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Globalization and the environment
Workshop in Hanoi. Friday, 8th May 2009
Jørgen Birk Mortensen
Department of Economics
Copenhagen University
• Increasing concern over the effects of international
trade on the local and the global environment.
• Even if increasing trade succeeds in raising incomes and
consumption it will lead to more pollution.
• Income gains will increase the demand for
environmental quality, increase investment in pollution
abatement and generate revenues for enforcement of
environmental regulation.
• “Rather dramatic shift in Vietnam’s trading patterns
has important implications for the environment and
the use of natural resources”.
• Increasing manufacturing and export activity in water
and toxic pollution-intensive sectors compared to
less pollution-intensive sectors.
(M.Mani & S. Jha: Trade Liberalization and the
Environment in Vietnam. World Bank Policy Research
Working Paper. 3879)
Some important environmental economic concepts:
• Market failure.
• Market system often generates the wrong level of
environmental quality
• External costs. The market price or the production costs
exclude its social impact, cost, or benefits.
• Public goods. A person or nation cannot be excluded from its
provision.
• A potential problem is free-riding.
Government/regulation failure:
• Government intervention can make things worse or make the
total costs too high.
• (The climate change policy of the European Union).
• Combining efficiency and goals for distribution.
International Trade. Why do countries trade?
• Adam Smith (1776) and Ricardo (1817): Greater efficiency
result when countries specialize in producing those goods for
which they have a natural advantage.
• Abundant resources will used more in the production of
goods and services than scarce resources.
• A country benefit by an increase in welfare from freer trade
and suffer a reduction in welfare when trade is restricted
through quotas and tariffs.
Income and the demand for environmental
quality.
• Do income influence demand for environmental protection?
• As people become wealthier, they seem to demand more
and more environmental protection.
• Normal good. Luxury good.
• It is generally accepted that environmental quality is a
normal good, whether it is a luxury good is less clear.
• Environmental quality is not a homogeneous good.
Is trade good or bad for the environment?
• The many possible effects of trade on the environment
can be divided into categories:
– those that operate via GDP in the same manner as
investment, technology and other sources of economic
growth;
– and those that are peculiar for trade alone and thus hold
even for a given level of GDP.
• In each category, there are beneficial and detrimental
effects.
• Depends on what dimension of environmental quality
is at stake.
The environmental Kuznets curve.
• In a developing industrial economy, little weight is given to
environmental concerns, raising pollution.
• After attaining a certain standard of living focus change greater weight to a cleaner environment.
• No evidence that this relationship hold for all types of
pollutants.
• It is not hard to explain why trade and growth
could help reduce local air pollution but
increase greenhouse-gas emissions.
– The later constitutes a global externality.
• Due to the international “free rider problem”
regulation on the national level is inadequate
to address it:
– Each country individually would have little
incentive to cut back emissions because it would
bear the economic costs alone even through the
benefits accrue to all.
Decomposition: Scale, Technique and Composition
Effects.
Useful to decompose changes in pollution into fundamental forces:
• The scale effect: Measure the increase in pollution that would be
generated if the economy were simply scaled up, holding constant
the mix of goods produced and production techniques.
• The composition effect: The change in the share of the dirty
goods in national income.
• Technique effect: Holding all else constant, a reduction in the
emissions intensity will reduce pollution.
• Trade liberalization and capital accumulation tend to raise the
productive capacity of the economy (scale effects in each case)
but they may stimulate very different types of economic activity
(their composition effects will differ).
• Both types of change could lead the government to tighten
environmental policy (which will lead to a technique effect).
• Trade and growth both stimulate economic activity, and
therefore both increase the economy’s scale.
• The sum of these effects of trade on the environment may be
positive or negative, depending on the industry or pollutant
involved.
International Trade with market failures.
• Consider a small country facing both market failures and the
prospect of trade liberalization. The small country produces or
consumes a commodity with adverse environmental impacts.
• The result of this externality is a “wedge” between private and
social costs of production.
• Liberalizing trade in a good with adverse environmental
impacts (uncontrolled) improves a country’s welfare, if it
imports the good, but if it export it, the negative
environmental effects are subtracted from the gains from
trade.
• International Trade with optimal environmental regulation
(Local pollution).
• Suppose the small country combine a trade reform with an
environmental policy intervention sufficient to internalize the
externality (pollution tax).
• In contrast to the situation in which no environmental
intervention occurs, the importing and the exporting country
will get a net gain from trade.
International Trade and transboundary pollution.
• When several nations are involved an international authority
capable of levying and enforcing environmental regulation is
absent. National governments must coordinate their actions.
• An increasing number of environmental externalities are truly
global. The best examples are greenhouse gases. A ton of CO2
creates the same global warming potential regardless where in
the world it is emitted.
• Even localized environmental damage, such as deforestation, is
increasingly seen as a valid object of international concern.
• A country concerned about its own health or environment has
the right to tax or ban products that it regards as harmful, so
long as it does not discriminate against foreign producers.
International Trade and transboundary pollution.
• But is it also legitimate for importing countries to discriminate
according to how a given product was produced?
• Foreign residents care about localized environmental damage
even there is no evident link to their interests. Non –use value.
• People place value on keeping a piece of nature unspoiled, even
if they know they will never see it.
• Citizen in one country may have a stake in another country’s
environmental and nature politics.
The leakage problem.
• The “green paradox” of environmental policies. Demand
control policies only lowers fossil fuel consumption to the
degree that resource owners decide to decrease their supply.
Countries doing nothing with regard to climate protection
enjoy an implicit subsidy on their energy demand.
• Without supply cuts, world energy prices fall by so much that
countries outside the Kyoto agreement consume and burn
exactly the quantities not demanded by the Kyoto countries.
• The supplier reaction depends on the temporal course of the
demand restrictions that the suppliers expect. If future
restrictions are expected to be stricter, then suppliers have an
incentive to extract more now.
The effects of environmental policy on competitiveness.
• There is little evidence that the stringency of environmental
control measure caused export patterns to deviate from
patterns predicted by the resource endowments of the
countries.
• The explanation : Pollution abatements costs are a relatively
small proportion of the total costs of production.
• There is little evidence that firms choose to locate new plants
in states with less stringent environmental regulations.
• Firms operating in a number of states find it cost-effective to
operate all plants to the same environmental standards.
The Porter hypothesis.
• Tighter environmental standards trigger innovations that
may increase a firm’s competitiveness and outweigh shortrun costs to firm of complying with the regulation.
Supported by evidence from some case studies.
• At present there is no theoretical justification for the Porter
hypothesis and no firm empirical evidence.
• However, it received widespread attention because it
provided an attractive idea to policy-makers to justify
tighter environmental regulations.
International competition among governments.
• Governments also compete against one another for
economic gain - to attract firms, for the purpose of
providing jobs, tax revenue, income and advantages for
existing domestic firms.
• Governments use tax policy, including tariffs, and regulatory
policy, including environmental regulation. The government
may relax environmental regulation to attract new
industries.
• Will countries with lax environmental regulation end up
specializing in dirty industries?
Pollution Havens.
• Environmental regulations cost polluters money. A
country with weak environmental regulations
would offer a cost advantage to polluting industries
and would thus tend to specialize in these
industries.
• Low- income countries will become more pollutionintensive.
• The general consensus of the empirical literature on
pollution havens and the effect of environmental
regulation on trade is that the effect is very weak
at best.
The “race to the bottom” hypothesis.
• International trade and investment will put downward
pressure on countries’ environmental standards and thus
damage the environment.
International trade, transport and pollution.
• The lack of environmental regulation in international
transport. Social costs of emissions related to transport are
not internalized.
• Transport prices are too low.
• Tax on air transport.
• Tax on maritime transport. Global maritime transport is the
main vehicle for global trade – 80 % of flows in terms of
volume and causes a considerable amount of pollution.
Conflicts between international trade and
environmental agreement.
• Trade agreements have provided foreign producers with
legal vehicle for challenging the domestic regulation of their
trading partners, if those regulators appear to discriminate
unfairly against their exports.
• The “tuna – dolphin” case.
• GATT dispute panel found that an American ban on imports
of tuna from nations whose dolphin protection standards
were laxer than US ones violated US treaty obligations
under the GATT.
Do trade and environmental regimes always pull in
opposite directions?
• Russia and the Kyoto Protocol. Russia decided to go along for
EU support of Russia’s application to accede WTO. Europe
wanted Russia to sign the protocol, and Russia wanted to
become a member of WTO.
• An international ban on subsidies to fossil fuels - reducing
carbon emissions.
• removing an economic distortion and contribution to deficit
spending.
• Should green countries use trade restrictions as a way of
changing the environmental practices of their less green
trading partners?
Concluding remarks
• More trade among nations does not necessarily lead to
greater pollution at home or abroad. But it could.
• Removing trade frictions without an efficient environmental
policy, can create circumstances that decrease social welfare
and greater levels of pollution.
Concluding remarks
Local pollution:
• If a country already has efficient environmental policy in
place, trade liberalization should increase welfare.
Global pollution:
• If pollution is a public bad relocation of pollution intensive
industries
• to countries with les stringent environmental protection
may increase global pollution and decrease gains from
trade.
• Uncoordinated regulation of pollution at a national level
does not eliminate all market failures, and free trade need
not raise wellfare.