Climate Change and Trade Issues

TRADE AND CLIMATE CHANGE

*Dr. Navdeep Kaur

There has been an enormous expansion in world trade which has been made possible by technological advancements which have dramatically reduced the cost of transportation and communications, and by the adoption of more open trade and investment policies. The number of countries participating in international trade has increased :developing countries, for instance, now account for 34 per cent of merchandise trade – about double their share in early 1960s. Trade can increase GDP in a number of ways – for example by improving resource allocation through specialization according to comparative advantage or by allowing economies of scale in production to be exploited. Open economies also grow faster because trade fosters investment, innovation and institutional reform. However, development goes beyond higher GDP per capita. Other important indicators are Human Development Indices (HDIs) i.e life expectancy, infant mortality, nutrition, literacy, employment etc, Some of these factors are summarized in HDIs are positively correlated with GDP growth. But no clear picture emerges of the impact of growth on other dimension of development such as income inequality and environmental performance. Various environmental indicators ranging from greenhouse emissions to deforestation can be summarized by an Environmental Performance Index (EPI) which in turn can be compared to income growth .In the last decade, there has been a positive relationship between growth and environmental quality. This suggests that countries with rising income were able to pay more to preserve the environment. To the extent that trade and other policies can promote economic growth, they may indirectly help to improve natural environment. However, empirical evidence has to date produced mixed results on this question (World Trade Report, 2014). EPI is based on 22 indicators of environmental health and ecosystem viability including pollution, access to clean drinking water, sulphur dioxide emissions, carbon dioxide emissions, agriculture subsidies and critical habitat protection. Higher values of the index represent better environmental quality. Among the fast growing developing economies, some have improved their EPI performance while others have seen deterioration. There is a positive relationship between the EPI and per capita income. This suggests that countries with higher incomes are better able to pay for preserving their environment (World Trade Report, 2014).

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Environmental economies refer to the “Environmental Kuznets Curve” (EKC) to identify correlation between per capita income and environmental degradation. The hypothesis is that environmental quality degrades at the early stages of development while beyond a certain income level, environmental quality improves (Grossman and Krueger, 1993). Pollution increases as an economy industrialize and moves from agriculture to manufacturing (a pollution intensive sector). Then, as the country GDP per capita increases, environmental quality improves despite the increase in economic activity (scale effect). This is for several reasons- First, as an economy develops the composition of production changes. Production tends to move away from natural resource intensive goods to services. Secondly, changes in consumption and growing preference for environmentally friendly emerge at higher levels of income. Thirdly, as the country’s level of development increases, the quality of institution improves, as does a country’s capacity to enforce regulatory measures to address environmental problems. Finally a higher GDP per capita also enhances the possibility to exploit economies of scale associated with pollution abatement technologies (Technique Effect).

Trade is an important factor affecting the relationship between growth and environment. First, opening up the trade increases the availability and lower the cost of environmental friendly technologies, secondly the greater demand by the public especially in more advanced economies – for cleaner environment also provides an incentive to adopt cleaner technologies. For example it has been argued that multinational enterprises, due to concerns about their reputation and economies of scale, may require more stringent environmental measures from their subsidiaries than that required by the host country (Abornoz et. al, 2009). Thirdly assuming no changes in scale of an economic activity and production method, trade opening may reduce domestic pollution in the country that specialize in clean sectors. Specialization in a pollution intensive sector, however worsens environmental quality if the country does not improve its environmentally friendly technologies.

In the light of above observations, the objective of this paper is to study the impact of climate change on trade and various issues related to WTO and environment. This paper is divided into three sections. In Section I, the impact of climate change on trade and mitigation and adaptation measures are discussed. In Section II , WTO and environment measures are discussed, and in Section III, concluding remarks are made.

Section-I

The impact of climate change is specific to location and to the level of development, but most sectors of global economy are expected to be affected and these impact will have implications for trade .The three trade related areas which are considered vulnerable to climate change are(WTO-UNEP,2009):

1. Agriculture: It is considered to be the key sector in international trade, which is highly vulnerable to climate change. In low-latitude regions, where most developing countries are located, reductions of about 5 to 10 per cent in the yields of major cereal crops are projected even in the case of small temperature increases of around 1degree centigrade .Although it is expected that local temperature increases of between 1-3 degree centigrade would have beneficial impacts on agriculture outputs in mid –latitude regions, warming beyond this range will most likely result in increasingly negative impacts for these regions also. According to some studies, crop yields in some African countries could fall by up to 50 per cent by 2020,with net revenues from crops falling by as much as 90 per cent by 2100. Depending over the location, agriculture will also be prone to water scarcity due to loss of glacial meltwater and reduced rainfall or droughts.

2. Tourism: It is another industry that may be particularly vulnerable to climate change, for example, through changes in snow cover, coastal degradation and extreme weather. Both fisheries and forestry sectors also risk being adversely impacted by climate change. Likewise, there are expected to be major impact on coastal ecosystems, including of the disappearance of coral and the loss of marine biodiversity.

3. Trade infrastructure and shipping routes: The IPCC has identified port facilities, as well as buildings, roads, railways, airports and bridges, as being dangerously at risk of damage from rising sea levels and the increased occurrence of instances of extreme weather, such as flooding and hurricanes. Moreover, it is projected that changes in sea ice, particularly in the Arctic, will lead to the availability of new shipping routes.

Climate Change Mitigation and Adaptation:

There is a need for increased efforts focused on climate change mitigation and adaptation. Mitigation refers to policies and options aimed at reducing greenhouse gas emissions or at enhancing the “sinks”(such as oceans or forests) which absorb carbon or carbon dioxide from the atmosphere. Adaptation, on the hand, refers to responses to diminish the negative impacts of climate change or to exploit its potential benefits. Mitigation includes using energy more efficiently in transport, buildings and industry, switching to zero or low carbon energy technologies ,reducing deforestation and improving land and farming management practices ,improving waste management.

The potential for adaptation depends on the “adaptive capacity” or the ability of people or ecological systems to respond successfully to climate variability and change. Adaptation measures are undertaken as part of larger sectoral and national initiatives related to, for example, infrastructure construction (dykes, sea walls, harbours, railways, etc.), building design and structure, and and research into development and deployment of drought-resistant crops.The cost of these technologies and of other activities may be considerable but the benefits of adaptation will outweigh the costs.

Technological innovation ,as well as the transfer and widespread implementation of technologies, will be central to global efforts to address climate change mitigation and adaptation. International transfer of technologies may be broadly be understood as involving two aspects. One concerns the transfer of technologies which are physically embodied in tangible assets or capital goods, such as industrial plant and equipment, machinery, components, and devices. Another aspect of technology transfer relates to the intangible knowledge and information associated with the technology or technological system in question. Since it is predominately private companies that retain ownership of various technologies, it is relevant to identify ways within the private sector, such as foreign direct investment, licence or royalty agreements and different forms of cooperation arrangements, which can facilitate technology transfer. Moreover, bilateral and multilateral technical assistance programmes can play a key role in technology transfer.

A continuing debate within political discussions and among academia has been whether the protection of intellectual property rights – such as copyrights, patents or trade secrets- impedes or facilitates the transfer of technologies to developing countries .One key rationale for protection of intellectual property rights, and in particular patents, is to encourage innovation: patent protection ensures that innovators can reap the benefits and recoup the costs of their R&D investments. On the other hand, it has been argued that ,in some cases, stronger protection of intellectual property rights might act as an impediment to the acquisition of new technologies and innovations in developing countries. While strong patent laws provide the legal security for technology-related transactions to occur, firms in developing countries may not have the necessary financial means to purchase expensive patented technologies. The importance of intellectual property rights needs to be set in a relevant context. In fact, many of the technologies which are relevant to addressing climate change, such as better energy management or building insulation, may not be protected by patents or other intellectual property rights.

Section-II

WTO Trade and Environment Negotiations

In the Marraakesh Agreement establishing the WTO, members highlighted a clear link between sustainable development and trade opening – in order to ensure that market opening goes hand in hand with environmental and social objectives. In the Doha Round of negotiations, member nations went further to pursue a sustainable development path and launched first multilateral trade and environment negotiations. One issue addressed in Doha round was the relationship between the WTO and multilateral environment agreements (MEA), such as the UNFCCC. In this area of negotiations, WTO members have focused on opportunities for further strengthening cooperation between WTO and MEA secretariats, as well as promoting coherence and mutual supportiveness between the international trade and environment regimes.(WTO-UNEP,2009)

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In Doha round, the member nations focused on environmental goods and services for liberalization. The negotiations called for “ the reduction, or as appropriate, elimination of tariff and non- barriers to environmental goods and services”. The objective was to improve access to more efficient, diverse and less expensive environmental goods on global market, including goods and services that contribute to climate change mitigation and adaptation. Climate- friendly technologies can be employed to mitigate and adapt to climate change in diverse sectors. Many of these technologies involve products discussed in the Doha negotiations, such as wind and hydropower turbines, solar water heaters, photovoltaic cells, tanks for production of biogas, and landfill liners for methane collection. In this context, the WTO environmental goods and services negotiations have a role to play in improving access to climate friendly goods and technologies.

There are two key rationales for reducing tariff and other trade distorting measures in climate-friendly goods and technologies. First, reducing or eliminating import tariffs and non-tariffs barriers in these types of products should reduce their price and therefore facilitate their deployment. The access to lower cost and more efficient technologies may be particularly important for industries that must comply with climate change mitigation policies. Second, liberalization of trade in climate -friendly goods could provide incentives and domestic expertise for producers to expand the production and export of these goods. Trade in climate-friendly goods has seen a considerable increase in the past few years, including exports from a number of developing countries.

Section-III

CONCLUSION

In this paper attempt was made to highlight various issues relating to climate change and trade. Climate change has affected many trade related areas i.e. agriculture, tourism, trade infrastructure and shipping routes. To counter the adverse affects of climate change efforts are being made by the nations. Several Climate change mitigation and Adaptation measures are being taken. WTO has also focused on sustainable development and trade. It has called for the reduction and elimination of tariff and non tariff barriers to environmental goods and services and also to improve access to more efficient, diverse and less expensive environmental goods on global market, including goods and services that contribute to climate change mitigation and adaptation.

References

Grossman,G.M. and Kruegar,A.B (1993). Environmental impacts of a North American free trade agreement. in Garber,P.M(ed),The US-Mexico free trade agreement, Cambridge, MA:MIT press.

World Bank.(2007).International trade and climate change – Economic, Legal, and Instituitional perspectives

World Trade Organisation.(2009).Trade and climate change-WTO-UNEP Report.

Albornoz, F.,Cole, M.A, Elliot, R.J.R and Ercolani, M.G.(2009). In search of environmental spillovers. The World Economy.32.

UNCTAD.(2013). Trade and environment review.

WTO (2014) World Trade Report

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