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Leverhulme Centre 6 th Form Conference 2007

Explore the interplay between trade, economic growth, and environmental sustainability. Understand the trade-offs and opportunities, and learn how economists can contribute to finding solutions. Discover the impact of economic activity on the environment and discuss potential strategies for a more sustainable future.

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Leverhulme Centre 6 th Form Conference 2007

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  1. Leverhulme Centre 6th Form Conference 2007 Trade and the Environment Dr. Tim Lloyd School of Economics Leverhulme Centre for Research on Globalisation & Economic Policy

  2. Introduction • We are in a critical time in history • Growth vs. Environment • Not a case of one or the other . . . We must have both • Far from being agent of disaster . . . International trade holds the key

  3. Trade & Economic Growth • Most economists argue . . . trade is ‘good’ and . . . free trade is better. • Both trading parties benefit • Consumption higher than without trade

  4. Trade & Economic Growth • Environmentalists retort . . . trade is bad for the environment and free trade worse. • Encourages greater pollution • Resource exploitation • Destruction of wildlife & habitats

  5. Trade & Economic Growth • Debate is one of the contentious yet vital of our time • Polarisation of views • Resolution needs understanding of the problems and opportunities

  6. After all, common sense . . . • If we ignore the environment we will irreversible damage (destroy) planet • Without economic growth, the world’s population resigned to poverty • Growth is not inimical to environment • Doomsday scenarios possible but not necessarily inevitable

  7. Economists can play a role • Understanding trade-offs • opportunity costs • Markets • Demand & Supply of pollution • Prices • Property rights • Externality - environment

  8. Why does trade boost growth? • ‘Comparative advantage’ • Engine of trade • Logic underlying all exchange • Individuals . . firms . . Countries • David Ricardo (1817) • England (wool) Portugal (wine)

  9. Where did all the Neanderthals go? Neanderthal • Horan et al. (2005) • Existed for 250,000 years • Became extinct 35,000 BC • Wars/disease not responsible • Perpetrator none other than . . .

  10. Where did all the Neanderthals go? Neanderthal Modern Man

  11. Where did all the Neanderthals go? Modern Man • Homo Sapiens had a special weapon . . . social interaction • First to exploit the competitive edge from specialisation and trade • Homo Sapiens were weaker but by specialisation and trade their calorific intake & fertility was higher • Survival of smartest

  12. But what of today’s humans? • Will the same forces lead to: • Resource exploitation • Environmental degradation • Eventual ecological catastrophe • Doomsday scenario seems inevitable (?)

  13. The Doomsday Scenario End of the World Pollution Per capita Economic growth causes environmental degradation Economic Activity per capita

  14. Doomsday hypothesis too simplistic? • In the past, environment ignored • Treated as if virtually infinite supply • Poorly defined ‘property rights’ (ownership) • Environment is a classic ‘externality’ • Used as if it’s price were zero • Over-use/degradation of environment

  15. Recent research . . . • Shows what happens when we ‘internalise the externality’ • Copeland and Taylor (2003) Economic growth affects the environment through causal mechanisms : • Scale Effects • Composition Effects • Technique Effects

  16. In model, pollution depends upon . . • Scale of the economy • Economic activity increases pollution ceteris paribus • Structural composition of the economy • Composition of clean or dirty industries • As share of dirty industries falls so does pollution ceteris paribus • Techniques used in production • Clean and dirty techniques of production exist • Clean techniques reduce pollution ceteris paribus

  17. An Alternative Scenario . . . End of the World Pollution Per capita Services Industrialisation Demand for environmental quality Poverty alleviation Tougher standards Green technologies Economic Activity per capita

  18. “The Environmental Kuznets Curve” Pollution Per capita Services Industrialisation Demand for environmental quality Poverty alleviation Tougher standards Green technologies Economic Activity per capita

  19. Environmental Kuznets Curve • EKC Hypothesis: “as per capita incomes rise , pollution will initially rise, reach a turning point and then fall” • ‘n’ shaped (‘Kuznets’) relationship So-called after the famous economist who found same ‘n’ shaped relationship between income and income inequality

  20. Empirical Evidence of EKC? • Grossman and Krueger (1995) • Urban air quality (smoke;CO;SO2) • River contamination (heavy metals) • Turning point varies by pollutant • Air quality ~$11,000/captia • Water quality ~$15,000/capita

  21. The EKC for US Air Quality Turning point $9,000

  22. And for Global Warming? • Stern Review (2006) stark warning • CO2 turning point ~$50,000/capita • Turning point has not been reached • Emissions are still worsening • CO2 growth continue 2050 despite catastrophic consequence

  23. An Invisible Threat • Current trends: 2-3 oc rise by 2050 • 200 m permanently displaced • Rising sea levels • Aridity • Threat of resource wars (water) • <40% species extinction • Malnutrition, heat stress, disease

  24. Stern Review (2006) • Understanding the problems offers opportunities for resolution • International co-ordination essential • Economic carrots (subsidies) & sticks (taxes) • Monumental but not impossible task • Sustainable 80% of 2000 emissions

  25. Sleep walking in to Catastrophe • Why aren’t we abating CO2 more? • Unlike other pollutants, CO2 • Only recognised as pollutant 1980s • Long lag between cause & effect • ‘Non-point pollutant’ • Classic ‘Free-rider’ problem

  26. Four Important messages • Growth need not be inimical to environmental degradation • Global warming - a new kind of threat • Trade & its governance offer mechanism for sustainable growth • World Trade Organisation • Economist have a role to play . . . and can make a difference

  27. Further reading Horan, R., E. Bulte and J. Shrogen (2005) ‘How Trade Saved Humanity from Biological Exclusion: An Economic Theory of Neanderthal Extinction’ Journal of Economic Behaviour and Organisation, 58:1-29. Copeland, B.R. and S.M. Taylor (2003) Trade, Growth and the Environment: Theory and Evidence. Princeton, NJ, Princeton University Press. Grossman, G. and A. Krueger (1995) ‘Economic Growth and the Environment’, Quarterly Journal of Economics, 110: 353-377.

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