Nadia Sapunov

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The Role of Private Governance Mechanisms in the Transition to

Renewable Energy

Master Thesis Political Science, Political Economy

Research Project: Rethinking Governance: New Solutions for Our Hot and Crowded Planet

June 2020

Nadejda Sapunov (10846603)

Supervisor: Philip Schleifer Second Reader: Robin Pistorius

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Table of

List of Abbreviations

ALC - Advancing Low Carbon CCS - Carbon Capture and Storage CDP - Carbon Disclosure Project CO2- Carbon Dioxide

CSR - Corporate Social Responsibility EU - European Union

GCC - Global Climate Coalition GHG - Greenhouse Gas Emissions

ICC - International Chamber of Commerce IEA - International Energy Agency

IOC - International Oil Company

IRENA - International Renewable Energy Agency LCTPi - Low carbon technology partnerships initiative NGO - Non-profit organization

OGJ - Oil and Gas Journal

OPEC - Organization of the Petroleum Exporting Countries RE- Renewable energy

UN - United Nations

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1. Introduction

1.1. Scaling up the energy transition

In the last few decades the transition to renewable energy sourcing has been promoted as one of the most promising solutions to decrease the greenhouse gas emissions. This rhetoric appeared as a response to the increased energy demand and the uncertainty of oil and gas supply (Roehrkasten, 2015). The discussion really picked up among governments during the Paris Climate Agreement where the topic of global warming highlighted the importance of energy decarbonization (IRENA, 2017a). Ratifying the agreement meant that all participants would have to come up with long term national strategies on how to transform and decarbonize their economies (Ibid). This long term strategy focused on both policy and technically based solutions to solve the barriers to transition which also assumed active involvement of private actors (UN, 2016).

It has been identified that around 75% of world greenhouse emissions are related to energy consumption and production, making the energy sector one of the most polluting sectors (CDP, 2017). With just 25 fossil fuel companies contributing to the majority (51%) of global industrial emissions (CDP, 2017). The Carbon Major Report (2017) highlights that if fossil fuel extraction continues at the same rate for the next two decades this could lead to disastrous and irreversible consequences for biodiversity and food scarcity. Therefore, this puts a lot of pressure on International Oil Companies (IOCs), as major polluters, to redesign their strategies and operations.

From the policy perspective there has been a strong push to involve the IOCs in decarbonization due to their high carbon footprint and availability of financial means. This has been done indirectly through the setting of defined renewable energy targets on the national level (e.g. National emission reduction targets) and the introduction of various financial instruments (e.g. feed in tariffs, subsidies, tax exemptions). The effectiveness of these policies can be measured to some extent by the high level of investment in renewable energy coming mainly (92%) from the private sector as can be seen in the figure 1 (IRENA, 2017b).

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Figure 1. Renewable energy investment (source: IRENA, 2017)

The above mentioned policies have been a catalyst for the changes in the energy sector (European Parliament, 2018). With the whole sector adjusting to the new policy developments, the companies became more aware of the need to change both, their strategies and their role in the energy sector.

From the technical side, over the year, IOCs have gained a unique set of assets in terms of vast learnings and partnerships by supplying energy to both private and public sectors (Interview 4). Moreover, according to Heggarty (2018), IOCs currently own 15% of the total oil and gas market share. Yet, despite their crucial positioning in the energy sector there has been done little research on the ability of companies to use their internal power tools towards benefiting the proliferation of renewable energy governance and helping advance the energy transition. Based on this, the aim of this research is to better understand if companies have the potential to take on a more leading role to shape the governance of the renewable energy and to investigate which internal mechanisms of power they use to achieve this.

In order to demonstrate what IOCs can do to shape the governance of renewable energy, this thesis will analyze the case of top 4 European-based IOCs, namely Shell, BP, Total, Eni. These four companies are frontrunners in terms of revenue and scale of their operations within the sector. Also, there have been signals of change in their attitude towards the above mentioned developments in the energy sector (Levy & Newell, 2002). For example, all four have made a number of announcements and published reports regarding how they are planning to reallocate their resources and contribute to the energy transition.

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The conducted research will focus on identifying the various internal mechanisms of power that these companies are using to shape the renewable energy governance as well as will investigate the reasons behind their preference to rely on some mechanisms more than others. As a result of this analysis, a set of hypotheses will be derived that will cover the special circumstances that shape the potential of companies to provide the governance of renewable energy. This way, the analyzed case can present an example for other IOCs in the energy sector that intend to play a similar role.

1.2. The Research Questions and sub-questions

This thesis contributes to the current literature on environmental governance by understanding the various private governance mechanisms that private actors, and specifically European IOCs use to shape the renewable energy governance. This is done by analyzing the various strategies of how these mechanisms are applied as well as studying the restrictive implications that shape those strategic decisions.

In other words, this thesis aims to answer the following question and sub-questions:

To what extent do private governance mechanisms shape renewable energy governance?

Sub-questions that will help to answer the main research question:

What mechanisms do IOCs adopt regarding renewable energy governance? How do they use these mechanisms to provide the transition? (descriptive)

Why do energy companies choose some mechanisms over others? (analytical)

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1.3. Academic and Societal Relevance

From a societal perspective, vast amounts of energy are used to power day to day activities, making it a vital resource (Roehrkasten, 2015, p.19). Energy is widely used, for basic human needs such as the heating, cooling and electricity of houses to powering industries (Ibid). Despite its above mentioned importance for the economy and human health, the energy sector contributes massively to climate change (IEA, 2013). This is due to the fact that energy production sourced from fossil fuels is responsible for almost 2/3 of global greenhouse emissions (Ibid). Moreover, it is expected that the energy demand will increase in the upcoming years resulting in a significant increase in the level of pollution. One of the potential solutions to minimizing these negative externalities involves sourcing energy from inexhaustible natural origins such as solar energy, wind power, biomass, hydropower and geothermal sources (Roehrkasten, 2015). Since IOCs play a leading role in the energy sector it is worth exploring their role as a provider of the renewable energy governance and the energy transition.

From an academic perspective, this study enhances the literature on private governance within the context of renewable energy governance by aiming to give a better understanding of the private governance mechanisms, investing strategies, activities and operations that are used by companies to promote the energy transition. Moreover, there has been relatively little research on how companies use their private governance mechanisms to shape renewable energy governance. However, since most papers regarding this topic were written in the last few years, it signals a rising interest among academia.

The literature mostly covers the geopolitical aspect of renewable energy governance as well as the negative impact of private lobbying on environmental governance. Hence, the possibility of private governance having a more facilitative effect on shaping the renewable energy governance presents a somewhat new perspective. With regards to IOCs, most of the recent literature is focused around their attempts to reposition themselves within the energy sector and the various factors that led them to do so. However, while the literature highlights the unique positioning of the IOCs it overlooks the possibility of them taking a more prominent role and actually shaping the governance of renewable energy by using their internal mechanisms of power. Moreover, a solid understanding of how companies do this and why they choose certain private

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governance mechanisms over others is lacking. Therefore, this thesis will contribute to the literature gap by advancing the knowledge on various private governance mechanisms used to facilitate the governance of renewable energy and accelerate the energy transition.

1.4. Thesis Structure

The remainder of this thesis is structured as follows: Section 2 will cover relevant literature on the development of renewable energy governance and the positioning of IOCs in the energy sector. Section 3 will elaborate on the concept of private governance as well as present the analytical framework containing the private governance mechanisms and their relation to the renewable energy policy aspects. Section 4 will further elaborate on the various sources and methods used to answer the research question. The analytical framework will consequently be applied to the empirical findings in sections 5. Section 5 will focus on discussing the various examples of companies using the private governance mechanisms to facilitate renewable energy governance. Subsequently, Section 6 will explain what internal and external barriers the IOCs are facing in fulfilling their role as providers of renewable energy governance, and thus the reason behind IOCs choosing to use the mechanisms that they are using now. Section 8 will then conclude this thesis by highlighting policy recommendations for future research.

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2. Literature Review

This section presents a comprehensive literature review and will cover how the topic of renewable energy governance evolved. Also, I will cover literature on the current position of IOCs in regards to the governance of renewables. Following the debate on the advantages and disadvantages of private governance my thesis will contribute to the literature debate by further analyzing the implications that private governance can have for the acceleration of the energy transition so that the ambiguity stemming from this debate can be to some extent diminished.

2.1. Renewable energy governance: from public to private

Traditionally, the governance of renewable energy has been studied mainly from a state centric perspective (Roehrkasten, 2015). This is due to the fact that availability and accessibility of natural resources are predominantly linked to geoeconomic and geopolitical questions of a state (Goldthau & Witte, 2010). As a result, for decades’ public governance, with such strong players like OPEC and International Energy Agency (IEA), has been considered the main institutional mechanism for leading the global rhetoric on various energy activities, including renewable energy (Giligan & Vandenbergh, 2020).

However, despite the topic of renewable energy being around since the 1880s it did not have much public or institutional support due to economic and structural barriers related to the high price of the technology needed to scale it up (Penha, 2011). Also, due to the low price for the use and dissemination of conventional energies, renewable energy sourcing remained a niche topic among experts for many decades (Ibid).

In the 1980s and 1990s the international political regime found itself in the midst of increased political complexity due to a mix of technological innovation, economic liberalization and their effects on global warming. Among other things this brought structural challenges to traditional ways of global energy governance. These included uncertainties regarding energy security, energy access as well as the increasing pressure amounting from the rise of greenhouse gas emissions (Roehrkasten, 2015). This made it difficult for state authority and public regulation to keep up with global economic activities and their externalities that are outside the control of a

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single government (Buthe, 2010). This subsequently pushed the countries and non-state actors to collaborate across borders in search of solutions for decarbonisation, bringing the necessary argument in favor of developing the governance of renewable energy sourcing. This collaboration initiated unprecedented developments on both academic and policy making levels. In general, the focus was around framing renewable energy as a feasible alternative energy source that is socially and economically attractive. Also, making it of paramount importance to integrate it within the global energy system in order to decrease the emissions. The topic appeared officially on the political agenda during the UN Earth Summit in 2002 (Roehrkasten, 2015). This event kick started a wave of trans boundary policy-making, which was aimed at facilitating the widespread deployment of alternative energy sources (Lougsami, 2019). The innovative policy developments on national, such as feed-in tariffs and subsidies together with the creation of a number of international organizations that are focused on facilitating various state and non state actors with the implementation and widespread deployment of renewables (e.g. SE4ALL, IRENA, REN21).

Nevertheless, as a result of significant cleavages and misunderstandings between the member states due to the previously mentioned geopolitical aspect of the energy activities, the policy making in the area of renewable energy resulted to be somewhat ineffective and fragmented (Roehrkasten, 2015; Sanderink, 2020). This became prominent through the limited accomplishments of national institutions to actually decrease the greenhouse emissions as evidenced by the fact that the level of greenhouse emissions continued to rise despite numerous national policies and international commitments (e.g. Kyoto protocol) (Andrade & Puppim de Oliveira, 2015).

Andrade and Puppim de Oliveira (2015) argue that the lack of success was attributed to such factors as lack of policy implementation and insufficiently open decision making process for other sectors and actors which also play an important role. This led many academics to debate whether private actors can play a more pronounced role in the decision making process and whether it will make a difference in the quality of implementation of environmental governance (Falkner, 2007). The idea behind this was that if private actors will play a bigger part in the decision making process of governance they will be more willing to adhere to the implementation process, improving the efficiency and overall effectiveness of policy implementation (Ibid).

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With regards to private actors playing a bigger part in the decision making process and the general rise of private governance activities can be traced back to the international conferences on sustainable development. The World Business Council for Sustainable Development (WBCSD) and the International Chamber of Commerce (ICC) have been invited for the first time to represent the interests of businesses during the 1992 Earth Summit in Rio de Janeiro (Andrade & Puppim de Oliveria, 2015). Their main goal was to promote and normalize the idea of cooperation between the international governments and the private sector in finding solutions to tackle environmental problems (Idem). Moreover, their political strategy was focused on requesting support for certain governance mechanisms that would be more market-oriented and would be based on self regulatory instruments such as international product standards, codes of conduct and certification programs (Idem). According to Cashore (2002), these types of instances presented efficiency gains for both public and private actors in the form of cost reduction and long term net benefits. Subsequently, this dynamic became the new standard which then formed the basis for the growth of various other private environmental regulations in the 1990s.

Overall, Gilligang and Vandenbergh (2020) argue that nowadays public institutions encounter various structural barriers that prevent them from reacting fast and in an efficient way to climate related issues. Meanwhile, through private governance and private capital investments companies have more flexibility to bypass those barriers and ensure a quicker response to climate change (Idem). On the other hand, Tzankova (2020) suggests that critics of private governance argue that private governance is often used by companies to undermine the public environmental policy and weaken the support for regulatory interventions. This however directly contradicts with the other popular rhetoric within academia that the rise of private and hybrid systems of governance perfectly complement the public environmental regime by “filling regulatory or

governance gaps when intergovernmental cooperation fails” (Andrade & Puppim de Oliveira,

2015, p.377; Buthe, 2010).

2.2. The role of IOCs

Following the discussions in the introduction, in 2016, fossil fuel companies were identified to be responsible for 51% of world carbon emissions, making their contribution to

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climate change undeniable (CDP, 2017). Although, for years, the companies denied their contribution to climate change as well as lobbied heavily against strict environmental regulations (Levy & Kolk, 2002). This made IOCs top targets for environmental NGOs, public policy and society in general, resulting in a loss of support and just an overall negative image of IOCs and their operations (Ibid). In addition, the latest technological developments in the renewable energy area present a real business risk to IOCs (McGlade & Ekins, 2015).

Therefore, many IOCs attempted to reorganize their strategic priorities to ensure that they are more in line with social and environmental causes (Penha, 2011). They did so by deploying various resources to alternative energy startups attempting to leverage their expertise and diversify their portfolios (Zhong & Bazilian, 2018). As a result of their positioning and widespread reach of their operations and financial means they have the potential to become significant players in the renewable energy market. Among other things, currently oil majors claim about 15% of the oil and gas market which highlights the central position of IOCs in the current global energy system (Heggarty, 2018). It is estimated that an investment of approximately 200 billion will be needed for the IOCs to gain a similar position in the renewable energy market (Ibid). However, the process of integration of alternative energies with the core operations of IOCs have been a mixed success. Some of the issues include difficulties with scaling up the technology and uncertainties related to the lack of a firm regulatory framework. This makes companies rely mainly on their conventional energy sourcing operations. Nevertheless, this made academics and policy makers speculate about the possibilities a more significant repositioning of their power mechanisms could bring to the governance of renewable energy (Zhong & Bazilian, 2018).

From a policy perspective, Penha (2011) was among the first to link the strategic decisions of IOCs to the policy context of the country that they operate in. In her study Penha (2011) compares the investment of various IOCs in renewable energy across the world. The study concludes that European-based IOCs tend to invest more in technologies related to renewables compared to US-based IOCs (Penha, 2011). One of the reasons seems to be the availability of more stringent regulations in the EU to cut greenhouse emissions. However, by identifying a one-way relationship between the policy context and the companies’ investments in renewable energy, the study fails to fully explore the influence that the corporate power can have on renewable energy governance. Mentioning only that there is evidence to believe that through their behavior, IOCs in

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Europe have “voluntarily led the way towards a viable policy concerning cutting GHG emissions” (Ibid, p.18). Hinting at the possibility of IOCs having the potential to be providers rather than just followers of the renewable energy movement.

In contrast to Penha (2011) a study published almost 10 years later by Pickl (2019) investigates the intent of the IOCs to transition and become energy companies by looking at their levels of investment in alternative energies. Interestingly, the author identifies a link between the amount of so-called proven oil reserves and the renewable energy strategy of the company (Pickl, 2019). The study concludes that the lower is the amount of oil that companies can extract with certainty the higher are the chances of them to invest in renewables. This study contributes to the literature in two ways, by highlighting the strategic dilemma of companies to transition and by identifying the renewables sourcing as a solid strategic decision.

2.3. Expanding the academic debate

The importance and influence of international companies in the environmental affairs is not a new research topic. The extensive research includes the neo-gramscian perspective on environmental governance (Levy & Newell, 2002), the interdependencies between private and public environmental governance (Abbott & Snidal, 2009; Falkner, 2007), the potential of public-private partnerships (Pattberg, 2010), lastly the various ways public-private actors influence public governance through private regulations (Auld, Bernstein & Cashore, 2008; Bartley, 2018; Cashore, 2002). Nonetheless, despite this extensive coverage, the role of private governance in scaling renewable energy governance has been barely researched. The limited number of papers on the topic have focused mainly on the impact of the company's investments in renewable energy projects and its effects on the energy transition (Zhong & Bazilian, 2018). In this way, the extant of influence of other types of corporate power mechanisms on the energy transition has been left under researched. Moreover, historically, the involvement of companies in climate change governance have mostly had a negative connotation due to lobbying activities that were often deployed by the IOCs to resist regulatory changes (Geels, 2014). Therefore, leaving space to research the potential of companies having a facilitative effect on the environmental affairs.

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Private governance is often framed within academic literature as part of the solution or part of the problem and less as a leading force for the governance of environmental affairs (Tzankova, 2020). It is usually presented as a solution where private actors are expected to follow the regulations and decrease their fossil fuel dependency and part of the problem when they refuse to do that. In this way limiting the potential of the private sector to one function –an implementation tool.

Furthermore, in order to meet the Paris agreement goals, it is estimated that in the time period of 2016-2050 an investment of approximately 3.5 trillion USD each year is needed (IEA, 2017). This is mainly to invest in renewable energy technologies and the necessary infrastructure to support the transformation of the energy sector. However, Fadly (2019) states that the current amount of investment that can be supplied by the public funding is not more than 15%, leaving a huge gap to be filled by the private sector. Even though a recent paper from Zhong & Bazilian (2018) explored the potential of IOC’s investments in renewable energy it was quite limited in its scope and did not assess other power tools a company can use to shape the renewable energy governance.

Interestingly, Levy and Newell (2002) have identified that IOCs have been changing their attitudes and behaviour towards the energy transition since the 1990s. Therefore, there seems to be a great opportunity in further studying the involvement of the private sector specifically of IOCs in renewable energy governance. The recent reorganization of the IOCs and their intent to become energy companies is a clear indication of their interest in renewable energy sourcing and willingness to assist its governance.

Therefore, with their increased investments in renewable energy and the current strategic dilemma of IOCs they present an interesting case for shaping renewable energy governance that has not been explored yet. Hence, my paper will focus on investigating the potential of private actors using their mechanisms of power to influence renewable energy governance. In addition, this thesis will fill in the gap by analyzing private governance mechanisms of power that top 4 European IOCs are using to shape the transition to renewable energy and consequently further explore which ones are more successful than others.

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3. Analytical Framework

To better understand the various strategies international companies can use to influence the governance of renewable energy, it is helpful to look at three potential roles companies can play in global governance. The three roles – sponsor, inhibitor and provider - will be applied to the context of environmental affairs in order to explain the different ways companies can shape its governance. Then, zooming in on the third one, several mechanisms will be delineated that relate to various ways companies use these mechanisms to shape public regulation. This is followed by a discussion of theoretical implications of these mechanisms for the renewable energy governance. These will then be used as a framework to identify the various instances when IOCs take on the third role to “provide” renewable energy governance and its effects on the three aspects of energy transition: energy security, energy access and environmental protection. More on the operationalization of these concepts can be found in the methodology section.

3.1 Private Sector Engagement in Environmental Governance

Nowadays, the private sector and in particular international companies engage daily with political, social and economic aspects of global environmental governance. Governance can be defined as “a set of formalized rules, standards, agreements, and administrative bodies that seek

to establish order and solve problems across numerous jurisdictions” (Bartley, 2018, p.147).

Consequently, environmental governance relates to various regulatory decisions taken by a range of actors to ensure environmental protection and decrease the human related risks of issues like climate change (Falkner, 2003). In the case of the private sector, private environmental governance refers to various ways companies disseminate their power and resources to engage in the three above mentioned aspects of global governance. This engagement includes lobbying activities, environmental and social reporting as well as the development of innovative, market based solutions (Cashore, 2002).

Although the increasing power and centrality of the private sector in environmental governance has been recognized a while ago (Falkner, 2003), a popular debate within academia revolves around the question whether the activities of private actors’ compliment or undermine the

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public environmental policy (Levy & Newell, 2002; Falkner, 2003; Tzankova, 2020). The arguments in favor of private governance suggest that their activities support the public policy in areas where it would otherwise lack resources and expertise (Haas, 2004). On the other hand, the critics of private governance argue that it actually lowers the overall support for public regulation without introducing a solid alternative to mitigating environmental issues. In this way, weakening the policy response to environmental issues while avoiding accountability-related sanctions (Falkner, 2003). However, while some academics focus on the overall effectiveness and outcomes of private governance, Bartley (2018) introduced a more comprehensive view regarding the various processes of influence of international companies. He explains that companies can influence political agendas in three ways, they can sponsor, inhibit or provide global governance. To better understand how all three roles impact the governance of environmental affairs, they will be discussed one by one in more detail in the following sections.

3.2. The 3 Roles of Private Actors in Global Governance

As mentioned above, Bartley (2018) argues that by playing the roles of sponsor, inhibitor and provider international companies can influence the setting and the implementation of the political agenda of a number of global issues ranging from trade to climate change (Bartley, 2018, p.123). Taken that IOCs are major players in the global energy system, it is important to identify the roles of IOCs within the context of environmental affairs.

3.2.1. The Sponsors

According to Bartley (2018), the majority of international corporations have acted as sponsors of international regimes. This relates to cases where companies have supported and helped design different rules and regulations produced by governments (Ibid, p.149). The most prominent case of support has been the push for neoliberal ideas since the 1970s that focused around “expanding the reach of markets, and reducing democratic intrusion into market

operations” (Bartley, 2018, p.150). Companies and other non state actors have been advocating

towards deregulation, market openness and the removal of regulatory barriers with the aim to expand their operations while protecting their property rights (Ibid, p.152). Besides that, there have

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been numerous cases of companies lending their expertise and other resources to produce agenda-setting studies, in this way contributing to the design of policy making.

However, despite the company's vast capabilities and interests, its potential to succeed and gain competitive advantage is still dependent on the local public policy framework. Thus, companies often try to sponsor international or local governance and tilt the balance of power to their advantage. This usually takes the form of lobbying, directly by the company or through various organizations. According to Falkner (2003) non-state actors have exerted a substantial level of influence over regulatory outcomes, by either hindering or supporting the development of environmental governance. IOCs present one of the more prominent cases that have used their positioning, power and resources to influence the structures and processes of international governance (Skjærseth & Skodvin, 2003). In the case of climate change, IOCs and various organizations like WBCSD and International Chamber of Commerce (ICC) have been very vocal in promoting market-oriented initiatives and self-regulatory mechanisms in relation to environmental governance (Falkner, 2003).

3.2.2. The Inhibitors

With regards to the inhibitor role, Bartley (2018) argues that there is ample evidence of companies playing the role of inhibitors in the climate change debate (p.152). According to Bartley (2018) one of the most significant reasons behind the ineffectiveness of environmental governance and regulatory fragmentation relate to the aggressive lobbying of IOCs and industry associations during the 1990s. In order to protect their revenue streams, the leading fossil fuel companies have successfully advocated against the formation and implementation of more stringent and possibly more effective regulations regarding the reduction of greenhouse gas emissions. This was done with the help of the international lobbying group Global Climate Coalition (GCC) and the International Chamber of Commerce (Falkner, 2007). In the case of GCC it has been well-documented that companies have publicly challenged the science behind global warming and have spread false information regarding climate change (Ibid.)

Specifically, IOCs strongly lobbied international agreements such as the Kyoto Protocol. In case of European-based companies, it has tilted the final decision of the governments towards

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an Emissions Trading System rather than a more stringent carbon tax, while in case of the USA, lobbying has resulted in the government completely withdrawing its participation from the Kyoto protocol (Meckling, 2011). Both cases highlight how corporate power can influence the viability and course of political affairs. Hence, the support of international companies can be vital to the development of newly formed governance issues such as the proliferation of renewable energy sourcing.

Bartley (2018) explains that the positions of companies on an issue evolve over time and that there have been signs of change in the attitude of companies towards climate change. As a result of strong criticism from the public and environmental groups in the 1990s, a shift in company’s behavior has been recognized. It has mainly focused on IOCs seeking carbon market opportunities such as emissions trading as well as small investments in renewable energy projects (Levy & Spicer, 2013 as cited in Bartley, 2018). As explained by Levy and Spicer (2013) this mainly happened because the global perception of climate risks has shifted and the inevitability of emissions regulations became all too obvious. Hence, companies could not afford anymore the reputational and economic costs resulting from their strategies of denying climate change implications (Ibid). One of the first signs of repositioning of IOCs was the measuring and reporting of their carbon emissions as well as diversifying their portfolio by investing in biofuels and solar energy. These shifts in IOCs behavior led them to take on the third role, that of the provider of environmental governance.

3.2.3. The Providers

The third role presented by Bartley (2018) is that of a provider of global governance. This role regards companies as the private authority that sets transnational private regulations. Private regulation can be defined as “instances where non-state actors set rules to govern their behavior

and/or the behavior of others” (Auld & Gulbrandsen, 2013, p.394). These generally include the

setting of standards and norms, voluntary sustainability standards, and corporate social responsibility (Bartley, 2018, p.155).

Moreover, relating this back to IOCs and climate change, some of these instances started as voluntary initiatives that addressed social and environmental reporting (e.g. CSR reports) and

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the reduction of greenhouse gas emissions (e.g. Voluntary Carbon Standard). In some cases, these later evolved to be legitimate and sometimes even mandatory standards supported by many governments (e.g. ISO 14000 series, CDP standards) (Andrade & Puppim de Oliveira, 2015). Some of the aspects that make private governance effective include the capabilities of companies to publish know-how information, monitor the compliance through reporting and provide various opportunities for collaboration with other actors (Pattberg, 2004, p.19). As acknowledged by Falkner (2007) “on numerous occasions, businesses, environmental non-governmental

organizations (NGOs) and international organizations have cooperated to create norms, rules and mechanisms for environmentally friendly corporate behavior” (p.7).

Mainly, private governance presents a way for private actors to carry out what is traditionally considered governmental functions and empowers them because they can regulate their behavior and the behavior of other non state actors. Consequently, this role grants companies with the most regulatory power out of all three roles. While playing this role companies often seek to harmonize differences in national approaches and informational asymmetries within different markets in order to manage risks and successfully expand their operations (Bartley, 2018).

The role of “provider” has been evolving quite slowly, in the case of renewable energy, compared to other environmental issues. However, companies have played a significant role in supporting and advocating for the wide acceptance of various certification schemes and market-based initiatives such as renewable energy procurement and renewable energy certificates (Tzankova, 2020). These schemes were mainly a result of such policy developments like the EU Renewable Energy Directives and National Renewable Energy Action plans that have set clear targets for member countries regarding the regulatory minimum of energy shares to be sourced from alternative energy origins (ranging from 49% for Sweden to 10% for Malta) and for EU overall ( 32% in 2030) (Jansen, 2013). As a result of these strict targets, companies have been vivid supporters of the above-mentioned market instruments since they leave some space for maneuvering compared to a strict carbon tax. Nevertheless, the proliferation of these schemes made renewable energy sourcing more accessible both financially and geographically. Importantly this has been crucial for scaling up the investment and accelerating the implementation of policy making.

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The purpose of certification is often to bridge the informational gap by specifying the origins of the energy sourcing and its production so that companies that buy RE can make an informed decision, meanwhile incentivizing the companies that produce renewable energy to innovate and improve their production (Hulshof et al., 2019). Despite the benefits the newly formed market for renewable energy sourcing has been gaining criticism. Some of the problems relate to the reliability of the certifier, volatile prices and lack of an international standard, leaving room for improvement in form of public or private regulations (Ibid).

Sponsor This role relates to a more general behavior of companies to get involved in the design of rules and regulations and make them more market oriented.

Inhibitor This relates to the instances when companies resist the rules that would restrict their autonomy by hindering their implementation or undermining the decision making process. One of the more popular tools used in this case is lobbying. Provider This role relates to companies creating harmonized norms and standards without

the involvement of governments. Some examples of these are voluntary self-regulatory instances or corporate social responsibility

Table 1. The 3 roles transnational companies play in global governance (Bartley, 2018)

3.2.4. From Inhibitors to Providers

Overall, Bartley (2018) highlights that the above three roles (sponsor, inhibitor, provider) are situational and that over time the same companies can adjust and change their behavior towards the same global issue. In the specific case of climate change, IOCs have been evolving from inhibiting stringent regulations such as binding targets and taxes to supporting and providing various market-based incentives including green certificate trading and renewable energy procurement (Scoones, Leach, & Newell, 2015).

However, in order to understand beyond the simple outcome of supporting or opposing certain governmental issues it is important to understand what are the tools and how companies use them to shape the governance issues (Falkner, 2007). Bartley (2018) explains that by analyzing the “processes of influence” of a company one can identify the various ways companies exert their power in politics. In other words, the way the company decides to use its power and resources will

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reflect in the role it will play in global governance. Hence, the next section is going to focus on describing the various mechanisms of power that companies use to influence global governance.

3.3. The mechanisms of private governance

According to Falkner (2007) corporate power is often studied by treating companies as interest groups that intend to influence policy outcomes within their states (p.11). This definition suggests that in order to successfully influence a policy area companies in general rely on their mechanisms of power and political strategies to change the behavior of other actors (Ibid). In the study presented by Levy & Newell (2002) the three mechanisms of power were originally discussed solely in relation to the inhibitor role. In order to operationalize the private governance mechanisms, this thesis will apply the mechanisms of power identified by Levy and Newell (2002) within the context of the Provider role. The authors explained that the combination of material,

discursive and organizational mechanisms of power is critical to successful positioning and

stronger bargaining power of private actors within the international environmental regime (Ibid, p.63). Therefore, this thesis will research to what extent IOCs are using these mechanisms to achieve a stronger positioning as providers of renewable energy governance. The three mechanisms will be explained in more detail in the sections below.

The material mechanism of power relates to the technological and innovation capabilities of the company. Companies use their key resources – financial, technological and organizational – that provide them with a central role in deciding on investment and innovation developments, which are crucial aspects of the evolution of any international regime (Falkner, 2007). According to Levy and Newell (2002) companies can use their technical capabilities to raise investments and make technology widely accessible. With regards to the energy transition, Zhong & Bazilian (2018) identify IOCs having a stronger position since their technological know-how and business expertise can help low-carbon technology reach maturity. Some of these technological solutions are carbon capture and storage, biofuels, offshore wind and low carbon hydrogen (IEA, 2020). Nonetheless, according to Geels (2014) technical feasibility does not always lead to commercial viability. The author explains that IOCs have been enthusiastic about the development of the technology for carbon capture and its storage underground since it brought a promise for “clean coal”. This is because the development of such a technology would alleviate the pressure from the companies regarding the issue of carbon emissions in the atmosphere. However, the opponents of

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the technology have been very vocal about the uncertainty related to its side effects, such as the impact on the soil, in this way blocking its development. Hence, focusing only on the use of a company's material mechanisms is not very effective. This is why it is often reinforced by the discursive mechanism, which will be discussed in the next paragraph.

The discursive mechanism summarizes the attempts of companies “to challenge the

scientific and economic basis for regulations” (Levy & Newell, 2002, p.96). To go one step further,

Glasbergen (2011) explains that discursive power is an effective mechanism that is used by private actors to “set the terms of the global debate” (p.195) giving them the power to influence public perception (Falkner, 2007). However, since the companies do not fully disclose their interest sometimes it can be very difficult to detect how companies use this power to influence the public debate. However, what can be representative of the discursive power and is usually more accessible is the various research that is done by companies. Private actors, through their operations, often have access to large amounts of data on the ground, which gives them professional knowledge that governments often require. As a result, Glasbergen (2011) explains that companies and non state actors often contribute significantly to the information gathering based on which the public policies are developed. Hence, the dependence of public actors on the research and the data produced by companies, gives the latter a stronger bargaining position to set the global debate.

Lastly, the organizational mechanism of power refers to the ability of companies to build issue-specific alliances with various actors across different sectors (Levy & Newell, 2002). The importance of this mechanism is also recognized by Glasbergen (2011) he refers to it as networking. According to the author private governance presents a meeting ground for various initiatives to connect and explore ways to overcome “the challenges of access, scope and

credibility” (Glasbergen, 2011, p.196). More so, these meetings often produce a vast amount of

knowledge through various conferences, documents and research papers (Ibid.). The third mechanism ties the previous two (discursive and material) together and re-enforces them by gathering the support of other actors. The best example of this mechanism was the collaboration of IOCs during the 1990s and the attempt to undermine the science behind the topic of climate change. Hence, exploring the participation of companies in various instances where they network

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can provide an insight into their position in renewable energy governance as well as ways that they use this position to influence the behavior of others.

Overall, the authors used the actions of IOCs against climate change in the 1990s as an example of the application of these three sources of power. Levy and Newell (2002) argue that IOCs have successfully used the combination of these sources of power to build alliances and contest the science behind climate change in order to change the public opinion on the issue (Levy & Newell, 2002, p.94). Hence, they concluded that by using these three mechanisms companies contribute to shaping global values and norms as well as to influencing the behavior of both state and non-state actors on the international arena. More importantly, companies use these mechanisms to lock-in a specific role or position within the international arena.

Nonetheless, Levy and Newell (2002) acknowledge that interests and capabilities of actors are prone to change and this can affect the development of international regimes over time. Lastly, as future research a further analysis of the changes within IOC’s strategies to more accommodating of environmental issues was suggested by the authors. Levy and Newell (2002) argue that by studying the company’s strategies behind the reallocation of resources an insight into why specific mechanisms evolve over others can be provided. Relating back to the above-mentioned three roles, the paper by Levy and Newell (2002) focused on identifying these mechanisms in relation to the IOCs playing the inhibitor role. This makes it necessary to conduct further analysis into the application of these mechanisms to the sponsor and provider roles of IOCs in order to draw a more balanced conclusion on the effects of private governance on the governance of renewable energy. However, since the sponsor role is more of an overarching role, whereby companies promote their support for the neoliberal agenda, this thesis will mainly focus on the implications of these mechanisms for the provider role.

Furthermore, over the years, various academics have applied the three mechanisms of power by Levy and Newell (2002) to various sectors and industries to further research the influence of companies on environmental governance. Geels (2014) extended the research on the corporate power of IOCs by combining a number of power instruments including the ones provided by Levy and Newell (2002). The author used it to analyze the ability of fossil fuel companies to resist the

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energy transition within the UK’s electricity sector. Among his contributions was the development of the fourth mechanism called “the institutional mechanism”, which relates to how heterogeneity in institutional settings between countries alters domestic firms’ behavior. While this mechanism has its benefits such as the deeper understanding of the different dynamics between the local policy context and company’s behaviour it goes beyond the scope of this thesis. The reason for the exclusion of the institutional mechanism is that the four companies that will be analyzed are all subject to the EU policy context the differences in the local governance regulations and its impact on company’s behaviour are negligible. The focus of this thesis is to contribute to the growing body of literature on the involvement of companies in the renewable energy governance by using internally controlled sources of power, which are also presented in the table below.

Discursive mechanism

Relates to the dominant discourses of companies and their way of influencing what is discussed on the global agenda and the direction of the discourse.

Material Mechanism

Refers to private actors mobilizing financial and informational and technological resources to achieve their goals and influence other actors

Organizational Mechanism

Refers to the ability of companies to build issue-specific alliances with various actors across different sectors. E.g. Global Climate Coalition

Table 2. The private governance mechanisms by Levy and Newell (2002)

3.4. Specifics of the modern energy transition

In order to understand how companies can use the above discussed mechanisms to actually shape the energy transition it is important to take into account the specific features of the current energy transition. A recently published paper by Fattouh et al. (2019) identifies a number of drivers of the contemporary energy transition. More so, it is written with IOCs in mind including their attempts to influence the pace of the energy transition by diversifying their portfolios and by integrating low-carbon assets. This makes it extremely relevant for this thesis.

Energy transition refers to a fundamental change in the energy system where one source of fuel is replaced with another, which also leads to a new energy model (Fattouh et al., 2019). The

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author explains that the energy transition is often triggered by the combination of the changes within three aspects: tangible elements (technology, infrastructure, consumption patterns, production equipment); actors and their behavior (investment patterns, political strategies, coalitions and capabilities); regulations and policies (institutions, the mindset, the dominant discourse on normality). Therefore, a strategy based on a successful combination of these elements can drive the transition. More so, as identified previously private actors have the potential to influence (to some extent) all three of these aspects.

Furthermore, Fattuoh et al. (2019) identify that the current transition has a number of specific features. Firstly, it is problem-driven (climate change) rather than opportunity-driven meaning that any actor can provide a solution may it be a result of a new technology or change in the consumption behavior of citizens. Secondly, the transition is managed (coordinated) rather than accidental (naturally occurring). In this way the societal pressure to tackle climate change may produce the necessary push for the changes across society and industries and offer companies an opportunity to step up. Another feature of this transition is that the new energy sources may increase the potential for new innovations and technology. Some of the examples are advancements in solar and wind power as well as infrastructure needed for biofuels. Therefore, the specific features of the modern energy transition can provide opportunities to the IOCs if taken into account while developing their strategies.

3.4.1. The policy aspects of the energy transition

Lastly, I will discuss the three policy areas of energy transition that companies can contribute to. Roehrkasten (2015) identifies three main policy areas that the energy transition focuses on at the state-level. These are energy security, energy access, and environmental

protection. Besides the national oil import/export dependency academics emphasize the risk of

rising energy demand especially from emerging economies that consequently leads to the rise of greenhouse emissions. As a result, academics believe that the transition to renewable energy will provide the diversification of energy sources and decentralization of energy production. Consequently, helping with decreasing the energy risks and environmental destruction. Acknowledging the importance of companies in the global energy system, this thesis will focus on researching the contributions that can happen to these three policy aspects on a firm-level.

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Energy Security Actions related to reliable and affordable energy supply (certificates, diversifying the energy mix of the portfolio)

Energy Accessibility

Relates to ways a company can increase access to modern forms of energy (incl. decentralized technical interventions, capacity building, financial and technical assistance, information exchange, integrating low carbon technologies)

Environmental Protection

Focuses on the reduction of GHG emissions from energy usage and their operations (legally binding agreements on emission reductions, financial and technical assistance, capacity building, formal

information dissemination)

Table 3. Three policy aspects of energy transition (Roehrkasten, 2015)

Figure 2. Companies using three mechanisms of power to provide the policy aspects of

energy transition (information in figure is based on Levy and Newell (2002), Bartley (2018) and

Roehrkasten, 2015)

A problem that is commonly recognized in academic literature is that the governments often lack the necessary cross-border resources and on site technical expertise to efficiently regulate the renewable energy governance. Besides the technical limitations to tackle climate

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change, governments are also faced with issues regarding the lack of effectiveness of their policy implementation, which creates a regulatory gap (Glasbergen, 2011; Sanderink, 2020). Taking into account various capabilities of companies, this creates a window of opportunity for private actors to play a more prominent role in the energy transition.

Relating this back to the research question, since the private governance mechanisms are aimed at impacting the governance of renewable energy it is expected that they have at least some facilitative effect. If this is the case, the aim is to identify the specific circumstances under which the private governance mechanisms can provide renewable energy governance. Ideally, this thesis generates new hypotheses based on the findings.

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4. Methodology

4.1. Research Design

Hancké (2009) presents two widely used approaches to conduct research within social sciences: deduction and induction (p.110). In order to apply the first approach, the researcher will start with a theory and use his or her analysis to test whether their findings hold with the existing assumptions of the theory (Hancké, 2009). Meanwhile, in order to conduct an inductive research, an opposite analysis of the previous one is studied whereby the researcher starts with raw data and tries to develop new arguments and build a hypothesis out of those arguments (Ibid).

The empirical analysis of this thesis will involve a mix of two approaches, including the deductive and inductive reasoning. The first part of my empirical analysis is deductive in nature, I will be using the mechanisms identified by Levy and Newell (2002) to assess whether or not the private governance actions of IOCs regarding the renewable energy have any effect on the energy transition and which mechanisms are used more often than others. This will be followed by an inductive part of the research in which I will try to delineate what are the common barriers or challenges that make companies choose some mechanisms over others. This approach is suitable with the intent of this research because it will contribute to expanding the knowledge on the various practices companies use to influence renewable energy governance (Levy, 2008). Since there currently exists little research on what the oil companies are doing to influence the renewable energy governance, this makes this research more explorative in nature. That means that in order to answer the question a new theory will be generated from the empirical facts rather than purely testing an existing theory. This makes the second part of the research hypothesis-generating rather than hypothesis-testing (Levy, 2008).

4.2. Specifics of the study and case selection

In order to answer my question, I will be using multiple qualitative case study analysis. This method provides the necessary flexibility to integrate the different aspects of the complexity of the case (Hancke, 2009). Furthermore, the level of analysis is EU level and the unit of analysis is the strategy of the privately-owned fossil fuel company which makes the universe of cases all

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strategies of privately-owned fossil fuel companies in the world. Within this paper, the top four European-based oil companies: Royal Dutch Shell, British Petroleum, Total SA, Eni have been selected for the multiple case study. The reasons for this decision will be explained below.

Firstly, studying the oil and gas sector makes an interesting case since they contribute majorly to the climate change issue. In 2019, a report by IEA (2020) states that despite the regulatory attempts and policy developments to decrease the level of the carbon emissions, the number keeps rising with an increase of 1,3% from 2018 levels. Not a very significant number however according to the CDP report (2017) the overall contribution of the oil and gas sector to global warming has almost doubled since 1988, signaling that the fossil fuel extraction has become more carbon-intensive than ever before (p.7). Taking this into account and the projected increase of the future global energy demand it is important to study the implications that the world transfer to low-carbon technologies could bring.

This thesis is primarily focusing on the main actors within the above mentioned sector, the International Oil Companies. Since the fossil fuels do not excavate themselves it can be argued that the strategic decisions and operations of the IOCs are the main point of influence. Moreover, the operations of only 25 oil and gas companies have been found responsible for almost 51% of global industrial carbon emissions (CDP report, 2017). All four companies that will be analyzed in this thesis are part of that top 25 this makes them a crucial case to study. This means that changes of these companies’ strategies can play a pivotal role in the energy transition. Moreover, after the publishing of the report all 25 companies have been publicly held accountable for climate change (Ibid). Therefore, it is important to monitor closely their strategic shifts in order to ensure their compliance with social and environmental expectations. All four companies are investor-owned therefore in the pursuit of keeping their stakeholders content it is expected that the companies will re-adjust their operations to be more environmentally friendly. One of the first signs of this is that in the last few years all four companies published at least one report on energy transition describing how they are planning to contribute to it. Despite the fact that some companies are lagging behind with their energy transition strategies compared to the other, an analysis of these four top companies would provide a more holistic view of various strategies and practices that companies can follow with regards to renewable energy.

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Moreover, European Union is one of the largest greenhouse gas emitters in the world preceded by the USA and China and therefore presents an interesting policy context (Jamet, 2019). As a result, an effective transition to the renewable energy sourcing of the member states and companies can significantly decrease the level of greenhouse emissions. Also, EU member countries were among the first to sign the Kyoto Protocol and the Paris Climate Agreement, which put a lot of pressure on the European based oil and gas companies. Furthermore, the EU level renewable energy objectives can be characterized as the most ambitious compared to any other global region, with setting their target on cutting greenhouse emissions to 40% in 2030 and sourcing 27% of energy from renewables (European Commission, 2017). In addition, co-regulation and involvement of the private sector, including energy companies, can bring socio-economic benefits and increase the effectiveness of the energy transition (IRENA, 2019). Involvement of the private sector can help address concerns related to accelerating investment in clean energy, long term value creation and setting fair pricing (Ibid). To conclude, European-based oil and gas companies are expected to follow the strict regulations by rearranging their corporate and strategic discourse as well as re-allocating their financial, technological and informational resources, accordingly.

Lastly, in my analysis I will also take into account the influence of secondary actors such as multi-stakeholder initiatives, for example World Business Council for Sustainable Development since companies often use these secondary actors to influence the public policy indirectly. WBCSD is a CEO-led initiative with more than 200 members and it focuses on taking actions and informing companies regarding sustainable development which includes climate change, energy transition, circular economy (WBCSD, 2020).

4.3. Data Collection and Method

The empirical analysis section of this thesis is based on both primary and secondary data. The primary data relies upon a triangulation of the following data sources: interviews and data extracted from documents such as the annual reports and news reports. In the case of the Royal Dutch Shell, BP, Total and Eni, their websites have been crucial sources for the information

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gathering since they publish a vast amount of reports and press releases regarding the topic of energy transition. Secondary data has mainly been used for the analytical framework, thus it helped to structure the empirical data.

The analysis follows the method of process tracing. This method is often used in case studies to explore causal mechanisms (Halperin and Heath, 2012). It is often used for inductive research where the purpose is to lay out various causal paths to explain a certain outcome rather than testing an existing theory (Hancké 2009, p. 66-68). Specifically, this research tries to establish a clear chain of evidence linking cause (barriers to providing the energy transition) and effect (using specific mechanisms to provide some aspects of energy transition). This essentially means that contextual factors like social acceptance or economic reasons influence how companies use the mechanisms to get involved in the proliferation of renewable energy activities. The research in this thesis consists of two parts. On the one hand, this thesis starts with a more descriptive study of the mechanisms that the IOCs are using to provide renewable energy governance and accelerate the energy transition. On the other hand, it proceeds with an analysis of the reasons why certain mechanisms have been chosen over others.

4.3.1. Interviews

The first sub-question “What mechanisms do they adopt regarding renewable energy governance, and how do they use them to drive the transition” is answered by using semi-structured interviews as well as the second sub-question (Why do energy companies choose some mechanisms over others?). However, whilst the first sub-question could easily be answered by using document analysis, the analysis for the second sub-question mostly relied on the answers from interviews. The interviews have therefore been essential to answering the second sub-question, and provided a valid source for triangulation of the documents extracted from the websites of the companies.

The interviews were held from mid-May until mid-June. Using semi-structured interviews means that a number of general questions were prepared and shared with the interviewee in advance which presented more of a general guideline for the structure of the interview. However,

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the respondent still had the ability to go off script and go into more detail if needed. This resulted in the interview having a more open and free flow discussion as well as the interviewee could switch between the topics without being guided through specific questions.

In total, 42 people were approached to participate in this research, 6 of whom confirmed to contribute. The interviews were thus conducted with 6 stakeholders from six different organizations. Among the interviewees were three workers from oil companies: an energy adviser (Royal Dutch Shell), business developer (Total Solar), energy analyst (Eni). I also had discussions with one principal consultant (Technopolis), one assistant professor (TU Delft), and one oil/gas analyst (Influence Map). All 6 interviews were conducted through skype. All interviews were recorded and subsequently some parts of it were transcribed and used in the form of quotations. For the purposes of anonymity and per request of some of the respondents no names will be used in this thesis.

4.3.2. Document Analysis

The document analysis is primarily based on publications, reports and press releases originating from the IOCs’ websites. These documents were obtained through online search as well as from the interviewees. Moreover, some of the people who didn’t agree to do an interview did send a number of useful documents. Among the documents that were analyzed were the latest annual reports and CSR reports of Royal Dutch Shell, Total, Eni, BP; Investors’ Handbook 2013-2017, 2015-2019; Energy transition reports; Long term strategic plans. As mentioned previously, the websites of these companies were very helpful. All four of them have a separate section on their website related to renewables or the energy transition and those sections would usually contain the latest news as well as have an easily accessible archive with older reports.

The above mentioned data is supported by an examination of publications and news articles produced by external parties such as trade organizations related to the energy sector as well as journalists and academic reports. In this way by including external publications one can make sure that there is a balance in perspectives and that other opinions are also taken into account.

In terms of using secondary data for this research it has mainly been used to develop the theoretical framework. However, it also had a crucial role with regard to the empirical data, since