Contributing to Environmental Objectives through RTAs: Trade in Organic Agricultural Products and Renewable Energy Technologies OECD Workshop on Regional Trade Agreements and the Environment Tokyo, June 19-20, 2007 Mark Elder, Ph.D. Senior Policy Researcher IGES

Mark ElderIGES | Workshop on RTAs & Environment 2 This presentation is based on work from one of our projects: RISPO-II (Research on Innovative and Strategic Policy Options) "Promotion of Sustainable Development in the Context of Regional Economic Integration: Strategies for Environmental Sustainability and Poverty Reduction" RISPO II aims to provide strategic policy options using the partnership framework of the United Nations Environmental Programme-Network for Institutions for Sustainable Development (UNEP-NISD).UNEP-NISD This study includes 3 case study areas, including renewable energy, organic agriculture, and waste/recycling; this presentation will focus on the first 2 areas. This presentation is not a comprehensive, systematic treatment, but focuses selectively given limited time. This presentation represents the views of myself and other researchers working on the project, and is not the official view of IGES.

Mark ElderIGES | Workshop on RTAs & Environment 3 Overall Message: 1. Trade liberalisations potential contribution to promoting renewable energy and organic agriculture may be limited. 2. Direct measures by national governments to promote renewable energy and organic agriculture have significantly more potential. Mandate increased use of renewable energy Reduce costs of organic relative to non-organic agriculture 3. However, priority liberalization of renewable energy and organic agriculture is still worth pursuing.

Mark ElderIGES | Workshop on RTAs & Environment 4 Agriculture Organic agriculture is widely seen as a good way to address negative environmental impacts from agricultural activity (especially land degradation & water pollution from synthetic fertilizers & pesticides, and inappropriate use of pesticides). – It is a market-based solution (not command & control) – It has the potential to benefit from trade liberalization and economic integration (more trade => economies of scale => reduced transaction costs) – Current organic market share is very small (1-2%), but if this could be increased by even a small amount, to 3-5%, the environmental and other benefits could be significant. – (Main focus may be fruits & vegetables, including processed as well as fresh, & perhaps rice)

Mark ElderIGES | Workshop on RTAs & Environment 5 Therefore, prioritization of liberalization of organic products is one way that RTAs could contribute to promoting organic agriculture (including classification as Environmentally Preferable Products (EPP)). – Farmers would have strong incentives to grow organic products for export

Mark ElderIGES | Workshop on RTAs & Environment 6 Difficulties in Liberalizing Trade in Organic Agricultural Products Difficult to agree on organic standards, labelling/certification systems It may be difficult for some developing countries to establish organic standards, labelling/certification systems Falsely labelled products could be a large problem if organic products are liberalized first

Mark ElderIGES | Workshop on RTAs & Environment 7 Maybe more realistic to focus more directly on organic promotion measures First priority should be on developing certification and labelling schemes (conformity assessment systems), before trade liberalization – Including domestic infrastructure for implementation Then, work towards harmonization of standards and conformity assessment systems, beginning with intermediate steps such as promotion of equivalence Other measures General organic marketing promotion, consumer awareness Subsidy switchingto activities related to organic agriculture – From non-organic to organic fertilizers & pesticides & integrated pesticide management Coordination with livestock industrywin-win scenario: use livestock waste as source of organic fertilizers Stricter enforcement against illegal pesticides Stricter standards for pesticide use; incentives for integrated pest management (IPM)

Mark ElderIGES | Workshop on RTAs & Environment 8 Still, prioritization of liberalization of organic agricultural products is probably worth pursuing Organic agriculture could be potentially beneficial for developing countries if trade is liberalized – Demand for organic products is increasing in high income countries – Organic products generally receive a price premium – Organic products can be labor intensive – Trade liberalization will increase the scale of the market, and reduce transaction costs Therefore, this could be an opportunity for developing countries to exploit Trade liberalization of organic products by developed countries could provide a strong incentive for developing countries to make strong efforts to develop or strengthen their own organic standards and conformity assessment systems

Mark ElderIGES | Workshop on RTAs & Environment 9 Political feasibility of prioritization of liberalization of trade in organic agriculture Certainly not easy, but may be easier than broader agricultural liberalization, since the quantities involved are much smaller (now) Uncertainty about whether developing countries will actually be able to meet strict organic standards and certification requirements could provide an incentive for developed countries to agree to organic agriculture trade concessions. – It may take developing countries a long time before they could meet the standards – So developed countries could offer it as a concession for something else – But it may be potentially valuable enough for some developing countries to trade something for it

Mark ElderIGES | Workshop on RTAs & Environment 10 Renewable Energy (RE) Renewable energy (in addition to energy conservation) is widely seen as a way to address negative environmental impacts from the energy sector (especially GHG emissions) – May be preferred by business compared to taxes or regulation – Has the potential to benefit from trade liberalization Short run: Lower tariffs = immediate, direct cost reduction Long run: More trade => economies of scale => reduced costs – Can also play a large role in rural electrification in developing countries to meet Millennium Development Goals Therefore, prioritization of liberalization of renewable energy & equipment is one way that RTAs could contribute to promoting renewable energy (including classification as Environmentally Preferable Products (EPP))

Mark ElderIGES | Workshop on RTAs & Environment 11 Potential for Trade Liberalization of Renewable Energy & Equipment RE Equipment: Many countries have significant tariffs on various renewable energy equipment & parts, for example solar power. – Lower tariffs could promote greater use of RE and promote FDI in RE parts in developing countries – RE equipment can be subjected to unintended protection due to lack of special classifications for RE equipment RE: Much RE is not tradable, because of difficulty of storage or lack of grid connection. Biofuels and biomass, though, can be traded – Many countries have tariffs or other trade barriers on biofuels and/or biofuel crops/raw materials – Lower protection would promote biofuel production & use – But some mechanism is necessary to ensure that sustainable production methods are used for biofuels; otherwise there is a significant danger of negative environmental effects, such as deforestation or agricultural pollution

Mark ElderIGES | Workshop on RTAs & Environment 12 The overall potential of trade liberalization to promote renewable energy is limited, as long as the cost of renewable energy is significantly higher than fossil fuel-based energy Therefore, domestic policies that mandate increased use of RE will have much more effect on its rate of adoption, regardless of the extent of trade liberalization of RE or RE equipment. – Example: requirement that a certain percent of electric power be generated using renewable energy In other words, through government policy, society would pay a price premium for RE in order to pay for the environmental and other benefits (such as energy security)

Mark ElderIGES | Workshop on RTAs & Environment 13 Trade in Renewable Energy & Equipment and Economic Competitiveness Many countries are reluctant to raise RE mandates, because they fear losing economic competitiveness if energy prices increase as a result. This may be a good reason for countries to jointly implement higher RE mandates, to minimize relative competitive effects on energy consuming industries. However, greater use of RE appears to be a long term trend, and countries who can develop RE & RE equipment faster may gain a long term advantage. Countries with higher RE mandates may enjoy competitive benefits sooner: – Increased RE standards will increase economies of scale, thereby enabling cost reductions and increasing market size – Domestic RE-related businesses will have earlier incentives compared to countries that delay higher mandates – Better chance to get CDM/JI projects, participate in emissions trading Countries that liberalize RE & RE equipment sooner (even unilaterally) will enjoy benefits sooner (lower cost RE, environmental benefits, energy security benefits, rural electrification)

Mark ElderIGES | Workshop on RTAs & Environment 14 Caution: Need to analyze renewable energy forms using Life Cycle Analysis to carefully assess potential negative environmental effects Examples: – Large windmills need large amounts of concrete – Solar systems may result in significant amounts of e-waste at end-of-life – Biofuel production may result in deforestation, biodiversity loss, water shortages, agricultural pollution

Mark ElderIGES | Workshop on RTAs & Environment 15 Caution: Need to analyze renewable energy forms using Life Cycle Analysis to carefully assess potential negative environmental effects of renewable energy forms Examples: – Large windmills need large amounts of concrete – Solar systems may result in significant amounts of e-waste at end-of-life – Biofuel production may result in deforestation, biodiversity loss, water shortages, agricultural pollution