“If the Americans and their regional allies want to pass through the Strait of Hormuz and threaten us, we will not allow any entry,” said deputy commander of Iran’s Revolutionary Guards, Hossein Salami, last Wednesday. Iran has a long history of making threats against this critical waterway, through which some 17 million barrels of oil exports pass daily, though it has not carried them out. But multiple regional security threats highlight threats to energy transit from and through the Middle East and North Africa (MENA)—and demand new thinking about solutions.

Weak spots

Hormuz attracts attention because of its evident vulnerability. But recent years have seen severe disruptions to energy flows across the region: port blockades in Libya; pipeline sabotage in Egypt’s Sinai, Yemen, Baluchistan in Pakistan, and Turkey’s southeast; attacks on oil and gas installations across Syria and Iraq; piracy off Somalia. Energy security is threatened at all scales, from local community disturbances and strikes, up to major regional military confrontations.

Of course, it would be best to mitigate these energy security vulnerabilities by tackling the root causes of conflict across the region. But while disruption and violence persist, energy exporters and consumers alike should guard against complacency.

A glut of oil and gas supplies globally—with low prices, growing U.S. self-sufficiency, and the conclusion of the Iranian nuclear deal—may seem to have reduced the urgency: markets have hardly responded to recent flare-ups. But major economies – even the United States – still remain dependent, directly or indirectly, on energy supplies from the MENA region. Spare oil production capacity is at unusually low levels, leaving the balance vulnerable to even a moderate interruption.

Most concern has focused on oil exports, given their importance to the world economy. But the security of liquefied natural gas (LNG) shipments is an under-appreciated risk, particularly for countries such as Japan and South Korea which are heavily dependent on LNG. A disruption would also have severe consequences for countries in the Middle East and North Africa, depriving them not only of revenues but potentially of critical imports.

Doing better 

There are three broad groups of approaches to mitigating the risk of energy transit disruptions: infrastructure, institutions, and market. 

1. Infrastructure includes the construction of bypass pipelines avoiding key choke-points and strategic storage.
   
   Existing bypass pipelines include SUMED (which avoids the Suez Canal); the Habshan-Fujairah pipeline in the UAE (bypassing Hormuz); and the Saudi Petroline, which runs to the Red Sea, hence offering an alternative to the Gulf and Hormuz. Proposed projects include a link from other Gulf Cooperation Council (GCC) countries to Oman’s planned oil terminal at Duqm on the Indian Ocean; new or rehabilitated pipelines from Iraq across Jordan and Turkey; an expansion of Petroline; and a new terminal in southern Iran at Jask.
   
   Strategic storage can be held by oil exporters, by importers, or a combination (in which exporters hold oil close to their customers’ territory, as with arrangements between Saudi Arabia and Japan, and between Abu Dhabi and Japan and India).


2. Institutional approaches include mechanisms to deal with disruptions, such as cooperative sharing arrangements.
   
   More analysis has focused on infrastructure than on institutional and market mitigation. Yet these approaches have to work together. Physical infrastructure is not enough: it has to be embedded in a suitable framework of regulation, legislation, and diplomacy. Cross-border or multilateral pipelines require agreements on international cooperation; strategic storage is most effective when rules for its use are clear, and when holders of storage agree not to hoard scarce supplies. 
   
   The effective combination of infrastructure and institutions has a strategic benefit even if it is never used. By making oil exporters and consumers less vulnerable to threats, it makes it less likely that such threats will be carried out.
   
   Alliances can be useful for mutual security and coordination. However, they raise the difficult question of whom they are directed against. Mutually-hostile alliances would be a threat to regional energy security rather than a guarantor. Organizations such as the International Energy Agency (IEA), the International Energy Forum (IEF), Organization of Petroleum Exporting Countries (OPEC), Gulf Cooperation Council, and the Association of Southeast Asian Nations (ASEAN) could all have roles, but none is ideally placed. Rather than creating another organization, reaching an understanding between existing bodies may be more effective.


3. In general, markets cope well with the task of allocating scarce supplies. Better and timelier data, such as that gathered by the IEF, can greatly improve the functioning of markets. Governments do have a role in protecting the most vulnerable consumers and ensuring sufficient energy for critical services, but price controls, rationing, and export bans have usually been counterproductive, and many of the worst consequences of so-called energy crises have come from well-meaning government interference with the normal market process of adjustment.
   
   However, it is generally difficult or impossible for a single company or country to capture all the benefits of building strategic infrastructure—which, as with a bypass pipeline, may only be required for a few months over a period of decades. International financing, perhaps backed by a major energy importer—mostly likely China—can help support such projects, particularly at a time of fiscal austerity in the Middle East.

Energy exporters within the MENA region may often find their interests divergent. But the field of energy security is one area for more fruitful cooperation—at least between groups of states, and some external players, particularly their increasingly important Asian customers. If regional tensions and conflicts cannot be easily solved, such action at least alleviates one of the serious risks of the region’s turmoil.

For more on this topic, read Robin Mills’ new analysis paper “Risky routes: Energy transit in the Middle East.”

On December 12, 2015, 195 countries adopted the Paris Agreement, the most ambitious climate change pact to date. The document lays out a plan to curb greenhouse gas emissions, among other climate-related initiatives. Participating countries must now find ways to translate those ambitions into policy, and answer important questions about financing, transparency and accountability, national implementation, and accelerated emissions reduction goals, to name but a few. But one issue looms large: coal.

Coal-fired electricity is responsible for producing 40 percent of the world’s power and about 70 percent of its steel. The coal industry employs millions worldwide and provides billions of people with electricity. Analysts estimate that the world has hundreds of years of coal reserves in the ground, at current consumption levels. Its abundance, low price, and global availability make it a difficult fuel source to give up. But despite coal’s advantages, it poses significant environmental and health risks. Ten percent of coal consists of ash, which contains radioactive and toxic elements. It is responsible for over $50 billion in medical costs annually in the European Union alone. The environmental consequences of coal use, such as water contamination and habitat destruction, are common. Burning coal adds millions of tons of dangerous particulates and greenhouse gases, including carbon, to the atmosphere.

States and societies around the world rely on coal, even though many of its dangers have been known for decades. If the Paris Agreement is to succeed, global leaders must address the reasons why many countries—particularly in the developing world—still rely on coal. Better yet, they must find new ways to provide coal-reliant countries with affordable, alternative energy, and invest in new technologies that could help mitigate coal’s negative consequences.

COAL ACROSS THE WORLD

Globally, coal production and consumption has risen almost continuously for more than 200 years. The International Energy Agency has estimated that the world burned approximately 7,876 million tons of coal in 2013, adding over 14.8 gigatons of carbon to the atmosphere. But global coal statistics do not tell us much about markets and trends. In fact, coal usage varies enormously around the world, with some regions transitioning away from the resource as others have increasingly embraced it.

For example, stringent environmental, health, and safety policies in the United States have put increasing pressure on the coal industry. Well-funded environmental groups have succeeded in closing coal-fired power plants, and many states on the country’s west coast and in its northeast have aimed to create a coal-free power grid. Yet market forces have turned out to be the nail in U.S. coal’s coffin. The rise of natural gas in the United States has gave the country’s electricity producers an incentive to shift away from coal. In fact, U.S. coal consumption declined from a billion tons in 2008, to roughly 850 million tons by 2013. This year, analysts suggest that coal will fuel only 32 percent of all U.S. electricity, and natural gas will become the country’s leading electricity source for the first time. As a result of low prices, low returns, and political controversy, investors have shied away from coal, which has caused major coal companies to struggle to stay afloat. Of all announced new electricity generation capacity in the United States, not a single megawatt is coal-fired. Although change is happening, it will likely be decades before coal is no longer an important fuel source in the U.S. economy. Canada’s coal sector faces similar pressures: weak demand from Asia, public opposition to the construction of new export facilities, domestic environmental legislation, and the shale boom have all taken their toll.

In Europe, stringent air quality controls and climate change regulations have cut the use of coal dramatically in Denmark, Sweden, and the United Kingdom. But the EU emissions trading scheme, which relies on carbon offsets and carbon dioxide caps, has proven disappointing. In fact, most European countries still lack an economically competitive and readily available alternative to coal. Plus, the coal industry still has political power in capitals like Berlin and Warsaw, which lowers the European common denominator for energy policy, as well as its policies that fight climate change.

Photo courtesy of REUTERS/James Regan/File Photo. Coal is stockpiled at the Blair Athol mine in the Bowen Basin coalfield near the town of Moranbah, Australia, June 1, 2012.

In Asia, both Japan and South Korea are set to expand their use of coal despite signing the Paris Agreement. After the Fukushima disaster, Japan has implemented ambitious renewables and energy efficiency policies, but those cannot take the place of its nuclear energy production on their own. These countries are entirely import dependent, which makes natural gas prices high. This, in turn, makes natural gas a less likely fuel source as the countries transition to greener electricity. In this context, high-efficiency coal plants appear to be a viable alternative, especially as nuclear power remains highly controversial.

And outside of advanced economies, coal often plays the role it once played in Europe and North America. For over a decade, China was the main engine of global coal consumption, driving booms in coal mining and shipping. China’s domestic coal production skyrocketed, and other countries, such as Australia, experienced coal booms to keep pace with Chinese demand. Although China produced and consumed almost as much coal as the rest of the world combined in 2014, it seems that the country’s consumption has peaked. But China will still rely heavily on coal-fired electricity for decades. The country remains a key player in steel production, and millions of its citizens continue to work in the mining industry, despite recent layoffs.

South Asian countries continue to invest heavily in new coal-fired electricity plants and industrial projects. India may appreciate the risks of climate change, but its chief concern is delivering low-cost power to 350 million of its citizens who lack electricity. Coal is set to play a prominent role in meeting such goals. Countries like Indonesia, Thailand, and Vietnam have followed suit as they search for low-cost electricity to power their countries.

In short, coal remains a big player in the global fuel mix, even as it faces tough challenges from stringent environmental regulations, competition from other fuel sources, and a lack of new investments.

Photo courtesy of REUTERS/Sheng Li/Files. A labourer carries honeycomb briquettes at a coal processing factory in Shenyang, Liaoning province in this December 2, 2009 file photo.

WHITHER COAL?

Different strategies apply in different parts of the world when it comes to eradicating coal, despite the global agreement in Paris. Just as there is not a global energy grid, there is also no single, global transition to lower-carbon energy. Although some countries are transitioning away from coal, others continue to transition toward it.

Second, pragmatism and persistence—rather than ideological purity—remain key values as countries transition towards low-carbon economies. Natural gas provides North America with a backup fuel as it transitions to green energy. Without major bulk terminals on the west coast, western U.S. coal producers will not find new markets for their products overseas. And in Europe, policymakers will have to make good on long-promised and long-delayed changes to energy policy and infrastructure. If Germany and other EU states are to achieve promised clean energy transitions, coal production must be scaled back substantially across the continent. European leaders must also build an “Energy Union” that will accelerate the flow of cross-border electricity, if they are to achieve the Paris Accord’s climate change goals. Europe must also reform its existing carbon pricing mechanisms. And across China, Europe, and North America, workers will have to be re-educated for new job opportunities as the coal market dries up.

But for now, coal still keeps the light on around the world. It powers new, high-tech economies, as well as a huge share of traditional manufacturing. If hundreds of millions of Africans and Asians are to gain access to electricity, new coal-fired power plants will have to come online in the years ahead. As coal continues to play a prominent role in industrial processes like steel and cement making, technological investments are required to limit its consequences.

To tackle these challenges, coal advocates, as well as some climate experts, suggest that more countries must invest in carbon capture and sequestration (CCS) research. But such investments are lagging, and the world would require several dozen CCS projects in order to make the technology commercially viable in the long term.

If the Paris Accord is to succeed, the earth’s atmosphere cannot remain a free dump for billions of tons of pollution every year. In fact, virtually all greenhouse gas emissions must be reduced. Countries can impose taxes, cap-and-trade schemes, and regulation to make this happen. Governments will have to design unique strategies that are custom fit to their countries, and, in some cases, find opportunities with their neighbors as well. For example, some private and public institutions have chosen to stop financing coal-fired projects, and the Obama administration has indicated it will not give out new leases for coal mining on federal land. Others will choose to build more coal-fired plants until the alternatives are cheaper, or until someone pays them not to.

Globally, coal may indeed be at the beginning of the end. But the energy transition is not strictly global. It is also national, regional, and local. Coal remains economically competitive—attractive even—in many parts of the world. Some countries will wage wars on coal, which will be as much economic and financial as they are political. But some countries, like India, will host coal booms regardless of the consequences. After Paris, there is no point in ignoring coal. It will be powering the world—and the world’s debates—for decades to come.

This piece was originally published by Foreign Affairs.

This election cycle, what will separate Democrats from Republicans on energy policy and their approach to climate change? Republicans tend to be fairly strong supporters of the fossil fuel industry, and to various degrees deny that climate change is occurring. Democratic candidates emphasize the importance of further expanding the share of renewable energy at the expense of fossil fuels, and agree that climate change is a real problem—with some saying the challenge trumps most, if not all, other U.S. security concerns.

Now that there are presumptive nominees for both major political parties, it’s an important moment to outline, in broad strokes, the positions of Secretary Hillary Clinton and businessman Donald Trump. We realize that Democratic Presidential candidate Bernie Sanders has not dropped out of the race, but note that it is fairly unlikely at this point that he would clinch the nomination.

Clinton: Building on the Obama legacy 

Secretary Clinton has laid out the most comprehensive and detailed energy and climate policy proposals of the candidates to date. They are in essence a continuation, and in some cases a further expansion, of existing White House policies under President Obama. The Secretary has stated that she wants the United States to be the “clean energy superpower of the 21st century.”

This starts with the notion that climate change is an existential threat, which the global community has to address as soon as possible. In order to do that, in her view, the United States needs to continue to show leadership on the international stage, as the Obama administration sought to do surrounding the Paris agreement in December 2015. This will require substantial reforms to expand low-carbon options, including nuclear energy to some degree, while tightly regulating fossil fuels (and gradually phasing them out). 

[S]he wants the United States to be the “clean energy superpower of the 21st century.”

The first casualty of this transformation is the coal industry, which Clinton has explicitly acknowledged. She presented a $30 billion plan to revitalize communities where coal production is currently an important industry and job creator, for example, and has campaigned with this message in various state primaries. Implicitly, Secretary Clinton does not seem to believe in the economic viability of carbon capture and sequestration in the United States—this is despite the fact that most analyses, including those of the Intergovernmental Panel on Climate Change (IPCC), suggest that this technology could be a cost-efficient tool in a wider carbon emission mitigation portfolio. 

Clinton sees natural gas as a bridge fuel, though at this point it’s not clear how long that bridge is. Questions remain about the role that natural gas can play in scenarios of deep decarbonization in 2030 and beyond. At the moment, the gas industry is rather nervous of the Secretary’s statement that she’d increase regulations on, in particular, the fracking industry—if her conditions came to fruition, there would very few places where fracking would continue. 

Secretary Clinton believes that oil consumption has to be cut substantially in the coming years, and she has suggested that new drilling in places like the Arctic, off the Atlantic Coast, and on federal lands would be discouraged or banned. She has previously opposed crude oil exports, though we would not anticipate a roll-back of existing policies (in December 2015, the Obama administration lifted the decades-old ban). 

Clinton foresees a new energy economy built on rapidly increasing shares of renewable energy, which should comprise 25 percent of the U.S. fuel mix by 2025 according to her plan (solar energy would be a key focus, with half a billion panels to be installed by the end of her first term). To facilitate this transition, she presented an elaborate energy infrastructure plan to modernize the U.S. grid and improve efficiency in reviewing and approving projects. 

Tax credits to support renewables would be continued under a Clinton White House, whereas fossil fuel subsidies would be phased out. Increased energy efficiency, including harmonization of vehicle efficiency and fuel standards, are high on her agenda as well. The Secretary also supports the Clean Power Plan that the Environmental Protection Agency under the Obama administration has launched, and which is currently on hold in the Supreme Court. 

On the international stage, Clinton supports the Paris agreement on climate change. Should she win the presidency in November, she would make an effort to take this Treaty to the next step, thus continuing U.S. leadership. That would mean reinforcing U.S. leadership along the lines described above, while helping address current uncertainties about finance, transparency, and accountability, to name only a few challenges that remain.

Trump: Drill, baby, drill

Although Donald Trump’s candidacy remains highly controversial, he is now the presumptive Republican nominee for president. To the extent that we know any detailed plans, quod non, it is safe to say that his views on energy and climate change are diametrically opposed to most of Clinton’s. Broadly speaking, Mr. Trump has come out as a fervent supporter of the fossil fuel industry, and has expressed skepticism about the economic viability of renewable energy.

Mr. Trump’s views start with the belief that climate change is not man-made. In the past, the controversial businessman has suggested that climate change might be a hoax invention from China, in order to undermine U.S. industrial interests and job creation. This starting point allows Mr. Trump to be extremely supportive of existing industrial interests (if carbon and other greenhouse gas emissions are not a problem, the thinking goes, then business as usual is the way to go). 

In a speech in North Dakota in late May, Mr. Trump laid out some broad initial ideas for his energy policy. He declared that under his presidency the United States would “accomplish complete American energy independence,” leaving unaddressed arguments about what that would mean for existing international energy trade. 

It is probably safe to say that Mr. Trump would like to further expand oil, gas, and coal production in the country. The latter, in particular, is remarkable: even coal executives have declared that market forces (particularly very competitive natural gas) have been the primary threat to the coal industry. Since Mr. Trump is also a strong supporter of the natural gas industry—and considering the challenges of building new bulk terminals for exports—it is unclear how a revitalization of the coal industry would occur. 

If climate change is a hoax, it will come as no surprise that Mr. Trump will not support efforts to mitigate carbon and other greenhouse gas emissions.

Contrary to his opponent, Mr. Trump would also like to revoke restrictions on drilling for oil and gas, and would permit production on federal lands. He also supports further expansion of energy infrastructure, and would, if elected, ask Trans Canada to resubmit a permit application for the Keystone pipeline, which he’d approve. He has caveated his support for projects like these by demanding that a portion of the revenues from oil and gas flows be redistributed to local communities, to compensate them for intrusion on their private property. Mr. Trump has also indicated that he wants to use revenues from oil and gas production to rebuild U.S. infrastructure more broadly.

If climate change is a hoax, it will come as no surprise that Mr. Trump will not support efforts to mitigate carbon and other greenhouse gas emissions. The candidate has called the Obama administration’s Clean Power Plan “stupid,” and when asked what he would do about the Paris agreement on climate change, he said he’d cancel it. 

Though Trump says the United States must pursue all forms of energy—including renewables—he has expressed skepticism about their economic viability, calling solar energy “very expensive.” Wind energy received similar pejorative feedback, since Trump says it kills eagles and is noisy. During one of the few debates about renewable energy during the Iowa primary, he voiced his support for blending biofuels in vehicles. 

To the polls

The 2016 U.S. presidential election will have a profound impact on global affairs. Not only will it affect a range of security and economic issues in important ways, it also means a lot for global energy and climate policy. Will the United States continue on the trajectory that President Obama has started and continue a major energy transition strategy? Or will it shift course, potentially undermining existing domestic policies and investments, as well as international obligations? In November 2016, the American people will decide.

Saudi deputy crown prince and defense minister Mohammad bin Salman is just wrapping up a heavily hyped visit to Washington, aimed at reinforcing the kingdom’s partnership with the United States. Recent years have frayed what is traditionally the central strategic relationship for Riyadh, principally over the Obama administration’s nuclear diplomacy with Iran.

Since the conclusion of the Iranian nuclear deal last July, the perennial antagonism between Riyadh and Tehran has reached a dangerous pitch, fueling the violence that rages in Syria, Iraq, and Yemen and the undercurrent of instability that saturates the region. And the fallout of their rivalry has left its mark well beyond the boundaries of the Gulf, exacerbating volatile energy markets and, by extension, the global economy. 

Within OPEC, Riyadh and Tehran are eyeing each other warily, and their continuing differences torpedoed a proposed ceiling on oil production at OPEC’s latest meeting. The outcome was not surprising; a similar effort to agree on a production freeze between the group and a handful of non-OPEC producers fizzled in April. In the meantime, any incentives for drastic measures to address soft oil prices have abated as oil prices creep back up to approximately $50 a barrel. 

Iran and Saudi Arabia have plenty of reasons to continue pumping for the foreseeable future. Since the lifting of nuclear-related sanctions in January, Iranian leaders have been determined to make up for lost time and lost revenues, already defying expectations by quickly raising production to levels that hadn’t been reached since November 2011 and aggressively cutting prices in hopes of winning back its pre-sanctions export market. 

The centrality of oil to the legitimacy and autonomy of both regimes means that these plans are little more than publicity stunts.

Meanwhile, Saudi Arabia appears prepared to continue pumping at record-high levels, part of a larger strategy aimed at maintaining market share and driving down non-OPEC production. The two states’ economic incentives are compounded by their fierce geostrategic and sectarian rivalry, which has intensified, as evidenced by the standoff over Iranian participation in the annual pilgrimage to Mecca.

But even as the two states duel over oil production and prices, both Saudi Arabia and Iran are conspicuously planning for a post-oil future. Leaders in both countries have decreed an end to the era of oil dependency, endorsing ambitious blueprints for restructuring their economies that—if implemented—would ultimately transform state, society, and the wider region. The centrality of oil to the legitimacy and autonomy of both regimes means that these plans are little more than publicity stunts. Still, just imagine for a moment what it would mean for Iran, Saudi Arabia, and the Middle East if these grandiose agendas were adopted.

Competing and complementary visions

Tehran’s plan actually dates back more than a decade, with the 2005 release of its “20 Year Perspective” (sometimes called “Vision 2025”). The plan laid out extravagant expectations: rapid growth and job creation, diversification away from oil, a knowledge-based economy. Intervening developments—sanctions that targeted Iran’s oil exports and helped expand non-oil trade—have only bolstered the rhetorical commitment of Iran’s supreme leader, Ayatollah Ali Khamenei, to a “resistance economy” in which oil exports constitute a minor part.

“One of our most serious losses is dependence on oil,” Khamenei bemoaned in a 2014 speech. “I am not saying that oil should not be used. Rather, I am saying that we should reduce our dependence on selling crude oil as much as we can.” 

Not to be outdone, Saudi Deputy Crown Prince Salman announced Saudi “Vision 2030,” to address what he described as “an addiction to oil.” The plan, which has met with equal doses of fanfare and skepticism since its announcement last month, aims to create a “thriving economy” and end Saudi dependence on oil revenues by 2020. Vision 2030 includes provisions to sell off a small stake in the kingdom’s state oil company, Saudi Aramco, and create the world’s largest sovereign wealth fund to manage the country’s income, as well as goals of creating 450,000 new private sector jobs, cutting public sector wages, and tripling the country’s non-oil exports all within the same abbreviated time frame.

Jeopardizing domestic stability

There is one hitch, however: these aspirations, though laudable, are preposterously unmoored from current political and economic exigencies. The institutions of governance and the structure of power in resource-rich states such as Saudi Arabia and Iran are organized around the state’s role as purveyors of vital social and economic goods. Riyadh and Tehran distribute cash handouts, provide jobs in already-bloated state bureaucracies, and levy few taxes. Diversifying away from reliance on oil would essentially require Riyadh and Tehran to radically curtail this distributive role, inviting historic social and political changes that could ultimately compromise regime ideology and weaken state legitimacy. 

[T]hese aspirations, though laudable, are preposterously unmoored from current political and economic exigencies.

In Saudi Arabia, the supply of these benefits is central to the monarchy’s legitimacy. To diversify away from oil, which currently accounts for over 70 percent of government revenues, Riyadh would have to drastically cut spending, far more than it already has. Not only would this further slash subsidies and hike fees, it would also effectively force Saudi workers—two-thirds of whom are employed by the state—to take up private sector jobs, 80 percent of which are currently staffed by expatriates. To accomplish this transition would require fundamental changes to the incentive structure for the Saudi labor force: a much broader willingness to accept low-skill, low-wage jobs, as well as the requisite improvements in education and productivity to support larger numbers of Saudi nationals moving into private sector positions.

For the Saudi economy to be truly competitive, Riyadh would have to initiate dramatic changes to a central component of the Saudi social compact—women’s rights and freedoms. The Vision 2030 document boasts that over 50 percent of Saudi university graduates are women and pledges to “continue to develop their talents, invest in their productive capabilities and enable them to strengthen their future and contribute to the development of our society and economy.” 

But the domestic Saudi labor force is overwhelmingly male, and even the plan’s modest aspirations to raise female participation in the workforce from 22 to 30 percent are likely to run into logistical and social obstacles. Shortly after announcing Vision 2030, Deputy Crown Prince Salman said Saudi Arabia is not yet ready to let women drive. A diversified economy will not emerge in the kind of constricted social environment mandated by the Saudi interpretation of sharia (Islamic law). 

Iran’s Islamic Republic doesn’t have the same degree of gender segregation, but Iran’s official interpretation of Islam has still constrained female participation in the workforce. Iran employs an equally low percentage of women—according to a 2014 U.N. report around 16 percent—and women’s unemployment is more than double that of men (nearly 20 percent).

A Saudi man walks past the logo of Vision 2030 after a news conference in Jeddah, Saudi Arabia June 7, 2016. Photo credit: Reuters/Faisal Al Nasser.

The bigger challenge for Iran will be truly opening up its economy to foreign direct investment. This remains hotly contested among the leadership, even in the aftermath of the nuclear agreement and the lifting of related sanctions. While there is some consensus around the need for foreign capital and technology, hardliners including Khamenei are determined to insulate Iran from any accompanying cultural influence and dependency. As the supreme leader recently inveighed, the global economy is “a plan and system that has been devised mainly by Zionist capitalists and some non-Zionists with the purpose of usurping the economic resources of the whole world...If a country merges its economy with the global economy, this is not a source of pride, rather it is a loss and a defeat!”

This deeply-rooted paranoia has provided a convenient platform for the Islamic Republic to galvanize citizens’ loyalty to the state and hostility to outside interference. And it also inhibits the liberalization that makes foreign investment possible: measures to enhance transparency and security, develop more attractive legal and fiscal frameworks, shrink the role of the state, and undertake an array of other structural reforms. Without these measures, Tehran will struggle to capitalize on its extraordinary reengagement with the world. 

While Saudi Arabia has maintained a more consistent and mutually beneficial pattern of foreign investment, its leadership too will have to revamp its approach if it is to broaden its economic base. For Riyadh, the challenge is less one of attracting foreign capital than of developing a sustainable influx of technology and expertise to develop sectors other than energy. The kingdom will also have to overcome serious regulatory hurdles and a proclivity for mammoth (and often white elephant) projects.

Compromising regional clout

Riyadh and Tehran will need to balance their economic aspirations and their approach to the region, too. Historically, their role in global energy markets has largely shielded both states from the fallout of regional instability. The world’s need for reliable oil at reasonable prices has inculcated the commitment of outside powers to secure transportation of resources and considerable autonomy for Riyadh and Tehran from the implications of their own policies. 

As a result, Saudi Arabia and Iran can fund nefarious activity across the region, violate the civil and human rights of their citizens and other residents, and carry out belligerent foreign policies without severe repercussions for their oil revenues. Only in the past five years has Tehran seen the limits of the world’s reluctance to jeopardize its investment with a major oil exporter; and the recent reversal of the U.N. condemnation regarding the Saudi-led coalition in Yemen demonstrates that Riyadh remains insulated.

Saudi Arabia and Iran can fund nefarious activity across the region, violate the civil and human rights of their citizens and other residents, and carry out belligerent foreign policies without severe repercussions for their oil revenues.

Regional developments make the prospect of economic diversification even less likely, as sensitivity to such developments will only increase if either country successfully develops its non-oil sectors. At the same time, regional stability is a basic prerequisite for economic diversification. Robust growth and good governance throughout the Middle East would provide the optimal context for the economic transformation of Iran and Saudi Arabia, since the marketplace for their non-oil exports is concentrated in the immediate neighborhood. But such transformation would require both countries to put economic priorities that serve their general populations above the ideological and religious agendas—supported by oil rents—that propel their regional and international influence and that provide a large portion of their autonomy in foreign policymaking. 

Technocrats in both countries understand this intuitively. At a 2015 conference on Iran’s economy, President Hassan Rouhani wondered “How long can the economy pay subsidies to politics?” He added that the country’s economy “pays subsidies both to foreign policy and domestic policy. Let us try the other way round for a decade and pay subsidies from the domestic and foreign policy to the economy to see [what] the lives and incomes of people and the employment of the youth will be like.” The problem, of course, is political will: neither country is prepared to elevate the interests of its people over the demands of ideology.

Imagining an unlikely future

Can either Iran or Saudi Arabia really kick the oil habit? It seems exceptionally unlikely. Even as Khamenei extols the need for inward-focused development, Tehran is racing to expand crude output level to four million barrels per day by March 2017. 

Oil enabled the creation of the modern Middle Eastern state and fueled the rise of both countries to regional predominance. Oil is a vector for their regional rivalry, and it provides prestige and funds to be used in other arenas of competition. A genuine diversification of the two largest economies in the Middle East and North Africa would jeopardize their revenue streams and domestic legitimacy, as well as their efforts to assert their primacy across the Islamic world.

[N]either country is prepared to elevate the interests of its people over the demands of ideology.

“All success stories start with a vision,” Deputy Crown Prince Salman is quoted as saying on the Vision 2030 website. But vision is insufficient to bridge the gap between aspiration and reality; a serious agenda to implement either the Saudi or the Iranian vision would require painful compromises to regime ideology and a fundamental overhaul of the institutions and the structure of power in both countries. 

Imagine, though, for a moment, that these far-fetched ambitions were quite serious, and that both the Saudi and Iranian leadership were determined to do what was necessary to truly wean their economies off oil dependence. Consider what it might mean for the region if these grandiose ambitions were not simply the illusions of overpriced consultants and embattled technocrats—if a leadership emerged in one or both of the Middle East’s most powerful actors prepared to invest political capital in a genuine transformation of priorities and policies. What might be possible if Tehran and Riyadh sought to compete for economic opportunities instead of fueling violence and sectarianism around the region? If instead of a vicious sectarian and geopolitical rivalry, these two old adversaries engaged in a race to the top?

What will it take to move these visions from wishful thinking to reality? More than rhetoric, to be sure. But even the articulation of improbable objectives will have its impact. As documented in a recent book, Iran’s post-revolutionary experience demonstrates that the regime’s reliance on promises of economic gains has generated public expectations for effective and accountable governance. Now Iranians and Saudis have been told by their leaders—who happen to be officially infallible—that the time has come to transcend oil. What might happen if they believe it?

Renewable energy is an important source to tackle against climate change, as the latest IPCC report has pointed out. However, due to the existence of multiple market failures such as negative externalities of fossil fuels and knowledge spillovers of new technology, government subsidies are still needed to develop renewable energy, such as solar photovoltaic (PV) cells. In the United States, there have been various forms of subsidies for PV, varying from the federal level to the state level, and from the city level to the utility level. California, as the pioneer of solar PV development, has put forward the biggest state-level subsidy program for PV, the California Solar Initiative (CSI). The CSI has planned to spend around $2.2 Billion in 2007–2016 to install roughly 2 GW PV capacity, with the average subsidy level as high as $1.1/W. How to evaluate the cost-effectiveness and incentive pass-through of this program are the two major research questions we are pursing.

Our cost-effectiveness analysis is based on a constrained optimization model that we developed, where the objective is to install as much PV capacity as possible under a fixed budget constraint. Both the analytical and computational results suggest that due to a strong peer effect and the learning-by-doing effect, one can shift subsides from later periods to early periods so that the final PV installed capacity can be increased by 8.1% (or 32 MW). However, if the decision-maker has other policy objectives or constraints in mind, such as maintaining the policy certainty, then, the optimally calculated subsidy policy would look like the CSI.

As to the incentive pass-through question, we took a structural approach and in addition used the method of regression discontinuity (RD). While in general, the incentive pass-through rate depends on the curvature of the demand and supply curve and the level of market competition, our two estimations indicate that the incentive pass-through for the CSI program is almost complete. In other words, almost all of the incentive has been enjoyed by the customer, and the PV installers did not retain much. Based on the RD design, we observe that PV installers tend to consider the CSI incentive as exogenous to their pricing decision.

The relative good performance of the CSI in terms of both the cost-effectiveness and the incentive pass-through aspect are tightly related to its policy design and program management. International speaking, the biggest challenge for the design of any PV subsidy program is the quick running out of the budget, and in the end, it looks like customers are rushing for the subsidy. Such rushing behavior is a clear indication of higher-than-needed incentive levels. Due to the policy rigidity and rapid PV technological change, the PV subsidy policy may lag behind the PV cost decline; and as a result, rational customers could rush for any unnecessarily high subsidy.

Due to the high uncertainty and unpredictability of future PV costs, the CSI put forward a new design that links the incentive level change and the installed capacity goal fulfillment. Specifically, the CSI has designed nine steps to achieve its policy goal; at each step, there is a PV capacity goal that corresponds to an incentive level. Once the capacity goal is finished, the incentive level will decrease to the next lower level. Furthermore, to maintain the policy certainty, the CSI regulated that every step-wise change in the incentive level should not be higher than $0.45/W, nor smaller than $0.05/W, together with other three constraints.

A good subsidy policy not only requires flexible policy design to respond to fast-changing environment, but also demands an efficient program management system, digitalized if possible. For the CSI, the authority has contracted out a third-party to maintain a good database system for the program. Specifically, the database has documented in detail every PV system that customers requested. Key data fields include 22 important dates during the PV installation process, customers’ zip code, city, utility and county information, and various characteristics of the PV system such as price, system size, incentive, PV module and installer. All information is publicly available, which to some extent fills in the information gap held by customers and fosters the market competition among PV installers. For customers to receive the incentive, their PV systems have to pass the inspection of the local government, and also to be interconnected to the grid. On the supply side, the CSI has also certified and created a list of PV installers that every customer can choose from.

Although the CSI has ended in 2014 due to fast PV cost reduction starting from 2009, its experience has been transferred to other areas in the United States and in Europe. It is highly possible that other similar new technologies and products (e.g. the electric car and the battery) can adopt the CSI policy design, too. In summary, a good and successful policy may need to be simply, clear, credible, foreseeable, flexible, end-able, and incentive-compatible. The PV subsidy policy in China still has a long way to go when compared to the CSI.

What do Americans think about U.S. natural gas? 

The answer depends on who you ask. Presidential candidates, Washington think tank analysts, and ordinary citizens all give widely different answers to that question. In the United States, natural gas is sure to play an important role in the energy mix for the foreseeable future and has yielded several major economic, environmental, and health benefits in the short- and medium-term. Despite this, the image of natural gas has deteriorated in recent years, particularly within the environmental community. 

In a new policy brief, "Natural gas in the United States in 2016: Problem child and poster child," Tim Boersma discusses the various sentiments surrounding the debate over natural gas, analyzing the data supporting or refuting these varied points of view. Additionally, Boersma discusses the role that natural gas can play as a bridge fuel to a low-carbon economy, outlining a policy and research agenda for the utilization of natural gas going forward.

Downloads

• Natural gas in the United States in 2016

Eye-tracking technology now makes it possible for computers to gather staggering amounts of information about individuals as they use the Internet, and draw hyper-accurate conclusions about our behavior as consumers. As the technology becomes more practical, Senior Fellow John Villasenor discusses its benefits and risks.

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• Eye-Tracking Technology and Digital Privacy

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• @ Brookings Podcast: Eye-Tracking Technology and Digital Privacy

Baltimore provides a prime example of how metropolitan areas around the nation are turning to clean, green industries as a source of vibrant, sustainable growth. Expert Jennifer Vey outlines how such communities can identify their assets and capitalize on them to revitalize their economies.

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• Baltimore as a Case Study in Metro Economic Recovery

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• @ Brookings Podcast: Baltimore as a Case Study in Metro Economic Recovery

In many African countries, women still cannot own land or resources, a significant barrier to their ability to start businesses and take advantage of the continent’s economic potential.  Fellow Anne Kamau explores their plight.

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• Challenges for Women in the African Economy

Partisan gridlock and political extremism threaten to tear down the pillars of public policy and render the U.S. government utterly dysfunctional, argues Senior Fellow Thomas Mann, co-author with Norman Ornstein—resident scholar at the American Enterprise Institute—of It’s Even Worse Than It Looks (Basic Books, 2012). He argues that a flood of super-PAC money, negative ads and cowed mainstream news media are contributing to the problem.

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• Mann: Blame for Gridlock Is Squarely on Republican Party

Emerging economies may chafe at international agreements calling for sustainable development, but Nonresident Fellow Nathan Hultman says many governments are putting plans for sustainability and green innovation in place out of self-interest, and cooperating with neighbors across the globe.

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• Nathan Hultman: Global Progress in Sustainable Development

The increasing diversification of news media—from online versions of major newspapers to political bloggers, to 24-hour cable news to social media—plus the profession’s changing economics have caused the balance of power between political reporters and presidential candidates to change. Stephen Hess, senior fellow emeritus, says our very good, well-trained reporters are “almost dangerous” to presidential candidates who are trying to stay on message. Thus, says Hess, the way the press covers campaigns has changed as well, and not for the better.

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• Stephen Hess: The Changing Balance of Power in Presidential Campaign Reporting

While falling off the "fiscal cliff" (of automatic spending cuts and tax increases if Congress fails to act) could hurt the economy, expert William Gale says the actual result, if coupled with a temporary economic stimulus, would be greater incentives to make a better long-term budget deal.

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• William Gale: Combine Going Over the Fiscal Cliff with a Stimulus

In this post-election season and with a fiscal cliff looming, states and metros have begun the work of meeting their many challenges. They’re implementing game-changing initiatives to create jobs and restructure their economies for the long haul. The federal government needs to take notice and get on board note, Metropolitan Program policy experts Bruce Katz and Mark Muro as they urge a move for remaking our federalism and renewing the economy. Katz and Muro explain in this episode of @ Brookings.

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• Bruce Katz and Mark Muro: Remaking Federalism and Renewing the Economy

The civil war tearing through Syria is worsened by a growing tide of refugees and displaced persons along with an escalating humanitarian crisis. Food shortages, a lack of housing and adequate health care are additional burdens that many Syrians now face. Senior Fellow and Brookings-LSE Project on Internal Dispacement Co-Director Elizabeth Ferris examines the cost of war in Syria in this episode of @ Brookings.

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• Elizabeth Ferris: Syria’s Escalating Humanitarian Crisis

Senior Fellows Fiona Hill and Clifford G. Gaddy discuss their book, Mr. Putin: Operative in the Kremlin in a five part podcast series.

In the book, Hill and Gaddy write that Russian President Vladmir Putin’s style of rule is influenced by his identities as a Statist, a Man of History, a Free Marketeer, a Survivalist, an Outsider, and a Case Officer; these are distinct personalities, they note, that interact and affect policy decisions. On February 6, the Center on the United States and Europe at Brookings hosted an event for the launch of Mr. Putin with a discussion featuring the authors.

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• Fiona Hill: Putin’s Statist Personality: Restoring the Greatness of Russia
• Clifford Gaddy: Putin the History Man and Survivalist
• Fiona Hill and Cliff Gaddy: The Outsider Influenced Putin’s “Free Market” Personality
• Fiona Hill: Putin’s History in KGB Leads to “Case Officer” Personality
• Fiona Hill: Putin’s Personalities Leveraged to Boost Russia

Despite widespread agreement that the federal budget is on an unsustainable path, there is also widespread disagreement about what should be done. The Hamilton Project asked leading experts from a variety of backgrounds—the policy world, academia, and the private sector, and from both sides of the political aisle—to develop and share their ideas for addressing the deficit. The proposals will be released at two events scheduled for February 22 and February 26. In a dialogue previewing those events, Hamilton Project Director Michael Greenstone and Policy Director Adam Looney discuss some of the key ideas offered by the experts.

Greenstone stresses that the goal of the papers is to move beyond the fights and disagreements between President Obama and Congress and to provide some of the poetry, or some of the details, on how government might run better. The papers will also be featured in a book, 15 Ways to Rethink the Federal Budget, and will take on a wide-ranging set of topics, including immigration, transportation, health care, defense spending, and tax expenditures.

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• Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits