Transcript Environmental Linkages and Climate Change Part One

Topic 4.a: Trade and the Environment
• There are two main sets of international environmental
linkages:
– trade and investment
– transboundary environmental impacts
• We will talk about trade and investment first
• Arguments over whether trade is “good” or “bad” for the
environment are typically overly simplistic
1
Topic 4.a: Trade and the Environment
• There is a two-way linkage between trade and the
environment:
– the production and consumption patterns associated
with global trade have substantial environmental
impacts (trade to environment impact)
– the policies designed to manage those impacts have
important implications for competitiveness and the
pattern of trade (environment to trade impact)
2
Topic 4.a: Trade and the Environment
The Trade to Environment Linkage
• Trade affects the volume and composition of resource
flows and these changes in turn impact on environmental
quality.
• Three key channels:
– a scale effect
– a technology effect
– a composition effect
3
Topic 4.a: Trade and the Environment
The Trade to Environment Linkage
• The Scale Effect of Trade
• Trade leads to an increase in the volume of production and
consumption due to:
– specialization according to comparative advantage
– the exploitation of scale economies
• This trade-induced increase in the scale of economic
activity causes an increase in the scale of environmental
impact.
4
Topic 4.a: Trade and the Environment
The Trade to Environment Linkage
• The Technology Effect of Trade
• Trade leads to an increase in wealth. This leads to an
increase in demand for environmental quality, and
pressure for the adoption of cleaner technologies
(remember environmental quality is a a normal good)
• That is, a substitution of knowledge capital (technology) for
natural capital
• The strength of the technology effect of trade relies on
effective market and political pressure in response to
demands for higher environmental quality:
– increased market pressure on industry
– increased political pressure on government.
5
Topic 4.a: Trade and the Environment
The Trade to Environment Linkage
• The Composition Effect of Trade
• The composition effect reflects the change in relative
natural capital intensity across countries in response to
specialization.
• The environmental impact of the composition effect is:
– positive for countries with a comparative advantage in
non-natural capital intensive production
– negative for countries with a comparative advantage in
natural capital intensive production
6
Topic 4.a: Trade and the Environment
The Trade to Environment Linkage
• Note that an increase in relatively polluting industries in a
developing country does not necessarily imply an increase
in the absolute level of pollution in that country
• The technology effect can mean an absolute reduction in
pollution even for countries that specialize in relatively
polluting production
• Scale effect is negative; technology effect is positive;
composition effect is positive for some countries, and
negative for others
• What is the likely net effect?
• The answer depends critically on the type of policies
implemented
• The key to sustainable growth through trade is the
technology effect
7
Topic 4.a: Trade and the Environment
The Environment to Trade Linkage
• Economies of scale and scope can cause imperfect global
competition in global markets and the existence of
economic rent
• Rent captured by a domestic firm means higher returns to
its shareholders, higher wages to its workers and higher
taxes to government
• However:
– higher environmental standards put upward pressure on
domestic production costs
– cost increases cause a loss of global market share for
domestic firms
– a smaller share of global economic rents for the
domestic country
8
Topic 4.a: Trade and the Environment
The Environment to Trade Linkage
• National governments may have an incentive to distort
environmental policy in an attempt to capture a greater
share of global economic rent for their citizens
• This can lead to downward pressure on environmental
standards
• It is in the self-interest of each country to find a balance
between environmental quality and capturing a share of
global rents All countries acting unilaterally in their own
self-interest can potentially precipitate a destructive “race
to the bottom” in setting environmental standards
9
Topic 4.a: Trade and the Environment
The Environment to Trade Linkage
• Three important factors can weaken the negative
relationship between environmental standards and
competitiveness:
– the productivity costs of poor environmental quality
– the promotion of technological change
– environmental protectionism
10
Topic 4.a: Trade and the Environment
The Environment to Trade Linkage
• International cooperation, and the integration of
environmental agreements with trade liberalization
agreements is crucial
• The solution lies in comprehensive regional and
international policy cooperation
• This does not necessarily mean uniformity of policies
across countries: policies should be tailored to individual
circumstances but set cooperatively
11
Topic 4.b: Transboundary Environmental Impacts
• Now we are going back to the second environmental
linkage the transboundary pollution problem
• Transboundary environmental impacts (TEIs) are impacts
of actions taken in one country on environment-related
welfare in another country
• The prime example of a TEI is global climate change
caused by greenhouse gas emissions
• Many TEIs involve the physical transportation of air-borne
pollutants for example: greenhouse gases (GHGs) and
sulphur dioxide
12
Topic 4.b: Transboundary Environmental Impacts
• In other instances there is no physical transmission of
pollution but there are nonetheless important welfare
effects for example: the loss of biodiversity and
deforestation
• TEIs are international externalities: a cost imposed on
other countries for which the source country does not have
to pay
• Consequence: unilateral action leads to standards that are
too low from the perspective of maximizing global welfare
• The only resolution to international externalities is through
international agreements like the Kyoto Protocol on GHGs
13
Topic 4.c: The Economics of Global Warming
• We will begin with a little (very little) background info on the
problem of global warming.
• Global warming is linked to greenhouse gas (GHG) emissions
– increased concentration of GHGs in atmosphere trap heat hence “greenhouse effect.”
• Most common GHGs: Carbon Dioxide, Methane (CH4), Nitrous
Oxide (N2O), Clorophluorocarbons (CFCs).
• GHG emissions arise from a variety of sources, some
anthropogenic (human-made), some “natural.”
– First three GHGs are both anthropogenic and natural.
– Last four are anthropogenic only.
• Note that the distinction between “natural” and anthropogenic
emissions can be a little tricky to draw.
14
15
16
Trends in atmospheric concentrations and human-generated
emissions of GHGs
17
18
19
20
Global warming will be a problem for a LONG time….
21
Topic 4.c: The Economics of Global Warming
•
•
Effects on the natural system are likely to be wide-ranging
and cannot be known with certainty.
 But effects will not be uniform across the world. Likely to
be worse impacts in poorer nations.
Some estimates from climate scientists:
 Sea levels rising, from both melting of polar ice caps and
expansion of ocean volume as it warms.
• IPCC estimates: sea level rises of between 7 and 23
inches by 2100 (compares to 6-9 inches last century).
• One estimate: rising sea levels “likely” to  land area of
Bangladesh by 15%, displacing 13-20 million people.
22
Topic 4.c: The Economics of Global Warming
–
–
–
–
Heat waves and heavier precipitation in some parts of the
world (like here).
Droughts or cooling in other parts of the world.
Some species threatened (polar bears), others will thrive
(ants!).
Events arising from climate change disproportionately
affect women and children.
23
Topic 4.c: The Economics of Global Warming
•
Majority of scientists agree that anthropogenic emissions of
GHGs are driving (at least in part) climate change.
•
Alternative view: anthropogenic emissions of GHGs constitute
just 5% of overall emissions.
–
–
Our emissions are too small to be causing global warming.
This is a minority view.
–
–
Effects of global warming are uncertain.
To reverse effects we need to incur costs now in order to
receive benefits far off in the future.
So what, if anything, should be done to halt/reverse/slow
climate change?
We will look at what policies have been proposed, and what
economists have to say about them.
–
–
24
Topic 4.c: The Economics of Global Warming
•
First: some info on the Kyoto Protocol.
•
Goals of Kyoto:
•
–
Reduce aggregate emissions to 5% below 1990 levels by
2008-2012.
–
Annex I countries (essentially industrialized countries)
given various emissions reduction goals. e.g. Canada to
reduce to 6% below 1990 levels.
–
Developing countries emissions not restricted (yet).
Mechanisms under Kyoto:
–
Emissions trading system (ETS) among Annex I countries.
–
Clean Development Mechanism (CDM) to incorporate
developing countries.
–
Details of implementation are still unclear, though CDM
projects and some emissions trading are going ahead..
25
Topic 4.c: The Economics of Global Warming
•
Where is Kyoto at?
•
For Kyoto to be binding, treaty had to be ratified by at least 55
governments from countries responsible for 55% of Annex I
country emissions.
•
Five years ago, it looked like Kyoto was dead: neither Russia
nor US would ratify, making 55/55 target impossible.
– Late 2004, Russian changed course and ratified, meaning
that the 55/55 target was achieved.
– US & Australia are only Annex I countries not to have
ratified.
•
Kyoto came into effect on February 16 2005.
– Europe has begun carbon permit trading.
– Some CDM projects are taking place.
– Most countries are a long way off meeting Kyoto targets.
•
We want to try to get a sense of the economic impacts of
Kyoto targets, relative to alternative policy targets.
26
Topic 4.c: The Economics of Global Warming
•
EU Emissions Trading Scheme (EU ETS)
– Phase I launched in January 2005, scheduled to run to end
of 07.
– Phase II: 2008-2012.
•
EU ETS targets specific large industrial sectors.
– Energy, metal production, cement, bricks, pulp & paper.
– Covers about 40% of EU GHG emissions.
•
Each of 27 member states sets National Action Plan (NAP) to
decides their own national-level quota as well as the initial
distribution of permits among firms.
– Most permits given away; only 0.2% of total permits were
auctioned during Phase I.
•
NAPs are subject to EU approval.
– NAP must show progress towards meeting Kyoto target.
27
– But…. very little actual abatement to date (<1.0%).
28
•
Topic 4.c: The Economics of Global Warming
Other carbon trading schemes?
•
Norway: cap and trade for heavy industry and major
energy generation introduced in 2005.
•
Japan and South Korea: small pilot programs
currently underway.
•
Australia (non-Kyoto signatory): a form of state-level
(NSW) emissions trading for electricity retailers.
•
US (non-Kyoto signatory):
–
Some companies have volunteered to reduce
emissions by certain amounts and “comply” via
carbon trading on the
Chicago Climate
Exchange. CCX emitting Members make a
voluntary but legally binding commitment to meet
29
annual GHG emission reduction targets.
Topic 4.c: The Economics of Global Warming
•
The Western Climate Initiative began in February 2007
when the Governors of Arizona, California, New Mexico,
Oregon, and Washington signed an agreement directing
their respective states to develop a regional target for
reducing greenhouse gas emissions, participate in a multistate registry to track and manage greenhouse gas
emissions in the region, and develop a market-based
program to reach the target.
•
The Premiers of British Columbia, Manitoba, Ontario, and
Quebec, and the Governors of Montana and Utah have
since joined the original five states in committing to tackle
climate change at a regional level.
•
Regional targets are to be set in 2009.
30