Ec 1661 / API 135 Section Climate Change IV: Trade & the Environment, Climate Review

1. Ec 1661 / API 135 SectionClimate Change IV: Trade & the Environment, Climate Review Gabe Chan April 29, 2011

2. Climate and Trade

3. Is Trade Good for the Environment in Theory? gains from trade downward EKC trade growth upward EKC race to the bottom

4. Environmental Kuznets Curve (EKC) • In the early stages of growth, environmental degradation increases, but above some level of income per capita, the trend reverses • The EKC is a theoretical relationship between wealth and environmental quality with controversial theoretical and empirical justification • Does the EKC apply for localized and/or non-localized pollutants? environmental degradation income / person

5. Environmental Kuznets Curve (EKC) • It depends on what causal mechanism is actually at play • a shift from heavy industry to services • technological change • philosophical / political enlightenment (changing preferences) • institutional capacity • climbing up Maslow’s hierarchy of needs • the environment as a luxury good • economies become more efficient with scale • more?

6. Race to the Bottom • A “race to the bottom” can occur when countries engage in “regulatory competition” • effective regulation (for environmental reasons or otherwise) typically increases production costs • Porter hypothesis suggests otherwise • Countries competing in similar industries can lower their (environmental) regulations to gain competitive advantage • The incentives appear to align to perpetually lower (environmental) regulation • Other factors to consider: • other comparative advantages • costs of shifting productive capacity • the power of importing countries / consumers to demand de-facto standards

7. Environmental Gains from Trade • Imports of environmentally friendly products • Technological spillovers and cumulative innovation • Standards transmitted through multinational corporations • Consumers / importing countries demand environmental production processes • Trade sanctions can be used for enforcement of multilateral agreements

8. Frankel’s “impossible trinity” protectionism national sovereignty environmental standards unregulated emissions multilateral governance globalization

9. Frankel’s “impossible trinity” protectionism national policies national sovereignty environmental standards race to the bottom targets and timetables unregulated emissions multilateral governance globalization

10. Is Trade Good for the Environment - Econometrics • The EKC relationship appears to hold for localized pollutants (e.g. SO2, PM, water, etc.) • But what is the relevant causal mechanism? • Little evidence for CO2

11. WTO and Kyoto • In Kyoto: Parties should “strive to implement policies and measures...to minimize adverse effects on international trade...” • It appears feasible that trade sanctions (to reduce leakage or to incentivize countries to join policy regime) are feasible under the WTO rules • WTO precedent for process and production method (PPMs) targeting has changed in the last decade and it appears countries will be allowed to adopt trade policy to target environmentally damaging PPMs

12. Climate Review

13. Key Concepts • Science • GHG emission sources, global-mixing, atm lifetime, uncertainty, distribution of impacts • International Climate Policy • baseline, linkage, CDM, country groupings, leakage, border adjustments, free-rider, policy architectures • National Climate Policy • general approaches (tax, C&T, command and control, voluntary, standards), cost containment (banking, borrowing, price ceiling/floor, offsets, etc.), technological change, distributional equity (allocation and independence principal), political feasibility, upstream vs. downstream, economy-wide vs. sectoral • Sub-national Climate Policy • preemption, leakage, negative/benign/positive interactions with national policy

14. Substantive Knowledge • Science • general understanding of the greenhouse effect • International Climate Policy • UNFCCC, Kyoto, Copenhagen, Cancun, (Durban), WTO, COPs, alternative venues (G-20, MEFs, etc.), CDM • National Climate Policy • Waxman-Markey, (Collins-Cantwell), EPA vs. MA • Sub-national Climate Policy • CA AB32, RGGI