Trade and Climate Change: Theory and Evidence

1. Trade and Climate Change: Theory and Evidence Presentation of the WTO-UNEP Trade and Climate Change Report Robert Teh 16 February 2010

2. Outline • Based on the economic literature, examine the links between trade and climate change • conceptual framework • empirical evidence • Explain how trade can help mitigate climate change and assist in adaptation • Discuss the relative importance of the various modes of transport in international trade and their contribution to emissions • Describe how climate change can affect the pattern and volume of trade 2

3. Mechanisms by which trade opening can affect greenhouse gas (GHG) emissions • Composition effect (?) • Greater specialization towards products/services where country has comparative advantage • Emissions may increase (decrease) if a country’s comparative advantage lie in more-emission (less-emission) intensive sectors • Scale effect (+) • Trade opening leads to increased output & hence more emissions • Technique effect (-) • Improvements in technique of production lead to less emissions • Higher income leads to demand for better environment (possible caveat because of transboundary nature of GHG emissions) 3

4. Empirical evidence • Econometric studies • Use statistical methods to determine relationship between countries’ openness to trade and their greenhouse gas emissions • Environmental assessments of FTAs • Ex ante assessments rather than ex post • Although focus are on local/national environmental impacts, some consider greenhouse gas emissions • Accounting methods • Measure the CO2 “embodied” in trade • Empirical literature is quite recent

5. Econometric evidence • Most of the econometric studies suggest that more open trade would likely increase CO2 emissions: • Studies by Cole and Elliott (2003), Frankel and Rose (2005), McCarney and Adamowicz (2005), Managi (2005) • Large coverage of countries and decades-long time series • Scale effect tends to dominate the technique and composition effects • However, some studies, e.g. Managi (2008), suggest differences in emission impact - improvements being observed in OECD countries and deterioration in developing countries

6. Environmental assessments of trade agreements • Possible increase in greenhouse gas emissions from increased transport activity (Australia-US, NAFTA, EU Mediterranean FTA, EU-Mercosur) • FTA could spur growth of forestry plantations in Chile that can capture CO2 emissions (EU-Chile FTA) • Small reduction in greenhouse gas emissions from the reallocation of production between Mercosur and the EU • Part of the economic gains from FTAs could be directed to mitigating the expected climate change impacts (EU Mediterranean FTA)

7. Trade can help mitigate climate change • The increased income made possible by trade opening can lead to greater demand for better environmental quality and thus to reduced greenhouse gas emissions • More open trade can increase the availability of goods and services that are “climate-friendly” • Trade (or trade opening) encourages the international spread of technological innovations that are beneficial to mitigation efforts 7

8. Trade can help in adaptation • Some projected effects of climate change cannot be averted, requiring mankind to adapt • One of these threats is the disruption of food and agricultural production • Trade can bridge differences in demand and supply conditions, so that a country that suffers a loss in agricultural productivity will nonetheless be able to obtain supplies from trade partners • Simulation studies suggest that: • allowing markets to remain open significantly reduces losses in GDP even in the face of a large reduction in yields (Reilly and Hohmann, 1993; Rosenzweig, 1993) • the less distorted food and agricultural markets are, the more effective is trade as an adaptation tool (Hertel and Randhir, 2000) 8

9. Role of transport in international trade • International trade involves exchange between countries and requires that goods be transported from the place of production to the place of consumption • How much trade affects emissions depends on: • relative importance of different modes of transport (air, maritime and land) • the emission intensity of these various modes of transport

10. Importance of various modes of transport By volume By value Note: Data excludes intra-EU trade.

11. Differences in emission intensity • Share of CO2 emissions of the transport sector: • road transport and rail with 75%; • international shipping with 12% • aviation with 11% • others 2% • Based on the amount of CO2/ton-kilometer, marine transport is the most “carbon efficient” • measures the amount of CO2 emissions generated by transporting 1 ton of cargo a distance of 1 kilometer

12. “Carbon efficiency” of various modes of transport Source: WMO (2008) Prevention of Air Pollution from Ships. MEPC 58/Inf.6.

13. No reason for complacency • The volume of goods shipped by air has been growing rapidly • at about twice the rate of other modes of transport • Driven by technological advances and demand for speed in international trade • Without significant policy or regulatory changes, CO2 emissions from international shipping will rise by significant amounts in the next four decades

14. How climate change can affect trade • Climate change can affect the pattern and volume of international trade flows • It may alter countries’ comparative advantage and lead to shifts in the pattern of international trade • Increase the cost of doing trade by disrupting supply, transport and distribution chains 14

15. Shifts in comparative advantage • Countries or regions that are more reliant on agriculture may experience a reduction in exports if future warming and more frequent extreme weather events result in a reduction in crop yields. • Many tourist destinations rely on natural assets – beaches, clear seas, tropical climate, or abundant snowfall. Climate change may adversely affect the value of these natural assets.

16. Vulnerability of supply chains • Disruptions to the supply, transport and distribution chains would raise the costs of international trade. • Extreme weather events (such as hurricanes) may temporarily close ports or transport routes and damage infrastructure critical to trade. • Coastal infrastructure and distribution facilities are vulnerable to flood damage. • Transportation of bulk freight by inland waterways could be disrupted during droughts.

17. Concluding remarks • Much more empirical work is needed to be confident of the degree to which trade affects climate change • Studies need to tease out what explains differences in outcomes among countries • Is it better domestic regulation? • Is it quality of institutions? • Is it economic structure?