Creating a better future
"Trade and Environment" - summary of a recent report by the WTO and UNEP
The WTO’s report on international trade and the environment
The report “Trade and Environment” was published by the WTO and UNEP on 26 June 2009 and investigates the intersections between climate change and trade from four different perspectives: the science of climate change; economics; multilateral efforts to tackle climate change; and national climate change policies and their effect on trade.
Both Executive Director Achim Steiner and the WTO’s Director General Pascal Lamy urge the international community to seal an equitable and decisive deal at the crucial UN climate convention meeting in Copenhagen, Denmark in December 2009.
Increasing greenhouse emissions could have detrimental effects on developing countries
The report points out that greenhouse gas emission per person in industrialised countries have been four times higher than those in developing countries and that the member countries of OECD are jointly responsible for 77% of the total greenhouse gases that were emitted in the past. However, the report also says that emissions from developing countries are rising fast and that two thirds of the new emissions are from non-OECD countries.
Also, as has been indicated in numerous other studies, this report concludes that the increased emissions will lead to a further rise in temperatures and most likely it will cause dangerous interference with the global climate system. As a consequence, hurricanes, typhoons, floods, droughts, and storms are projected to increase.
Poorer nations will likely be the most adversely affected, thus, climate change risks add to the long list of already existing issues, such as poverty, poor health car, poor food security and lack of water and energy.
Agriculture is a sector that is highly vulnerable and is also a vital factor for international trade. Poor countries are predominantly located in low-latitude regions where yield reductions of 5-10% in the major cereal crops are projected even in the case of temperature increases of about 1° C. The report quotes some other studies that highlight that crop yields in some African countries could fall by up to 50 per cent by 2020.
Another sector that is in jeopardy is infrastructure, such as ports, roads, bridges, airports, etc. which are vulnerable to extreme weather changes.
Mitigation and Adaptation
The report distinguishes between mitigation (policies and options mainly aimed at reducing greenhouse gas emissions or increased absorption of them) and adaptation (actions to reduce the negative impacts of climate change or to take advantage of its potential benefits).
As the report points out, there is much information on mitigation efforts, particularly around some key areas with potential to result in large reductions of greenhouse gases, such as more efficient energy usage in transport, buildings and industry, switching to low-carbon energy technologies, reduced deforestation and improved land and farming management practices as well as improved waste management.
The listed activities hold a lot of potential but the report highlights that their success ultimately depend on the policies that are set up to promote mitigation, i.e. “multilateral agreement on a target for greenhouse gas stabilization in the atmosphere, as well as firm and binding commitments on the level of global greenhouse gas emission reductions that will be required to achieve this stabilization target, will be instrumental in the large-scale deployment of emission-reduction technologies and practices”.
Also, the report highlights that measures at the national level are important in order to incentivise customers and corporations to demand and adopt climate-friendly products and technologies.
Finally, as mentioned before, the report points out that the crucial factor in making a significant impact is the financing, technology transfer and co-operation between developing and industrialised countries. Thus, it points out that trade and technology transfer can be facilitators for developing countries to produce and maintain low carbon technologies.
The cost of cutting greenhouse emissions
In the wake of the global financial crisis and in an already battered world economy it is particularly disheartening to read about the economic impact of trying to save the planet.
The report analyses the impact based on two different scenarios: first, to limit global warming to 2° C and second, the target of 550 parts per million (ppm) of CO2-equivalent, resulting in a stabilisation of the CO2 concentration in the atmosphere at about twice its pre-industrial level and corresponding to a temperature increase of roughly 3° C.
The Intergovernmental Panel on Climate Change (“IPCC”) estimates that the second scenario would result in an annual reduction of global GDP between 0.2 and 2.5%. A stabilisation target of 2° C implies an annual reduction in global GDP of more than 3%. To put this in perspective, on 30 March 2009 (during the storm of the global financial crisis) the World Bank issued a projection that the global GDP would fall by 1.7% in 2009…
Also, the IPCC estimates that carbon prices of USD 20/80 per tonne of CO2-equivalents would be required by 2030 to make sure the world is on track to obtain stabilisation of emissions according to the second scenario by 2100.
Adaptation cannot be assessed by any one single indicator and that its success relies on several other factors, such as political stability, market development, education and income / poverty levels.
The report states that “is generally recognized that technological innovation, together with the financing, transfer and widespread implementation of technologies, will be central to global efforts to adapt to climate change.”
The adaptation technologies could be applied in several different ways, for instance, infrastructure construction, building design and structure and research and development into drought-resistant crops. Needless to say the costs of these technologies and of other adaptation activities may be substantial although, as the report points out, very few adaptation cost estimates have been made available to date.
Complex impacts on greenhouse gases from international trade
International trade has increased massively since the end of world war two and the developing nations now account for 34% of all merchandise trade. On back of this, the report tries to analyse whether trade opening leads to more greenhouse gas emissions and by how much does trade change greenhouse gas emissions? As hinted before, however, there is a great deal of complexity.
Trade opening can impact the amount of emissions in three ways, scale (expansion of economic activity as a result of trade opening), composition (how trade opening changes the production structure of a country as a result of changes in relative prices) and technique effects (production efficiency leading to reduced emission intensity). In regards to the composition, this depends on if a country has a comparative advantage in emission-intensive sectors and if these are expanding or decreasing. Another factor to consider is that sometimes the composition can be a direct consequence of differences in environmental regulations in various countries, i.e. high-emission industries relocate to countries with less tough emission policies.
Technique is the main way in which trade opening can mitigate climate change: either through increased availability and lower cost of climate-friendly goods and services (for markets where there is an unmet demand) or, as income levels rise on the back of trade opening, a country’s population might demand lower greenhouse gas emissions.
However, the report argues, in order for companies to adopt cleaner production technologies and, thus have a positive impact on greenhouse gases, governments need to support with appropriate tax and regulatory measures. Also, the link between rising income levels per capita and environmental quality is far from obvious. Greenhouse gases in the air come from several different countries and, as a consequence, there might not be a strong incentive for a particular country to reduce its own emission regardless of a country’s income level.
The scale and technique effects often work in opposite directions and, as a consequence, the publishers conclude that the net impact of greenhouse gas emissions depend on the magnitude or strength of each of the three effects.
Looking at the empirical evidence on the relation between trade opening and emission levels, however, although far from conclusive, most statistical studies indicate that more open trade typically does lead to increased CO2 emissions. Thus, the scale effect tends to offset the technique and composition effects.
Can trade act as a positive catalyst?
The report stresses that technological innovation and transfer and implementation of technologies will be imperative to global efforts climate change mitigation and adaptation. International transfer of technology comes through either tangible assets, such as equipment, machinery, components, etc. or intangible assets, i.e. knowledge and information.
Technologies, in turn, are predominantly owned by private companies and therefore, the report states; it is “relevant to identify ways within the private sector, such as foreign direct investment, licence or royalty agreements and different forms of cooperation arrangements, which can facilitate technology transfer.”
International trade could also increase the flow of communication between countries and could increase the available opportunities for adapting foreign technologies to meet local conditions. In addition, as the report points out, “the learning process made possible by international economic relations reduces the cost of future innovation and imitation”.
International co-operation – what has been achieved so far?
So far, the results of joint international efforts on climate change cannot be deemed very useful. While it is too early to determine the effectiveness of the provisions in the first commitment period of the Kyoto Protocol it does look like most industrialised signatories will be unable to meet their targets. Also, global greenhouse gas emissions have increased by astounding 24% since 1990, despite action taken under the Kyoto Protocol and the UNFCCC.
The main challenge now facing climate change negotiators is to agree on a multilateral response to climate change after the Kyoto Protocol’s first commitment period has expired. Next up is the 15th conference of the parties to the UNFCCC meeting in December 2009 in Copenhagen.
While international progress on climate change tends to be quite slow, one international co-operation that has been effective is the Montreal protocol, which was established more than 20 years ago in response to stratospheric ozone destruction. According to the report by the WTO and UNEP it is estimated that the Montreal protocol has achieved between four and five times greater levels of climate mitigation than the planned target by the first commitment period under the Kyoto protocol.
What about the WTO? The ongoing Doha round have seen the launch of the first-ever multilateral trade and environment negotiations and some efforts for trade liberalisation has targeted particular environmental goods and services, such as wind and hydropower turbines, solar water heaters, photovoltaic cells, tanks for biogas production, etc. The aim with the trade liberalisation in these areas (which have been subject to increased trade in recent years) is to achieve price reductions, which, in turn, should facilitate their deployment.
Putting a price tag on CO2 emissions
The report also discusses two ways to put a price on pollution in order to induce change in behaviour (i.e. a shift to less carbon intensive energy sources and products): taxes and cap- and trade systems.
The most common approach in the last couple of decades has been to impose taxes on the consumption of fossil fuels based on the relative carbon content. While the theoretical framework holds that a carbon tax should be set at a level where it absorbs the environmental damage (i.e. a “Pigouvian tax”) empirical evidence shows that these have been a rare occurrence in real life. Rather, taxes have predominantly been set at levels where they are believed to influence tax payers’ behaviour.
The studies made on taxes’ effectiveness show that they have small but positive impact on CO2 emissions in certain industries.
An alternative is to create what the EU did in 2005, i.e. an emission trading scheme. Thus, rather than putting a price on carbon you set a cap on total emissions, use this as a basis for creating allowances which are subsequently traded (and priced) in an open market. The paper argues that this alternative may be more preferable in situations where greater environmental certainty is needed.
There is a great deal of debate about the effectiveness and structure of a carbon trading scheme (not the least here in Australia) but as the report points out, existing schemes have only been in operation for a short time and have had limited scope and range for curbing emissions. The main concern voiced is how the international competitiveness of energy intensive industries would change by domestic policies aimed at constraining carbon emissions.
The role of the WTO
In light of the debate discussed above, the report concludes that “a number of WTO rules may be relevant to carbon taxes and cap-and-trade systems and related border measures, including core trade disciplines, such as the non discrimination principle.”
Also, while no policies on climate change mitigation have been discussed in the dispute settlement of the WTO it has been argued that policies seeking to decrease CO2 emissions could fall under the GATT exceptions. The latter are intended to protect humans from adverse impacts of climate change, to conserve the earth’s climate as well as its plant and animal species.
Conclusions of the report
Global warming, which stems from human activities, is projected to continue unless significant changes take place through laws, policies and actions. As a consequence, most industries of the global economy will be impacted and so will trade. Many of the most affected are those that are critical for developing countries, such as forestry and agriculture. Climate change can change these countries’ comparative advantages and thus, change the pattern of international trade.
The report also states that prevailing global financial crisis makes action on climate change even more challenging and “the need for vigilance against trade protectionism more critical”. Further, it states that “there is a profound need for a successful conclusion to the current negotiations on both climate change and trade opening”.
Key multilateral climate change negotiations are due to come to a conclusion at the UNFCCC meeting in Copenhagen, Denmark in December 2009 and the report highlights that the issue of climate change requires concerted action at both the national and the international level. Preferably, the main instrument for addressing climate change would be a multilateral agreement with binding agreements that establish a framework for reducing greenhouse gas emissions post 2012 and beyond.
Trade intersects with climate change in numerous ways, not the least due to the consequences climate change might have in terms of regulatory and economic changes needed to mitigate and adapt. The impact on greenhouse gas emissions by trade opening is complex. More open trade is likely to lead to increased CO2 emissions on the back of more economic activity but conversely, trade opening could lead to adoption of technologies that reduce the emission intensity of production processes that could lead to a change in the production mix from energy intensive to less energy intensive sectors. The net effect is not clear cut and further analytical work is needed.
International trade results in greenhouse gas emissions through transportation of goods. Most of the international trade, however, is done through maritime transport, which accounts for a relatively small share of total greenhouse gas emissions.
The report highlights some key areas where technology could significantly reduce greenhouse gas emissions: energy efficient technologies in transport, buildings and industry, as well as a switch to zero- or low-carbon energy technologies in production. International trade can channel these technologies to mitigate climate change. Having said that, more research is needed on this topic.
Governments have a wide range of policy measures available in order to curb greenhouse gas emissions and the impact of these on international trade and the multi-lateral trading system are complex.
The WTO and its bodies present a forum for debate on policies. As an example, the Committee on Trade and Environment could discuss trade-related measures that could support climate change mitigation and adaptation.
The report “Trade and Environment” was published by the WTO and UNEP on 26 June 2009 and investigates the intersections between climate change and trade from four different perspectives: the science of climate change; economics; multilateral efforts to tackle climate change; and national climate change policies and their effect on trade.
Both Executive Director Achim Steiner and the WTO’s Director General Pascal Lamy urge the international community to seal an equitable and decisive deal at the crucial UN climate convention meeting in Copenhagen, Denmark in December 2009.
Increasing greenhouse emissions could have detrimental effects on developing countries
The report points out that greenhouse gas emission per person in industrialised countries have been four times higher than those in developing countries and that the member countries of OECD are jointly responsible for 77% of the total greenhouse gases that were emitted in the past. However, the report also says that emissions from developing countries are rising fast and that two thirds of the new emissions are from non-OECD countries.
Also, as has been indicated in numerous other studies, this report concludes that the increased emissions will lead to a further rise in temperatures and most likely it will cause dangerous interference with the global climate system. As a consequence, hurricanes, typhoons, floods, droughts, and storms are projected to increase.
Poorer nations will likely be the most adversely affected, thus, climate change risks add to the long list of already existing issues, such as poverty, poor health car, poor food security and lack of water and energy.
Agriculture is a sector that is highly vulnerable and is also a vital factor for international trade. Poor countries are predominantly located in low-latitude regions where yield reductions of 5-10% in the major cereal crops are projected even in the case of temperature increases of about 1° C. The report quotes some other studies that highlight that crop yields in some African countries could fall by up to 50 per cent by 2020.
Another sector that is in jeopardy is infrastructure, such as ports, roads, bridges, airports, etc. which are vulnerable to extreme weather changes.
Mitigation and Adaptation
The report distinguishes between mitigation (policies and options mainly aimed at reducing greenhouse gas emissions or increased absorption of them) and adaptation (actions to reduce the negative impacts of climate change or to take advantage of its potential benefits).
As the report points out, there is much information on mitigation efforts, particularly around some key areas with potential to result in large reductions of greenhouse gases, such as more efficient energy usage in transport, buildings and industry, switching to low-carbon energy technologies, reduced deforestation and improved land and farming management practices as well as improved waste management.
The listed activities hold a lot of potential but the report highlights that their success ultimately depend on the policies that are set up to promote mitigation, i.e. “multilateral agreement on a target for greenhouse gas stabilization in the atmosphere, as well as firm and binding commitments on the level of global greenhouse gas emission reductions that will be required to achieve this stabilization target, will be instrumental in the large-scale deployment of emission-reduction technologies and practices”.
Also, the report highlights that measures at the national level are important in order to incentivise customers and corporations to demand and adopt climate-friendly products and technologies.
Finally, as mentioned before, the report points out that the crucial factor in making a significant impact is the financing, technology transfer and co-operation between developing and industrialised countries. Thus, it points out that trade and technology transfer can be facilitators for developing countries to produce and maintain low carbon technologies.
The cost of cutting greenhouse emissions
In the wake of the global financial crisis and in an already battered world economy it is particularly disheartening to read about the economic impact of trying to save the planet.
The report analyses the impact based on two different scenarios: first, to limit global warming to 2° C and second, the target of 550 parts per million (ppm) of CO2-equivalent, resulting in a stabilisation of the CO2 concentration in the atmosphere at about twice its pre-industrial level and corresponding to a temperature increase of roughly 3° C.
The Intergovernmental Panel on Climate Change (“IPCC”) estimates that the second scenario would result in an annual reduction of global GDP between 0.2 and 2.5%. A stabilisation target of 2° C implies an annual reduction in global GDP of more than 3%. To put this in perspective, on 30 March 2009 (during the storm of the global financial crisis) the World Bank issued a projection that the global GDP would fall by 1.7% in 2009…
Also, the IPCC estimates that carbon prices of USD 20/80 per tonne of CO2-equivalents would be required by 2030 to make sure the world is on track to obtain stabilisation of emissions according to the second scenario by 2100.
Adaptation cannot be assessed by any one single indicator and that its success relies on several other factors, such as political stability, market development, education and income / poverty levels.
The report states that “is generally recognized that technological innovation, together with the financing, transfer and widespread implementation of technologies, will be central to global efforts to adapt to climate change.”
The adaptation technologies could be applied in several different ways, for instance, infrastructure construction, building design and structure and research and development into drought-resistant crops. Needless to say the costs of these technologies and of other adaptation activities may be substantial although, as the report points out, very few adaptation cost estimates have been made available to date.
Complex impacts on greenhouse gases from international trade
International trade has increased massively since the end of world war two and the developing nations now account for 34% of all merchandise trade. On back of this, the report tries to analyse whether trade opening leads to more greenhouse gas emissions and by how much does trade change greenhouse gas emissions? As hinted before, however, there is a great deal of complexity.
Trade opening can impact the amount of emissions in three ways, scale (expansion of economic activity as a result of trade opening), composition (how trade opening changes the production structure of a country as a result of changes in relative prices) and technique effects (production efficiency leading to reduced emission intensity). In regards to the composition, this depends on if a country has a comparative advantage in emission-intensive sectors and if these are expanding or decreasing. Another factor to consider is that sometimes the composition can be a direct consequence of differences in environmental regulations in various countries, i.e. high-emission industries relocate to countries with less tough emission policies.
Technique is the main way in which trade opening can mitigate climate change: either through increased availability and lower cost of climate-friendly goods and services (for markets where there is an unmet demand) or, as income levels rise on the back of trade opening, a country’s population might demand lower greenhouse gas emissions.
However, the report argues, in order for companies to adopt cleaner production technologies and, thus have a positive impact on greenhouse gases, governments need to support with appropriate tax and regulatory measures. Also, the link between rising income levels per capita and environmental quality is far from obvious. Greenhouse gases in the air come from several different countries and, as a consequence, there might not be a strong incentive for a particular country to reduce its own emission regardless of a country’s income level.
The scale and technique effects often work in opposite directions and, as a consequence, the publishers conclude that the net impact of greenhouse gas emissions depend on the magnitude or strength of each of the three effects.
Looking at the empirical evidence on the relation between trade opening and emission levels, however, although far from conclusive, most statistical studies indicate that more open trade typically does lead to increased CO2 emissions. Thus, the scale effect tends to offset the technique and composition effects.
Can trade act as a positive catalyst?
The report stresses that technological innovation and transfer and implementation of technologies will be imperative to global efforts climate change mitigation and adaptation. International transfer of technology comes through either tangible assets, such as equipment, machinery, components, etc. or intangible assets, i.e. knowledge and information.
Technologies, in turn, are predominantly owned by private companies and therefore, the report states; it is “relevant to identify ways within the private sector, such as foreign direct investment, licence or royalty agreements and different forms of cooperation arrangements, which can facilitate technology transfer.”
International trade could also increase the flow of communication between countries and could increase the available opportunities for adapting foreign technologies to meet local conditions. In addition, as the report points out, “the learning process made possible by international economic relations reduces the cost of future innovation and imitation”.
International co-operation – what has been achieved so far?
So far, the results of joint international efforts on climate change cannot be deemed very useful. While it is too early to determine the effectiveness of the provisions in the first commitment period of the Kyoto Protocol it does look like most industrialised signatories will be unable to meet their targets. Also, global greenhouse gas emissions have increased by astounding 24% since 1990, despite action taken under the Kyoto Protocol and the UNFCCC.
The main challenge now facing climate change negotiators is to agree on a multilateral response to climate change after the Kyoto Protocol’s first commitment period has expired. Next up is the 15th conference of the parties to the UNFCCC meeting in December 2009 in Copenhagen.
While international progress on climate change tends to be quite slow, one international co-operation that has been effective is the Montreal protocol, which was established more than 20 years ago in response to stratospheric ozone destruction. According to the report by the WTO and UNEP it is estimated that the Montreal protocol has achieved between four and five times greater levels of climate mitigation than the planned target by the first commitment period under the Kyoto protocol.
What about the WTO? The ongoing Doha round have seen the launch of the first-ever multilateral trade and environment negotiations and some efforts for trade liberalisation has targeted particular environmental goods and services, such as wind and hydropower turbines, solar water heaters, photovoltaic cells, tanks for biogas production, etc. The aim with the trade liberalisation in these areas (which have been subject to increased trade in recent years) is to achieve price reductions, which, in turn, should facilitate their deployment.
Putting a price tag on CO2 emissions
The report also discusses two ways to put a price on pollution in order to induce change in behaviour (i.e. a shift to less carbon intensive energy sources and products): taxes and cap- and trade systems.
The most common approach in the last couple of decades has been to impose taxes on the consumption of fossil fuels based on the relative carbon content. While the theoretical framework holds that a carbon tax should be set at a level where it absorbs the environmental damage (i.e. a “Pigouvian tax”) empirical evidence shows that these have been a rare occurrence in real life. Rather, taxes have predominantly been set at levels where they are believed to influence tax payers’ behaviour.
The studies made on taxes’ effectiveness show that they have small but positive impact on CO2 emissions in certain industries.
An alternative is to create what the EU did in 2005, i.e. an emission trading scheme. Thus, rather than putting a price on carbon you set a cap on total emissions, use this as a basis for creating allowances which are subsequently traded (and priced) in an open market. The paper argues that this alternative may be more preferable in situations where greater environmental certainty is needed.
There is a great deal of debate about the effectiveness and structure of a carbon trading scheme (not the least here in Australia) but as the report points out, existing schemes have only been in operation for a short time and have had limited scope and range for curbing emissions. The main concern voiced is how the international competitiveness of energy intensive industries would change by domestic policies aimed at constraining carbon emissions.
The role of the WTO
In light of the debate discussed above, the report concludes that “a number of WTO rules may be relevant to carbon taxes and cap-and-trade systems and related border measures, including core trade disciplines, such as the non discrimination principle.”
Also, while no policies on climate change mitigation have been discussed in the dispute settlement of the WTO it has been argued that policies seeking to decrease CO2 emissions could fall under the GATT exceptions. The latter are intended to protect humans from adverse impacts of climate change, to conserve the earth’s climate as well as its plant and animal species.
Conclusions of the report
Global warming, which stems from human activities, is projected to continue unless significant changes take place through laws, policies and actions. As a consequence, most industries of the global economy will be impacted and so will trade. Many of the most affected are those that are critical for developing countries, such as forestry and agriculture. Climate change can change these countries’ comparative advantages and thus, change the pattern of international trade.
The report also states that prevailing global financial crisis makes action on climate change even more challenging and “the need for vigilance against trade protectionism more critical”. Further, it states that “there is a profound need for a successful conclusion to the current negotiations on both climate change and trade opening”.
Key multilateral climate change negotiations are due to come to a conclusion at the UNFCCC meeting in Copenhagen, Denmark in December 2009 and the report highlights that the issue of climate change requires concerted action at both the national and the international level. Preferably, the main instrument for addressing climate change would be a multilateral agreement with binding agreements that establish a framework for reducing greenhouse gas emissions post 2012 and beyond.
Trade intersects with climate change in numerous ways, not the least due to the consequences climate change might have in terms of regulatory and economic changes needed to mitigate and adapt. The impact on greenhouse gas emissions by trade opening is complex. More open trade is likely to lead to increased CO2 emissions on the back of more economic activity but conversely, trade opening could lead to adoption of technologies that reduce the emission intensity of production processes that could lead to a change in the production mix from energy intensive to less energy intensive sectors. The net effect is not clear cut and further analytical work is needed.
International trade results in greenhouse gas emissions through transportation of goods. Most of the international trade, however, is done through maritime transport, which accounts for a relatively small share of total greenhouse gas emissions.
The report highlights some key areas where technology could significantly reduce greenhouse gas emissions: energy efficient technologies in transport, buildings and industry, as well as a switch to zero- or low-carbon energy technologies in production. International trade can channel these technologies to mitigate climate change. Having said that, more research is needed on this topic.
Governments have a wide range of policy measures available in order to curb greenhouse gas emissions and the impact of these on international trade and the multi-lateral trading system are complex.
The WTO and its bodies present a forum for debate on policies. As an example, the Committee on Trade and Environment could discuss trade-related measures that could support climate change mitigation and adaptation.
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