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The status of Chinese–Russian energy cooperation in the Arctic

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Authors: Ekaterina Klimenko & Camilla T.N. Sørensen

[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] T [/yt_dropcap]he Arctic is estimated to contain 30 per cent of the world’s undiscovered oil and gas reserves. Climate change has accelerated the melting of the Arctic ice, making these resources more available. This backgrounder looks at the status of Chinese–Russian energy cooperation in the Arctic.

In the past decade, Russia has been actively developing Arctic resources and shipping routes, while boosting its military presence in the region. While Russia has primarily worked with European countries to develop its energy resources, including in the Arctic, a number of factors have led Russia to reconsider and look even more to Asia for potential investors and technology partners, and as a key consumer market. China is increasingly highlighted as an important partner for Russia in developing the Russian Arctic.

China has increased its focus on and engagement in the Arctic over the past decade. From a Chinese perspective, cooperation with Russia on Arctic resources and shipping routes also helps facilitate a greater Chinese role and influence in the region and gradually gain respect and acceptance for China as a legitimate Arctic stakeholder.

Interests in the Arctic

Russia’s Arctic strategy identifies the following core national interests: (a) use of the Arctic Zone of the Russian Federation as a strategic resource base; (b) safe-guarding the Arctic as a zone of peace and cooperation; and (c) use of the Northern Sea Route as a national integrated transport-communication system for Russia in the Arctic. Among these goals, the development of offshore and onshore oil and gas resources is a top priority.

The Russian economy is largely dependent on revenues from oil and gas. At least 50 per cent of federal budget revenue is generated from exports of energy resources. Most of Russia’s oil and gas production is concentrated in the traditional areas of western Siberia. However, their depletion over the past decade means that the geography of production has been shifting to new regions to the north of western Siberia, including the Yamal Peninsula and the Arctic seas.

To date, China’s focus and activities in the Arctic region have been primarily concentrated on its scientific interests, particularly those that relate to how the melting ice and changing climate in the Arctic will affect China. However, over the past decade, China’s activities have begun to concentrate more on economic interests and concerns about securing and diversifying China’s supply of energy resources and minerals. China has also developed a growing interest in the Arctic shipping routes, which could provide it with alternatives to the longer and strategically vulnerable routes currently in use. Furthermore, China is interested in securing a voice in the evolving Arctic governance regime, which is related to its importance and potential implications for wider global and regional governance.

As a result, China seeks to diversify and strengthen its bilateral relations with all the Arctic states by establishing stronger diplomatic ties, scientific cooperation, and economic partnerships.

Drivers of Chinese–Russian energy cooperation in the Arctic

Russia

Major shifts in world energy markets have significantly affected the development of Russia’s Arctic shelf resources and the expansion of the current onshore resources of the Yamal Peninsula. At least three key factors have led to a significant overproduction of natural gas in Russia and hence delayed the development of gas resources on the Arctic shelf: (a) EU plans to prioritize the diversification of gas suppliers in the European market; (b) difficult relations with Ukraine, which is the third largest consumer of Russian gas; and (c) shale gas revolution has also resulted in the loss of other potential markets.

In relation to oil, estimates suggest that the fall in oil prices has made the development of the Arctic shelf oilfields unprofitable. This will continue to be the case while the price of oil stays below USD $100 per barrel. However, the decisive factor in the need for Russian companies to diversify their partnerships has been the geopolitical tensions between Russia and the West in the wake of the crisis in Ukraine.

The USA and the EU introduced sanctions against Russia in 2014 after Russia’s annexation of Crimea. Among these sanctions, the third package, which was introduced in July 2014, has had significant implications because it concerns the transfer of technologies. The USA and EU sanctions include a ban on the transfer of equipment and technology for deep drilling below 150–152 metres, as well as on exploration and development of Arctic shelf shale oil reserves.

These sanctions forced ExxonMobil, Statoil and other Western companies to suspend their cooperation with Russia in the Arctic. The third package of sanctions also introduced strict financial restrictions, applied to loans of longer than 30 days. The largest Russian banks and corporations in Russia, such as Rosneft, Transneft, Gazpromneft, Gazprom, Novatek, Lukoil and Surgutneftegaz, remain under sanctions. This has made it difficult to seek financing for Arctic projects in Western financial markets.

China

Seen from Beijing, Russia, as the biggest Arctic state, stands as an important gatekeeper and ‘necessary partner’ for non-Arctic states such as China. China knows that in many ways it is dependent on Russia—for example, for Russian goodwill and support—if China is to increase its activities and consolidate its role as a legitimate stakeholder in the region. Consequently, in a Chinese analysis, there is no way to avoid dealing and getting along with Russia in the Arctic.

Despite the lower growth rate of the Chinese economy in recent years, its demand for energy and resources continues to grow and its state-owned enterprises are continuously encouraged to identify and establish new areas for exploration and extraction. China sees the Russian Far East, Siberia and the Russian Arctic as increasingly important due to their potential in relation to energy resources, export markets and new shipping and trading routes. It also sees these regions as recipients of and partners in Chinese-led infrastructure and other development projects.

These activities have synergies with China’s high-profile ‘One Belt, One Road’ initiative, through which China is seeking access to vital European markets through Central Asia and Russia. China also seeks to take advantage of current Russian geostrategic and geo-economic vulnerabilities and of Russia’s need for China as a partner to gradually strengthen its presence and relationships in the Arctic.

Concrete steps towards Chinese-Russian cooperation on the development of the Arctic shelf

In February and March 2013, during a round of oil delivery negotiations, Rosneft and the China National Petroleum Corporation (CNPC) discussed opportunities for cooperation on shelf projects in the Arctic Barents Sea and Pechora Sea, with a particular focus on the Zapadno-Prinovozemelsky, Yuzhno Russky, Medyskoe Sea and Varandeyskoe Sea deposits. Among these, the Medyskoe Sea and Varandeyskoe Sea are the most promising, containing an estimated 3.9 million and 5.5 million tonnes of oil per year, respectively. Although the head of Rosneft, Igor Sechin, confirmed a commitment to work with China on the Arctic shelf early in 2014, however, no official confirmation or details have yet to emerge.

In late 2015, Russia’s Deputy Energy Minister reiterated that Rosneft was still ‘negotiating’ and ‘discussing’ its participation in Arctic shelf energy and extraction projects with China. The relative lack of progress over nearly two years could indicate that China is either reluctant to invest or trying to get a better deal. Moreover, the fact that China did not invest in the Vankor deposit in East Siberia and did not buy Rosneft’s shares could demonstrate that its interest in the Russian upstream has decreased, or that it cannot accept Rosneft’s conditions. It could also be argued that the Russian oil and gas delivery deals that China secured in 2013 and 2014 have reduced its overall interest in the Russian upstream, including in the Arctic. Nonetheless, analysts continue to claim that China wants not just to be part of, but to have a managerial stake, in these Arctic projects.

Another unanswered question is the extent to which Chinese companies can replace the work of Western partners on the Arctic shelf, particularly their technological assistance. Despite such concerns, Russia and China have increased their technological cooperation in the oil and gas sectors since the imposition of sanctions. In September 2015, for example, China Oilfield Services Limited (COSL) signed deals with Rosneft and Norwegian Statoil to drill two exploration wells in the Sea of Okhotsk, which has similar conditions to the Arctic. Igor Sechin noted that the agreements unlocked new potential for cooperation on oil and gas resource exploration by industry leaders in Russia, Norway and China. The extent to which this potential will affect the Arctic remains to be seen.

Emerging Chinese-Russian cooperation on the Yamal Peninsula

If offshore projects remain a question for the future, onshore cooperation in the Arctic is already advancing. In February 2013, the head of Novatek visited China as part of an official Russian delegation to discuss opportunities for cooperation on its main Arctic project, Yamal liquefied natural gas (LNG). As a result of this visit and several subsequent rounds of negotiations, on 5 September 2013, Novatek and CNPC signed a contract for the sale of a 20 per cent stake in Yamal LNG. The agreement includes a long-term contract for the supply of not less than 3 million tonnes of LNG per year to China, which is 18 per cent of total capacity. The deal was approved by the Russian Government in November 2013 and signed in January 2014.

Following the breakout of the crisis in Ukraine, Novatek became the target of sanctions and Yamal LNG faced further financial difficulties. Novatek was forced to seek further engagement with foreign partners and China was among the few remaining alternatives. In September 2015, Novatek sold the Silk Road Fund, a Chinese sovereign fund, a further 9.9 per cent of Yamal LNG for approximately EUR €1.09 billion. In December 2015, as part of the deal, Novatek received a loan from the Silk Road Fund of EUR €730 million for a period of 15 years to finance the project.

As a follow-up to these advances, on 29 April 2016 Yamal LNG announced the signing of agreements with the Export-Import Bank of China and the China Development Bank on two 15-year credit facilities of a total amount of EUR €9.3 billion to finance the project. China will therefore provide up to 60 per cent of the necessary capital to implement the project.

Despite this impressive track record of cooperation on Yamal LNG, two problems reveal the limits of possible Chinese-Russian energy cooperation. First, Novatek had serious difficulties in securing Chinese financing for the project. The deal was only concluded after numerous delays and negotiations. Second, China also received huge benefits from the deal, since up to 80 per cent of the equipment for Yamal LNG will be produced in Chinese shipyards.

This shows that, despite China’s interest in energy projects in the Arctic and Russia’s eagerness to obtain Chinese partnerships, there are a lot of difficulties ahead. Chinese companies will work on projects that they are interested in only under conditions that they find acceptable. Thus, Russia will have to offer good conditions to attract the Chinese and develop Chinese–Russian energy cooperation.

Looking forward

Despite the stream of positive adjectives flowing from both Russia and China in recent months about partnership and friendship, cooperation in the Arctic has not progressed much. Except for cooperation on the Yamal Peninsula, Russian and Chinese companies have not yet found further mutual ground for energy cooperation in the Arctic.

On the one hand, Russian companies need and welcome Chinese investments and loans; on the other hand, they are not entirely comfortable allowing Chinese companies to play too big a role in Russian energy projects, including those in the Arctic. Chinese companies, in contrast, are in a very strong position at the moment and would not agree to anything less than a significant controlling and management role.

As a result, there is a degree of disappointment in Russia that energy cooperation with China has not developed as anticipated and thus has not mitigated the crisis with the West to the desired degree. Seen from Russia, China has taken advantage of the situation, for example to extract especially favourable terms on energy deals and to insist on high interest rates on major Chinese loans. That is, China has not shown the expected goodwill, which is why using the Chinese–Russian partnership as leverage against the West has not worked.

This topical backgrounder is based on the upcoming policy paper ‘Emerging Chinese–Russian Cooperation in the Arctic: Possibilities and Constraints’ by Camilla T. N. Sørensen and Ekaterina Klimenko. First published at SIPRI.org

(*) Camilla T. N. Sørensen is Assistant Professor at the Department of Political Science at the University of Copenhagen.

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Renewable Energy is a Brewing Geopolitical Catastrophe

Todd Royal

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According to the International Energy Agency (IEA) “the world will spend $US 162 billion subsidizing renewable energy (mainly solar and wind.” This money could be spent on the over 2 billion people globally without electricity – over 600 million in just Africa – that will be used to prop-up chaotically, intermittent and grossly inefficient renewables. Every nation-state, country, or individual state that uses renewables on a wide-scale basis realizes higher electrical prices and emissions for the simple reason they need constant fossil fuel or nuclear energy backup.

Consider Australia, which has “substantial energy reserves.” Green state governments have legislated keeping their oil, natural gas, and coal in the ground, and this means the Australian Defense Minister, Linda Reynolds has been seeking U.S. help for their dangerously low national fuel supplies. Australia – in a perilous, geopolitical move – is likely sending warships to the Strait of Hormuz to protect the oil-rich Persian Gulf. Australia should have never been in this predicament if it weren’t for overreliance on renewables, and energy battery storage systems that cannot meet Australia’s supply of energy needed causing substantial capacity issues.

Now realize the entire world going down this path except China, Russia, Iran, and North Korea, since the Paris Climate Agreement (PCA) if fully implemented:

“Will cost the world from $US1 trillion to $US2 trillion a year by 2030, neither of these hugely expensive policies will have any measureable impact on temperatures by the end of the century.”

The UN Framework Convention on Climate Change has also debunked the Paris Climate Agreement by estimating: “

Even if every country makes every single carbon cut suggested in the Paris treaty to the fullest extent, CO2 emissions would be cut by only 1 per cent of what would be needed to keep temperature rises under 2C.”

To reiterate the complete-nothingness of energy policy options coming from green-aligned legislators – the much-touted U.S. Green New Deal – from Congresswoman Alexandria Ocasio-Cortez, D-N.Y., and Senator Ed Markey, D-Mass., “would have no meaningful impact on global temperatures.”If the U.S. entirely cut out every ounce of carbon dioxide emissions (CO2), “100 percent it would not make a difference in abating global warming.”

Every green policy being considered and utilized by governments globally – particularly, in the U.S. and European Union (EU) – would:

“Fundamentally change how people produce and consume energy, harvest crops, raise livestock, build homes, drive cars, travel long distance, and manufacture good.”

The entire green movement believes harnessing the sun and wind is the answer when nothing could be farther from the truth. Besides zero-carbon nuclear power plants, there is new technology from net-zero natural gas-fired power plants currently being “demonstrated,” or natural gas-fired power plants are the best option, because there use allowed the U.S. to be the only industrialized nation to meet the Kyoto Protocol standard.

The other low cost, simple option to reduce emissions is planting trees. Instead, the west continues committing a suicidal, economic death spiral that will allow their enemies to pick up the pieces in their race toward authoritarian, governmental control.

If the U.S. cannot ensure the liberal-led order in place since World War II (WWII) over keeping fossil fuels in the ground and nuclear energy on the shelf then who will use realist balancing against China, Russia, Iran, and North Korea? Not Australia – realistically, and militarily, the Australians do not have the blue water navy capabilities, or force projection to deter the Iranians in the Middle East. Only the Americans backed by NATO do at this time.

The premier environmental organization – the United Nations (UN) Intergovernmental Panel on Climate Change said: “if we did absolutely nothing to respond to global warming, the total impact by the 2070s will be the equivalent to a 0.2 per cent to 2 percent loss in average income.” Then a global poll of 10 million people by the UN “found that climate change was the lowest priority of all 16 challenges considered.” Climate change and renewables are interwoven.

Vaclav Smil, author of the premier energy book, Energy and Civilization, endorsed by Bill Gates opined about renewables by saying: “The great hope for a quick and sweeping transition to renewable energy is wishful thinking.” Al Gore’s chief scientific advisor, Jim Hansen also opined the same sentiments:

“Suggesting that renewables will let us phase rapidly off fossil fuels in the United States, China, India or the world as a whole is almost the equivalent of believing in the Easter Bunny and Tooth Fairy.”

Where this is geopolitically concerning comes to India. In coming years they will have a larger population than China, and they need more, not less fossil fuels for prosperity and development. According to the UN 2019 Multidimensional Poverty Index, “India lifted 271 million people out of poverty in a decade,” by building nuclear power plants, coal-fired power plants, and using fossil fuels in way they never have in their history.

If India went the way of Australia, which is currently experiencing electrical blackouts from wind turbine farms, and political instability, then the Kashmir crisis could be enflamed further, and China would move to conquer or crush India in every way possible. Deterrence that comes from fossil fuels and nuclear that fuel militaries and nuclear arsenals will continue keeping the peace that has led to unprecedented global prosperity and poverty reduction. Currently, renewables cannot accomplish those goals.

What geopolitics understands is the reality that China, Russia, Iran, and North Korea are presenting to world peace. Renewables are on the precipice of causing a geopolitical disaster when policymakers believe this will solve world energy problems that actually don’t exist. Renewables need to be weaned off subsides and an all-of-the-above approach is what will eventually allow solar panels and wind turbines to displace fossil fuels. But the problem of what to do with the over 6,000 products that come from a barrel of crude oil will need to be solved – including every part of the solar panel and wind turbine supply chain emanates from crude oil. Or else, the world is walking into a geopolitical disaster of their own making believing renewables will displace fossil fuels or nuclear energy.

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Three priorities for energy technology innovation partnerships

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Authors: Jean-Baptiste Le Marois and Claire Hilton*

Governments around the world are setting increasingly ambitious climate targets while at the same time pursuing challenging national policy goals such as affordable and sustainable energy for all. In many cases, achieving these goals will require technologies that either do not yet exist, or are not yet ready for market, meaning innovation will be critical. Technology innovation can be a game changer across all sectors, including power generation, industry, buildings and transport.

Yet it is unlikely that any single country will be able to solve all of its energy and climate problems alone. International collaboration can help countries accelerate innovation processes by identifying common priorities and challenges, tackling pressing innovation gaps, sharing best practices to improve performance, reducing costs and reaching broad deployment of clean energy technologies. Given this massive potential, the fundamental question is not if countries should collaborate, but rather who should collaborate and how they can do so efficiently.

As part of the IEA’s efforts to support global energy transitions, we are working to help governments identify relevant collaborative partnership opportunities, engage with international partners and optimise possible synergies among existing initiatives. Our recent Energy Technology Innovation Partnerships report is a key step along this path, providing an overview of the global landscape of multilateral efforts relevant to energy technology innovation, and examining four selected collaborative partnerships. There are three key takeaways that highlight the challenges and potential of these efforts.

Enhancing collaboration among existing multilateral initiatives

International collaboration in the field of energy technology innovation is not new – many countries already participate in numerous multilateral initiatives, some of which have been active for decades, such as The Technology Collaboration Programme by IEA (TCP) which was established in 1974. Today, 38 independent Technology Collaborations operate under the TCP, made up of over 6,000 experts from nearly 300 public and private organisations based in 55 countries, who work together on topics ranging from renewable energy and smart grids to hydrogen and nuclear fusion.

Governments have launched several new partnerships over the last decade, such as the Clean Energy Ministerial (CEM) in 2009 and Mission Innovation (MI) in 2015, which both aim to accelerate international efforts to address climate change. The 27 members of CEM collaborate to promote the deployment of clean energy technologies through over 20 initiatives and campaigns. Similarly, MI counts 25 members who have pledged to double clean energy RD&D spending and co-lead activities under eight key innovation challenges, such as clean energy materials and affordable heating and cooling in buildings. Participation in Technology Collaborations, MI and CEM present a great degree of overlap, as countries tend to join the full suite of collaborative partnerships. In fact, 13 countries and the European Commission participate each in more than 20 Technology Collaborations, CEM and MI: the United States, Japan, Korea, Canada, China, Germany, Australia, France, Sweden, Finland, Italy, Norway and the United Kingdom. This “core” group of decision makers is in a strong position to pursue further synergies across partnerships.

There are also many relevant regional partnerships that are making valuable contributions to energy technology innovation, such as the European Technology and Innovation Platforms (EU-ETIPs), which bring together EU governments and companies to identify research priorities and relevant energy innovation strategies.

Other examples of regional partnerships include mechanisms under the African Union and other African regional partnerships; the Asia-Pacific Economic Cooperation and the Association of Southeast Asian Nations; various partnerships in the Middle East; and the Latin American Energy Organisation and the Organisation of American States. Many other partnerships focus on specific themes of interest, such as the Biofuture Platform, a group of 20 countries seeking to advance sustainable bioenergy and facilitated by the IEA.

As the global landscape of multilateral activities relevant to energy technology innovation becomes increasingly diverse and complex, it can be challenging for policy makers to identify which partnerships to engage with. In fact, despite the central role of innovation in energy transitions and the potential of international collaboration, there is limited information available on the full landscape of multilateral initiatives and how they interact.

Examining a selection of collaborative partnerships reveals that numerous initiatives focus on the same technology areas. Our own examination shows that in eight technology areas, at least three of the four selected partnerships have active initiatives: heating and cooling; carbon capture, utilisation and storage (CCUS); nuclear; bioenergy and biofuels; wind; solar; smart grids; and hydrogen. The overlap becomes even more apparent when including other global, regional and thematic partnerships: for example, Technology Collaborations, MI, EU-ETIPs, the Biofuture Platform and the Global Bioenergy Partnership all focus on bioenergy. More generally, recent trends suggest that partnerships are increasingly centring on low-carbon energy sources and cross-cutting themes including systems integration.

Focusing on the same technologies across different partnerships may induce risks of duplication, thereby diluting policy maker attention and creating fundraising or political support challenges. That said, in some instances, activities may well address different aspects of the same technology area, justifying the overlap. Yet even in those cases, stakeholders have acknowledged that the perception of duplication may be enough to trigger a degree of competition between multilateral efforts. Policy makers would therefore benefit from identifying possible synergies between mechanisms to avoid replication of efforts while at the same time maximising complementarity.

Enhanced cross-mechanism collaboration may increase the impact of ongoing activities. For instance, co-locating stakeholder dialogue, events and roundtables may mobilise more actors and bring varied and valuable perspectives, attract attention from policy makers and enhance networking opportunities. Co-branding technology policy and market analyses may reveal new findings thanks to the combined experience, knowledge and networks of the initiatives involved. Collaboration between early-stage activities executing RD&D and initiatives providing competitive funding or grant opportunities may facilitate the development of energy technologies and their demonstration in real-life conditions or in strategic markets.

However, innovation stakeholders have also reported challenges in engaging with other collaborative mechanisms, in part because of a lack of systematic co-ordination processes. As a result, the number of interactions between existing partnerships, whether at the political or working level, remains low relative to the number of ongoing activities.

Despite these challenges, there are some initiatives that are already effectively collaborating across partnerships. For example, last year the co-leads of collaborative activities on smart grids under the International Smart Grid Action Network (ISGAN) (both a TCP and a CEM Initiative), identified a strategic opportunity to work more closely with the relevant Innovation Challenge under MI and formalised this co-operation.

Focus on emerging markets

Participation in collaborative partnerships continues to grow and diversify every year. IEA Members and Association countries currently account for the broadest participation in Technology Collaborations, CEM and MI, as illustrated by the “core” group of top-collaborators mentioned above.

While a strong central core of support is invaluable, an important trend for global innovation ecosystems is the increasing participation of emerging economies, such as China (currently a member of 23 Technology Collaborations), India (11), Mexico (10), South Africa (8) and Brazil (5).

Emerging market countries also tend to participate in regional partnerships, which allow governments that are not necessarily members of global efforts to benefit from international co-operation. The transition from regional to global collaboration is an encouraging trend for key emerging market countries, with which the IEA seeks to deepen engagement as part of the Clean Energy Transitions Programme (CETP).

Partnerships have made it clear that emerging economies are a top priority. As part of a survey conducted in 2019 by the IEA Secretariat, India was identified as a key prospective partner by 14 Technology Collaborations; Brazil by 12; Chile and China by 8; Mexico and Indonesia by 7. If prospective membership materialised, China would consolidate its high participation by holding membership in over 30 Technology Collaborations; India would join the “core” group of top-collaborative countries; and both Mexico and Brazil would be involved in over 15 Technology Collaborations.

Strengthening public-private cooperation

In addition to public agencies, private-sector actors play a critical role in RD&D and in ensuring key technologies reach markets. Examining both public and private contributions can help governments better understand the broader innovation ecosystem, engage with companies to leverage corporate expertise, influence and capital; and strategically allocate public funds in those energy sectors that remain underfunded or face financing access challenges.

While there is substantial interest from collaborative partnerships to deepen engagement with private-sector actors, this engagement is, at least for now, relatively uncommon. Among the four partnerships analysed in the report, only EU-ETIPs are co-led by industry stakeholders while some 80% of participants in Technology Collaborations are public bodies. For now, membership in MI and CEM is restricted to national governments, although engagement of private sector is actively sought and governments may designate in-country private sector experts to represent national interests in certain initiatives.

Different factors may be preventing companies from seeking engagement with government-led multilateral initiatives, including a lack of awareness of such programmes, differing working cultures between public and private actors, diverging priorities and little incentive to share information, and burdensome administrative procedures. On the other side, some stakeholders within collaborative partnerships remain reluctant to engage with industry, fearing the influence of corporate interests on their strategic decisions, work programmes or outputs. These reasonable concerns need to be overcome for effective public-private co-operation to take place.

Thankfully, we are seeing some positive developments. For instance, over 100 private-sector companies are now participating in the technical work of CEM activities, resulting from both CEM stakeholders reaching out to companies, and vice versa. In collaboration with the IEA, CEM also leads an Investment and Finance Initiative (CEM-IF) to help policy makers mobilise investments and financing, particularly from private sources, for clean energy deployment. Policy makers, collaborative partnerships and energy innovation stakeholders may benefit from further research on private-sector participation, building on these encouraging cases, to find ways to best leverage corporate capabilities.

Ways forward

As we continue to enhance our efforts related to technology innovation to support global energy transitions, the IEA encourages broad international collaboration to tackle pressing innovation gaps, share best practices and accelerate the deployment of clean energy technologies. Enhancing collaboration between existing initiatives, engaging with emerging markets and leveraging corporate capabilities, are three areas of promising focus for policy makers looking forward.

*Claire Hilton, Energy Partnerships Analyst.

IEA

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Iran’s huge energy subsidies: supporting or battering the economy?

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In one of its latest reports dubbed “World Energy Outlook 2018”, the International Energy Agency (IEA) has allocated a section to fossil-fuel subsidies. The IEA has gathered the information regarding different countries’ fossil-fuel consumption subsidies and presented it in a chart on top of which the name of “Iran” catches the eye.

Based on the report, in 2018 with $69 billion of subsidies allocated for various types of energy consumption including oil, natural gas and electricity, Iran holds the first place among the world’s top countries in terms of the amount of subsidies which is allocated to energy consumption.

According to the IEA report, in the mentioned year, Iran has allocated $26.6 billion, $16.6 billion and $26 billion of subsidies for oil, electricity and gas respectively.

Based on the data, the total amount of allocated subsidies equals 15 percent of the country’s total GDP.

But what this information means? How one should interpret seeing the name of “Iran” on top of a chart for countries with most energy consumption subsidies?

Three main purposes of energy subsidies

Energy subsidies for long have been used by governments all around the world for pursuing certain political, economic, social, or environmental agendas. In different countries, energy subsidies are provided in different forms and modalities with a direct or indirect outcome on energy production costs and/or final prices.

Iran, as one of the world’s top energy-rich countries, for long has been offering significant amounts of energy subsidies to (according to the government claims) reach three main targets:

1- To support the less privileged population of the society

2- To create and support job opportunities across the county

3- To support domestic production

Considering these major purposes assumed for allocating gigantic amounts of energy subsidies in Iran, the question is to what extend these goals have been reached so far?

The poor, the rich or the air pollution?

Regarding the support for the less-privileged classes of the society, a look at the gasoline subsidies which the Iranian government has been offering for all people, can show the extent of this approach’s inefficiency. 

On one hand, many energy experts and scholars in the country believe that allocating great amounts of subsidies for gasoline is not in fact supporting the poor but it is more lifting the rich. They argue that most of the lower class population in the society do not use much gasoline in comparison to the upper classes with their luxury cars. That means the government is in fact supporting the upper classes’ luxurious lifestyle by providing them with cheap fuel which in fact they do not need.

On the other hand, many environmental experts believe that such subsidies are in fact encouraging people to consume more and to care less about the negative impact that they are leaving on the environment. Cheaper fuel means more careless consumption that is more consumption in fact. Most of Iran’s big cities are currently struggling with high levels of air pollution which is a direct outcome of the cheap fuel which is being consumed by everyone on a daily basis.

New job opportunities
One other argument that is behind the heavy energy subsidies in Iran, is to support and create new job opportunities. In this regard one major example could be the subsidy which is provided for the gas consumed by the industrial units.

An example in this area would be the best explanation to the question of how well this strategy has paid off.

In Iran a major part of the country’s gas is consumed in the industrial sector. In this particular example I want to take a look at the cement industry as a sample community. Every year in Iran, about 90 trillion rials (nearly $2.15 billion) is allocated to the gas subsidies used in the cement industry while based on the data provided by the industry ministry, the total revenues earned from this industry in the past Iranian calendar year (March 2018-March 2019) was reported to be 15 trillion rials (about $357 million). 

Considering the revenue earned and the amount of subsidies, it is clear that 75 trillion rials is lost. Now the interesting part is that considering the fact that there are nearly 250,000 people working in the country’s cement industry, if the subsidies money was directly paid to the workers, each worker would earn 350 million rials, which is way more than most of their actual annual income level.

Supporting domestic production

The above example might make you think that the money has been spent to support the domestic production, as it has been stated as one of the main goals for energy subsidies. 

It has been years that Iran is allocating subsidies for many industrial sectors, including the auto industry, the cement industry and etc. but the outcome has not been what is expected it to be. 

Using more and more subsidies has made most industries less competitive and more reliant on outside sources for their inefficiencies.

One recent example is the emerging of the great number of Bitcoin mining farms all over the country. It was reported that even in many of the country’s industrial parks the production units were using the subsidized electricity to farm Bitcoin instead of producing what they were supposed to be making.

Final thoughts

As many energy and economic analysts and scholars have stressed before, it is obvious and almost certainly we could say that allocating huge amounts of energy and fuel subsidies is not a good strategy to follow.

The budget that is allocated for subsidies every year could be spent in a variety of more purposeful, more fruitful areas. The country’s industry should compete in order to grow, people must learn to use more wisely and to protect the environment.

A government which provides irrational amounts of subsidies for energy consumption is just like a father who spoils his children by over-protecting and over-supporting them, those children, most probably, won’t turn out to be successful contributors to their society.

From our partner Tehran Times

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