Faculty Research Working Papers Series

Faculty Research Working Papers Series Kyoto and Geneva: Linkage of the Climate Change Regime and the Trade Regime Jeffrey Frankel October 2004 RWP04-042 The views expressed in the KSG Faculty Research Working Paper Series are those of the author(s) and do not necessarily reflect those of the John F. Kennedy School of Government or Harvard University. Copyright belongs to the author(s). Papers may be downloaded for personal use only. June 20 + Oct. 1, 2004 “Kyoto and Geneva: Linkage of the Climate Change Regime and the Trade Regime” Jeffrey Frankel, Harpel Professor, Harvard University Broadening Climate Discussion: The Linkage of Climate Change to Other Policy Areas conference organized by FEEM/MIT Venice, Italy, June 2004 The author would like to thank Joe Aldy, Thomas Brewer, and Steve Charnovitz for exceptionally useful comments on an earlier draft, Maral Shamloo for research assistance, and the Savitz Fund for research support. Abstract The multilateral regime to address the problem of global climate change is manifest in the Kyoto Protocol, negotiated in that city in 1997, and likely soon to enter into force. The multilateral regime to address international trade is manifest in the World Trade Organization, established in Geneva in 1995. Are these two regimes likely to come into conflict? This short paper considers some of the potential conflicts, and also some of the potential complementarities. The overall picture is more optimistic than some pro- environment critics of the WTO fear. “Kyoto and Geneva: Linkage of the Climate Change Regime and the Trade Regime” Jeffrey Frankel Global Climate Change (GCC) policy is a large and complicated subject. It cuts across many academic disciplines, agencies, interest groups, and so on. If you live in the world of climate and Kyoto, and you run up against yet another area, such as the world of trade and the WTO, you may be tempted to react along lines like the following: “Things are complicated enough already. Our efforts to address GCC are legitimate and important. If trade policy and the WTO are sincere and legitimate, they should not create obstacles or constraints to what we are doing. So we should be able to ignore them and they should be able to work around us.” Unfortunately, one can’t entirely ignore the interconnections between climate policy and trade policy. They are sufficiently deep and numerous that each needs to be aware of the other, and some amount of coordination is desirable. So the idea for this year’s FEEM/MIT conference is a good one: “The Linkage of Climate Change to Other Policy Areas,” and I am particularly pleased and honored to be leading off the first session with a discussion of the linkage between climate change policy and trade policy. I used the word “unfortunate” to describe the fact that one cannot ignore the linkages because they do indeed complicate things. But my central message is a positive one: that international trade, and the multilateral institutions we have in place to maintain the liberal trading system, need not be obstacles to effective GCC policy, and can actually be a great help. But some collaboration is required.i Let me begin by noting that many of those who live full time in the world of trade policy view environmental policy with an attitude that is symmetric to the suspicions going the other direction: “Trade policy is important, and complicated enough as it is. If environmental policy is sincere and genuine, there is no reason why its instruments should involve discrimination against some countries’ exports. So let them work around us.” Free traders, which includes almost all economists, fear that talk about environmental protection will be used as an excuse by some economic sectors to gain protection for themselves against competition from abroad. That fear is symmetric to the fear of environmentalists that talk about free trade will be used as an excuse to give inadequate weight to environmental goals and excessive weight to maximization of market-measured GDP. Both fears have a significant element of truth to them. Thus both areas of policy need to acknowledge the legitimate concerns of the other. But the good news is that, if they do, then international institutions and multilateral trade can help give us an outcome where we achieve more environmental protection for a given economic cost, or achieve higher GDP for given environmental goals, or some of both. 2 Is trade itself good or bad for the environment? I want to say something about whether trade per se is good or bad for the environment, a distinct question from whether aspects of the WTO and the rest of the trade policy regime are good or bad for the environment. There are many possible effects of trade on the environment. They can be categorized according to whether they operate via GDP, just like investment, technology, and other sources of economic growth, or whether they are peculiar to trade alone, and hold for a given level of GDP. Within each category, there are effects both beneficial for the environment, and detrimental. What is the overall bottom line? It depends on what dimension of environment quality we are interested in. For concentrations of SO2, statistical studies give a relatively clear answer, on average across countries. Regarding the effect via income, air pollution peaks at a per capita income of around $5,700 a year, and after that further economic progress results in cleaner air – the famous Environmental Kuznets Curve.ii It is not that the market solves the problem entirely on its own. Rather, as people grow richer, they demand cleaner air and -- in a country with a responsive and competent government – the result is effective regulation. This is the “EKC” cell in the table.iii Table: Is Trade Good or Bad for the Environment? (source for estimates: Frankel and Rose, 2005) Effects of trade via growth in income for a given level of on the income environment Harmful effects larger scale of economic activity “Race to the bottom” in national regulation Beneficial effects shifts to cleaner techniques and “Gains from trade”: composition of economic activity ratcheting up of standards, innovation, consumer power Statistical evidence on bottom line for SO2 EKC, after an income per capita of about, other things equal, the further growth tends to reduce pollution favorable effects of (via national regulation) trade seem to dominate for CO2 No sign that total emissions turn down Trade, if anything, may on their own (presumably because CO2 is increase emissions even a global externality: little regulation is for a given level of possible at national level) income 3 What about the effect of openness to trade, holding constant the- level of income? Do competitiveness fears put downward pressure on national regulation? In the case of SO2 the overall effect, across countries, is the opposite. Evidently openness to trade helps reduce air pollution, whether an international ratcheting up of standards, accelerated innovation, empowerment of the consumer, or other channels.iv Happily, a country need refrain from neither trade nor growth, even if it has strong concerns about air pollution. One cannot be as sanguine for many other measures of environmental quality, especially CO2 emissions. The estimates in my paper with Rose found no statistical evidence of a tendency for a country’s emissions per capita to peak at some level of income and then to turn down; evidently they just keeps rising (though I should note that others have found signs of a peakv). Furthermore, openness to trade may exacerbate emissions more than other sources of growth [as in the race to the bottom hypothesis].vi It is not hard to explain why trade and growth could be beneficial for local air pollution and yet exacerbate emission of greenhouse gases. Because the latter constitutes a global externality, regulation at the national level is inadequate to address it. We need not only the will and economic resources to address global climate change, but also the international cooperation that comes from a multilateral regime of regulation, such as the Kyoto Protocol, which has not been effect during the time span in question. So let us now turn from the subjects of trade and the environment to their institutional champions, the Kyoto Protocol and the WTO. Mutual respect Drafters in Kyoto and drafters in Geneva have shown more enlightened consideration for each other than has sometimes been shown by the rank and file of environmentalists and free traders. The text of the Kyoto Protocol says parties should “strive to implement policies and measures...in such a way as to minimize adverse effects on international trade...” and the Framework Convention on Climate Change features similar language in several places.vii Meanwhile, the trade regime is equally solicitous. Article XX of the GATT explicitly allows for exceptions to its trade rules to protect health and conservation of resources; the Preamble to the Marrakech Agreement that established the WTO in 1995 recognizes the importance of seeking “to protect and preserve the environment;” and the Doha Communiqué of 2001 that kicked off a new round of negotiations judged that “the aims of upholding and safeguarding an open and non-discriminatory trading system, and acting for the protection of the environment and the promotion of sustainable development can and must be mutually supportive.”viii But are these noble sentiments carried out in practice? Win-win examples Three examples of win-win situations, that can benefit both free trade and the environment. First, in late May, Russia announced it would ratify the Kyoto Protocol -- and hopefully that is its final answer. Russia had been at best lukewarm about the Kyoto Protocol (perhaps because it considers itself to be one of the few countries that might 4 actually benefit from global warming).

Load more