Energy policy

Summary: Energy policy allows governments to influence levels of supply and demand for energy, the composition of the energy sector, impacts from energy consumption and production, and energy markets.

The energy policy of a decision-making body or government, whether local, state, national, regional, or international, is a broad course of action comprising a portfolio of strategies and objectives to guide the system of production and use of energy. Governments utilize a suite of energy policies in seeking to achieve different goals in both the short term and the long term. Governments can use fiscal and regulatory policies to control short-term prices of energy and thereby consumer behavior; while using longer-term strategies, such as investments in research and development investment or infrastructure, to develop new energy technologies, diversify fuel mixes, and transform energy systems to minimize environmental and public health impacts. High-priority concerns that many energy policies around the world seek to address include access to energy, energy security, and energy sustainability.

The Need for Policy

Concentrated sources of energy—in liquid, solid, and gaseous forms of hydrocarbon chains—are important inputs for economic activity and one of the basic drivers of human civilization. Since the mid-1700s and throughout the Industrial Revolution, human societies have increasingly utilized hydrocarbon-based fossil fuels for personal and industrial transport, electricity, and agricultural purposes. Growing dependence on fossil fuels, which as of 2008 accounted for approximately three-fourths of global energy use and 25 percent of global energy-related carbon dioxide (CO2) emissions, is one of the major factors driving the need for coordinated energy policy at all levels of government. Many of these policies seek to ensure that fossil fuel production remains reliable and sufficient for economic development and steady growth. Maintaining the safety and sustainability of energy production and consumption has also become an increasing concern over the past several decades, as global consumption of energy has nearly doubled: nuclear energy, coal, and offshore and unconventional sources of fossil fuels, such as oil sands and shale rock, have been increasingly exploited in order to meet growing global energy demand, coupled with growing concern over possible impacts on public health and environmental health.

Energy Security

Growing demand, price volatility, supply disruptions in the wake of extreme weather events and other natural disasters, and political interventions all contribute to concern over national energy security. These concerns can be exacerbated by a perceived overreliance on imports, such as experienced by the United States, Japan, and the European Union (EU), which currently import more than half of their total energy. In order to ensure consistent energy supplies, governments can articulate multiple and often complementary policies.

One option is to increase domestic production of energy, which could entail (1) taking advantage of indigenous renewable energy through development and deployment of solar, wind, hydro, geothermal, and other alternative energy technologies; (2) supporting expansion of domestic fossil fuel recovery, potentially from previously uneconomic or unconventional sources; or (3) developing surplus production capacity, in the event that refinery capacity limits domestic supplies. For example, Iceland has managed to produce more than 80 percent of its energy domestically, largely through renewable geothermal and hydro technologies. Although this domestic production is made possible largely by Iceland’s optimal geological characteristics and glaciers, Iceland’s government has helped to stimulate private-sector investment in renewable energy development, hydrogen-powered transportation, and domestic industry to reduce imports. Conversely, the US continued to prioritize its domestic oil production and remained the world's largest oil producer into the 2020s, despite making significant investments in the sustainable energy sector at that time.

Another option for increasing energy security is to diversify sources of energy. This includes utilizing an array of energy feedstocks and production technologies, such as renewables, nuclear energy, biofuels, natural gas, oil, and coal, as well as avoiding the consolidation of energy imports around a single or select few trading partners. For example, the United States made diversification of its energy supplies a priority in its national security strategy of 2010 and in the president’s Blueprint for a Secure Energy Future of 2011. Denmark has prioritized its diversification of energy sources since the 1970s; in order to achieve this goal, the Danish government has invested heavily in renewable energy (especially wind power), combined heat and power (CHP), increased oil and natural gas drilling in the North Sea, and reliable energy trading relationships with neighboring Scandinavian countries and Germany.

In the event that a country is highly dependent on a single trading partner or region for much of its energy needs, it becomes a political priority to develop political or economic agreements to ensure a steady flow of energy imports. For example, the EU long imported significant amounts of oil and gas from Russia. After experiencing a series of gas cutoffs in 2007, the EU and Russia developed an agreement to avoid future supply crises. However, this relationship entered a period of extreme tension in 2022 following the Russian invasion of Ukraine in February, which led the EU and its allies to place harsh sanctions on Russia. Facing a possible severe energy shortage, the EU recommitted to investing in green energy and other alternatives in order to reduce its dependence on Russian oil and gas. Meanwhile, by December 2022, the EU had banned most Russian oil and gas imports.

Governments can also opt to develop strategic or auxiliary reserves of oil and gas or public stocks. While not a long-term solution to supply disruptions, such a program can still head off the immediate effects of a sudden disruption in normal energy supply. Other emergency preparedness strategies, such as demand restraint and fuel rationing, can play smaller but significant roles in maintaining energy security in the event of unexpected supply disruption.

Overseas Energy Investments

Countries not only seek to expand domestic energy supply, through the aforementioned strategies, but also invest in energy development overseas, particularly in developing countries where there is growing demand. Developed countries as well as fast-growing, resource-poor countries may undertake such foreign investment strategies in response to the imperatives of increasing energy access and facilitating economic growth.

Governments also support the expansion of energy infrastructure as part of development aid policies through multilateral bodies like the World Bank and their development finance institutions. For example, the Overseas Private Investment Corporation (an agency of the U.S. government) established the Global Renewable Energy Fund in 2008 to invest in renewable energy projects in emerging markets. UN-backed policies designed to reduce energy poverty around the world helped motivate continued investment in developing regions into the 2020s.

Energy Access

Domestic, multilateral, or bilateral energy investments can address the policy objective of increasing energy access in developing countries, many of which continue to struggle with energy poverty. In 2022 the International Energy Agency (IEA) estimated that 775 million people worldwide remained without access to electricity, having to rely on less concentrated and more polluting forms of energy, such as wood, charcoal, and other biomass. Increasing the access of these communities to modern energy grids can help improve livelihoods and public health.

Multilateral funding mechanisms such as the World Bank have provided billions of dollars in loans over the past several decades to developing countries such as Mozambique, Kazakhstan, Nepal, and Vietnam for renewable energy and energy access projects, largely in rural areas. Coal plants, while controversial for their significant greenhouse gas (GHG) emissions, are also supported in certain areas when there are not economically viable low-GHG options for improving energy access. World Bank funding, for example, comes from donor countries that sit on the board of directors and determine which energy projects meet the objectives of World Bank funding, including reducing poverty and increasing sustainable economic growth.

Reducing Environmental Impacts

Environmental impacts can result from each step along the life cycle of energy production and consumption. Biological communities and wildlife habitats can be degraded from fossil fuel mining and drilling. Air and water pollution in the form of GHGs, nitrogen oxides, sulfur dioxide, particulate matter, mercury, and other heavy metals are emitted during fuel production and combustion. A significant proportion of energy policies is devoted to addressing, mitigating, or minimizing the emissions and other impacts from the energy sector. Strategies to achieve these objectives include requiring energy producers to use the best available technologies (BATs) in their operations and other pollution control requirements; setting emission standards and limits to ambient pollution concentration; requiring permits for pollution-emitting facilities; taxing or pricing the environmental externalities of energy consumption; and requiring environmental impact assessments prior to any new energy extraction or production facility construction.

Requiring energy companies to carry out environmental impact assessments (EIAs) is a preventive step for minimizing the impact of new energy recovery projects. In carrying out an EIA, the company must investigate all potential impacts of an individual project before it is undertaken. Degradation of wildlife habitat, stress on water supplies, air pollution and water pollution, noise and other disruptive activities during construction or operation of the facility, devaluation of surrounding properties, and risk of malfunctions or disasters that could have an impact on nearby populations are all variables that must be accounted for. Normally, the energy company must demonstrate in the EIA how it plans to address or minimize identified potential impacts and submit the document to a regulatory entity for review. The regulator can determine whether the EIA has been appropriately broad and detailed in its analysis and whether the proposed actions for addressing the impacts are sufficient.

BAT requirements state that the most advanced technologies must be used to limit pollution from energy production. The U.S. Clean Air Act, originally passed in 1963, refers to best available control technology (BACT) for reducing the emissions of air pollutants, including particulate matter, carbon monoxide, sulfur oxides, nitrogen oxides, and ground-level ozone. Setting explicit limits on ambient pollution levels in a local area is a related pollution reduction strategy, and the two polices can be complementary.

In combination with these policies, regulatory authorities can also require operating permits for pollution-emitting entities, which would contain information on what kinds of pollutants are released from the facility, the rate of emission, and required mitigation strategies. The permitting process is useful if facilities are regulated under multiple statutes in order to clarify the array of regulatory requirements.

Setting a price on the emissions from energy production has become a more extensively discussed option for regulating environmental impacts. One of the first examples of such a policy was the U.S. sulfur dioxide cap-and-trade system implemented in 1990. This was highly successful in reducing U.S. sulfur dioxide emissions by more than 50 percent from 1990 to 2002. In later years, many governments have discussed applying the emissions pricing scheme to carbon dioxide emissions from energy combustion, and some regions have even implemented such a scheme. In 2015 President Barack Obama and the Environmental Protection Agency (EPA) established the Clean Power Plan for reducing carbon emissions from power plants. In February 2016 the US Supreme Court stayed implementation of the plan pending judicial review. The US federal government continued to push for a wide range of green energy initiatives through the remainder of the 2010s and 2020s, though the issue remained politically contentious.

Sustainable Energy Systems

Policy makers not only want to incrementally reduce the environmental impacts from existing energy use and infrastructure, as described above; they also aim, over the long term, to develop energy systems that contribute near-zero emissions and that depend on renewable feedstocks, as opposed to exhaustible supplies of oil, coal, and natural gas. Policies meant to increase the market penetration of renewable technologies, increase energy efficiency, and utilize lower-impact transportation technologies and modes can facilitate the transition toward sustainable energy systems.

Renewable energy technologies can be promoted through a suite of policy strategies, including renewable energy portfolio standards, renewable energy goals, feed-in tariffs, cap-and-trade schemes, carbon taxes, and various grants and subsidies. For example, the EU has a goal of renewable technologies providing 20 percent of total energy consumption and 33 percent of electricity consumption by 2020. In order to meet this goal, the EU has put additional policies in place, including a cap-and-trade system for certain economic sectors, which began in 2005, and multiple national-level feed-in tariff programs and other aggressive funding schemes. These have made the EU the largest renewable energy consumer in the world.

Increasing energy efficiency is also a key component of transitioning to a sustainable energy system, both to reduce use of fossil fuels in the near to medium term and to partially offset rising global energy demand over the coming decades. A country’s average energy efficiency can be measured in terms of amount of energy required for each unit of GDP generated. An energy efficiency policy can seek to reduce this number over time. For example, China established a target in 2005 to reduce energy consumed per unit of GDP by 20 percent over five years, a target that China came close to meeting through significant engagement with and oversight of local governments and industries. Other, smaller-scale energy efficiency policies can set efficiency standards for specific buildings, appliances, vehicles (referred to as fuel efficiency standards), and economic activities.

Transportation accounts for nearly a third of all energy consumed globally and is one of the only sectors in which energy use continues to grow in developed countries. More than 95 percent of the transport sector is powered by fossil fuels. To achieve sustainable transport, countries have implemented policies to make vehicles more efficient, to increase the amount of renewable fuels (namely biofuels) used in personal vehicles, to invest in research on alternative vehicles and battery technologies, and to increase use of public buses, trains, and other low-emission modes of transport, such as bicycles.

To reduce GHG emissions and increase efficiency of international shipping and air transport, discussions have been under way at the United Nations Framework Convention on Climate Change (UNFCCC), the International Maritime Organization (IMO), and the International Civil Aviation Organization (ICAO) to regulate these emissions. International agreements are already in place to reduce air and water pollutants from shipping under the International Convention for the Prevention of Pollution From Ships (MARPOL) and the Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter (the London Convention), among others.

Maximizing Safety

Energy recovery and production activities have long been associated with health and safety risks, particularly for oil and gas drilling, coal mining, and nuclear energy. In recent history, a number of energy-related disasters have occurred that had severe impacts on surrounding economic activities and ecosystems.

During 2010 and 2011, multiple incidents encouraged policy makers to revisit their energy health and safety policies: the BP Deepwater Horizon oil spill in the Gulf of Mexico; the Chilean coal mining incident in which 33 miners were trapped in a collapsed mine for 69 days; the Fukushima nuclear reactor meltdown in Japan; and concern about groundwater contamination from shale gas drilling, or fracking, throughout the United States. Policy responses to these events varied. In response to the issue of the toxic fluids generated by shale gas drilling, the Pennsylvania governor ordered that all gas-drilling wastewater cease to be treated at public drinking water treatment facilities. After the Deepwater Horizon oil spill, the United States imposed a temporary moratorium on deepwater offshore drilling. Longer-term policy changes include dividing regulatory authority for offshore drilling activities and strengthening safety and emergency procedure standards. Following the Fukushima disaster, Germany shut down its oldest nuclear plants and reversed its plans to reduce the rate of phaseout of nuclear power. China suspended new plant approvals in order to develop new nuclear safety standards.

In addition to these large-scale disasters, improving public health is also an argument for regulating the air and water emissions from the normal daily operations of energy production facilities, the policy strategies for which are described above.

Harmonizing Markets

One strategy for reducing transaction costs of energy distribution is to harmonize energy regulations across regions. This can allow for transfer of greater amounts of energy and streamlined production processes with fewer steps of monitoring and regulation. Fractured regulation creates barriers to trade and competition, thereby increasing inefficiency and reducing the flexibility of energy markets to meet demand.

For example, different countries and even different states have distinct standards for gasoline quality, such as sulfur content. A refinery may either produce according to a single sulfur standard, in which case its market is reduced to those areas of the corresponding standard, or it can match the standard of the most aggressive regulation, which is also costly. Harmonized national or global sulfur standards would allow for each gasoline producer to maximize its market potential and minimize the need for multiple stages of monitoring across regional borders as gasoline travels from producer to consumer.

The EU has been working for more than a decade, with partial success, to harmonize its internal energy policies and market rules in order to ease energy trade, especially of natural gas and electricity, within the region and to allow market access to more suppliers. EU policy makers seek to open the EU energy market fully to internal and external competition while harmonizing fuel quality standards across member states, which the EU government argues create a barrier to competition.

The Common Market for Eastern and Southern Africa (COMESA) also developed a policy framework for regional energy market harmonization in 2007, largely in order to increase efficiency of regional energy production, increase consumer access to energy supplies, and stimulate greater energy investment.

Liberalization and State Ownership

Governments can control many aspects of the energy sector in their countries, from direct ownership of oil companies to capping the price of electricity to regulating the electricity suppliers from which consumers can purchase their power. Governments can exert different levels of influence over energy-sector development, depending on how much of the sector is regulated or state-owned as opposed to liberalized. State-controlled or national oil companies control more than three-quarters of global oil reserves, which confers on them significant political influence and the ability to control global energy supplies and prices.

Conversely, small private companies are more characteristic of the renewable energy sector, which has begun to achieve economies of scale over the past decade in many parts of the world, albeit with significant levels of subsidization (though a fraction of fossil fuel subsidies).

Research and Development

Policies to support research and development (R&D) of energy technologies can be used by governments to achieve multiple goals; publicly funded research, alongside private research, can increase the efficiency of mature technologies, expand the applications of technologies, develop technologies to mitigate impacts from energy production and consumption, and develop new technologies with lower costs and impacts.

Many of the U.S. government energy research programs were first undertaken in the 1970s, largely in response to the Arab oil embargo of 1973. Concern over security of conventional energy supplies spurred governments to devote funds to developing alternatives to oil-dependent technologies and synthetic alternatives to oil.

Governments are increasingly supporting carbon capture and sequestration (CCS) research, lower-cost batteries and fuel cells, advanced biofuels, and electrical grid improvements such as “pressurized-water reactor” upgrades, among other initiatives for reducing environmental impacts, reducing dependence on oil, and diversifying the energy mix. Government R&D support is particularly important for technologies that are at early stages of development and that therefore receive low levels of investment from private firms. As government funding advances the state of technology, private-sector confidence can grow such that the later stages of development and distribution are taken over by firms.

International Energy Policy

Much of the discussion so far has been devoted to energy policy at the national level, yet meaningful energy policy is also created at other levels of governance, from the local to the international scale.

Much of international policy comes from the United Nations in the form of various international agreements to which a predetermined number of countries must agree for them to enter into force and otherwise be effective. International energy policy has evolved out of global initiatives to develop norms of behavior and international standards related to the law of the sea, transboundary impacts, safety, and climate change.

While it does not explicitly address energy policy, the United Nations Framework Convention on Climate Change (UNFCCC), established in 1992, is the international institution tasked with developing international climate policy. The 1997 Kyoto Protocol extended this agreement. UNFCCC parties reached agreement in 2010 to an objective of limiting global temperature rise to 2 degrees Celsius above preindustrial levels by 2050. Meeting this goal requires a significant ramp-up of renewable technology deployment in both developed countries and developing countries as part of an overall effort to change the development paradigm away from increasing reliance on lower-cost, higher-carbon fuels such as coal.

The United Nations Convention on the Law of the Sea (UNCLOS), which entered into force in 1994, contains sections that explicitly address energy recovery in the global commons of the high seas. Under UNCLOS, coastal states are responsible for preventing, reducing, and controlling marine pollution from offshore oil and gas activities. The convention also provides some guidance on energy exploration and exploitation rights in the high seas.

The Espoo Convention on Environmental Impact Assessments, which entered into force in 1997, was developed by European countries and the United States to address transboundary environmental pollution. The Strategic Environmental Assessment (SEA) Protocol to the Espoo Convention requires that all plans and programs undertaken by a country that have a potential for transboundary impacts must carry out an SEA. The protocol is applicable to offshore oil and gas recovery.

Smaller multilateral bodies can also develop energy policy, both legally binding and nonbinding. For example, the Arctic Council, an intergovernmental forum comprising the eight Arctic nations with some additional observer countries and organizations, developed a set of nonbinding guidelines for offshore oil and gas activities, which advises energy companies on minimizing the impacts of hydrocarbon recovery on other Arctic sectors. Conversely, under the Convention for the Protection of the Marine Environment of the North-East Atlantic (OSPAR, named for the cities in which it was developed, Oslo, Norway, and Paris, France), the decisions made by parties are legally binding.

The United Nations Conference on Climate change was held in Paris from November 30, 2015 to December 12, 2015, during which 186 countries published their action plans for reducing GHG emissions with the goal of limiting global warming by 2100 to below 2 degrees Celsius (3.6 degrees Fahrenheit). On Earth Day, April 22, 2016, 175 nations signed the nonbinding Paris Agreement on climate change. By 2023 these nations had reduced emissions enough to bring the projected level of warming down to approximately 3 degrees by 2100, down from pre-agreement projections of 4 degrees, although many scientists and other experts felt that stronger action was needed.

State and Local Policies

In many countries, including the US, local municipalities, such as states, cities, and towns, can also implement their own energy policies. States and local governments can seek to diversify energy sources, improve energy efficiency in buildings and public transport, implement renewable energy portfolio standards, regulate GHGs, and undertake educational or outreach campaigns to influence consumer behavior.

For example, California passed state legislation to regulate GHG emissions in 2006 through an emissions trading scheme. As described above, climate policy has significant implications for the energy sector. California has also implemented a low carbon fuel standard (LCFS), which requires transport fuel producers to meet certain quotas of less GHG-intensive fuels, including natural gas, biofuels, electricity, and hydrogen. Throughout the 2010s and into the 2020s, other states passed new legislation with major implications for the energy sector. For example, in 2021 the state of Oregon passed a law which committed the state to providing its energy customers with 100 percent clean energy by 2040.

The city of Berlin, Germany, exemplifies an outreach campaign through its public transportation promotional advertising. The city has even established a “personals” website where passengers who have met briefly on the train and would be interested in getting to know each other can post a comment in search of their counterpart, making public transportation more of a social and interactive experience.

Local communities can work with Nongovernmental organizations (NGOs) or foreign governments to improve energy access and install more efficient and cleaner technologies to improve public health. For example, the US government launched its Global Alliance for Clean Cookstoves initiative in 2010; the program seeks to supply communities in need with high-efficiency cookstoves, in partnership with private partners, NGOs, and several government agencies. This reduces the dependence of local women on wood, crop residue, and dung, the burning of which can cause high levels of local air pollution and breathing ailments.

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