Fragmentation and Governance Risk in International Energy

Abstract: When states create international institutions they can give the institution broad jurisdiction over a range of issues or narrow jurisdiction over a single issue. Broad jurisdiction creates the possibility of welfare-enhancing issue linkages within an institution. At the same time, broad jurisdiction also creates the risk that a state or states can hold up cooperation on a range of issues within the institution’s jurisdiction for the sake of achieving individual gains on a single issue. I refer to this risk as institutional governance risk. Narrow jurisdiction diversifies this risk by eliminating institutional issue linkages. If one institution becomes gridlocked, cooperation on other issues in other institutions can proceed. In some situations, however, institutions are functionally linked, meaning policies in one area affect economic activity in another area (for example, climate change and energy). By creating separate institutions with different procedural rules and different memberships, narrow jurisdiction increases coordination costs across functionally linked policy issues. Increased coordination costs mean that cooperation on one issue (for example, energy security) may crowd out cooperation on another issue (climate change) by distorting the incentives for governments and private actors to cooperate on the second issue. I refer to the risk that institutions undermine each other in this way as systemic governance risk. In designing institutions, states balance the net costs of increasing hold up power across issues within an institution (institutional governance risk) against the costs of coordinating policies across institutions (systemic governance risk). I illustrate the argument by applying the concept of governance risk to international energy, an area of international cooperation that is highly fragmented and has largely resisted the trend towards multilateral governance that has characterized the last twenty years of international relations.