The Institutional Sources of Energy Transitions: From the oil crises to climate policy (Summary)

I am collaborating with several coauthors on this international research project in an effort to understand what determines the scope and nature of energy transitions across different countries. The key empirical approach we use is extrapolating the implications for contemporary energy transitions related to climate change from the example of the 1970s oil shocks, which were external shocks affecting many countries simultaneously. Towards the end of the presentation I will also discuss some implications for Japanese energy policy making.

The basic theory we propose is that political institutions affect the degree and nature of energy transitions across different countries. We focused on two mechanisms: insulation and compensation. We also focus on two policy tools, broadly speaking: demand-side policies, which impose costs on energy consumers in the form of things like gasoline taxes or carbon taxes to reduce the consumption of energy in general or of undesirable kinds of energy, and supply-side policies, like fuel economy standards and clean energy mandates, which impose costs on producers.

We examine three political options that governments have when faced with the need for a significant energy transition. The first option is to basically ignore resistance to the energy transition. Another option is to pay off or compensate the losers. The final option is giving up on the transition and retreating.

We focus on four political institutions, each of which has a specific role in our analysis. The first is electoral rules, which in our view insulate politicians from consumer interests, or the losers in the case of demand-side policy measures. Second are welfare state institutions, which can offer social compensation schemes to compensate consumers who might otherwise resist energy transitions. On the supply side, we look at bureaucratic insulation, which is the delegation of authority to bureaucratic actors who might be able to achieve a certain degree of insulation from producer interests. Finally, we look at interest intermediation institutions: things like corporatism that create a consensus around a transition and allow for it through compensatory mechanisms. Our argument is that if you have these institutions, it's possible to achieve energy transitions. Without these types of institutions, countries will have difficulty overcoming resistance to change. It's not only an either/or, where some countries transition and some don't: these institutions also determine energy transition patterns.

A great deal of political science literature argues that electoral rules determine the degree to which politicians are more sensitive to backlash from voters or from organized interest groups. One general finding from this literature is that under more proportional electoral rules, politicians aren't quite as worried about voter backlash, as opposed to these systems are more majoritarian where you need close to 50% of the vote in order to be elected. We argue that proportional electoral rules increase the ability of governments to accelerate energy conservation and transition through the use of demand-side measures, such as gasoline taxes and carbon taxes, because politicians are not as afraid that raising taxes will cause voters to punish them in the next election. We see this most prominently in US politics, where gasoline taxes are considered to be untouchable. Raising gasoline taxes is basically political suicide in the US. We argue that an important reason for this is that the US has very majoritarian electoral rules and politicians are very sensitive to voter backlash.

We compared the relative average prices of gasoline and electricity before and after shocks during the oil shock period. We found that countries with more proportional electoral systems had a greater ability to increase gasoline and electricity prices compared to countries that adopted a single-member district or majoritarian electoral system. Countries with majoritarian electoral systems are highly sensitive to backlash, but they have the option of compensating consumers with unemployment insurance or other types of social welfare spending. A good example of this in the oil shock period was France, which had a majoritarian electoral system but also very strong welfare state institutions. Gasoline prices were raised very quickly, but you also saw double-digit annual expansions in social welfare spending. French consumers protested against higher energy taxes but also received generous benefits from the government that allowed them to tolerate the higher costs.

On the producer side, bureaucratic insulation is an important variable. The idea here is that delegating authority to a strong autonomous bureaucracy insulated from interest group politics can accelerate industrial energy transitions. In the oil shock period, the very powerful French bureaucracy was able to promote nuclear energy very aggressively, unlike many other countries. In Japan, MITI (now METI) has the role of pushing energy efficiency policy and supply diversification.

Even in the absence of a strong and independent bureaucracy, you can have institutions that allow for the compensation of industrial and energy losers. We argue that corporatist institutions can help with compensation. Countries that are based on a consensus model are better able to work out arrangements in which the winners in an energy or economic transition subsidize and compensate declining industries. This was the very conspicuous pattern in Germany during the oil shock period and also in contemporary climate change politics, where the coal sector receives significant subsidies but allows for a gradual decline, and this frees the government to make significant investments in new energy sources. On the other hand, in the UK during the oil shocks, we saw a very different adversarial pattern between the government and the coal sector and the government ultimately adopted a much more laissez-faire free market approach.

In our paper, we use network analysis to compare the patterns of connections between interest groups and governments in countries with and without corporatist institutions. We found that in countries like Germany, interest groups are very close to the government, and even after the oil shock it is very much the same interest groups that are accommodated in government policymaking. The UK, by contrast, which does not have a consensus model, depending on which party is in power, interest groups are able to access policy change substantially, leading to significant policymaking volatility. You also see this in the US.

Taking advantage of the fact that the oil shock essentially affected all countries relatively equally, we performed a difference-in-differences analysis to test whether the presence of insulation or compensation institutions affected demand-side or supply-side policymaking. On the demand-side, we found that countries with either proportional representation or a welfare state were able to increase gasoline taxes more rapidly and decreased the use of road fuels as a consequence. On the supply-side, countries with either relatively independent bureaucracies or corporatist institutions were better able to reduce their dependence on oil in power generation. This is all consistent with our theoretical intuition. In the paper, we supplement this with case studies of various countries and the use of discourse network analysis.

For the difference-in-differences analysis, if you have insulation or compensation, we tend to observe transitional policies on the supply or demand side. If you are missing both of these types of institutions, policy change becomes quite difficult. Additionally, the kinds of policies implemented under insulation and compensation systems differ. If you have insulation, you can change policy without paying off the losers, but in a compensatory environment, you can expect to see some kind of financial compensation flowing to those that lose out from the transition.

A cluster of countries have both a proportional electoral system and corporatist interest group intermediation, like in Germany and Denmark. In both of these countries, we see demand and supply-side transitions, and because of corporatism, we see significant compensation of producer interests but not necessarily of consumers. On the other hand, we see in France a fairly unique pattern of institutions characterized by a greatly insulated bureaucracy combined with a majoritarian system and a welfare state, so on the consumer side in France, you can't ignore voters but you can compensate them. Countries like the US and Australia have very limited transitions because they lack both insulating and compensatory mechanisms.

The implications for climate change are as follows. Among high-income democracies, countries with proportional rules have tended to adopt more ambitious climate change policies. We argue that the effect of political institutions on climate change has been quite similar to their effect on responses to the oil shocks. Bureaucratic insulation is also interesting. Countries or regions that have been able to create autonomous environmental bureaucracies have been better able to attain climate policymaking goals, including California in the US, in contrast with Germany, which has struggled somewhat.

Corporatism has played a similar role in contemporary climate change policy similar to the role it played during the oil shocks. Germany's coal phase-out is a compromise that gradually phases out coal while supporting industry and workers in the coal sector. Finally, the welfare state situation is probably the greatest difference from the 1970s. Budget deficits and austerity politics in OECD countries have limited their ability to increase welfare spending as a compensation mechanism. We see much less of this today than in the 1970s.

Countries with proportional representation adopted national carbon taxes or emissions trading schemes both earlier and in greater numbers than majoritarian countries. In terms of the effective carbon tax rate, majoritarian countries also adopt a very low effective price on carbon.

The institutional context for Japan has changed in two important ways since the 1970s. First, the 1994 electoral reforms shifted Japan from a relatively proportional single-nontransferable vote multimember district system to a mixed system that primarily emphasizes single member districts. Japan has basically moved from proportional representation to a majoritarian system. Also, in 1998, the Hashimoto administrative reforms significantly reduced the autonomy of Japanese bureaucracies like METI in favor of centralized authority around politicians, and especially the Prime Minister's office.

This has changed Japan's institutional configuration as it has confronted these two major energy challenges. During the oil shocks, because of its relatively proportional electoral system, Japan was able to implement relatively robust demand-side measures without having to compensate consumers. This led to very high gasoline taxes and energy prices that encouraged energy conservation. On the supply-side, MITI's independent authority allowed very robust supply-side measures in coordination with industry. Japan was able to adopt a relatively robust demand-side and supply-side transition in response to the oil shocks. In contrast, for contemporary climate change, Japan is very constrained on the demand-side because the electoral system now tends to be very majoritarian and politicians are very sensitive about raising costs for consumers. The consumption tax is one example where we see a lot of sensitivity. Gasoline taxes are another. Japan has never had a strong welfare state, giving it no insulation or compensation mechanism. On the supply-side, bureaucratic autonomy has been weakened. Compensation is still feasible but because of budgetary constraints, it is not as easy today for Japan to provide compensation to economic losers as it was in the 1970s.

The consequence of all of this is that the political context of Japanese energy policymaking today looks a lot more like that of the US than that of Japan in the 1970s. It's very difficult in Japan today to increase consumer energy prices through such measures as a gasoline tax or carbon tax. Even when taxes are adopted, they tend to be very low by international standards. Compared to the 1970s, industries tied to fossil fuels have a greater ability to obstruct transformational policies. The utility companies, for example, are better able to resist the adoption of new energy, particularly renewable energy. Japan's ambitious response to the oil shocks has not been matched by its response to climate change. One example of this is the DPJ's advocacy of reducing gasoline prices. That was a key part of their platform when they came to power before the Abe government. The Abe government has also not been very aggressive about increasing energy costs for consumers. The political discussion around energy prices has been very consumer-oriented in contemporary Japan.

Looking at the data on various transportation costs in Japan, things like the automobile weight tax, tolls and the gasoline tax used to be raised every few years without much political controversy. Since the mid-1990s, these have all been pretty flat and the discussion has focused on reducing these various charges. The tax revenue generated by automobile-related taxes like the weight tax and the acquisition tax has declined considerably to encourage the adoption of energy-efficient vehicles, but because of the substitution effect away from public transportation, this has tended to encourage the use of automobiles rather than more energy-efficient forms of transportation. Japanese electricity prices used to be the highest in the world, but today they are about average or slightly higher than average, as other countries have increased prices primarily in response to climate change and in an effort to encourage energy conservation.

On the supply side, in the 1970s, Japan successfully reduced its dependence on Middle Eastern oil by building nuclear power plants and shifting to other forms of energy, like natural gas, but during the more recent period, as climate change concerns have intensified, there has not been an equally significant shift. For example, renewables in Japan remain a small share of the energy mix, and the Fukushima disaster did not help because it shut down Japan's nuclear energy sector. Compared to other countries, Japan's share of renewable energy remains quite low and is not growing very significantly. Japan does better than South Korea but compared to other OECD and especially European countries, its adoption of renewables has been quite slow.

Using the synthetic control method to compare Japan with similar countries based on a weighted average of various characteristics starting around 1994, carbon dioxide emissions in Japan should have continued to fall. That is what happened in other similar countries, but Japanese CO2 emissions have stagnated. Japan also ranks very low now in expert evaluations of climate policy. Japan's reputation has suffered quite a bit in recent years and it is now regularly ranked towards the bottom in international climate rankings due to its support for coal and general lack of progress on emissions reductions.

Public opinion polls in Japan show generally very high support for managing climate change. The Japanese public is not skeptical about the dangers of climate change, in contrast to the public in the US and Australia. Strong international criticism of Japan has been used by Koizumi to increase support for an energy transition. One consequence of this shift of authority from the bureaucracies to the politicians is that, compared to the Japan of 30 years ago, today's leadership by politicians could make a significant difference. People close to Prime Minister Abe tell me that he is not very personally invested in climate change. People who have briefed Abe on climate change policy tell me that he was not interested in prioritizing this issue if it would lead to lower economic growth. If another prime minister comes to power who is more personally interested in environmental issues, Japanese policymaking may become more proactive on climate change.

The UK offers an interesting institutional contrast because it in many ways has limited institutional support for climate change policies. Despite a majoritarian electoral system, a relatively weak welfare state and a not very independent bureaucracy, it prioritizes climate change policy and may serve as an important model for Japan. The idea here was to create legally binding targets to overcome the weak insulation and compensation institutions. The problem with this is that any law can be overturned, so you need to create a law that is sufficiently credible to not be easily abandoned for political reasons. That kind of initiative may be something that Japan can learn from in thinking about how to create a political environment conducive to better climate change policymaking.

Q: What should the Japanese government do to deal with the current institutional setting, which is unfavorable to better climate change policy?

A: In majoritarian systems, politicians are very sensitive to slight changes in voters' evaluations of them. However, they can also implement significant policy changes without constraint. The UK illustrates this to some degree. The 2008 law was a significant change and it has managed to stick. If Japan implements a law like this, there could be enough public support to enable politicians to maintain the framework. This framework would enable the government to connect the need for mitigation with higher energy prices through a legal framework and it would be one important step.

For Japan, one very important part of the solution needs to be investment in renewable energy. Japan lags behind other industrialized countries here and the government needs to kick-start the industry. Once you provide initial support and investment, you tend to create a self-reinforcing cycle because you create stakeholders who want to keep the transition going. That was seen in Denmark with wind power. Investing a lot of resources early can assist the transition by altering the political dynamics. The Japanese institutional context is difficult but I think the government can move forward by making selective investments in key areas.

Q: Did the UK introduce its law in 2008 because of pressure from the EU?

A: The law itself was not a result of pressure from the EU, but you raised a very important point. Unlike Japan, the UK was subject to significant EU environmental and climate policy regulatory rules. Post-Brexit, the UK has a legal mechanism for advancing climate change policy, but it is also losing much of the regulatory framework that pushed the country along despite its domestic politics. If it turns out that the EU was a big factor, that paints a pessimistic picture for Japan. I think it is a result of both the UK and EU institutions.

Q: Could the United Nations serve as something like an EU institution for Japan, the US or Canada?

A: The United Nations Framework Convention on Climate Change (UNFCCC) attempts to create a global climate change framework but the problem is that it becomes a lowest common denominator exercise. All that can be agreed on are unenforceable agreements with self-declared targets. If you could instead focus on a smaller group of the largest emitters and design a framework just around them, you could cover a very large share of global emissions without covering a lot of actors.

Q: I have a few questions. First, with regard to highway tolls not changing much after the electoral reforms: Japan experienced deflation, which could be the reason why you observed no change in highway tolls, etc. after the reform period. Actually, highway tolls were reduced around 2010. A similar thing is electricity pricing based on US dollars but what about on a yen basis? What happens if you change the currency?

A: Certainly deflation is a factor. If you compare Japanese highway tolls to other countries, in the 1980s, Japanese highway tolls were by far the highest and most comprehensive in the world, but over time other countries began to catch up. It's not just deflation causing nominal prices and the level of these taxes and so forth to stagnate; there has also been an international shift where Japanese prices compared to other countries have declined.

If you look at electricity prices in terms of Japanese yen instead of dollars, the overall price level declines slightly over time but not dramatically. Essentially, the economic rents that are paid to Japanese utility companies have declined and the reason why electricity prices are fairly flat is that energy costs increased during this period. The government is no longer providing compensation to utility companies like it used to, but it hasn't quite resulted in lower prices for consumers because of the counteracting effect of rising energy prices.

Q: Under the proportional representation system, politicians don't really pay attention to backlash from voters because the electoral system is more party-based rather than person-based. The proportional representation system often leads to a coalition government. Did you notice any differences in countries that use the proportional representation systems, between multi-party governments or coalition governments or other electoral results?

A: One thing I have investigated is what exactly it is about proportional representation that tends to lead to more proactive energy-related policymaking. One possible alternative explanation could be that, for example, in proportional representation systems you are more likely to have green parties in coalition with the dominant party, which gives the green party the chance to attach environmental legislation to other policies and thus produce support for renewable energy or higher carbon taxes and so on. Another mechanism could be that in proportional representation systems, you are more likely to have left-leaning parties in power. In a few cases, Germany and New Zealand for example, green parties have entered coalitions and had some effect on government policymaking. However, in fact this is very rare. There are not too many cases in which green parties are part of a majority coalition.