Trade and the Environment Debate—WTO, Kyoto, and Beyond

1
Trade and the Environment DebateWTO, Kyoto, and
Beyond

• Kristalina Georgieva
• Director
• World Bank Russia Office

2
Introduction
A decade of debates (often contentious) Free
traders feared that talk about environmental
protection will be used as an excuse by some
economic sectors to gain protection for
themselves against competition from
abroad. Environmentalists feared that talk about
free trade will be used as an excuse to give
inadequate weight to environmental goals and
excessive weight to maximization of GDP.
3
Introduction

• New developments and new challenges
• Economic integration (globalization) is ongoing
  and unstoppable EU, NAFTA, MERCOSUR, FTAA,
  AFTA.
• The environmental policy implications are at the
  forefront of public debate (WTO Doha round).
• Kyoto Protocol (climate change) ratified.
• Does trade liberalization limit the choice of
  environmental Policies?

4
Some of the common concerns

• Reducing barriers to trade will reinforce the
  tendency
• for countries to export commodities that make
  use of
• resource-intensive production factors
  (pollution havens).
• Trade liberalization may directly affect
  environmental
• standards (race to the bottom).
• Environmental tariffs may be employed against
  trading
• partners deemed to have inadequate
  environmental
• standards.

5
But, evidence seems to suggest otherwise

• Countries that are more open to trade adopt
  cleaner technologies more quickly.
• Increased real income is often associated with
  increased demand for environmental quality .
• Greater openness to trade also encourages cleaner
  manufacturing (because protection always tends to
  shelter pollution-intensive
• heavy industries).

6
Scale, composition, and technique effects
Scale effect It measures the increase in
pollution that would be generated if the economy
were simply scaled up, holding constant the mix
of goods produced and production
techniques. Composition effect Changes in the
relative size of the economic sectors following
a reduction in trade barriers. Technique effect
Refers to changes in production methods that
follow trade liberalization. Example Scale of
Economic Activity by 1 raises pollution
concentrations by 0.25-0.5 , but accompanying
increase in incomes per capita drives
concentration down by 1.25-1.5.
7
Trade, Growth and the Environment (Environmental
Kuznets Curve)
Environmentalist view (all growth is bad!)
Grow-now clean-up later (macroeconomists view?)
Environmental Kuznets Curve literature
8
Environmental Kuznets Curvepolicy implications

• Quality of policies and institutions can
  significantly reduce
• environmental degradation at low income levels
  and speed up
• improvements at high income levels.
• Those who see economic growth as a way out of
  environmental
• problems are only partially right, as they
  focus only on abatement
• (regulatory) effects of higher income ignoring
  the corresponding
• scale and industrialization effects.

9
WTO and the Environment

• Preamble Environmental goals recognized
• No country should be prevented from taking
  measures necessary for the protection of human,
  animal or plant life or health, of the
  environment, at the levels it considers
  appropriate, subject to the requirement that they
  are not applied in a manner which would
  constitute a means of arbitrary or unjustifiable
  discrimination between countries where the same
  conditions prevail or a disguised restriction on
  international trade.
• Article XX Protect Life and Health
• Sanitary/Phytosanitary Provisions
• Technical Barriers To Trade

10
WTO-Environment Disputes (I)

• Tuna - Dolphin case
• US imposed embargo on Mexican tuna in support of
  its Marine Mammal Protection Act (MMPA).
• 1991 GATT ruling MMPA in contravention of trade
  rules restriction based on process methods as
  opposed to product attributes.
• GATT rules did not allow one country to take
  trade action for the purpose of attempting to
  enforce its own domestic laws in another country
  even to protect animal health or exhaustible
  natural resources.
• Ruling never imposed, due to NAFTA negotiations.
• 1998- International Dolphin Conservation Program
  was adopted.

11
WTO-Environment Disputes (II)

• Shrimp - Turtle case
• 1998- US closed its market to shrimp caught
  without turtle exclusion devices to support the
  US Endangered Species Act .
• India, Malaysia, Pakistan and Thailand challenged
  under WTO.
• WTO ruling and subsequent appeal concluded that
  US is in violation of WTO rules (not under
  Article XX for promoting environmental
  objectives, but because it discriminated between
  WTO members).
• In essence, legal reasoning acknowledged that in
  some circumstances, countries can use trade
  measures to protect global resources.
• US still maintains statute, but restricts by
  shipment, not
• by country.

12
WTO and the Environment (Doha Round)

• the relationship between existing WTO rules and
  specific trade obligations set out in
  multinational environmental agreements (MEAs).
• the reduction or, as appropriate, elimination of
  tariff and non-tariff barriers to environmental
  goods and services.
• clarification and improvement of WTO disciplines
  on fisheries subsidies, taking into account the
  importance of this sector to developing
  countries.
• clarification of environmental labeling
  (including ecolabeling) policies.

13
Kyoto Protocol

• The Kyoto Protocol establishes mandatory emission
  reduction targets below 1990 levels but only for
  industrialized (Annex I) countries.
• 5.2 reduction of emission levels below 1990
  levels by 2008-2012 for all industrialized
  countries.
• specific targets for various countries.
• 6 greenhouse Kyoto gases are considered CO2,
  CH4, N2 O, HFC(hexafluorocarbon),
  PFC(perfluocarbon), SF6(sulphur hexaflouride).

14
Kyoto Protocol

• Emission reductions can be achieved in a variety
  of ways, country specific or through the use of
  the so-called Kyoto flexible mechanisms which
  are
• Clean Development Mechanism -- Countries earn
  credits by investing in emission reduction
  projects in developing countries.
• Joint Implementation -- Countries earn credits by
  investing in emission reduction projects in
  industrialized countries.
• International Emissions Trading -- Countries buy
  and sell emission credits among themselves.

15
Russia and Kyoto

• The target for Russia is that its combined
  emissions of Kyoto gases should not exceed five
  times their 1990 levels during 2008-1012.
• As of 1999, Russias combined emissions were
  38.4 below 1990 levels CO2 emissions 32.7
  below 1990 levels.
• To that extent the constraint is
  non-bindingeven under optimistic estimates of
  GDP growth and conservative estimates of
  declining carbon intensity (Lecocq and Shalizi).
• Russia stands also to benefit from the sale of
  AAUs and JI.

16
Kyoto and the Carbon Market

• Ratifying OECD cumulative target reductions will
  be 5 to 5.5 billion tons of carbon dioxide below
  1990 levels by 2012 based on their Kyoto
  obligations.
• If half emissions reductions are achieved
  domestically, the compliance gap to be met
  through trade with developing countries and
  economies in transition (EITs) through 2012 would
  be 2.5 3 billion tons 10 times current carbon
  purchase contracts.
• Carbon is currently selling for about 5 ton of
  carbon dioxide, but likely to increase to about
  10 ton.
• At a selling price of 5-10 per ton carbon
  payments to developing countries and EITs between
  now and 2012, trade value will be between 12.5
  billion and 25 billion.

17
Structure of the Carbon Market
Project-Based Transactions
Allowance Markets
UK Emission Trading Scheme
Kyoto Pre-Compliance
Kyoto Compliance
EU Emission Trading Scheme
Chicago Climate Exchange
New South Wales Certificates
Retail
Not for Kyoto Compliance
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Main Driver ComplianceVolume traded in
project-based transactions, million tCO2e
80
Kyoto Pre-Compliance
60
Not Kyoto Pre-Compliance
40
20
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
(Jan-May)
19
Total Value of Carbon Projects (in million
U.S., nominal)
300
Known
Estimated
200
100
0
1998
1999
2000
2001
2002
2003
2004
(Jan-May)
20
Who is Buying? In percent of volume purchased
since Jan.03
Australia New
Canada
USA
Zealand
3
3
3
Other EU
CFB
3
24
Netherlands
23
Japan
41
21
Who is Selling? In percent of volume sold from
2003 to May 2004
OECD
10
Transition
Economies
Latin America
8
27
Africa
4
Asia
51
22
Outlook

• Major Development EU ETS. Single largest market
  worldwide, potentially major driver.
• Large scale pledges (by EU governments) to become
  projects in 04, 05.
• More CDM Methodologies Approved to reduce
  transaction costs.
• Large sellers continue to dominate the market
  (China, India, Brazil, Indonesia).
• Russian ratification. Russian energy projects
  will become a key focus.
• Likely upper limit of contribution of CO2e and
  CH4 assets to OECD compliance gap until 2012
  300 Mt CO2e gap to be filled up by AAUs, HFC23,
  N20 assets.

23
World Bank Carbon Finance Products
Total funds under current management 420 million

• Prototype Carbon Fund. 180 million.
  Multi-shareholder.
• Bio Carbon Fund. 15 million - target 40
  million Multi-shareholder.
• Community Development Carbon Fund. 45 million -
  target of 100 million Multi-shareholder.
• Dutch Carbon Fund. 125 million, prospect of
  180 million Dutch Government.
• Italian Carbon Fund. 15 million, with further
  80 million/year under discussion Italian
  Multi-shareholder.
• Netherlands JI Facility. 40 million. Economies
  in Transition only.

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Compatibility (of carbon trading) with
international trading regime

• Another win-win situation that benefits both the
  environment and economy.
• WTO rules do not apply (so far) emission permits
  are neither goods nor services. No conflict in
  this regard.
• Trade controls or sanctions not going to be
  used to enforce compliance (within Kyoto) or to
  punish non-members.

25
Kyoto and WTO (mutual respect)

• The Kyoto Protocol text
• Parties should strive to implement policies and
  measures...in such a way as to minimize adverse
  effects..on international trade...
• FCCC features similar language.
• WTO regime is equally solicitous of environment
• Article XX allows exceptions for health
  conservation.
• Preamble to 1995 Marakesh Agreement establishing
  WTO seeks to protect and preserve the
  environment
• 2001 Doha Communiqué starting new round of
  negotiations the aims of ... open and
  non-discriminatory trading system, and acting for
  the protection of the environment ... must be
  mutually supportive.

26
Kyoto and WTO(potential synergies)

• Kyoto Protocol text
• progressive reduction or phasing out of market
  imperfections and subsidies in all greenhouse gas
  emitting sectors.. is consistent with
  multilateral trading arrangements
• WTO (Doha round) text
• ..a multilateral liberalization of goods and
  services used in environmental efforts (such as
  air quality improvement).. consistent with Kyoto
  Protocol

27
Kyoto and WTO (potential conflicts)

• Border tax adjustments
• A countrys border tax adjustments to offset
  effects of specific domestic GHG taxes on
  competitiveness of its industry vis-à-vis
  foreigners.
• Legitimate when applied against
• coal itself, or carbon/energy content of
  manufactures.
• Not when applied,
• solely as punishment for free riding, against
  unrelated products of a non-member.

28
Kyoto and WTO (potential conflicts)

• WTO Agreement on Subsidies and Countervailing
  Measures.
• Payments under environmental programs (e.g.
  agriculture) are exempt from restrictions.
• Possible conflicts when Kyoto Parties
• exempt particular favored industries from an
  energy tax, or
• give out domestic emission permits in a
  non-neutral way, or
• reward their companies with credits for CDM and
  JI projects.

29
Kyoto and WTO (potential conflicts)

• WTO Technical Barriers to Trade (TBT)
• TBT agreement clearly allows non-discriminatory
  labeling, e.g., according to energy efficiency.
• But, it is also possible for such standards to be
  constructed with the aim of favoring domestic
  industries.
• Emission permits are treated neither as goods nor
  as services No conflict on that so far.
• But, they will be subject to GATS in case they
  are deemed as services MFN principles will then
  be violated.

30
Kyoto and WTO(potential conflicts)

• Leakage
• Kyoto implementation may lead to leakage of all
  carbon-producing activities to non-member
  countries, thus offsetting the reduction in
  emission among members.
• Can trade measures be directed against CO2
  emissions in other countries, as embodied in
  electricity, or in goods produced with it?
• Theoretically there is a justification for using
  environmental tariffs, but
• Use of trade sanctions to enforce PPMs still an
  exception (shrimp-turtle) and not a norm in WTO.

31
Conclusions

• Globally
• Both Kyoto, and WTO have enormous potential to
  deliver economic, social, and environmental
  progress.
• More complete understanding of the linkages
  between global pollution and international
  markets is needed.
• Within countries
• There should be increased understanding of the
  issues and potential conflicts/problems in order
  to formulate the necessary legal and regulatory
  framework.
• The Ministries of Finance/Trade and Environment
  must consider ways and means to elaborate
  coordination of policies and measures taking
  national circumstances and potential effects into
  account.