Aged infrastructure, government subsidies and weak institutions have hobbled efforts to reform Central Asia's energy markets for decades. Increasing tariffs is politically unpalatable: A plan to raise the price of fuel in Kazakhstan last year quickly sparked widespread street protests that ended in bloody chaos. And yet electricity shortages persist, even in hydrocarbon-rich Kazakhstan and Uzbekistan.
Efficiency is one possible solution: Making the available power go farther.
While many discussions of the region’s power problems take a top-down approach, demanding government action, a forthcoming paper examines energy usage – asking why and when private firms in Central Asia adopt energy-efficiency standards.
One of the co-authors, Christopher Hartwell, a professor and economist at the Zurich University of Applied Sciences, spoke with Eurasianet about the research and why reform in Central Asia is more likely to come from the grassroots than from government mandates. This interview has been edited for clarity and length.
Eurasianet: What are some of the barriers to more efficient energy use in Central Asia?
Christopher Hartwell: Like a lot of former Russian colonies, in Central Asia there was a good transition macroeconomically [after the Soviet Union] in terms of stabilization and trade liberalization. There was a more halting institutional transition. Energy markets have pretty much resisted any pull of competition and any pull of liberalization. And it's created all sorts of institutional governance problems.
The biggest problem in Central Asia is that there hasn't been movement towards breaking up the monopoly approach to energy generation and transmission. Energy exploration is of course a great source of power and rent for each of the governments. I was in Kazakhstan in the early 2000s and I remember Agip and Chevron and all these Western companies using whatever means necessary to get concessions. But then again, if you look at other places in the world, like Norway, the Gulf states – it's still very state centric there, too. It's just that a place like Norway or even Saudi Arabia has a much more robust governance structure – for better or worse in the case of Saudi Arabia – than you have in Kazakhstan or Uzbekistan.
The second point is that the infrastructure is Soviet legacy. Everything was oriented toward Moscow. The Central Asian states were just a cog in a greater machine that was meant to serve Russia and was meant to serve Moscow in particular. So they haven't had the ability to reorient the infrastructure, upgrade it the way that they want to. Kazakhstan has been pretty good about this, in developing the west of the country, but others, the relatively poorer countries, are still working on outdated grids, on outdated transmission lines, and outdated transportation infrastructure that's holding them back.
EN: In your paper, you look at manufacturers seeking certification to signal their commitment to energy efficiency. How important is it to consumers in Central Asia that firms indicate their green credentials, for example by seeking certification?
CH: Yeah, I think it is important because you've kind of reached that level in Maslow's hierarchy of needs where you start worrying about the environment. I wouldn't say it's as pervasive or even obsessive as it is in some places in Western Europe, but there is a general recognition that you can do good while you're doing well. So there is some demand for the certification, even if there's not as much knowledge about what certification means. But there is a recognition in general, especially among your urban middle class, that this is something that you should strive for.
[The certification] also can be taken to mean this firm is actually a firm, it's not a shell corporation, it’s not a money-laundering operation. It's not something that’s only there because of political connections. And we touch on that in the paper: certification as a signaling device. To say, ‘Hey, you know, we are working on this, we are environmentally conscious. And this is why in a not-so-crowded marketplace, but in a marketplace, this is how you can differentiate us and see how we are better.’
EN: And do these certifications lead to more efficient energy use? What’s the role of competition?
CH: Certification does lead, in general, to more energy efficiency. In reality, if you go for certification, then maybe you're already at some level of environmental cleanliness and you just want that seal of approval. So we control for that and find that, yes, you have firms that while going for certification – and even after certification – are working more within the informal rules and sometimes explicit rules of what the certification says.
The more interesting thing we found was that while you don't have a ton of energy competition in Central Asia, the shadow economy, which is huge in each one of these countries, is pushing firms to become more energy efficient, because there is more competition from firms in the shadows. Just because you don't see it doesn't mean it's not there. It may not be sanctioned, it may not be legal, it may not be allowed, but it is there, and it is making firms watch their back.
EN: So is the informal sector able to undercut established or legitimate firms through pricing?
CH: Exactly. They are seen by consumers as a legitimate alternative to established manufacturing firms. Even if you’re just smuggling cheap Chinese stuff across the border, that is going to undercut – if you are a manufacturing firm – your potential profits. So you're looking for a way to be able to compete, and you might not be able to compete on quality, especially if it's a different pricing segment, but you might be able to cut your cost – keep the margins a little bit larger. And the best way to do that is energy efficiency. You go for the certification as well. You're looking for ways to improve yourself internally. And then that gives you some kind of differentiation between you and the shadow firms.
EN: What can governments do more broadly to reform energy markets while encouraging efficiencies? We know how hard it is to undo subsidies, like we saw last year in Kazakhstan. So, in an ideal world, where do governments start?
CH: Absolutely, it comes down to accurate pricing. Capital, if it's scarce, should be priced accordingly. Electricity power generation is expensive, a huge cost goes into creating the infrastructure and the transmission and actually generating any kind of power, and it needs to be priced accordingly. I did a paper a couple years ago, in the journal Economic Systems, which looked at the institutional basis for energy efficiency, environmental improvement, environmental efficiency – the material usage: How much per unit of output do you use in terms of materials? And basically, it said that if you are resource abundant, you tend to waste.
It's something you see everywhere in the world. I've got a seven-year-old. If he knows he's got everything, then he's not going to treat it so well. And he’s going to be wasteful. But if he knows that this is the last potato chip, he's going to guard that baby with his life. And there's no sense of scarcity in terms of either the abundance, which, God bless them, they [Kazakhs] have oil, that's fine. But also, in terms of the subsidies and the skewing of incentives.
This is a huge political obstacle made worse in a fragile political environment. Everybody looks at Kyrgyzstan, and says, ‘We do not want to do that. We don't want to have a revolution every five years.’ So that's kind of the worry. How do you marry what is economically necessary and politically feasible without losing your head?
EN: We hear a lot about investment in renewables, solar, wind, hydrogen – billions and billions of dollars apparently, are going to be spent on these things, especially in Kazakhstan and Uzbekistan, two gas-rich countries that suffered energy shortages over this past winter. It can be hard to tell from all the press releases how much has been done. We have reported on how Kazakhstan is failing to meet its Paris Agreement targets. Do you have a sense about how decarbonization is going across Central Asia?
CH: I'm not a fan of top-down solutions to the environment. And I think the Paris Agreement falls into the same trap: ‘Here's a five-year plan, or here's a quota. And here's what we must meet in terms of production.’ And it doesn't focus on the bottom-up of the incentives, it doesn't focus on the multiple layers of governance.
The Paris Agreement takes this top-down approach and just puts the top higher. If we can get the incentives right, local and regional initiatives might contribute to more decarbonization. But again, I don't think decarbonization is the goal; I think better environmental improvement, environmental outcomes are the goal. Decarbonization might just be one of the processes by which you go about that.
So I think there's hope. But the hope happens, like we see in Russia, due to the absence of state involvement, rather than active state involvement. Because if Kazakhstan actually does decide to go whole hog in implementing its Paris Agreement obligations, then that's going to lead to a big change, to a massive disruption, and also something I don't think is politically feasible.
I worked in Azerbaijan about 12 years ago. And I’ll never forget what one Azeri told me: ‘If we followed every rule, every law that we have on the books, nothing would get done.’
And it kind of goes the same way when it comes to environmental quality. If you look, you'll find the malfeasance, you'll find people breaking the law polluting because they’re trying to make a fast buck. But you'll also find that in the spaces in between is where a lot of environmental improvement comes about. And that's what we find in our paper: It’s the spaces in-between.