it is possible that pragmatism, and not principles, drove the deal to its conclusion. But in a year where the most influential people in the world are regarded to include the most notorious terrorist since Osama bin Laden, an oft-shirtless national leader unbound by international law, and a real estate mogul turned anti-immigrant populist, the deal offers proof that the diverse countries of the world can come to an agreement on extraordinarily complex issues. So whatever the motivation, it is a welcome note on which to end 2015.

Ambition and Reality: ‘Paris Talks, Beijing Coughs

While the world celebrated one environmental milestone in Paris, China marked another at home. The country issued its first ever Red Air Alert since introducing an alert system in 2013. Schools closed, flights were grounded, and cars were banned from the roads as the U.S. Embassy reported air quality readings of 250-300 micrograms of particulate matter per cubic meter, ten times the level recommended by the WTO. Although some view the alert issuance as an indication that the Chinese government is taking environmental issues more seriously, others say warnings in lieu of actions only demonstrate that China’s regulatory system is not up to the challenge. This is a worrisome conclusion in the context of the freshly inked, and still fragile, agreement reached in Paris.

Furthermore, a significant discrepancy between official Chinese readings and that of the U.S. Embassy, as shown in the Financial Times, further highlights that allowing countries to report their own emissions data in the context of an international agreement may prove problematic. Trust and verify?

The focus on Beijing continues, but India, not China, boasts the most polluted cities in the world.

As Keith Johnson writes for Foreign Policy, India has 13 of the top 20 most polluted cities in the world. Millions of citizens still do not have power and India plans to install 85,000 MW of electric generation capacity between now and 2017. Much of this new capacity will be coal-fired, as the IEA’s Southeast Asia Energy Outlook makes clear.

In short, following an agreement many hailed as the end of coal, India announced just the opposite--that its coal development would continue apace. And they are not the only ones; the Asian Infrastructure and Investment Bank announced $1 billion in financing last month for coal development in Indonesia over the next four years, while Japan and South Korea are also continuing with plans to open new coal-fired power plants.

Let’s Make a Deal: The Ryan Edition

While the agreement may be making dubious waves in Asia, back in Washington it appears the spirit of compromise might be contagious.

In a far-reaching budget deal announced late Tuesday evening, both Republicans and Democrats got something they wanted. [And as an early Christmas gift to Federal employees, Congress didn’t shut down the government to get it.] The agreement includes both a five year extension of tax credits for renewable energy projects—namely wind and solar—and a removal of the restrictions on crude oil exports. The restrictions on oil exports were enacted in response to the Arab Oil Embargo in 1973, and are regarded as outdated and ill suited policies of scarcity in an age of abundance.

Efforts to remove the restriction gained traction as energy prices have plummeted, and many say removing the ban will end a mismatch between crude production and refinery type which distorts the domestic market. The president has previously threatened to veto stand-alone legislation lifting the ban, however, he is anticipated to approve it as part of the larger spending package approved by Congress later this week.

As Jason Bordoff put it to the Financial Times, “It’s not every day that a compromise across the political aisle actually yields two good policies, but this is one of those cases. Free trade in oil plus more support for clean energy: that’s a very positive outcome.” Writing for the Council on Foreign Relations, Michael Levi agreed that the deal was a “win-win.” Levi argues that the implications for markets and greenhouse gas emissions are minimal, while the geopolitical impact is positive.

Playing the Long Game

Despite the urging of many members suffering from declining revenue thanks to low oil prices, OPEC decided against production cuts at its meeting December 5. Staying the course is unwelcome news for cash strapped producing countries like Venezuela. Even Saudi Arabia—the architects of the pro-production policy—are burning through $10 billion in currency reserves per month according to the Wall Street Journal. However, the Saudis remain steadfast in their unwillingness to cede market share, particularly as the waiting game for Iranian production continues.

This decision comes a year after OPEC’s initial break with former price setting policy. In contemplating the past year—and pondering how despite rock bottom oil prices producers are still weathering the storm—CFR’s Michael Levi and Blake Clayton (whose book, Market Madness is a nice stocking stuffer for those who cannot get their fill of the oil price debate) go beyond break-even prices.

According to their analysis, there are blind spots in the way we think about break-even prices and what they mean for stability. In particular, as Saudi Arabia has proven, fiscal reserves matter, and break-even prices can be moving targets in times of difficult market conditions. For instance, many oil producing countries also use times of low oil prices to reduce domestic fuel subsidies, and thus their budget outlays. In short, while economics and geopolitics are intertwined, Levi and Clayton illustrate that break-even prices as a barometer can be tricky and even misleading.

Tricky indeed. Writing for Fuel Fix, Amy Myers Jaffe says that Paris, along with the so-called age of shale, have changed the nature of the oil price game. How? “Producers are coming to realize that oil under the ground might someday soon be less valuable than oil produced and sold in today’s market.” In this new normal, fears of peak supply have given way to the reality of peak demand. Thus OPEC (read: Saudi Arabia’s) preference for market share over price might be a perceptive choice.

According to Jaffe, this new normal leaves Saudi Arabia and Russia hoping that low prices will eventually knock certain resources out of the market--and leave more room for the two to compete for dwindling demand. Given the difficulties facing high-cost producers, the strategy has had some success, although the entry of U.S. crude exports could complicate the picture. Bloomberg has more on Saudi Arabia’s strategy to retain market share, namely by spending billions to invest in Asia, buying into refineries and solidifying long term supply relationships. It remains to be seen how the loosening of U.S. oil exports will impact this battle for market share.

What to Watch

The “Zohr Effect

Zohr is the largest gas field in the Eastern Mediterranean. Some argue its discovery off the coast of Italy this summer by Italian producer Eni may provide a reason for troubled regional neighbors to overcome their differences and work together. The growing potential of the Eastern Mediterranean basin, which also includes the Tamar and Leviathan fields off the coast of Israel and the Aphrodite field off the coast of Cyprus, could serve as a catalyst for cooperation. Still, others warn that the delicate process of negotiating sea boundaries, transport routes, and supply contracts could be more divisive than unifying.

In Egypt, which became a gas importer in the fallout of the Arab Spring, hopes are high that drilling operations in the Zohr field will yield results and satisfy domestic demand. Meanwhile, the future prospects for Leviathan in Israel seem to be dimming. According to Quartz, despite grand ambitions, Israel is struggling to find customers for its gas. In particular, Egypt suspended negotiations following an international arbitration court ruling, which decided in favor of an Israeli utility after Egypt cut off its gas exports in 2011. Hopes of exporting to Jordan have also been cut short, thanks to domestic political opposition in that country.

As the fate of the fields remains to be seen, the leaders of Egypt, Greece, and Cyprus have established a Joint Committee of Cooperation to focus on tourism, investment, and energy. Meanwhile, Israel, Greece, and Cyprus are expected to send representatives to an energy summit in Nicosia next month.

Heading South for the Winter

As the relationship between Turkey and Russia continues to deteriorate, dreams of Turkish Stream begin to look like a distant memory. Russian Deputy Foreign Minister Meshkov called Turkey a “real threat” to Russian security and said the country should provide compensation for the downed Russian plane. Meanwhile, Keith Johnson at Foreign Policy has changed his tune and now acknowledges that the seemingly ‘untouchable’ energy sector is feeling the chill in relations.

Turkish Stream may have been the first casualty--and still a point of argument as to who pulled the plug—but recent reports also indicate that work has also been suspended on a Russian-led nuclear power plant in Turkey. Incidentally, while the nuclear deal with Turkey appears to be headed south, interest in nuclear power is on the rise in the region. Egypt just signed two nuclear deals with Russia.

Russia’s energy fortunes seem headed in a similar direction. Between the Energy Union, Saudi Arabia’s own pivot to Asia, rock bottom energy prices, and an international agreement on greenhouse gas emissions, things do not appear to be looking up. Nord Stream II also remains under fire, as Italian Prime Minister Matteo Renzi joined the chorus of those in opposition to the project, a list which includes 7 EU member states. The project was the ‘elephant in the room’ at today’s EU summit, as some in the EU feel that commercial cooperation on the project is at odds with EU sanctions against Russia, which are up for renewal.

Curious to hear how President Putin feels about these seemingly sticky situations? Lucky for you, the President held his annual news conference/television drama/reality show today to deliver what Bloomberg billed as his reflections on ‘Love, War, and the Ruble.’

You can watch Putin pontificate on topics ranging from his anger at Turkey to his admiration of Donald Trump here. And if you don’t have four hours to spare to watch Putin hold court with what the New York Times calls ‘customary swagger and salty language,” you can just read the article.

Ellen Scholl is a Robert Bosch Fellow currently working in Berlin, where she focuses on energy policy and security. She previously worked on energy issues for the Texas Legislature and the U.S. Congress and completed the U.S. Foreign Service Internship Program during graduate school. Ellen has an M.A. in Global Policy Studies from the LBJ School of Public Affairs and graduated with highest honors from the University of Texas at Austin with a B.A. in Government and Humanities.

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