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Energy Markets or Energy Governance?

MADRID – This month, the International Energy Agency will publish its annual report, the internationally definitive World Energy Outlook, which will confirm that we are not on the right track to reduce global warming. If the current trend in energy production continues, the earth’s average temperature will be more than 2ºC higher in 2100 than it was in 1990, irreversibly harming the planet and conditions for human life.

Other, more immediate crises are occupying the world’s attention almost completely, distracting governments and citizens alike from the energy challenges that are still before us. In the United States, there has been no energy debate at the federal level for a long time; the European Union is in the eye of a financial hurricane; and the emerging countries want to maintain rapid economic growth in order to lift millions out of poverty. In this context, the next meeting of the United Nations Framework Convention on Climate Change (UNFCCC), set for the end of November in Durban, South Africa, is passing totally unnoticed.

But energy is fundamental for humanity, not only because of its potentially negative externalities, but also given its economic relevance: Western countries spend 8-10% of their GDP on energy, and developing countries spend double or triple that amount. For this reason, we need a system to govern energy.

Owing mainly to its environmentally negative externalities, an unregulated energy market is not a useful governing mechanism, because it is unable to internalize the environmental costs. It has been calculated that the most contaminating energy sources would have to pay a 70% tax to reflect their negative externalities.