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 countrys 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 CO 2 embodied in trade Empirical literature is quite recent

5 Econometric evidence Most of the econometric studies suggest that more open trade would likely increase CO 2 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 CO 2 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 volumeBy value Note: Data excludes intra-EU trade.

11 Differences in emission intensity Share of CO 2 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 CO 2 /ton-kilometer, marine transport is the most carbon efficient –measures the amount of CO 2 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, CO 2 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?