EGS and Climate Change: A Reality Check Veena Jha "This presentation builds on a forthcoming paper prepared for ICTSD. Citation: Jha,V.(forthcoming, 2008). Environmental Priorities and Trade Policy for Environmental Goods: A Reality Check, ICTSD Environmental Goods and Services Series, Issue Paper No.7, International Centre for Trade and Sustainable Development, Geneva, Switzerland."

Structure of the presentation Where are the environmental hotspots related to climate change? Linking trade flows in the list of 153 EGs with Environmental problems related to Climate Change and its associated technologies Trends in trade of EGS related to Climate Change Factors behind imports of these products by developing countries Policy implications

What results in Green house gas emissions Causes of green house gas emissions in developing countries related to overpopulation, urbanization, degradation of natural resources, desertification, poor sanitation, and to a lesser extent industrial development. Making certain environmental technologies and relevant services available in the market is not sufficient to solve these environmental problems as they would not address the root causes.

Where are the Environmental Hotspots The developed countries have higher per capita carbon emissions than developing countries. If carbon emissions from agriculture are included then their emissions would increase substantially. However, reducing carbon emissions is not merely a matter of technology or products but patterns of consumption too, especially food.

Where are the Environmental Hotspots Asia – Pacific has increased its energy use by 190 % over the period compared to a global average of 130%. According to UNFCC-CDIAC sources (2005), this region has increased its share of global CO2 emissions from 32% in 1992 to 36% in North East Asia contributes to 63% of the region’s emissions. On the other hand, Central Asia has recorded a a 24% decrease.

Where are the Environmental Hotspots Asia Pacific also most vulnerable to climate change. The small island States of the South Pacific are extremely vulnerable to sea- level rise and global climate change. Countries such as Thailand, India, Myanmar and China are exposed to coastal flooding and erosion due to sea-level rise and meteorological changes. Bangladesh would be wiped out with a rise in sea level of one meter.

Are the major emitters or the major vulnerable countries trading in relevant EGS? The top ten importers from developing countries of renewable energy products include China, Hong Kong, Korea, Malaysia, India, and Pakistan over the last three years for which data is available. Among the top ten developing and developed country importers, China and Korea figure prominently.

Trade in EGS products in general Top ten importers of these EGs include 5 developing countries accounting for roughly 35% of the total imports of this group. This is higher than the forecasted share for 2010 for EGS. Top ten exporters of EGs account for roughly 28% of the total exports of this group. Nearly the same developing countries dominate the top ten exporters and the top ten importers. China along with Hong Kong accounts for over half of the developing countries exports and imports.

Are the major emitters or the major vulnerable countries trading in relevant EGS? However the top ten importers from developing countries are also the top ten exporters of relevant EGs. This implies that these countries while major importers are also trying to develop their own fledgling climate friendly industry and would in some cases need infant industry protection. To examine whether this is the case, it is important to look at the tariff profiles of the top traders.

Tariffs of top ten Developing country importers of EGs

An analysis of tariff profiles Applied tariffs of most high level importers fluctuates between 0 and 12%. While these are not very high, on specific tariff lines they can be as high as 40%. Tariff water is high for some countries. Liberalisation through cutting tariffs would yield real market access benefits to trading partners. However, these benefits would only accrue if imports of developing countries sensitive to tariff cuts.

Linking trade flows with Climate Change Essentially climate associated technologies and products scattered along the 9 categories of EGS currently in the list of 153 products. If we use the World Bank identification of climate friendly technologies and products as the starting point, around 43 products identified as being associated with climate change. About 30% of these products do not show any sensitivity to tariff changes. A number of these products are also dual use, so difficult to identify how many would be put to environmental end use.

Linking trade flows with Climate Change An important shortcoming of the world bank as well as the WTO list is that both do not identify technologies or products associated with agriculture which could reduce carbon emissions. According to some studies if the EU reduces its meat consumption by just 5%, the reduction in carbon emissions would be equivalent to removing 21 million cars off the road. Thus Carbon emissions associated with intensive agriculture, particularly intensive meat production needs to be calculated.

Factors affecting imports of EGs relevant to climate change Assumptions of the model: The higher the GDP higher the imports. The lower the tariffs the higher the imports. The higher the FDI the higher the imports. The higher the level of industrialisation the higher the imports. The higher the number of technical assistance projects between governments of developed countries and those of developing countries, the higher is trade The higher the environmental performance index of a country, the higher is the trade in EGs.

Results of the regression Tariffs not significant in 30% of the World Bank list of products. Tariffs important in explaining trade of developing countries in heat and energy management products. Trade in renewable energy products are also sensitive to reduction in tariffs at the 5% level.

Results of the regression Elasticity with respect to tariffs is low, showing that a one percent reduction in tariff leads to 0.15% increase in trade. GDP a far more important determinant of trade. Trade in air pollution equipment, environmentally preferrable products, and products aimed at addressing natural risk increases as GDP increases.

Results of the regression Trade in management of solid and hazardous wastes, clean up and remediation, renewable energy products, and natural resource based products show a significant negative correlation with GDP. This is probably because as GDP rises, developing countries develop their own capacities in these products.

Results of the regression The higher the EPI ranking of the developing country the higher is the trade in climate friendly products. (about 26 of the 43 products identified by World Bank) High EPI ranking implies a better framework of implementation of environmental regulations, as well as better chances of attainment of environmental targets. This high correlation could therefore be interpreted to imply that probably trade in goods in these categories is being put to some environmental end use.

Results of the regression As FDI increases trade in seven categories of EGS from Job 54 increases. The most direct, significant and positive correlation is to be found with respect to technical assistance projects. This correlation is found to be robust and positive for eight of the ten categories of EGs in job 54 and cover nearly 30 products from the World Bank list. Elasticities in most cases is also significantly over 1, indicating the crucial role of technical assistance projects in explaining trade in EGS.

Dynamic Comparative advantage Dynamic Comparative advantage in nearly four categories moving clearly in favour of developing countries. This is not the case for Climate friendly technologies as identified by the World Bank group of products. However, even for other EGs which may be relevant to Climate Change, only a handful of developing countries have dynamic comparative advantage.

ES of export interest to DCs Ecosystem services including Carbon Sequestration and Forestry Management, Watershed management, and Biodiversity conservation. These services can be bundled. Developing a market for these services is complex as it may involve detailed international negotiations, scientific reviews and national legislative action

ES of export interest to DCs Implementation will require investment in market infrastructure (e.g. payment mechanisms, monitoring and enforcement agencies, ancillary service providers), as well as a costly process of familiarisation amongst market participants. Countries which lack implementation capacity may find it difficult to make such services tradeable except by including their value in land prices, or when granting prospecting rights for biodiversity for example.

Policy Implications and proposals While the Doha Mandate puts environment at the centre of the EGS negotiations, it is difficult to see how products classified in the HS code can be directly related to Climate Change. Thus the next logical step is to examine the trade implications for developing countries of the lists proposed as EGs to the extent that they are relevant to climate change.

Policy Implications and proposals Examining the list of 43 EGs, the findings of this paper show that roughly 26 products would be sensitive to tariffs. The list can be further examined in light of the dynamic comparative advantage of developing countries. In this case, the dynamic comparative advantage of climate friendly technologies and products would not shift in favour of developing countries in the near future. (2015)

Policy Implications and proposals However, other factors such as FDI, GDP, Environmental performance and technical assistance projects are much more important determinants of trade flows than tariffs. The elasticity with respect to TA of trade in EGs is particularly high. This shows that international and bilateral donors would have a large role to play in directing the trade of EGs, rather than tariff negotiations. This also points to the role of UNEP in developing such TA projects.

Policy Implications and proposals As far as ESs are concerned future work could usefully focus on the scope of making eco system services tradeable. A number of projects in this area particularly linked to multilateral funding in the context of Kyoto Protocol could help evolve an understanding of how these markets could develop.

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