Facultade de Economía e Empresa
Traballo de Trade and fin de grao Environment
Sergio Santiago Otero
Titor/a: Inés Mezo Balaca
Grao en Administración y Dirección de Empresas Ano 2016
Traballo de Fin de Grao presentado na Facultade de Economía e Empresa da Universidade da Coruña para a obtención do Grao en Administración e Dirección de Empresas.
Trade and Environment Abstract
This paper aims to analyse the existing relationship between international trade and environment and their different consequences. This paper is organised as follows: firstly, we make a review of the climate change phenomenon, explaining briefly the concept and examining the different methods and indicators that are used to measure it. Secondly, we focus on the relationship between trade and environment. To do so, we review the existing literature mainly through different econometric studies and data analysis are reviewed. After that, we introduce different environmental measures that are proposed by public and private sectors (mitigation measures). If all these environmental measures are well-applied, sustainability will be obtained, so in the last section we see this concept connecting it to the business world.
Keywords: Climate change, international trade, trade openness, environmental policy, sustainable development.
Number of words: 13923
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Trade and Environment Resumen
Este trabajo se propone analizar la relación existente entre el comercio internacional y el medio ambiente y sus distintas consecuencias. Se organiza del siguiente modo: en primer lugar, repasamos el fenómeno del cambio climático, explicando brevemente el concepto y examinando los distintos métodos e indicadores que se usan para medirlo. En segundo lugar, nos centramos en la relación entre el comercio y el medio ambiente. Para ello, revisamos la literatura existente principalmente por medio de diferentes estudios econométricos y análisis de datos. A continuación, incluimos las distintas medidas medioambientales que los sectores públicos y privados proponen (medidas de mitigación). Si estas medidas se aplican bien, se obtendrá sostenibilidad; por lo tanto, en la última parte observamos este concepto conectándolo con el mundo del trabajo.
Palabras clave: Cambio climático, comercio internacional, liberalización del comercio, política medioambiental, desarrollo sostenible.
Número de palabras: 13923
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Trade and Environment Index
Introduction ...... 8 1. Climate Change ...... 9 1.1 Background ...... 9 1.2 Environment Valuation Methods and Indicators ...... 12 2. Trade and Environment ...... 17 2.1. General Aspects ...... 17 2.2. Trade Openness ...... 19 2.2.1. Arguments for Free Trade and Protectionism ...... 19 2.2.2. Regional and Multilateral Agreements ...... 22 2.3. Trade and Transport ...... 30 2.4. Trade Openness Effects on Environment ...... 35 3. Environmental Measures and Sustainability ...... 44 3.1. Introduction...... 44 3.2. Public and Private Sector Solutions ...... 45 3.3. Company and Sustainability ...... 51 Conclusions ...... 56 Bibliography ...... 58 Annex ...... 67
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Trade and Environment Figure Index
FIGURE 1. GREENHOUSE GAS EMISSIONS 2010 ...... 10 FIGURE 2. ADVERSE EFFECTS OF CLIMATE CHANGE ...... 10 FIGURE 3. PROJECTIONS OF NON CO2 GHGS EMISSIONS BY SECTOR ...... 11 FIGURE 4. NUMBER OF PUBLICATIONS WEB OF SCIENCE CLIMATE CHANGE 2000-2015 ...... 11 FIGURE 5. ENVIRONMENTAL VALUATION METHODS ...... 12 FIGURE 6. TRADE EVOLUTION 1976-2014 (% GDP) ...... 17 FIGURE 7. WORLD IMPORTS AND EXPORTS 1960-2014 (% OF GDP) ...... 24
FIGURE 8. WORLD CO2 EMISSIONS BY SECTOR ...... 30 FIGURE 9. LONDON CITY AIRPORTS AIR TRANSPORT MOVEMENTS 1989-2013 ...... 32 FIGURE 10. ENERGY USE PER CAPITA 1980-2010 ...... 33 FIGURE 11. RENEWABLE ENERGY SOURCES ...... 34 FIGURE 12. RENEWABLE ENERGY EXPECTED EVOLUTION (TWH) ...... 34 FIGURE 13. EUROPEAN COUNTRIES ROAD FUEL TAXES 1998-2012 ...... 35 FIGURE 14. TOTAL RESEARCH AND DEVELOPMENT EXPENDITURE 2005-2012 (€/INHABITANT) ...... 49 FIGURE 15. EVOLUTION OF NUMBER OF ECOLABELS LICENCES EU 2005-2010 ...... 49 FIGURE 16. TRIPLE BOTTOM LINE ...... 52 FIGURE 17. ROOME CLASSIFICATION ...... 53
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Trade and Environment Table Index
TABLE 1. DISPUTE ENVIRONMENTAL CASES AT THE GATT AND WTO ...... 21 TABLE 2. IMPORTANT FTAS ...... 23 TABLE 3. MERCHANDISE EXPORTS EVOLUTION BY GROUP OF PRODUCTS (2005-2013) ...... 25 TABLE 4. IMPORTANT MULTILATERAL AGREEMENTS ...... 27 TABLE 5. KYOTO PROTOCOL EMISSIONS REDUCTION TARGETS BY COUNTRIES ...... 28 TABLE 6. MOST POLLUTING MEANS OF TRANSPORT ...... 31 TABLE 7. SUSTAINABILITY CONCEPT BY DIFFERENT AUTHORS ...... 51 TABLE 8. DIFFERENT COMPANIES SUSTAINABLE STRATEGIES ...... 54 TABLE 9. CONS AND PROS OF BEING SUSTAINABLE ...... 54 TABLE 10. MOST IMPORTANT ARTICLES GATT/WTO ...... 67
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Trade and Environment Acronyms
ASEAN...... Association of Southeast Asian Nations COP...... Conference of the Parties EEA...... European Environment Agency EKC...... Environmental Kuznets Curve EPA...... Environmental Protection Agency EU...... European Union GATT...... General Agreement on Tariffs and Trade GHGs...... Greenhouse Gases IEA...... International Energy Agency IPCC...... Intergovernmental Panel on Climate Change LCACC...... London City Airport Consultative Comittee NAFTA...... North American Free Trade Agreement OECD...... Organization for Economic Co-operation and Development UNCTAD...... United Nations Conference on Trade and Development UNEP...... United Nations Environment Programme UNPD...... United Nations Development Programme UNFCCC...... United Nations Framework Convention on Climate Change WMO...... World Meteorological Organisation WTO...... World Trade Organization
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Trade and Environment Introduction
Climate Change is a problem that has greatly concerned the world recently. Institutions such as World Trade Organization (WTO), Intergovernmental Panel on Climate Change (IPCC) or United Nations Programme Development (UNPD) are playing a greater role making different multilateral and regional agreements and contributing to the implementation of policies. In addition, more and more publications and researches dealing with this issue are booming. Thus, we are fully aware of its deep impact on our lives and on our economy. This is one of the main reasons why I decided to do my project about this increasingly worrying issue as well as satisfying my curiosity.
To address the climate change issue we have reviewed different literature showing the relationship that exists between trade and environment. We have seen that trade has increased in the last century due to the reduction of trade barriers and the existence of more and more multilateral and regional agreements. Trade openness has produced an increase of transport and greater environmental problems. Therefore, valuing environment is important and to do it different valuation methods and indicators are used.
This project is organized in three sections: the first section conceptualizes and contextualizes the phenomenon of climate change and we explain how it is valued and which indicators are the most used. The second one reviews the current relationship between trade and environment. We focus on the effects deriving from trade openness and technological improvement on the relationship between Greenhouse Gases (GHGs) and income per capita. To do so, we focus on the different econometric studies and literature about the Environmental Kuznets Curve (EKC), seeing the different opinions and conclusions of some authors about the issue depending on what variables they have used. In the third section we explain how public and private sectors implement mitigation measures to reduce the previous effects and how different companies try to integrate environment in their politics and strategies. Our project ends up by drawing some conclusions that can be reached from our work.
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Trade and Environment 1. Climate Change
1.1 Background
In this section of the project we are going to introduce the concept of climate change, explaining how we can value it and seeing the different agreements that have been implemented by different institutions.
When we talk about environment in economics, we talk about an asset. It is a highly uncommon asset, though. Not only does it provide a variety of services but it also gives us the life support system where we can live without any charge, everyone can dispose of it freely. That is the reason why caring about the environment is so important.
Nevertheless, in the last century a phenomenon called “climate change” appeared. We can define this term as “a set of variations that are happening in our weather, due to direct or indirect human activity that are changing the composition of the global atmosphere (Karl and Trenberth, 2003).
Since the Industrial Revolution, greenhouse gases emissions have been increasing enormously. These gases are known to damage our environment by concentrating on our atmosphere and retaining some of the energy emitted by the soil, after being warmed by solar radiation. According to the World Meteorological Organization (WMO) (2013) and the Committee on the Science of Climate Change (2015) in each of the last three decades we have had greater global average surface temperatures than any previous decade since 1850. Some of these Greenhouse Gases are: Carbon dioxide (CO2),
Methane (CH4), Nitrous oxide (N2O), Perfluorocarbons (PFCs), Hydrofluorocarbons
(HFCs) and Sulphur hexafluoride (SF6).
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In Figure 1, we can see the percentage of these gases in the atmosphere:
Figure 1. Greenhouse Gas Emissions 2010
Greenhouse Gas Emissions 2010
F- Gases 2% Nitrous oxide(N2O) 6% Methane(CH4) 16% CO2(forestry and other land use) 11% CO2(fossil fuel and industrial processes) 65% 0% 20% 40% 60% 80%
Source: Own application using U.S. EPA1 (2014)
Climate change is bringing about a lot of different adverse effects to our world such as loss of biodiversity, temperature increase, deforestation, security thread, water acidification, etc. These effects are known as “direct effects” because they are related to changes in nature whereas the ones that affect the market are called “indirect effects”.
Figure 2. Adverse Effects of Climate Change
Loss of Temperature Security Deforestation Respiratory and biodiversity increase thread cardiovascular diseases
Stronger Rain, seas Increasing storms and and rivers Ice melting sea level hurricanes acidification
Source: Own application using Tietenberg and Lewis (2009)
When handling the problem of climate change, we can find three types of human profiles (Xavier Sala i Martín, 2007): the ones that believe that climate change phenomena do not exist, others that believe that climate change is happening on a great scale and those that believe that this is a common global problem and try to give different coherent responses to solve it. Taking these facts into account, despite the effort that several different institutions are doing, prospects of future are not very optimistic in relation to climate change.
1 Environmental Protection Agency
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In Figure 3, we can see that more emissions of non CO2 are expected in 2030 in every sector. We must highlight the great increase in waste (an increase of nearly 5000 million metric tons of CO2 equivalent).
Figure 3. Projections of Non CO2 GHGs Emissions by Sector
Projections of Non CO2 GHGs Emissions by Sector
20000
15000 Energy Industrial processes 10000 Agriculture 5000 Waste
0 2005 2030
Source: Own Application using US EPA (2012)
Analyzing all the evidence found, we can reach the conclusion that climate change is a very worrying topic and has to be addressed with urgent actions and global cooperation (Holtz Eakin and Selden, 1995). This issue is such a matter of concern that not only institutions are worried about it but also researches and publications are currently on the rise as we can see in Figure 4 according to Web of Science.
Figure 4. Number of Publications Web of Science Climate Change 2000-2015
Number of Publications Web of Science Climate Change 2000-2015
2015 50000 2010 2005 2000 0
Source: Own application using Web of Science (2016)
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Trade and Environment 1.2 Environment Valuation Methods and Indicators
In this subsection we will refer to the different valuation methods which are more widely used (see Figure 5) to measure the benefits of environmental improvements or the damage caused by environment degradation. In addition to valuation methods, environmental policy- makers use indicators to reflect trends and progress in the state of the environment.
Figure 5. Environmental Valuation Methods Market Price Direct Simulated Markets
Revealed Travel Cost Preference Hedonic Property Values Indirect Valuation Hedonic Wage Values Economic Avoidance Expenditures Methods Direct Contingent Valuation
Stated Attribute Based Models Preference Conjoint Analysis Indirect Choice experiments
Contingent Ranking
Source: Own application using Tietenberg and Lewis (2009), p.44
Analyzing the figure, two different methods of valuing environment exist: indirect method and direct method. On the one hand, the indirect method uses real elections made by customers to develop different models of choice, revealing preferences2 over market and non-market goods. They intend to infer the value that nonmarketed goods have for users by observing their behavior in related markets. They have the advantage of working in a real observable scenario but their main disadvantage is that they are not useful for a new situation. On the other hand, the direct method tries to deduct the value of a non market good by asking the customers directly. It asks consumers how much they are disposed to pay or accept for a change in environmental services, normally by using surveys.
2 This theory is known as the “Revealed Preference Theory” and was introduced by Paul Samuelson in 1938.
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Individuals do not make any changes in their behaviour, they only indicate what they would do in a specific situation (Adamowicz et al., 1994).
Direct methods are criticized because the questions asked are hypothetical and they cannot consider real behaviour (Cummings et al., 1986; Mitchell and Carson, 1989) (Adamowicz et al., 1994). Because of their use of hypothesis, they can be potentially biased and contain problems of consistency. Contingent valuation is one of the most common direct methods. Although in some settings it does well, its validity in others is questionable, as they use complex surveys and data analysis, which can lead to inaccuracy. Those are their main cons; however, they have the advantage that they are really valid if a market does not exist (that is why they are really commonly used on environment).
Other widely used methods (revealed preference valuation) are the travel cost and the hedonic methods. Travel cost estimates the value of a place or resource by using the information available of how much the visitors are ready to pay for it. There are two different approaches (Freeman, 2003) (Tietenberg and Lewis, 2009). In the first one, analysts examine how often visitors go to a place. In the second, they look at which place the person has chosen to visit.
Hedonic methods use a statistical technique to estimate the different costs and profits involved in a transaction linking them to environmental quality. As we can see in the figure above, there are two hedonic methods: hedonic property value and hedonic wage value. Their approaches are similar, but the first one refers to properties and the second to wages. According to the first one, the price of a house is related to its own characteristics3, the neighbourhood characteristics4 and environmental characteristics5. On the second one, they try to separate the wages component. For example, workers’ compensation on their wages due to taking risks in their job.
To sum up, it turns out difficult to determine which method would be the best choice, so many researchers agree to combine more than one methods simultaneously to achieve a better outcome (Tietenberg and Lewis, 2009).
3 Number of bedrooms, size, features, etc. 4 Crime rates, school quality, etc. 5 Air quality, noise, open space, etc.
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In addition to valuation methods, different indicators are used with these main purposes: to provide information on environmental problems to assess their importance and identify factors that can affect the environment and verify if environmental actions are effective (EEA, 1999).
The main indicators we will refer to are the European Environment Agency (EEA) “Typology of indicators” and the Organization for Economic Co-operation and Development (OECD) indicators. According to the EEA Indicators can be classified into 3 main groups:
1. Descriptive indicators: based on the DPSIR6 framework, they can be classified into different types: Indicators for driving forces describe the changes in life styles and patterns of consumption and production, which act as driving forces that make pressure on the environment. Examples of these are population growth and developments in the needs and activities of individuals. Pressure indicators describe developments in release of emissions, in the use of resources and land which change environmental conditions.
Examples of them are CO2 emissions per sector, the use of rock, gravel and sand for construction and the amount of land used for roads. State indicators describe the physical, chemical or biological phenomena present in an area. For example, the forest and wildlife resources, the concentration of phosphorous and sulphur in lakes, or the level of noise in the neighbourhood of airports. Impact indicators are used to describe the impacts on the environment due to the pressure on it. They occur following a process: air pollution may cause global warming (primary effect), which may in turn lead to an increase in temperature (secondary effect), which may produce a rise of sea level (tertiary impact), which could result in the loss of biodiversity. Response indicators refer to responses by groups and government to prevent, compensate or adapt to changes in the environment. Examples of response indicators are the relative amount of cars with catalytic converters and recycling rates of domestic waste.
6 DPSIR: Driving forces, Pressures, States, Impacts and Responses.
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2. Performance indicators: they compare the current environmental situation and the desired situation or target (government national and international policy targets and sustainability levels). An example of a performance indicator is an
analysis of the current CO2 emissions per capita for European Union (EU)
Member States trying to stabilize them at the level of the atmosphere’s CO2 of 1990. 3. Efficiency indicators: They connect environmental pressures to human activities. They reflect whether or not society is improving the quality of its products and processes in terms of resources, emissions and waste per unit of GPD. For example, the energy efficiency of cars may be described as the volume of fuel used per person and km travelled.
On the other hand, for the OECD (2008) the most used environmental indicators are:
1. Climate Change: Normally the data available is based on CO2 emissions but there are others such as the countries´ energies supply, climatic factors, the importance of fossil fuels and renewable energy that are also taken into account. 2. Ozone Layer: the most common indicators are consumption of substances such as CFCs, halons, HCFCs, methyl bromide, etc. However, we must mention that ozone layer depletion is not very easy to measure and these indicators are used as a proxy.
3. Air Quality: We found that SOx and NOx are used to measure air quality but they do not give us a total view of the problem. 4. Waste Generation: An indicator is used to represent the waste intensity generated per capita and per unit of private final consumption expenditure but it needs to be more reliable in terms of comparability. 5. Freshwater Quality: To see how good fresh water is, the different existing indicators are focusing on public waste water treatment plants. 6. Forest Resources: To indicate the damage of forest resources, the intensity of use of timber is applied, comparing current harvest with the harvest in the late 1990s. 7. Fish Resources: Changes in fish catches since 1979-81 are the used indicators. 8. Energy Resources: The intensity of use or consumption of energy are the indicators applied. They must take into account changes in energy efficiency and climatic factors. 9. Biodiversity: The indicator we find more are the number of threatened species compared to the number of species discovered. Nevertheless, it should be
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complemented with indicators of sustainable use of biodiversity as a resource and of habitat alteration.
In sum, despite the difficulty in valuing the environment damages and improvements we have shown, there is a general agreement that by combining these methods and environmental indicators it is possible to determine more accurately the different impacts on environment and try to respond to them.
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2. Trade and Environment
In this section we want to refer to the interactions between trade and environment. First of all, we will introduce the concept of trade openness, briefly overviewing arguments and counterarguments. Secondly, the legal context will be analysed, more specifically the importance of multilateral and regional agreements and the conflict which may arise between them (trade diversion). Thirdly, we will see the relationship of trade and transport, reviewing the literature about the three main effects that free trade is supposed to be producing on environment and explain the relationship that we can find between
CO2 emissions and income per capita using different econometric studies.
2.1. General Aspects
International trade has had an incredible expansion since the last century, as we can see in the following graph:
Figure 6. Trade Evolution 1976-2014 (% GDP)
Trade Evolution 1976-2014 (% GDP) 70 China 60
50 European Union
40
Least developed 30 countries: UN classification 20 North America 10
0 OECD members 1976 1986 1996 2006 2014
Source: Own application using World Bank Database (2016a)
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Since 1976, we can observe that both developed and developing countries have an increase in their percentage of GDP that is traded internationally. We can point out the case of China and EU which are having a huge growth according to this graph.
We will focus on trade openness and technological change to explain the expansion in trade:
1. Trade openness: The elimination of barriers to trade in countries had an increase in the number of goods and products that were exchanged between different countries. FTAs (Free Trade Agreements) were really important in this issue because they contributed to the increase in trade between countries and the reduction of trade barriers. In addition to this, the creation of General Agreement on Tariffs and Trade (GATT) (later transformed into World Trade Organization or WTO) in 1947 was also highly significant because it was the first time that an international environmental framework policy had been achieved. From that time on, a lot of agreements have been reached and environment has been considered together with trade. 2. Technological Change: This factor is closely linked to transport. By the improvement of technology, both transportation and communication costs have been reduced. In the 20th century, jet engine´s discovery and the increasing use of containers in the goods transportation have significantly reduced the cost of air and maritime transport (Hummels, 2007). At the same time, due to these improvements, we have a greater range and volume of goods which can be traded (with lower communication costs). Another issue to take into account is production control. Nowadays, with the improvement of technology, production control can be done without being in the same place, we have new discoveries such as labelling, tracking or electronic data interchange (EDI) that allow this. Besides, this last fact has been accompanied with better logistics and a more integrated value chain (we have less processes) due to globalization (Hesse and Rodrigue, 2004).
In the next subsections we intend to explain further these two factors and see their importance in the relationship between trade and environment.
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Trade and Environment 2.2. Trade Openness
In this section of the project we will review the concept of trade openness, briefly summarizing the main arguments in favour of or against this reduction of trade barriers. Secondly, we will explain the importance of both regional and multilateral agreements. To do that, we will look at the existing free trade agreements, examining their characteristics and then we will view the different multilateral agreements, focusing on the GATT and on the Kyoto Protocol. Finally, the concept of trade diversion will be explained as well.
2.2.1. Arguments for Free Trade and Protectionism
Since the time of Adam Smith, most economists have strongly defended free trade. Thus, we can find different theoretical models which suggest that free trade will avoid the efficiency losses associated with protection. Some economists believe that by using free trade we produce additional profits beyond the elimination of production and consumption distortions such as economies of scale or promotion of learning and innovation. Other economists are not confident about government policies and think that free trade will be always better than any policies they can apply. They believe that policy measures are in practice dominated by special political interests rather than consideration of national costs and benefits. Therefore, if that is the case there is no doubt that the best possible choice would be liberalizing trade.
If we follow the view of international trade theory7, free trade is profitable because it permits the increase of GDP. In the XVIII and XIX centuries, Adam Smith and David Ricardo abandon merchantilism and approached trade from a different perspective. The main reasons given by classic economists to trade were that specializing according absolute advantage (Adam Smith) or comparative advantage (David Ricardo), both countries will be better off and therefore, there will be an increase in production, favouriring free trade.
At the beginning of XX century there was a reformulation of the previous economical trade theories, highlighting the Heckscher-Ohlin Model. H-O explain international trade through Ricardo´s comparative advantage, based on the different factor endownments
7 Retrieved from Pugel (2004)
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Trade and Environment of a country. One country will specialize in producing and exporting the good that use intensively its more abundant factor of production.
Later, in the mid-80s new studies appeared that tried to explain phenomena such as intra-industry trade or the exchange of similar goods that were increasing sharply in this period. So, the New Trade Theory was developed by Krugman (1985) among others. He says that “there are two sources of potential gains from trade, specialization to take advantage of differences in relative factor endowments and specialization to achieve larger scale of production” (p. 17). Therefore, this theory will incorporate an innovative imperfect competition model and will allow to explain trade advantages in terms of scale economies and product differentiation.
However, some economists prefer protectionism to free trade. Protectionism consists of implementing economic policy that limits trade through tariffs, imports, restrictive quotas and other similar mechanisms.
Firstly, one common argument to defend protectionism comes from the correction of domestic market failures. This statement comes directly from the “theory of the second best”. According to this theory, a hands-off policy is only appropriate in one market when the other markets are working properly. In case they do not work well, a government intervention may increase welfare by compensating the consequences of market failures. If we take this issue into account, protectionism can be needed as a solution to market failures.
Secondly, another reason for deviating from free trade comes directly out of cost benefit analysis if we focus on the short term. The cost benefit analysis is based on seeing deeply the different alternatives we have when we must make a choice in a business. It is specially applied to see the benefits in labor, time and cost savings. Only when benefits exceed the costs, the action is desirable. Therefore, in the short term it will not be affordable because we will have more costs than benefits.
Nevertheless, this previous argument was contradicted by some free trade defenders saying that domestic market failures should be corrected by domestic policies aimed directly at the problems’ sources and that they cannot be diagnosed well enough to prescribe policies (Krugman and Obstfeld, 1997, p.227).
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Thirdly, we must mention the infant-industry theory. It affirms that a temporary tariff is justified because it decreases imports while emerging internal industry learns to produce at costs low enough. In other words, one country does not often possess the economies of scale that other more experienced and developed international competitors have, so the emerging country will have no other choice than using protectionism until emerging industries can achieve a similar level of economies of scale. Once the emerging industry is stable and can compete internationally, the protective measures should be removed, but this does not usually happen.
Fourthly, although there are plenty of arguments in favour of protectionism, Bhagwati summarized them in four issues (“genuine problems”) (Hans Wiesmeth, 2012, p. 281):
1. Unfair Trade: Differences in environmental regulation, which are expected to lead to differences in international competitiveness, are possibly the biggest objection to free trade. To illustrate this, in Table 1 we will see different dispute cases between the WTO regulation and countries regulation in USA.
Table 1. Dispute Environmental Cases at the GATT and WTO
CASE YEAR ISSUE OUTCOME
Tuna-Dolphin 1991 US had banned imports of In 1992, GATT decided that the tuna from Mexico because United States could not forbid the Mexico brought a Mexico used nets that import of tuna. One country cannot GATT case were not safe for dolphins “enforce its own domestic laws in against the whereas US fishermen another country, even to protect United States were obliged to use safe animal health or exhaustible because USA nets. natural resources”. Despite this, banned Mexican the strong consumer response tuna imports defending dolphins led to the labelling of Mexican imported tuna as “dolphin-friendly”.
Gasoline The US had limited In 1996, the WTO decided in 1994 imports of gasoline from favour of Venezuela and Brazil Venezuela and these two countries because US violated the principle Brazil appealed because the gas did not that national and foreign producers to the WTO meet the requirements of must be treated in an equal way. against a US ban the US Clean Air Act that Refineries in the US could reach on gasoline commands a maximum the Clean Air Act targets in a imports. amount of certain smog- three-year-period, while this period causing chemicals. was not extended to refineries abroad.
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Shrimp-turtles 1996 USA banned the shrimp In 1998, the WTO ruled against imports from India, USA as they considered that this India, Malaysia, Malaysia, Pakistan and prohibition had been applied Pakistan and Thailand arguing that the without no consensus with the Thailand nets they used to capture exporting countries involved, so appealed to the shrimps were not safe for these countries did not have recently formed turtles. enough time to employ turtle-safe WTO against the devices. Afterwards, USA made US ban on efforts to reach agreements with shrimp imports. these countries to use turtle-safe nets.
Source: Own Application using Feenstra and Taylor (2008), p. 379
2. Race to the Bottom: According to it, lower environmental standards protect against job loss, because jobs move to these locations looking for the lower costs resulting from these lower standards. Greenstone (2001)8 confirmed this assumption in the United States. He observed that employment was greater in attainment areas than in the stricter regulated non-attainments areas. However, the main problem stated by Bhagwati was the emergence of different social movements because WTO was thought to undermine national and international legislation, which was designed to protect people´s environment. 3. Ethical Preference: This is related to the attempts of some countries to impose their own ethical problems preferences about some issues on other countries. Animal rights activists sometimes use the treatment of animals in some countries to propose trade sanctions against these countries. 4. Welfare Loss: The increase in production that is accompanying free trade is leading to a worsening of environment. For instance, the increasing volume of truck traffic in North America is usually used to criticize NAFTA.
2.2.2. Regional and Multilateral Agreements
Trade openness has been increasing since the end of the Second World War. Trade openness means that different countries are decreasing trade barriers using different levels of integration:
. Free Trade Agreements (FTAs). . Creation of a common market. . Establishment of a unique monetary system.
8 He used data available of industrial and environmental regulation from the Clean Air Act Amendments between the years 1967 and 1987.
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All these three methods reduce the trade barriers between different countries especially through removal or reduction of tariffs. The main difference we can find is that the FTAs countries have different trade terms to negotiate with third parties.
Table 2. Important FTAs
FREE TRADE AGREEMENTS
Name Year Important Achievements or failures Countries
North America Free 1988 USA Illegal immigration from Mexico to USA Trade Agreement Mexico controversial Canada Some concrete protectionism Liberalization of trade None external customs duties in common
Andean Community 1969 Bolivia Countries decide which products Colombia everyone makes Ecuador Unification countries Peru Prohibition of any kind of exchange, Venezuela financial, tax incentives or exports subsidies
Mercosur 1995 Argentina Internal Tariffs eliminated Paraguay Inequalities between countries Uruguay Tariff union more than common market Chile Brazil
ASEAN 1967 China Does not take into account differences in Japan history and culture between countries Indonesia Difficulties to take decisions Brunei Thailand
European Union 1958 France Creation of common monetary system Germany Creation of a Central European Bank Italy Spain Belgium
Source: Own application using Keegan et al. (2009), pp. 78-94
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As we can observe in this table, FTAs are really common and are used in every part of the world. Analysing it, we can see the following points:
. These agreements are normally made by countries which are close between them. . It is not uncommon to see some type of protectionism, as we can observe in the North America Free Trade Agreement (NAFTA). . Some treaties did not work properly because of lack of coordination or differences in culture. . They were created after the establishment of the GATT.
Figure 7. World Imports and Exports 1960-2014 (% of GDP)
30 25 20 15 10 5 0 1960 Imports World 1970 1980 1990 Exports World 2000 2010 2014
Source: Own Application using World Bank (2016b) and (2016c)
As we can see in Figure 7, both exports and imports have been growing since the beginning of the implementation of FTAs. If we focus on the export of concrete product, we can observe below that manufactures represent nearly two thirds of the international merchandise trade, followed by mining and fuels products (21,9%) and agriculture products (9,5%). However, we can notice that manufactures are now increasing less than the mining and fuels products so we can conclude that they are being exported in lower quantities than in 2005.
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Table 3. Merchandise Exports Evolution by Group of Products (2005-2013)
Exports evolution by type of product (2005-2013) 2013 % Change Group value (billions €) exports 2005-2013 Agriculture Products 1.745 9,5% 9%
Mining products and fuels 3.997 21,9% 10%
Fuels 3.258 17,8% 11%
Manufactures 11.848 64,7% 6%
Office and Telecom equipment 1.750 9,6% 4%
Automotive Products 1.348 7,4% 5%
Others 3,9%
Source: Own Application using WTO report (2014a) and WTO report (2014b)
Another important step was taken with the appearance of multilateral agreements. In the last century, institutions have created an environmental policy to try to fight against climate change and several environmental organizations have appeared.
The starting point fighting against climate change was 1947. This year GATT was created. The GATT was the predecessor of the World Trade Organization (WTO) and it encouraged free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mechanism for solving trade disputes. Now it has been completely replaced by the WTO, which deals with the rules of trade between nations (see Annex I Table 10).
From the creation of the GATT, we wish to emphasize the incredible growth of multilateral and regional agreements (see Figure 11). Countries started to meet periodically for negotiations (“rounds”) and most importantly, an international context for setting environmental trade policy was established.
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Figure 11. Evolution of Regional Trade Agreements since 1948
Source: WTO (2016)
The next important date was 1992. “Earth Summit” was celebrated (178 countries took part in it) in Rio. This meeting was that important because it was referring to the target of establishing global partnership in terms of equity and the Agenda 21, considered the key document when talking about sustainable development, was created.
Later, in 1994, we can remark the creation of one of the most important treaties around the world. The United Nations Framework Convention on Climate Change (UNFCC) entered into force and has the following objectives and principles (articles 2 and 3):
Combating Global Warming. Involving developed countries in fighting against climate change. Promoting sustainable development.
The most important body of the UNFCC is the “Conference of the Parties” (COP). They comprise all the states which have ratified the convention and they are meeting different times around the year. In Table 4 we have made a summary of the main meetings of this body, the year when they met and the main target they were looking for:
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Table 4. Important Multilateral Agreements
Name Place Year Main Target
COP 3 Kyoto 1997 Meeting agreed levels of emission reductions in the period 2008-2012
COP 13 Bali 2007 Fighting against climate change using investment and clean technologies
COP 15 Copenhagen 2009 Seeing how to restructure Kyoto goals
COP 16 Cancun 2010 Establishing clear goals for reducing GHGs and targeting for global cooperation
COP 17 Durban 2011 Establishing a new treaty to limit carbon emissions.
COP 18 Doha 2012 Focusing on five main issues related to climate change (adaptation, finance, mitigation, technology and loss and damage)
COP 21 Paris 2015 Keeping a global warming below 2 grades Celsius
Source: Own Application using different information from UNFCC website
The agreement that is considered as most crucial of the previous ones is the COP 3. In this meeting the Kyoto Protocol was implemented. However, it did not enter into force until 2005 when it was ratified by 55 countries which accounted for at least 55% of the
9 CO2 emissions of the Annex I Parties in 1990.
The Kyoto Protocol requires industrialized countries to meet agreed levels of emission reductions over an initial commitment period that runs from 2008 to 2012. The exact amount of emission reduction commitments varies for each country, but the total collective commitment represents the reduction of greenhouse gas emissions to more or less a 5.2 % less than their 1990 levels (see Table 5).
9 Annex I Parties: Major part of OECD members plus States of Central and Eastern Europe.
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Table 5. Kyoto Protocol Emissions Reduction Targets by Countries
Country or institution Target
European Union (EU) 8%
USA 7%
Russia 0%
Japan 6%
Australia Permitted increases (+8%)
Norway Permitted increases (+1%)
Iceland Permitted Increases (+10%)
Source: Own Application using UNFCC (1997)
The main failure of this treaty was that powerful countries like USA did not sign up the Protocol and others were not completely integrated in the treaty. USA decided against it because of the following reasons (Feenstra and Taylor, 2008, p. 389):
Although the evidence toward global warming is strong, they did not understand at that moment all the consequences of policy actions. While the USA is the greatest emitter of greenhouse gases, meeting the Kyoto targets would negatively affect its economy. Kyoto failed to include the developing countries, in special China and India. According to USA, there are other ways to pursue the reduction in greenhouse gas emissions.
Despite the huge efforts made in Kyoto, in 2010 most of the countries were too far from the objective because it was too demanding. That is why in COP 15 (Copenhagen Climate Summit) they decided to renegotiate the different targets each country should obtain.
All in all, we can see the following common issues when we are talking about multilateral agreements:
a. They are negotiated to reduce climate change problems but they did not have the results that had been expected.
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b. Powerful economies such as USA are not favoured by these agreements because they incur in large costs. c. Some agreements need a body that ensures compliance of measures.
Having explained free trade and multilateralism, we must clarify the concept of trade diversion, which rises because of the growth of regionalism versus multilateralism. Trade diversion occurs when a member country of an agreement imports a product from another member country at the expense of third non-member countries.
As we have seen in this section, multilateralism involves global cooperation to avoid possible trade conflicts (reducing tariffs mainly) and environment distortions, which will be beneficial for both consumers and producers in the long run. Regionalism derives from the same idea but it only liberalizes trade on a specific area (regions), which often creates trade blocs that confront each other.
Economic theory believes that multilateralism is more efficient in the allocation of resources than regionalism. The World Bank (2005) affirms: “in general terms, multilateralism is the most development friendly outcome”. However, unlike regionalism, multilateralism has not increased much in the latest years. The creation of customs unions or large trade blocs such as EU (1951), Mercosur (1991) or NAFTA (1994) has been implemented instead of fomenting a progressive economic world integration using the tools of the WTO. This may bring about efficiency problems, leading to protectionism and distrust towards other economical regions, which may be extremely harmful for the world trade.
Besides, the World Bank gives three main reasons why countries have favoured regionalism over multilateralism:
1. Countries intend to increase their benefits signing an agreement with a large trading partner before competing countries do so. 2. Signing an agreement bilaterally or regionally may be the quickest and easiest way of accessing to particular markets. 3. A bilateral agreement may facilitate domestic reforms in areas that are not dealt with multilaterally, such as investment, competition, and environmental and labor standards.
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FTAs not only affect the countries that took part in their approval but third non-member countries are also affected. In 2005, the World Bank was already aware of the risks of regionalism on world trade arguing that “developing countries could gain an (unweighted) average of 1.7 percent in real income from a global agreement” whereas “creating a complex system of bilateral and regional agreements, developing countries would suffer losses averaging 0.4 percent (1 percent for the low-income countries)” (p. 321).
If we focus on one of the most important free trade agreements NAFTA, John Romalis (2007) claims that there was hardly any impact on the welfare of the member and non- member countries; in fact, in Romalis words “NAFTA increased North American output and prices in many highly-protected sectors by driving out imports from non-member countries” (p. 2).
2.3. Trade and Transport
Transport is the second sector that is polluting the most in terms of CO2 emissions (23%). In Figure 8 we can see that the only sector that pollutes more is the electricity and heat sector with a 42 %.
Figure 8. World CO2 Emissions by Sector
Services 7% 3% 23% Transport
Industry
42% Residential
19% Electricity and Heat
Other 6%
Source: IEA10 (2015a), p. 6
10 International Energy Agency
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However, despite being the second most polluting sector, it is said that one of the factors that explain the incredible growth of international trade was the falling of transport costs (Feenstra et al., 1998). Air, road, rail and water are the means used for the transport of merchandise. More than one transport mode can be needed until the products eventually reach the consumer (e.g. rail or air can be used and then land). This dependence on transport is causing different long term damage to the climate. On account of the increase of use of fossil fuels, we will probably exhaust petroleum soon (Duncan et Youngquist, 1999) and therefore our world resources are likely to be ended in the short run.
In the following table, we can see a summary of the different means of transport that are causing more pollution in atmosphere:
Table 6. Most Polluting Means of Transport
Means of Characteristics Drawback Solutions Transport Cars Increase in Second largest emitter Increasing parking number producing of CO2 emissions in charges or fuel prices traffic jams transport sector despite (unpopular solution) Very common in technological advances More investment in developed Not enough current R&D and policy countries infrastructure in big Public transport and cities bicycles
Road Dominant Large CO2 emissions in Increasing engine Freight transport small countries performance and The fastest Counterproductive improving vehicles growing growth design Fuel efficiency Larger demands and New fuel technologies improving costs because of (hydrogen and heavy globalization fuel cells) Increasing use of ships and rails Vehicle tracking and more space efficient handling systems
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Aviation Most worrying Massive quantities of More pricey flights and means of CO2 at every level slots transport (global, regional and Use of alternative Important growth local) transport of air traffic since Increased GHGs Improvements in 1960 emissions (emitted technology directly to troposphere Hard to implement and lower stratosphere) Unsustainable programs of airport expansion
Source: Own Application using L. Chapman (2007)
In this table we can observe that there are three main polluting means of transport. Aviation is the one that concerns us more because it is growing a lot (see Figure 9) as less pricey and more abundant flights make travel much easier for business or pleasure (Hummels, 2007), there is not a sustainable infrastructure to fight against this growth and GHGs are emitted directly into the troposphere and lower stratosphere. The mix of different combinations of emissions from aero planes and similar means is estimated to be 2-4 times greater than just the impact of CO2 alone (Lee, 2004) (Chapman, 2007). Chapman also cites Somerville (2003) who says that aviation was really discussed in the Kyoto protocol due to that combination of gases which contributes to climate change. However, no goals were set for either international aviation or greenhouse gas emissions other than CO2 from domestic flights.
Figure 9. London City Airports Air Transport Movements 1989-2013
Source: LCACC11 (2013)
11 London City Airport Consultative Comittee
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The possible solutions for this might be implementing more pricey flights and slots, improving technology or using transport alternatives such as shipping.
Cars are very common nowadays specially in developed countries and also pollute a lot. The main reason for this is that when affordability increases, people usually have more cars, as we can see in China and India (Dargay and Gately, 1999). However, energy efficiency has recently turned out to be an important way of reducing this pollution coming from cars (e.g. electric cars).
According to the graph we did below, energy use per person has been increasing in the last decades in all countries except for USA, Russia, Brazil and UK. However, it is expected that this energy use increase will be followed by a more efficient energy (IEA, 2015b).
Figure 10. Energy Use per Capita 1980-2010
ENERGY USE PER CAPITA 1980-2010 (TONS OF OIL EQUIVALENT)
10 Brazil 8 China
6 Japan
4 Norway Russia 2
Spain ENERGY ENERGY CAPITA USE PER 0 1980 1990 2000 2010 United Kingdom
Source: Own Application using GAPMINDER (2016)
Ultimately, our energy needs will have to be satisfied by the use of renewable resources because depletable energy sources have been exhausted or because their environmental costs are really high. Therefore, a mix of renewable energy sources should be chosen taking into account their relative cost and consumer acceptance (see Figure 11).
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Figure 11. Renewable Energy Sources
Wind Photovoltaics Active and Renewable Energy Passive Sources Solar Energy Hydroelectric Power Ocean Tidal Power Geothermal Biomass Fuels Energy
Source: Own Application using Tietenberg and Lewis (2009)
In Figure 12, we can observe that every renewable energy type is expected to grow. In 2005, the hydroelectric power was almost the unique renewable energy which was used in comparison to the rest. However, we can see that in 2030 in addition to the incredible increase of this type of renewable energy, wind energy and biomass fuels will have a great importance in energy efficiency.
Figure 12. Renewable Energy Expected Evolution (TWh)
Renewable Energy Expected Evolution(TWh) 10000 9000 8000 Ocean Tidal Power 7000 Solar Energy 6000 5000 Geothermal 4000 Wind 3000 Biomass Fuels 2000 1000 Hydroelectric power 0 2005 2030
Source: Own application using IEA (2007), p. 230
Apart from energy efficiency, other alternatives we can find are mainly the use of investment, policy and R&D. These measures can be applied to promote the use of public transport (Waterson et al., 2003) by increasing parking charges or fuel taxes.
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However, these measures are really unpopular and not accepted unless revenue collected is reinvested in a proper way (Lyons et al., 2004). Despite this fact, if we have a look at the graph done below we can observe that these tax measures are really common and increasingly growing in some countries such as UK, France or Portugal.
Figure 13. European Countries Road Fuel Taxes 1998-2012
2500 2000 1500 1998 1000 2012 500 0 France Germany Italy Portugal Spain United Kingdom
Source: Own Application using OECD database (2016)
Road freight is the most dominant transport and the one that is growing the most.
However, this growth has been counterproductive because it is reflected in CO2 emissions, especially in small countries (Schipper and Fulton, 2003) (L. Chapman, 2007) and costs and demand are greater because of globalization (Hummels, 2007). Concerning possible solutions, we can distinguish the following ones:
New fuel technologies: Use of hydrogen or heavy fuel cells will enhance the haulage industry. Alternative means of transport: According to Chapman (2007) citing Schipper and Fulton (2003), this would be the most logical solution, but it has the disadvantage of being pricey and require huge investments. Implementing vehicle tracking and using more space efficient handling systems: With these measures, space utilization of vehicles will be improved (McKinnon, 2000). 2.3.1.
2.4. Trade Openness Effects on Environment
International trade has been increasingly growing due to the reduction of barriers coming from free trade, the greater multilateral agreements, the falling transport costs and the improvement of production control, value chain and logistics. Therefore, different
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Trade and Environment economists have developed a conceptual framework to examine how this growth of trade and specially trade opening might affect the environment. Antweiler et al. (2001), knowing that there are three existing effects (scale, composition and technique), consider their relationship to be very important because of different national characteristics and trading opportunities.
Firstly, the scale effect refers to the increase in GHGs resulting from an expanded level of economic activity. It can be defined as “the increase in the value of production, which is measured in world prices as they were prior to trade opening”.
In the case that there are unemployed resources (labour, capital or land) before liberalization, trade opening will allow greater use of these resources and will lead to an expansion in the level of production, which will require a greater energy use. Copeland and Taylor (2004) affirmed that “since most countries trust fossil fuels as their main energy source, the scale effect will lead to higher levels of GHGs”. This increase in trade will produce a greater use of cross-border transportation services, which will increase greenhouse gas emissions even further due to larger demands and larger distances (globalization).
Secondly, the composition effect leads to greater specialization between countries resulting in the expansion of some sectors and the contraction of others. It also involves different rates of environmental degradation. The consequent increase or decrease of greenhouse gas emissions will depend on whether the emission-intensive sectors are expanding or contracting. If trade expands in sectors which are less emission-intensive, then trade opening will lead to lower greenhouse gas emissions, but if trade expands in the more emission-intensive sectors, then liberalization will lead to greater emissions of greenhouse gas.
One important fact to consider alongside the composition effect is the “Pollution-Haven Hypothesis” (Tietenberg and Lewis, 2009, p. 585). They affirm that “if a country has enforced enormous environmental protection measures, the increased competition brought about by trade opening may cause emission-intensive sectors to relocate to countries environmental (pollution havens) with weaker regulations because if they don´t do it they will have a loss of share”. Nations with harder environmental regulations tend to be more expensive for companies, so they expand in countries with less strict environmental standards.
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However, Copeland and Taylor (2004) found that although rising incomes affect environment quality positively, natural resources, capital abundance and other more conventional factors have a larger role and there is little convincing evidence that support pollution haven hypothesis.
Thirdly, the technique effect refers to the technological progress in the production methods of goods and services, so that the quantity of emissions released during the production process lowers. One of the most important econometric studies we can find about this issue comes from Grossman and Krueger (1991). This econometric study focuses on the impacts of NAFTA in Mexico and uses three different indicators of urban air pollution and GDP to affirm that the reduction in GHGs may come about in two ways:
Access to the technologies used in the production of climate-friendly goods and services should reduce the energy required during production, and therefore it will reduce gases emissions. For exporters, the prospect of increased market access would also provide an incentive to develop new environment-friendly goods and services that will help mitigate climate change. These potential benefits of more open trade highlight the importance of the Doha Round, whose main aim was to liberalize environmental goods and services (UNCTAD, 2004). The increase in income levels that trade opening brings about can lead people to demand lower greenhouse gas emissions (a cleaner environment is a normal good12). Wealth gives populations the freedom to be concerned about other aspects of their well-being, such as better environmental quality. Grossman and Krueger (1991) give much importance to this point of the technique effect. However, to achieve it governments must enforce measures so that firms adopt cleaner production that will lower greenhouse gas emissions.
Since the scale effect and the technique effect tend to work in opposite directions, and the composition effect depends on the countries’ “comparative advantage” and on the pollution-haven hypothesis, the overall impact of trade on greenhouse gas emissions cannot be easily determined. It will depend on the magnitude or strength of each of the three effects, and determining these will require detailed analysis of empirical evidence. However, after having reviewed the different effects, some findings can be highlighted:
12 It is the one that its demand is increased when a rise in income is produced.
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1. How quickly these effects occur will depend on how rapidly trade opening measures are implemented and their scope. Bilateral agreements generally involve deeper commitments and more accelerated time-frames than multilateral agreements. 2. The reallocation of resources within an economy in response to the elimination of trade barriers may be restricted by adjustment costs. If governments manage to reduce these adjustment costs, this resources reallocation will take place more easily. Thus, while it is possible that the scale, composition and technique effects will be visible in the first year of implementation of a trade agreement, they will not probably become fully visible until many years later. 3. A distinction should be made depending if a country is developed or not. Shunsuke Managi (2008) could observe this fact in different OECD and non
OECD countries where SO2 and CO2 levels emissions have a different pattern of behaviour. 4. UNEP and WTO (2009) stated that international trade has a high probability of
being the main causal factor of the CO2 emissions increase. According to their report, the scale effect usually tends to compensate the technique and composition effects. Cole and Elliot (2003), after observing 32 developed and developing countries between 1975 and 1995, could see that when trade is
opener, the levels of CO2 emissions will increase because scale effect is found in bigger quantities than the technique effect. This leads us to think that countries do not have enough technology to reduce emissions at the same pace as production is increasing.
In addition to the previous effects, a term really important when talking about the relationship between trade and environment is the Environmental Kuznets Curve (EKC).
The Kuznets Curve (Figure 13) reflects the relationship which exists between income per capita and environmental deterioration or degradation. In the first stages of economic growth, we can see that degradation and pollution increase, but when we reach a certain level of income per capita (which will vary for different indicators) or the turning point the trend reverses, so that at high-income levels economic growth leads to environmental improvement. Due to this relationship, the environmental impact indicator is an inverted U-shaped function of income per capita.
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Figure 13. Environmental Kuznets Curve
Source: Yandle et al. (2002), p. 3
Different economists have confirmed this EKC inverted U-shape but with different methods, variables or conclusions:
Grossman and Krueger (1995) investigated the curve examining urban air pollution, the state of the oxygen regime in river basins, fecal and heavy metalcontamination of river basins together with income per capita in different developed and developing countries. They stated three important points about the EKC:
1. It was not found that growth makes irreversible harm to natural habitat. Air and water quality seem to benefit from economic growth once some critical level of income has been reached. The turning points vary depending on the pollutant but they usually happen at an income of less than $8000. 2. U-Shape curve might arise because, as countries develop, they cease to produce certain pollution intensive goods. 3. Evidence from earlier literature shows us that the strongest link between trade and pollution comes directly from induced policy response.
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Selden and Song (1994) also confirmed this inverted U-relationship. A data panel on emissions of suspended particulate matter, sulfur dioxide, carbon monoxide and oxides of nitrogen in 30 countries in three different periods of time was used. They concluded that all these gases exhibit inverted U- relationship and in the long run, emissions are likely to diminish. Besides, they added that pollution may be affected by both market forces and changes in government regulation. Holtz Eakin and Selden (1995) studied 130 countries (108 with complete sets of
data) between 1951 and 1986, focusing only in the relationship between CO2 and income per capita. They could find that variation in rate of economic growth
does not lead to dramatic changes in CO2 emissions and these CO2 emissions are being allocated to most populated places. Hettige et al. (2000) observed that industrial water pollution and income per capita relationship confirms the curve hypothesis. However, maybe this study is not very reliable because they only studied 12 countries in three different econometric exercises and they only used one single indicator of water quality (industrial water pollution).
There are other authors that only can find the relationship depending on the pollutant used:
Stern et al. (1996) cite Shafik and Bandyopadhyay (1992) who studied the EKC (in 149 countries) using deforestation and different pollutants (air urban pollution, drinking water quality, drinking river quality and urban sanitation) but he only could see that the relationship was confirmed with air urban pollution. In 2002, Yandle et al. reviewed all the literature available and reached a similar conclusion. They say: “There is no single EKC relationship that fits all pollutants for all places and times” adding that “it is really common with local pollutants but
very rare with CO2 emissions”.
Many EKC econometric studies also included different policy variables:
Panayotou (1997) observed SO2 emissions levels, economic growth and policy variables such as enforcement of contracts, efficiency of bureaucracy or the efficacy of the rule of law. This study comprised 30 developed and developing countries and investigated years 1982-1994. He could see that in the case of
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SO2, policies and institutions can significantly reduce environmental degradation at low income levels and speed up improvements at high income levels, flattening the EKC curve and reducing the environmental price of economic growth. Torras and Boyce (1998) used different variables such as air and water quality (7 indicators), income inequality, GDP, political rights and civil liberties. He could see that these variables have an influence when we want a quality environment. The countries with less income, less development, less political rights and less civil liberties, were less worried about environment than the ones that have higher values in these indicators. Adamowicz and McCarney (2005) says that the more democratic a country is, the greater levels emissions it has. In autocratic regimes there are less due to the lack of good governance which reduces prosperity, reducing per capita income levels and emissions. Besides, the openness environmental profits we find in rich countries may be coming directly from environmental degradation in poorer countries. Damania et al. (2003) and Welsch (2004) used corruption together with policy variables. Damania et al. (2003) saw that in these cases the effects of openness to trade on environmental stringency policy will be larger. Lower corruption would allow stricter environmental laws and more rigid enforcement of these laws. Welsch (2004) added that this issue will enhance prosperity, improving per capita income and the preservation of environment in terms of pollution.
Lead emissions are used as a variable in the studies of:
Hilton and Levinson (1998) who observed 48 countries between 1972-1992 and reached the conclusion that gasoline consumption increases steadily with income. The only way to reduce pollution would be by reducing the intensity of the activity done.
Energy was introduced as a variable in the studies of:
Suri and Chapman (1998) who investigated 33 countries (1971-1991) with the introduction of commercial energy consumption as a variable. According to them, when industrialized goods mature, they move to services and then more manufactured goods are imported from developing countries. As a result of this study, they stated that international trade and capital control might be needed.
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Frankel and Rose (2005) had a very different opinion. After having studied 150
countries in the 90s with CO2, SO2, trade openness and trade endogeneity as
variables to be studied, they concluded that CO2 emissions were unlikely to be addressed by national environmental regulations.
Several authors have used trade openness as a variable13:
Antweiler et al. (2001) studied over 40 developed and developing countries between 1971 and 1996. They could see that increases in a country´s exposure to international markets create small but measurable changes in pollution concentrations. Managi et al (2008) saw that there are differences in results, depending if the country is developed or not. He stated that the reason for that is the difference in resources and technological progress we can find.
Some economists rejected completely the EKC curve:
Moomaw and Unruh (1997) investigated 16 countries between 1950 and 1992
using CO2 and income per capita. They found that improvements in levels of CO2 were not correlated with income levels, but were closely linked with historic events related to the oil price shocks of the 1970s and to the policies that followed. Roberts and Grimes (1997) also rejected the EKC but only in mid-low countries. To do this statement, they observed 147 countries between 1962 and 1991 using
CO2 intensity and income per capita. They justified this assumption because of improvements in production efficiency in a small number of developed countries, combined with reduced efficiency in low and middle-income countries. Huang et al. supported Moomaw´s et al. and Roberts´ et al. opinions in 2008, saying that in most of the countries they could not observe any visible relationships. They believed that international cooperation would be needed. To reach this outcome, they used emissions data between 1990 and 2003 in 38 industrialized countries.
Some other authors said that statistical analysis on which the Environmental Kuznets Curve is based is not robust (Stern, 2004). According to Stern (2004), there is little
13 Some of them were commented in previous sections such as Cole and Elliot (2003) or Copeland and Taylor (2004).
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To sum up, we can come to the following conclusions from the different econometric studies and literature review about EKC:
There is not a global consensus concerning the effects that growth can have over environment: Some authors confirm EKC (Grossman and Kreuger,1991; Hettige et al., 2000), other authors said that in some pollutants the phenomena is confirmed whereas in others it is not (Yandle et al., 2002), others cannot stablish a visible relation in most of the countries (Huang et al., 2008), others reject EKC (Moomaw and Unruh,1997) and others said that statistical analysis on which the Environmental Kuznets Curve is based is not robust (Stern, 2004). The results obtained depend on what indicators are used and the time lapse it comprises.
CO2 emissions differ between developed and developing countries due to the difference in resources and technological breakthrough. International cooperation would be important. Legislation may improve environmental situation. In addition to income and pollution, political and social factors must be taken into account.
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Trade and Environment 3. Environmental Measures and Sustainability
3.1. Introduction
The problem of climate change and the different effects (scale, composition and technique) we have talked about previously is thought to have different solutions. In this section, we will see the solutions that are proposed by the public and private sector to mitigate the problem (mitigation measures) and the importance of sustainability in our world.
Mitigation and adaptation are the best approaches to fight against climate change and its negative impacts. Mitigation refers to different policies and actions that are taken in order to reduce greenhouse gases emissions and improve carbon reserves (forests and oceans e.g.). Adaptation refers to the different responses which are aimed at attenuating the detrimental effects of climate change or exploiting its possible future beneficial effects to avoid the use of policy and rules. In other words, mitigation reduces the magnitude and effects of climate change whereas adaptation increases the capacity of people or natural systems to face the consequences of the effects of climate change.
Mitigation and adaptation are different in respect to time and geographical scales. For example, although the costs of reducing the CO2 are specific of a place, the benefits of mitigation are global. The whole world will benefit from those reductions. On the contrary, adaptation costs and benefits are just local. Mitigation has benefits in the long-term due to the long permanence in the atmosphere of most of the greenhouse gases produced. Adaptation has just benefits at short or mid-term. United Nations Framework Convention on Climate Change (UNFCCC) (1992) mentioned this issue in their article 2 related to their objectives that consist of achieving stabilization of greenhouse gas concentrations
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The Stern Review (2006) evaluates the climate change and pollution impact on our global economy. Although the most severe damage will appear in the future, our current decisions can be crucial to block the possible future damage. Moreover, costs will be lower if a rapid and efficient response is done now than if it is done in the future. They conclude that success depends on building carbon markets, reducing deforestation and global cooperation in fields such as technology.
Before explaining the different solutions proposed, we should explain the concept of “externality”. An externality is created when a person or company action produces some negative or positive effects on a third party. So, human actions over environment would be considered as an externality because they are affecting society through the damage of environment. Due to this negative externality, associated with the companies’ production action, market failures appear and governments should intervene to correct this failure.
This intervention is justified because of efficiency reasons, reducing economic effect due to increasing pollution, and because of equity reasons. As the whole cost of the negative externalities that individuals cause does not affect them, they do them in excess. On the contrary, as all individuals do not receive the totality of the benefits arising from the different activities that create positive externalities, they will scarcely carry them out.
As for solutions to the problem, we must divide these measures into the ones applied by the public sector and those applied by the private sector.
3.2. Public and Private Sector Solutions
The analysis of the public sector activities has two branches: the normative and the positive analysis. The normative analysis focuses on what the State should do, while the positive analysis explains what the State really do, as well as its actions consequences.
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According to the normative analysis, if there are important market failures14, the State must intervene because market is supposed not to be “Pareto efficient”. The Pareto´s Principle says that the allocation of resources cannot improve a person´s welfare without
worsening another person´s welfare. Nevertheless, to be Pareto efficient two issues must be fulfilled:
There should be a way of improving a person´s welfare, without worsening another person´s welfare. It should be shown that the real politic process and the bureaucratic structure of a democratic society are able to correct this market failure and reach an improvement according to Pareto.
The positive analysis believes that it is preferable to observe how the correcting measures are designed and how they are applied. Several economists think that economy must focus its attention on this positive analysis; however, economists´ analysis of the role that the State should carry out is considered as an important element of the political process of modern democracy systems.
The first public sector measures we must mention are based on an increase in prices of certain commodities in order to restrict their demand and are known as “Price Approach Policies”. By using this policy, both consumers and producers will adopt a more environmentally friendly behaviour. We can highlight three main mechanisms:
1. Ecotaxes, also known as Pigou Taxes15: the goods price must include the direct and indirect cost (the social cost) of the production process. In the short term, this tax will cause a negative reaction in economic agents because of the higher price of the good and consequently they will look for cheaper products. In the long term, this will be translated to a search for more preservative environment technologies. They reduce another type of taxes, which would benefit people but they have the disadvantage of being really difficult to apply as there are disagreements on the money of tax that will be paid (Baumol, 1972, p.11).
14 Imperfect competition, imperfect information, externalities, public goods and misemployment are considered as market failures 15 Arthur C. Pigou, British economist who develops Alfred Marshall’s externality concept.
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Mankiw (2009) refers to this point in the case of USA. He cites Nordhaus (2007, p.3) who bets for a $30 tax per carbon ton emitted, and increasing this carbon tax to $85 in 2050. Contrary to this view, Nicholas Stern (2006) estimates the external cost of carbon emission at nearly $300, which is more than ten times the Nordhaus number. Anyway, it is believed that the Government should decide if imposing a carbon tax or not and the quantity to be imposed. They should consider the cost that society will support to take the decision of introducing ecotaxes or not. 2. Use of subsidies. The State, instead of punishing people and companies who pollute, will create some incentives to the ones that help to reduce pollution by using subsidies. With these mechanisms prices are reduced, both production and consumption. This instrument will promote more environmental efficient products, but they are not very much used in the real life because they can make companies not enter the market (acting as an entry barrier), they are not efficient in the allocation of resources and they are not very transparent (OECD, 2011). 3. Tradeable emission certificates. Companies obtain an authorization to emit different number of polluting units. Then, they create a market where these emission allowances can be auctioned or traded, at a price set by the market. This price will be agreed between the polluter and the affected party without the intervention of the State (Ronald Coase, 1960). There are two main problems with this system: The initial allocation. Companies that spend their money on controlling pollution will receive less allowances and they will have more problems to reduce the emissions later. This allowances system only works well when it does not matter where the pollution takes place. However, in a lot of situations this is not like that. For instance, in US the trade allowances which were introduced to control acid rain did not have this fact into account (Stiglitz, 2000, p. 264).
Having clarified the three price approach policy measures, we can extract the following findings:
Different countries will choose different combinations of these approaches for different sectors, depending on their policy mix, history, current conditions and on the interaction between climate change policy and other policies (Stern, 2006).
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Ecotaxes might be most useful in pricing carbon emissions from sectors that have a large number of small emission sources. The use of trading emission systems is more favourable in sectors which possess large, stationary sources of emissions such as heavy industry or electricity generation because transactions costs for involvement in trading will be lower. In most cases, these sectors are competing between them. Including them in an international trading system can help them reduce any risks of different carbon prices being imposed at the domestic level, which can have some impact on competitiveness.
Most economists believe that the best way of stopping external effect is using the three previous solutions based on market but traditionally Governments have been using direct regulation because it reduces uncertainty.
It is known for sure which quantity is the maximum level we can pollute (quantity-based regulation), but it does not reduce pollution efficiently (marginal cost from pollution regulation can vary between companies) and it gives few or null incentives to companies to pollute less than allowed by law. Among the critics we can highlight Frankel and Rose
(2005) that said that growth and trade had a damaging effect on CO2 emissions owing to the externality global nature. Thus, they had a non-optimistic view of environmental policy because they think that it is not likely there will be a good measure to solve the environmental problem.
The previously mentioned regulation is based on results, but Governments usually focus more on the levels, practices and factors which produce pollution (factor regulation). For example, this type of regulation would be used when the State forbids the use of certain kind of carbon or makes compulsory the use of purifying plants to reduce pollution (Stiglitz, 2000, p. 265).
So we can conclude that when it is feasible, it is better to focus on results, but it has the problem that it is not as easy to control as the factor regulation.
Another mitigation policy very closely linked with regulation based on results is innovation. A very good result based on regulation can give incentives to innovate to have an increase in control capacity. This policy can provide an incentive for firms not only in their investment decisions towards low carbon technologies, but also to devote resources to innovation (Baker et al., 2008). As we can see in Figure 14, R&D
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Trade and Environment expenditure in different countries has been increasingly growing since 2005 in every sector (business sector, public sector, private nonprofit sector and higher education sector).
Figure 14. Total Research and Development Expenditure 2005-2012 (€/inhabitant)
1.400,0 European Union (28 1.200,0 countries) 1.000,0 United States 800,0 600,0 China (except Hong Kong) 400,0 Japan 200,0 0,0 South Korea 2005 2006 2007 2008 2009 2010 2011 2012
Source: Own application using Eurostat (2016a)
However, there is much controversy on how the best way of promoting innovation is. Some ecologists are not really convinced about the power of these economic incentives, but industry must be compelled to innovate. They think that innovating firms have more profits than costs; however, the incentives provided by the price approach system policy are not enough to guarantee that producers focus their attention on the environment field.
Finally, we can find the information programmes approach. It is based on the disclosure of information by the companies.
Figure 15. Evolution of Number of Ecolabels Licences EU 2005-2010
Evolution of number of ecolabels licences EU 1500
1000
500
0 2005 2006 2007 2008 2009 2010
EU (27 countries)
Source: Own application using Eurostat (2016b)
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As is the case of innovation, ecolabelling has increased (see Figure 15), despite the fact that it has three main disadvantages:
1. The high cost of giving this information. 2. The possible creation of alarmism: Most people would suppose that if a chemical substance appears in the list of dangerous substances, it is truly dangerous. So, they will pressure the company to get rid of this substance due to their perceptions of risk rather than the real risk, without evaluating previously the cost or profits of that measure (Gowda and Fox, 1998) (Beierle, 2003). 3. Unintended use of information: Disclosure on the internet creates a lot of new opportunities for communication, but it also makes information access geographically boundless and anonymous. Disclosed information may be used by terrorists or can be a way of possible corporate spying (Beierle, 2003).
In addition to public sector solutions, we can find that sometimes private markets manage to solve externalities without the help of the public sector. The easiest way is internalizing the externality creating economic units which have enough size to stand the externality action consequences. In order to do this, property rights have a great role.
Coase Theorem (1960) established that in order to correct negative externalities, the State intervention is not needed as long as property rights are well-defined and negotiation costs are null or small. If these two conditions are fulfilled, the two parts involved in the process will have a private agreement and will obtain an optimal social result. It will be reached independently of whom is assigned the property rights, because the possibility of renegotiating between both parts and improving the initial situation point will be open. This Coase Theorem will be more relevant when the number of affected agents is smaller, because it would not be so hard to reach an agreement.
The private sector solutions inconveniences are that normally transaction costs are really high to get together two parts and it is not very easy that both parts have a profitable agreement because of imperfect information or public goods (a lot of externalities affect a public good)16.
16 A public good is a product that one individual can consume without reducing its availability to another individual and from which no one is excluded. Examples of public goods are national defense, fresh air, public parks or education.
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Trade and Environment 3.3. Company and Sustainability
Companies are the main source of economic growth and employment (Baumol, 1993) (Carree and Thurik, 2003). They are the ones that are suffering more and more pressure from different communities, activists, governments and press media to become green (Garriga and Melé, 2004) and that is why the environmental measures we have referred to previously are increasingly applied. Provided that they are well implemented, sustainability can be reached. In Table 7, we can observe some definitions that show that sustainable development is open to different interpretations that help us understand the concept that the word “sustainability” involves.
Table 7. Sustainability Concept by Different Authors
United Nations Brutland Definition: meeting the needs of the present without Report (1987) compromising the ability of future generations to meet their own needs”. Limits: the ones imposed by the current state of technology and social organization on environmental assets and by the ability of the biosphere to absorb the effects of human activities.
Daly (1991) Contradictory notion because we are living in a world in which ecosystems are finite. At some point, there will be an economic growth with more use of resources and production of waste would be unsustainable. Qualitative rather than quantitative improvements should be the target to reach.
Greene and Wegener Definition: holding the sum of capital stocks of all the previous (1997) citing Pearce three types of assets (human, environmental and and Warford (1993) manufactured) at least constant, to make sure that future generations possess the same capability to develop as current generations.
Aalborg Charter of Definition: “achieving social justice, sustainable economies European Cities and and environmental sustainability”. Towns Towards Sustainability (1994)
Source: Own Application from different authors
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Whatever the definition of sustainability may be, sustainability is becoming a primary concern for companies. Nowadays, according to the triple bottom line (see Figure 16), a company should be economically feasible, environmentally sustainable and socially responsible.
Figure 16. Triple Bottom Line
Social Management
Economic Management
Company Sustainable Management
Environmental Management
Source: Ramírez (2006)
Alina Alea García (2007) cites Gonzales (2005) and states that efforts on being sustainable must be oriented to:
Have a rational resources use policy, avoiding wasting them. Participate with the different groups of interest on meetings approaching the environmental problems. Ethic image of their products, especially in press media. Create insulation systems against pollution, noise, smell generation that disturb society and harm the environment. Sponsor different environmental events. Improve non-polluting productive processes.
Nevertheless, not every company integrates environment on their decisions and policies. Aragón-Correa (1998) cites Roome (1992) who made a classification of the companies according to their use of environmental measures (see Figure 17):
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Figure 17. Roome Classification
Leading edge Commercial and natural environmental excellence
Compliance-plus
Compliance
Non compliance
Source: Own Application using Aragón-Correa (1998)
Observing the figure, different types of companies exist:
“Noncompliance” companies: the ones with the least advanced environmental measures and that were not applying any type of environmental regulation and have no will to do so. “Compliance” companies: the ones that applied environmental policies in accordance with the laws of the country. “Compliance-plus”: the firms that not only are implementing environmental measures because of law but also have their own natural environmental management systems. “Commercial and natural environmental excellence”: firms which are the ones that apply preventive methods in their natural environmental and overall managerial practices. “Leading edge”: firms whose postures and measures are showing the way for future development to other companies.
Once we have seen this classification, in Table 8 we will examine some of the leading edge companies from different industries and the strategies they follow to be green or sustainable. We can observe that these strategies are connected with energy efficiency, recycling and R&D.
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Table 8. Different Companies Sustainable Strategies
Companies Sustainable Measures
Transport Industry Improving energy efficiency of automobiles (fuel injection technologies), reducing CO2 emissions The BMW Group Sustainable plants Toyota Energy-saving tyres Michelin Optimization of painting processes
Iron and Steel Industry Energy-saving modifications Alternative iron - making processes Siemens High-strength steel for lighter and more efficient automobiles ULSAB-AVC
Electronics Industry Energy efficiency in data centers Product redesign IBM More efficient disposal of products, recycling Sharp Optimization of printing infrastructures Xerox
Source: OECD (2009)
Finally, in Table 9 we will sum up the main advantages or disadvantages that companies may have trying to be more sustainable.
Table 9. Cons and Pros of Being Sustainable
Pros Cons
Lower costs in the long run It depends on the strategies, structure, industry and objectives of the firm to be good to the firm or not
Better Brand Image More employees needed (more labour costs)
Preservation of the environment Lack of experience of the firm can be a problem
Sustainability as a competitive A continuous improvement of environmental advantage (more innovation) policies is necessary
Better use of inputs (more productivity, Legislation of the country has a great role profitability and less waste)
Safer workplace conditions coming Economic, social and environmental areas must be from savings in other costs working coordinated
Source: Own Application using Hart (1995)
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In this table, we can observe the following important points:
Sustainability can be a competitive advantage: It involves more innovation for firms, obtaining a better brand image, a better use of inputs and a cost advantage (Hart and Ahuja, 1996). A lot of capital is needed: To obtain this objective, it is necessary employees involvement and continuous efforts on improving emission reduction measures, so there will be greater labour costs. It depends on the industry, targets and strategies of the firm: If the firm has only short run objectives it might not be really beneficial to be environmentally friendly because profits usually come in the long run. Economic, social and environmental areas must be working coordinated: The different environmental approaches made by firms must affect the design of every level of strategy (corporate, functional, business and operative) and even should be central if they want to succeed in the long run (Shrivastava, 1995). Legislation of the country has a great role: All companies have to take into account the legislation of the country where they are developing their activity. The Porter “Induced Innovation” Hypothesis claims that firms which are situated in countries with the most stringent regulations are more likely to have a competitive advantage rather than a competitive disadvantage. With these high standards, firms have no other choice than innovate and companies with a high degree of innovation tend to be more competitive (Tietenberg and Lewis, 2009, p. 586).
In sum, nowadays companies have been using more and more environmental measures to be green. It is believed that fulfilling ecological norms is good for the firm in terms of brand reputation, profitability, costs in the long run and environment preservation. That is the reason why we can see that different important companies from different industries have integrated energy efficiency, recycling or product redesigning in their strategies and policies.
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Trade and Environment Conclusions
International trade has been increasingly growing since the Second World War and at the same time global environmental degradation and climate change have become an increasing world concern. In this project we have reviewed the most significant aspects of the relationship between trade and environment.
First of all, we have referred to climate change and the different valuation methods (direct and indirect) and indicators that measure it. There is a broad agreement that combining them is important to assess more precisely the different impacts on environment and respond to them.
Secondly, the implementation of free trade and multilateral agreements favoured the expansion of trade and allowed free trade to start to impose on protectionism. However, recent global trends have appeared that favour regionalism at the expense of multilateralism. This can be harmful, especially for developing countries, which are generally excluded from this type of agreements. Besides, the liberalization of trade has led to the falling of transport costs and consequently, an increase in transport. Due to the previous facts, different environmental problems such as the increase in GHGs emissions and the use of fossil fuels have become a greater concern.
Therefore, in our project we have reviewed different literature to give us a global vision of the different economists’ views on the impact of trade expansion on environment. Based on this literature we can see that there are three main effects. More trade will increase CO2 emissions due to more economic activity (scale effect). However, with trade opening it will be easy to have new cleaner technologies that will reduce emissions (technique effect) and lead to change the strategies of the different groups involved in the exploitation of less energy intensive sectors where they can be more efficient (composition effect). Therefore, it is not possible to determine which effect has trade openness on environment, it will depend on the intensity of each effect. After reviewing
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Trade and Environment these studies, we can state that these effects will depend on how quickly trade opening measures are implemented and on the resources that a country has.
On the one hand, according to the EKC, it is believed that at high income levels economic growth will lead to environmental improvement. However, there is not a global consensus about the confirmation of this relationship between environment and income per capita. Some economists show that this relationship is only confirmed in some specific pollutants, others believe that economic growth does not lead to dramatic changes in emissions and others affirm that the variables and statistical method used were not good enough to confirm this assumption. On the other hand, based on different econometric studies, we have also observed that environmental policy plays an important part in the consequences of climate change over trade. Therefore, there is a debate about how the public and private sector must intervene to solve the different external effects caused by climate change to avoid distorting individuals’ decisions.
To sum up, after reviewing literature about trade and environment, trade openness is seen as a key element explaining the increase in environmental problems in our world. Eliminating reduction barriers has contributed to the development of transport, communications and thereby, the degradation of environment. Therefore, every level of society and institutions are increasingly concerned about this issue, a great deal of publications and researches are coming out, agreeing that global cooperation and urgent action are needed.
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ANNEX 1
Table 10. Most Important Articles GATT/WTO
Article I: Known as the “most favored nation” clause, it states that every country belonging to the WTO must be treated equally: if a nation imposes low tariffs on some trading partners, these low tariffs must be implemented in every WTO trading member partner of the country.
Article VI: This article mentions the concept “dumping”. “Dumping” is defined as the sale of export goods in another country at a lower price than the remaining at home, or at a lower price than production and shipping costs. WTO article claims that an importing country might put a tariff on goods being dumped into its country by a foreign exporter.
Article XI: It is stated that countries should not keep quotas against imports. This article does not apply for temporally restrictions in exports due to preventing or solving a lack or scarcity of food or other products important to the export contracting part, or those that are necessary for norms application over product control quality, product commercialization and classification intended to international trade , or with restrictions of agriculture or fishery products when they are needed to the execution of governmental measures that have the objective of restricting the national product quantity that can be traded or in the case that there isn´t important national production of a similar product.
Article XVI: Countries ought to declare export subsidies provided to particular firms, sectors or industries. This article deals with export subsidies, benefits as tax breaks or other incentives for firms that produce goods specifically for export. It is stated that countries must inform each other of the extent of subsidies and talk about the chances of getting rid of them. Article XIX: Called the safeguard provision or the escape clause, it lists the conditions under which a nation can raise temporally tariffs on particular products. This can be done whenever domestic producers are suffering due to import competition.
Article XX: It permits countries to adopt their own laws in relation to environmental issues, whenever these laws are applied uniformly to domestic and foreign producers, not discriminating against imports.
Article XXIV: It allows regional trade agreements to be introduced. It distinguishes two types of regional trade agreements: free trade areas and customs unions. In a free trade area a group of countries voluntarily agrees to remove trade barriers between themselves and customs unions, which are also free trade areas where the countries adopt equal tariffs between themselves and the rest of the world.
Source: WTO (1986)
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