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---

### Overview
- The ongoing energy crisis amid Russia’s invasion of Ukraine has exposed vulnerabilities from fossil-fuel reliance and rekindled national energy security concerns.
- Energy security is defined here as the security of supply: "the uninterrupted availability of energy sources at an affordable price" (IEA, 2023). The focus of this paper is on uninterrupted availability of energy supply.
- The paper examines two main determinants of energy security: diversification of supply and political risk of suppliers, over 2000 to 2020, and assesses how the green transition could affect energy security going forward.

### Methods and approach
- Historical analysis:
  - Uses the Herfindahl–Hirschman Index (HHI) adjusted for political risks and diversification of trade partners to analyze energy security of coal, oil, and natural gas for 2000 to 2020 at global and country levels.
  - Accounts for political risks from two perspectives: (i) risks of supply disruption due to political reasons in energy-exporting economies and (ii) risks from weak political alignment measured as geo-political distance between exporters and importers.
  - Employs Democracy Index (Economist Intelligence Unit) and two political-risk indicators: (i) International Country Risk Guide (ICRG) index of the Political Risk Services Group (PRSG) and (ii) Ideal Point Distance (IDP) measure by Bailey, Strezhnev, and Voeten (2017).
- Forward-looking analysis:
  - Uses a model-based experiment under a globally coordinated carbon price floor arrangement to analyze how the green transition can affect energy security globally.
  - Employs a global computable general equilibrium (CGE) model to quantify effects.

### Key findings (three core results)
- Diversification was the main driver of global energy security changes over the last decade, with differing impacts across fuels:
  - This was particularly the case for coal and oil, whose supply was largely concentrated among a few large producers.
- Net effect of the green transition on energy security:
  - Climate mitigation policies reduce fossil fuel demand, forcing high-cost producers to exit and increasing market concentration (which weakens energy security).
  - Increased renewable energy penetration and electrification reduce import dependence and improve energy security because renewable generation does not require ongoing fuel imports or production.
  - On net, the reduction in import dependence is expected to dominate, yielding a net positive effect on aggregate energy security.
- New challenges from the green transition:
  - Increased dependence on imported "transition metals" could create new import‑diversification needs.
  - Intermittency of renewable energy (solar and wind) poses a challenge for uninterrupted supply, requiring investments in energy storage and grid extensions.
  - Energy systems with renewable generation plus supporting infrastructure are estimated to have similar cost as systems built on fossil fuels when higher upfront costs are offset by low operating costs.

### Historical trends in diversification and political risk (stylized facts)
- Coal and oil production became more concentrated over the last two decades:
  - Coal: rising shares of China and, to a lesser extent, Indonesia — from "33% of global production in 2000 to 60% in 2020".
  - Oil: shift toward more concentrated output markets with the United States, Canada and Iraq gaining market shares; joint market share of the top 7 producers increased but "stayed below 60 percent".
  - Natural gas: no material change in concentration over the last two decades, despite shifts (e.g., Qatar, Iran, and China gains; Russia’s and Canada’s shares decreased).
- Political risk and democratic freedom trends:
  - Indicators of political risks and democratic freedom have worsened in most fossil fuel producing economies during the last decade.
  - Political risks appear to have increased for coal and natural gas producers; the picture for oil producers is more mixed.

### Decomposition and contributions
- The paper decomposes energy security risk into two main determinants:
  - Diversification effect: how changing concentration of energy import sources affected energy security.
  - Risk effect: the impact of political risks on energy security.
- Quantifies the contribution of each effect at global and national levels.

### Policy and investment implications
- Strengthening energy security in a renewables era requires:
  - Strategic support of production capacities for transition metals across a variety of countries to facilitate import diversification.
  - Investments in infrastructure for energy storage and grid extensions to address intermittency and ensure uninterrupted supply.
  - Consideration that higher upfront costs for renewables are compensated by low operating costs, resulting in comparable system costs to fossil-based systems when supporting infrastructure is included.

### Box 1 — What is Energy Security? Key literature-derived points
- Definition and core dimensions:
  - Energy security framed as security of demand (exporters) and reliability of supply (importers); additional dimensions: sustainability of supply, affordability, and price stability.
- Security of supply and diversification:
  - Portfolio-theory grounding: DI(global) = ∑(Xi/X)^2_i × 100.
  - Political-risk–adjusted index: DIpol(global) = ∑[(Xi/X)^2 × POL_i × 100]_i, where POL_i = [1 − ICRG_i/100] or POL_i = [1 − DI_i/10] depending on risk proxy.
  - Decomposition of changes in DIpol: change = diversification effect + risk effect + covariance term.
- Renewables, affordability, and price volatility:
  - Renewables can decrease electricity price volatility in some countries and increase it in others (Ketterer 2014; Rintamäki, Siddiqui, and Salo 2017).
  - Full-renewable systems can improve availability, cost, environment, health, and keep diversity constant in some contexts (Azzuni et al. 2020).
- Energy independence versus energy security:
  - Energy independence focuses on reducing imports; energy security concerns broader reliability and risk.
  - Increasing domestic fossil-fuel production for independence can delay the green transition and conflict with Paris Agreement/net zero goals.
- Political risks, governance, and supply concentration:
  - IDP (Ideal Point Distance) from UNGA voting used to measure geopolitical distance; higher absolute IDP implies higher political risk for supplier–importer pairs.
  - Geo-political distance between natural gas exporters and importers has increased since 2010 (Aiyar et al. 2023).
  - Coal and natural gas production shifted toward regions with lower democratic freedom and higher internal instability risk (2000→2019/2020).
- Measurement of energy security: indices and country analysis:
  - The paper uses a simple, supply-focused index avoiding arbitrary weights; country-level CDI_pol = ∑[(NPI_i / C)^2 × POL_i × 100]_i, where NPI_i = net positive imports from country i and C = domestic consumption of the fuel.
  - A non-importing country has CDI = 0; domestic production is effectively assigned zero political risk.
  - Cross-country insights (ICRG-weighted CDI_pol, 2000–2020 for G20 with data):
    - On average: energy security risks highest for natural gas importers and lowest for oil importers.
    - Examples: U.S. low risk due to domestic production; Japan and Italy high coal dependence; Türkiye and Germany high natural gas dependence.
  - Decomposition at country level: diversification effect dominates changes in CDI_pol; political risk and covariance terms often marginal.
    - Lithuania improved natural gas security by diversifying away from 100 percent dependence on Russia in 2010 to a diversified portfolio (Russia 51 percent, Norway 45.8 percent, US 25.3 percent in later period).
    - Hungary’s natural gas security deteriorated amid increased import dependence on Russia: from 74.8 percent of consumption in 2010 to >100 percent in 2020 (excess used for re-exports).
- Energy security and recent macroeconomic impacts:
  - Complete Russian gas shutdown would have weighed heavily on growth, amplified by infrastructure bottlenecks (Di Bella et al. 2022; Lan, Sher, and Zhou 2022).
  - Higher dependence on Russian energy correlates with greater energy security risks and more adverse growth revisions (WEO revisions Jan 2022 vs Oct 2022).
- Net-zero transition: aggregate impacts and model-based projections:
  - Three channels through which climate policy affects energy security:
    1. Reduced fossil-fuel import demand → greater energy independence via domestic renewables.
    2. Exit of high-marginal-cost fossil suppliers → increased market concentration and higher risk for remaining fossil-dependent economies.
    3. Inter-fuel substitution (coal phased out faster → relative rise in natural gas share during transition).
  - EV global stock well below 2 percent at end-2021; pace of electrification determines oil phase-out speed.
  - Model experiment (IMF-ENV) under International Carbon Price Floor (ICPF) with minimum carbon prices: $US 75 for high-income countries, $US 50 for middle-income countries, $US 25 for low-income countries (Parry, Black, and Roaf 2021).
    - Under ICPF vs baseline (no new policies):
      - Energy security for individual fossil fuels deteriorates (index values rise) because higher-cost producers exit and market concentration increases.
      - Overall energy security improves because reduced dependence on imported fossil fuels raises domestic energy independence (renewable expansion).
      - Electricity generation in ICPF: low-carbon sources (renewables, hydropower, nuclear) expand; total fossil fuel production trajectory is much lower in ICPF than BAU.
    - Disorderly decarbonization can pose short-term risks if green investments are insufficient; internationally coordinated transition and clear policy signals are important.
- Transition metals and material supply risks:
  - EVs require more than five times as many metals than a conventional car (IEA 2021).
  - Prices for transition metals expected to increase until 2030 reaching historical record levels, then decline in a Net-Zero scenario (Boer, Pescatori, and Stuermer 2021).
  - For thirteen transition metals, current reserves estimated sufficient to cover demand until 2060 except possibly cobalt (Månberger and Johansson 2019).
  - Production concentration: top producers have >25 percent market share for copper, nickel, cobalt, rare earths and lithium (2021); processing is concentrated (>30 percent) in China for these metals.
- Electricity intermittency and flexibility options:
  - VRE (wind and solar) accounted for 54.7 percent of renewable energy capacity in 2021.
  - Flexibility options:
    1. Infrastructure investments: transmission grid expansion and energy storage; batteries experienced >50 percent cost reduction in 2013–2019.
    2. Demand- and supply-side flexibility: dispatchable generation, demand response (useful mainly for short-term balancing).
    3. Power-to-gas and green hydrogen: potential to reduce curtailment by 87 percent and required wind/solar capacity by 23 percent in some studies (Lyseng et al. 2018).
  - If flexibility options are deployed systematically alongside renewables deployment, VRE-dominated systems can operate without threatening energy security (Haegel et al. 2019).

### Conclusion — synthesis and policy takeaways
- Balance between short-term needs and long-term energy security:
  - The current energy crisis heightens the need to balance meeting short-term energy needs with pursuing long-term energy security.
  - Key determinants of energy security are diversification and political risks, and their interaction with the green transition is crucial.
  - Trade-offs:
    - High reliance on imported fossil fuels, especially from high political risk sources, exposes economies to supply uncertainty.
    - Increasing domestic fossil fuel production by reneging on climate mitigation commitments may strengthen short-term energy independence but risks undermining the green transition and long-term energy security.
- Drivers of recent energy security trends:
  - Increasing concentration of fossil fuel imports, driven by growing export shares of key energy producers, has underpinned energy security trends in recent decades.
  - Decomposition results indicate diversification, or lack thereof, is the main determinant of energy security, although political risk has in some instances had a material effect.
- Fuel-specific developments and implications:
  - Coal: massive increase in Chinese production absorbed domestically, allowing Indonesia and Australia to dominate the global coal export market, increasing coal market concentration.
  - Gas and oil: markets more diversified than coal, but increasing export shares by Australia, Qatar and the US have nevertheless caused energy security to deteriorate.
  - Geopolitical alignment: concentration of energy trade among geopolitically aligned economies can reduce political risks but may weaken diversification and heighten energy insecurity.
- Interaction between climate policy and energy security:
  - Climate policy reduces demand for fossil fuels, causing highest cost producers to leave the market and increasing market concentration.
  - Climate policy increases the share of renewable energy, raising domestically produced energy, decreasing import dependence, and improving energy security.
  - Transition from concentrated coal supply to natural gas improves global energy security because natural gas supply is more diversified than coal supply.
  - Overall assessment: On net, climate policies are expected to increase energy security.
- Challenges from rapid renewable deployment and available solutions:
  - Transition metals: production more concentrated than fossil fuel production; metals needed for expansion of capacity, not ongoing generation; shortages would not trigger immediate energy crises comparable to fossil fuel export collapses; metals are mutually substitutable.
  - Intermittency: challenges mitigated by interconnected grids, energy storage, demand- and supply-side flexibility, and zero-carbon fuels; these approaches are well advanced.
- Measurement and infrastructure considerations:
  - Energy security is multi-faceted; diversification metrics may understate vulnerability due to pipeline and LNG terminal dependence.
  - As renewables grow, new measures of energy security may be needed to capture interdependencies even when net trade is small.

*Source: wpiea2024006-print-pdf*

### Introduction ...........................................................................................................

### Introduction

### Overview
- The ongoing energy crisis amid Russia’s invasion of Ukraine has exposed vulnerabilities from fossil-fuel reliance and rekindled national energy security concerns.
- Energy security is defined here as the security of supply: "the uninterrupted availability of energy sources at an affordable price" (IEA, 2023). The focus of this paper is on uninterrupted availability of energy supply.
- The paper examines two main determinants of energy security: diversification of supply and political risk of suppliers, over 2000 to 2020, and assesses how the green transition could affect energy security going forward.

### Methods and approach
- Historical analysis:
  - Uses the Herfindahl–Hirschman Index (HHI) adjusted for political risks and diversification of trade partners to analyze energy security of coal, oil, and natural gas for 2000 to 2020 at global and country levels.
  - Accounts for political risks from two perspectives: (i) risks of supply disruption due to political reasons in energy-exporting economies and (ii) risks from weak political alignment measured as geo-political distance between exporters and importers.
  - Employs Democracy Index (Economist Intelligence Unit) and two political-risk indicators: (i) International Country Risk Guide (ICRG) index of the Political Risk Services Group (PRSG) and (ii) Ideal Point Distance (IDP) measure by Bailey, Strezhnev, and Voeten (2017).
- Forward-looking analysis:
  - Uses a model-based experiment under a globally coordinated carbon price floor arrangement to analyze how the green transition can affect energy security globally.
  - Employs a global computable general equilibrium (CGE) model to quantify effects.

### Key findings (three core results)
- Diversification was the main driver of global energy security changes over the last decade, with differing impacts across fuels:
  - This was particularly the case for coal and oil, whose supply was largely concentrated among a few large producers.
- Net effect of the green transition on energy security:
  - Climate mitigation policies reduce fossil fuel demand, forcing high-cost producers to exit and increasing market concentration (which weakens energy security).
  - Increased renewable energy penetration and electrification reduce import dependence and improve energy security because renewable generation does not require ongoing fuel imports or production.
  - On net, the reduction in import dependence is expected to dominate, yielding a net positive effect on aggregate energy security.
- New challenges from the green transition:
  - Increased dependence on imported "transition metals" could create new import‑diversification needs.
  - Intermittency of renewable energy (solar and wind) poses a challenge for uninterrupted supply, requiring investments in energy storage and grid extensions.
  - Energy systems with renewable generation plus supporting infrastructure are estimated to have similar cost as systems built on fossil fuels when higher upfront costs are offset by low operating costs.

### Historical trends in diversification and political risk (stylized facts)
- Coal and oil production became more concentrated over the last two decades:
  - Coal: rising shares of China and, to a lesser extent, Indonesia — from "33% of global production in 2000 to 60% in 2020".
  - Oil: shift toward more concentrated output markets with the United States, Canada and Iraq gaining market shares; joint market share of the top 7 producers increased but "stayed below 60 percent".
  - Natural gas: no material change in concentration over the last two decades, despite shifts (e.g., Qatar, Iran, and China gains; Russia’s and Canada’s shares decreased).
- Political risk and democratic freedom trends:
  - Indicators of political risks and democratic freedom have worsened in most fossil fuel producing economies during the last decade.
  - Political risks appear to have increased for coal and natural gas producers; the picture for oil producers is more mixed.

### Decomposition and contributions
- The paper decomposes energy security risk into two main determinants:
  - Diversification effect: how changing concentration of energy import sources affected energy security.
  - Risk effect: the impact of political risks on energy security.
- Quantifies the contribution of each effect at global and national levels.

### Policy and investment implications
- Strengthening energy security in a renewables era requires:
  - Strategic support of production capacities for transition metals across a variety of countries to facilitate import diversification.
  - Investments in infrastructure for energy storage and grid extensions to address intermittency and ensure uninterrupted supply.
  - Consideration that higher upfront costs for renewables are compensated by low operating costs, resulting in comparable system costs to fossil-based systems when supporting infrastructure is included.

### Organization of the paper
- Section 2: global aggregate trends in energy security.
- Section 3: country-specific trends and main drivers.
- Section 4: CGE model analysis of climate mitigation policies on energy security.
- Section 5: new challenges amid the green transition (green metal imports and intermittency).
- Section 6: conclusion.

*Source: Introduction (wpiea2024006-print-pdf)*

### Box 1. What is Energy Security? A review of the relevant literature

### Box 1. What is Energy Security? A review of the relevant literature

### Definition and core dimensions
- Energy security is broad and contested; literature frames include:
  - Security of demand (energy exporters): guaranteed access to diverse foreign markets.
  - Reliability of supply (energy importers): uninterrupted availability of energy sources at an affordable price (IEA 2014).
- Additional dimensions frequently invoked: sustainability of supply, affordability, and price stability.

### Security of supply and diversification
- Security of supply is the dominant theme; key determinants include:
  - Diversity of supply and political risks of suppliers (Le Coq and Paltseva 2009).
  - Transport route for fuels like natural gas (pipeline vs. seaborne LNG) affects diversification (Vivoda 2019).
  - LNG role: flexible contracts and growing spot trading (IEA 2019).
- Portfolio-theory grounding:
  - Herfindahl–Hirschman Index (HHI) applied to energy: DI(global) = ∑(Xi/X)^2_i × 100.
  - Political-risk–adjusted index: DIpol(global) = ∑[(Xi/X)^2 × POL_i × 100]_i, where POL_i = [1 − ICRG_i/100] or POL_i = [1 − DI_i/10] depending on risk proxy.
- Decomposition of changes in DIpol: change = diversification effect + risk effect + covariance term (see equation 3 in source).

### Renewables, affordability, and price volatility
- Renewables both substitute imports and introduce new security challenges:
  - Renewables can decrease electricity price volatility in some countries and increase it in others (Ketterer 2014; Rintamäki, Siddiqui, and Salo 2017).
  - Policy/regulatory responses can mitigate volatility (Germany example; Ketterer 2014).
  - Full-renewable systems can improve availability, cost, environment, health, and keep diversity constant in some contexts (Azzuni et al. 2020; Jordan example).

### Energy independence versus energy security
- Distinction emphasized: energy independence focuses on reducing imports; energy security concerns broader reliability and risk.
- Increasing domestic fossil-fuel production for independence can delay green transition and conflict with Paris Agreement/net zero goals.
- Joint achievement of energy security and sustainable investment requires investment into renewable energy capacity (Cevik 2022).

### Political risks, governance, and supply concentration
- Political distance and risk measures:
  - IDP (Ideal Point Distance) from UNGA voting; higher absolute IDP implies higher political risk for supplier–importer pairs.
  - IDP constructed for OECD importers due to data limits.
- Observed trends:
  - Geo-political distance between natural gas exporters and importers has increased since 2010 (Aiyar et al. 2023).
  - Coal and natural gas production shifted toward regions with lower democratic freedom, higher internal instability risk, and longer geo-political distance (2000→2019/2020 comparisons).
  - Oil production shifts are mixed; increased market share of the United States and Canada lowered political-risk exposure for oil overall.
- Freedom House–based patterns:
  - Coal, natural gas, and oil production shares increasingly concentrated in “not free” regions (Figure 4 observation).

### Measurement of energy security: indices and country analysis
- There are 63 indices in the literature (Gasser 2020); two broad types: comprehensive (arbitrary weights) and simple (data-driven).
- The paper uses a simple, supply-focused index avoiding arbitrary weights; captures market concentration and political risk dimensions.
- Country Diversification Index, political-risk weighted:
  - CDI_pol = ∑[(NPI_i / C)^2 × POL_i × 100]_i, where NPI_i = net positive imports from country i and C = domestic consumption of the fuel.
  - A non-importing country has CDI = 0 (best score); domestic production is effectively assigned zero political risk.
- Key cross-country insights (based on ICRG-weighted CDI_pol, 2000–2020 for G20 with data):
  - On average: energy security risks highest for natural gas importers and lowest for oil importers.
  - Large cross-country variation (e.g., U.S. low risk due to domestic production; Japan and Italy high coal dependence; Türkiye and Germany high natural gas dependence).
  - Energy intensity magnifies risks: higher energy use per unit of output (energy intensity) correlates with higher CDI_pol for corresponding fuels (examples: Korea for coal and oil; Italy for natural gas).
- Decomposition at country level: diversification effect dominates changes in CDI_pol; political risk and covariance terms often marginal.
  - Examples: Lithuania improved natural gas security by diversifying away from 100 percent dependence on Russia in 2010 to a diversified portfolio (Russia 51 percent, Norway 45.8 percent, US 25.3 percent in later period) with excess used for neighboring countries.
  - Hungary’s natural gas security deteriorated amid increased import dependence on Russia: from 74.8 percent of consumption in 2010 to >100 percent in 2020 (excess used for re-exports).

### Energy security and recent macroeconomic impacts
- The Europe energy crisis underscores diversification importance and supplier political risk impacts.
  - Complete Russian gas shutdown would have weighed heavily on growth, amplified by infrastructure bottlenecks (Di Bella et al. 2022; Lan, Sher, and Zhou 2022).
  - Higher dependence on Russian energy correlates with greater energy security risks and more adverse growth revisions (WEO revisions Jan 2022 vs Oct 2022).

### Net-zero transition: aggregate impacts and model-based projections
- Three main channels through which climate policy affects energy security:
  1. Reduced fossil-fuel import demand → greater energy independence via domestic renewables.
  2. Exit of high-marginal-cost fossil suppliers → increased market concentration and higher risk for remaining fossil-dependent economies.
  3. Inter-fuel substitution (coal phased out faster → relative rise in natural gas share during transition).
- Oil demand persistence tied to transport electrification:
  - EV global stock well below 2 percent at end-2021; pace of electrification determines oil phase-out speed and related security implications.
- Model experiment using IMF-ENV under International Carbon Price Floor (ICPF) scenario:
  - ICPF minimum carbon prices: $US 75 for high-income countries, $US 50 for middle-income countries, $US 25 for low-income countries (Parry, Black, and Roaf 2021).
  - Under ICPF vs baseline (no new policies), model finds:
    - Energy security for individual fossil fuels deteriorates (index values rise) because higher-cost producers exit and market concentration increases.
    - Overall energy security improves because reduced dependence on imported fossil fuels raises domestic energy independence (renewable expansion).
  - Electricity generation in ICPF: low-carbon sources (renewables, hydropower, nuclear) expand; total fossil fuel production trajectory is much lower in ICPF than BAU.
  - Disorderly decarbonization can pose short-term risks if green investments are insufficient; internationally coordinated transition and clear policy signals are important.

### Transition metals and material supply risks
- Transition metals (copper, lithium, nickel, zinc, cobalt, rare earths) demand rises rapidly for EVs and renewables:
  - EVs require more than five times as many metals than a conventional car (IEA 2021).
  - Prices for these metals expected to increase until 2030 reaching historical record levels, then decline in a Net-Zero scenario (Boer, Pescatori, and Stuermer 2021).
- Key differences from fossil fuels:
  - Metals are needed to expand capacity, not to maintain electricity generation; once renewable capacity is built, electricity continues even if metal supply is disrupted.
  - Recycling, sub-technology substitution, and technological progress create demand flexibility.
- Geological reserves:
  - For thirteen transition metals, current reserves estimated sufficient to cover demand until 2060 except possibly cobalt (Månberger and Johansson 2019).
- Concentration patterns:
  - Production of copper, nickel, cobalt, rare earths and lithium: top producers have >25 percent market share (2021); processing is concentrated (>30 percent) in China for these metals.
  - No clear global trend in supply security over time; copper shows slight improvement since 2000, nickel fluctuates strongly (Indonesia supply variations).

### Electricity intermittency and flexibility options
- Variable Renewable Energy (VRE: wind and solar) accounted for 54.7 percent of renewable energy capacity in 2021; VRE growth increases intermittency challenges.
- Flexibility options to manage intermittency and protect energy security:
  1. Infrastructure investments: transmission grid expansion and energy storage (short-term: batteries; long-term: pumped hydro, compressed air).
     - Batteries experienced >50 percent cost reduction in 2013–2019 and are economically viable for storing renewables (Comello and Reichelstein 2019).
     - Interconnected grids lower costs vs independent regions (Child et al. 2019); international electricity trade expands as VRE share rises.
  2. Demand- and supply-side flexibility: use of dispatchable generation (existing natural gas, hydropower), demand response by large consumers (useful mainly for short-term balancing).
     - Risk: adding new natural gas capacity risks oversupply and stranded assets.
  3. Power-to-gas and green hydrogen: convert surplus VRE electricity to hydrogen to reduce curtailment and better utilize wind and solar capacity.
     - Potential effects: curtailment could be reduced by 87 percent and required wind/solar capacity by 23 percent in some studies (Lyseng et al. 2018).
     - Hydrogen can use existing gas infrastructure after methanation or be used directly in retrofitted plants and hard-to-electrify sectors.
- If flexibility options are deployed systematically alongside renewables deployment, VRE-dominated systems can operate without threatening energy security (Haegel et al. 2019).

*Source: Box 1. What is Energy Security? A review of the relevant literature (wpiea2024006-print-pdf).*

### Conclusion

### Conclusion

### Balance between short-term needs and long-term energy security
- The current energy crisis heightens the need to balance meeting short-term energy needs with pursuing long-term energy security.
- Key determinants of energy security are diversification and political risks, and their interaction with the green transition is crucial.
- Trade-offs:
  - High reliance on imported fossil fuels, especially from high political risk sources, exposes economies to supply uncertainty.
  - Increasing domestic fossil fuel production by reneging on climate mitigation commitments may strengthen short-term energy independence but risks undermining the green transition and long-term energy security.

### Drivers of recent energy security trends
- Increasing concentration of fossil fuel imports, driven by growing export shares of key energy producers, has underpinned energy security trends in recent decades.
- Decomposition approach:
  - The politically weighted Herfindahl–Hirschmann index is decomposed into:
    - a diversification effect (changes in unweighted diversification), and
    - a political risk effect from two perspectives: political instability in energy-exporting economies and geopolitical distance/fragmentation between exporters and importers.
  - Results indicate diversification, or lack thereof, is the main determinant of energy security, although political risk has in some instances had a material effect.

### Fuel-specific developments and implications
- Coal
  - Massive increase in coal production in China is absorbed domestically, allowing Indonesia and Australia to dominate the global coal export market.
  - This dynamic has increased coal market concentration.
- Gas and oil
  - Markets are more diversified than coal, but increasing export shares by Australia, Qatar and the US have nevertheless caused energy security to deteriorate.
- Geopolitical alignment
  - Concentration of energy trade among geopolitically aligned economies can reduce political risks but may weaken diversification and heighten energy insecurity.

### Interaction between climate policy and energy security
- Model-based evidence highlights multiple channels:
  - Climate policy reduces demand for fossil fuels, causing the highest cost producers to leave the market and thereby increasing market concentration.
  - Climate policy increases the share of renewable energy, raising domestically produced energy, decreasing import dependence, and improving energy security.
  - The transition from highly concentrated coal supply to natural gas improves global energy security because natural gas supply is more diversified than coal supply.
- Overall assessment: On net, climate policies are expected to increase energy security.

### Challenges from rapid renewable deployment and available solutions
- Transition metals
  - Production of transition metals is more concentrated than fossil fuel production.
  - Metals are needed for expansion of energy production capacity, not for ongoing generation; a hypothetical shortage would not trigger an immediate energy crisis comparable to a collapse in fossil fuel exports.
  - Metals are not all concentrated in a single country and are mutually substitutable.
- Intermittency of renewables
  - Intermittency poses challenges for energy security.
  - Flexibility solutions include:
    - a more interconnected grid,
    - energy storage,
    - demand- and supply-side flexibility,
    - production of zero-carbon fuels.
  - These approaches are already well advanced.

### Additional aspects and measurement considerations
- Energy security is multi-faceted and can be measured in many ways; diversification of energy sources does not fully reflect dependence on infrastructure such as pipelines and LNG terminals.
- Infrastructure dependence implies that measured source diversification may understate a country's true vulnerability.
- As renewable energy grows, new measures of energy security may be needed:
  - Example: Two neighboring countries that both use large amounts of renewable energy might exchange electricity in both directions. Net imports could be close to zero while the countries remain highly interdependent; a stoppage of exports would harm both parties despite negligible net trade.

*IMF Working Paper — Conclusion section.*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024006-print-pdf.pdf_