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The New Face of the Resource Curse

Historically, industrialized, democratic nations with strong governance institutions and diversified economies have been considered immune from both the domestic and international impacts of the resource curse. Yet the economic importance of fossil fuel extraction in resource-rich countries such as Canada, Australia, and the United States presents similar—although perhaps less extreme—challenges to governance, with negative effects on both climate mitigation and diplomacy.

Canada, once considered one of the most environmentally progressive industrialized nations, has recently scaled back its political ambitions to address climate change, despite evidence pointing to strong public support for climate action. National polling indicates that in 2007, 46 percent of the Canadian public viewed the implementation of government standards and regulations as the most essential way to fight climate change; by November 2012, 59 percent of Canadians favored such measures.

Yet in December 2011, Canada became the first country to withdraw from the Kyoto Protocol,* shelving the previous administration's plans to meet its Kyoto targets by implementing mandatory emission cuts for large factories and power plants, improving fuel efficiency, facilitating the purchase of emission reduction credits, and assisting municipalities and provinces in local efforts. In addition to adopting a much weaker greenhouse gas reduction target, the government reduced funding for Canada's climate change plan and cut several key programs, including the Wind Power Production Incentive. On issues of weighing environmental protection and economic development, a 2013 public opinion poll reported that 60 percent of Canadians support protecting the environment, even if that poses a risk to economic growth.

Although the factors behind Canada's policy shift are varied and complex, the country's energy industry likely plays an important role. According to a 2010 report from the MIT Joint Program on the Science and Policy of

Box 17–1. The Norwegian Oil Fund

Unlike many of its fellow petro-states, Norway has managed to avoid many of the challenges commonly associated with a high dependence on oil revenue. Although the factors behind this success are numerous and diverse (and include a long tradition of strong democratic governance and institutions), Norway's efforts to ensure that its resource revenues benefit the public over the long term—and to develop a system allowing for public ownership and management of the nation's oil revenue—provide a model for other countries looking to avoid the resource curse.

In 1990, Norway created the Government Petroleum Fund (now named the Government Pension Fund) to manage the country's growing oil wealth. Commonly referred to as “The Oil Fund,” it is now the world's largest pension fund — valued at some $800 billion at the end of 2013—and the single largest European stockholder. The fund, designed to “facilitate government savings to finance rising public pension expenditures and support long term considerations in the spending of government petroleum revenues,” channels oil revenue to long-term, exclusively foreign investments.

The Fund directs a small share of oil earnings back into domestic programs such as infrastructure development and education, but great care is taken to ensure that the money is saved rather than spent in the near term. The reasons are twofold: first, long-term investments are necessary in order to protect against a projected shrinking of future oil revenue, and second, limited domestic spending is necessary to shield Norway from the ill effects of a resource-based economy—such as the declining competitiveness of the manufacturing sector, often referred to as “Dutch disease”—that have plagued other resource-dependent states.

The investment strategy seeks opportunities to achieve a high rate of return at moderate risk through firms promoting sustainable economic, environmental, and social development. Likewise, the Fund includes strict ethical guidelines to ensure that investments target only institutions that adhere to certain standards of operation, and cannot be directed to companies that contribute to killing, torture, deprivation of freedom, or human rights violations. Beyond these overarching principles, the Fund has published specific guidelines on how companies are expected to operate in respect to the country's high-priority areas of children's rights, climate, and water.

One of the most important aspects of the Fund's design is the inclusion of a strict set of transparency requirements, including public disclosure of the Fund's goals and regulations, management, and holdings. Norway has made nearly all aspects of the Fund's operations public, and each of the agencies sharing responsibility for its operation is held accountable to the public as well as to its cost managers. Overall, this has led to the operation of one the world's best-functioning sovereign wealth funds with respect to both its ethical standards as well as its 13 percent return on investment.

Source: See endnote 11.

Global Change, progress in global climate policy would threaten Canada's lucrative oil sands industry. The study found that in scenarios where developing countries participate actively in climate policy, “there appears to be little role for Canadian oil sands at least through the 2050 time horizon.” If worldwide demand for petroleum fell as a result of progressive international climate policy, oil sands would not be competitive with conventional petroleum, and demand would decline. “The niche for the oil sands industry,” the report concludes, “seems fairly narrow and mostly involves hoping that climate policy will fail.”

Australia's government, too, has sought to reverse key progressive climate policies in recent months, including the country's carbon reduction target and carbon tax, as well as its Climate Commission, which could leave Australia with virtually no national climate strategy moving forward. Although the Australian public is far from unified on the causes of climate change, approximately 90 percent of the population believes that there is an urgent need to combat the problem. Polls indicate that domestic public opinion increasingly favors Australia taking a leading role in the search for climate solutions, and popular support for such action actually increased in 2013 for the first time in half a decade.

Despite widespread global opposition to Australia's proposed rollback of its carbon tax, at least one foreign government voiced support. In November 2013, Canada praised the actions taken in Australia, declaring that the “Australian Prime Minister's decision will be noticed around the world and sends an important message.” Australia and Canada recently joined together to block the creation of a Commonwealth Climate Change Fund, which, if implemented, would have provided financial assistance to help small-island states and African countries in the Commonwealth deal with the impacts of climate change.

The emergence of new technologies that enable major emitters such as China and the United States to rapidly expand their domestic energy production adds to this disturbing trend. In many ways, the United States is considered the global face of climate change inaction, given its rampant fossil fuel consumption and contentious politics. Many in the climate movement argue that funding from private interests—the fossil fuel industry chief among them—has a destructive impact on national governance in the country, particularly in the energy sector. (See Chapters 11 and 20.)

The fossil fuel industry pours significant sums into the U.S. political system. Although the direct influence of this support on legislative decisions is subject to debate, the industry's heavy spending is well documented. Over the two-year term of the 111th Congress, the fossil fuel industry spent an estimated $347 million on lobbying and campaign contributions. Over that same period, the government awarded approximately $20.5 billion in subsidies to the industry. Close personal ties between the industry and those tasked with its regulation have been cited as a cause for concern. Despite the Obama administration's strong rhetoric in favor of climate governance and efforts to regulate emissions, U.S. oil and gas exploration is at an all-time high, with the International Energy Agency predicting that the United States will become the world's top oil producer by 2015.

 
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