International Energy Governance: The Role of the Energy Charter

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DIFFERENCE OF ENERGY FROM OTHER GOODS

Energy is different from manufactured commodities with which the WTO is used to dealing. In case of hydrocarbons we deal with finite non-renewable resources vital for our life that are distributed highly unevenly throughout the world. These resources are under sovereign control of a relatively small number of resource-owning countries. It is true that due to new discoveries in the Arctic and Brazil, and the development of new technologies for energy exploration and development, more countries are now involved in exploitation and extraction of energy. However, unequal distribution of hydrocarbons prevails, making international regulation of energy particularly challenging. The distinctive features of energy lead to the question of whether energy trade can be effectively regulated by a general international legal framework or whether a specialized framework is needed.

WTO DESIGN AND ENERGY TRADE

The WTO rules that govern international trade are fully applicable to trade in energy and energy products. But some might argue that these rules were not specifically designed to tackle energy issues. The traditional focus of GATT has been market access of domestic manufactured products abroad rather than access to foreign supplies. The multilateral trade rules have therefore been designed to address mainly import barriers related to market access rather than export barriers. But import restrictions are not particularly problematic in the energy sector--on the contrary, states have been more concerned with securing access to energy supplies at affordable prices. In energy, trade restrictions are more pertinent to export barriers.

WTO rules do not adequately address the issues of export restrictions and investment protection, commonly regarded as the most crucial challenges in oil and gas.

Manufactured products could normally be produced without limitation in many countries, due account being made to the theory of comparative advantage. Such goods do not encounter natural endowment constraints as energy resources do. Hydrocarbons are finite resources that are unequally distributed around the world. Resource-owning countries want to exploit their natural wealth for the benefit of their populations and national economies. When exporting, these countries strive to derive maximum rent for depletion of finite resources. Social policy objectives play an important role in shaping their energy policies. These domestic policy considerations have aroused controversies in the WTO (for instance, the energy dual pricing has been perceived (unconvincingly) by some WTO members to be inconsistent with WTO rules).

In addition, when energy resources are exported, producing countries want to be sure they receive maximum rent from development and exploration of energy resources. Export taxes are a common means of revenue generation for these countries. The WTO rules do not address to the full extent the issues of export restrictions, and export duties remain largely unbound. Also, WTO rules do not address issues of ownership of natural resources or access to energy supply.

However, it is not enough to address traditional cross-border export/import barriers in order to liberalize energy trade. The most significant challenges related to dealing with energy trade stem from the fact that a significant part of international energy trade takes place through fixed infrastructure, built specifically for the purpose of carrying hydrocarbons or electricity.

CHALLENGES FOR EXISTING MULTILATERAL FRAMEWORK: FIXED INFRASTRUCTURE AND TRANSIT

The energy sector is highly capital-intensive--significant costs are needed to find, produce, and transport energy. Trade in electricity and gas has mainly been regional due to the particular transportation characteristics of these products. Transportation of natural gas, for example, takes place mainly through pipelines, although the share of LNG trade has been increasing steadily. …