A heck of a lot, as it happens.  Let’s take a quick look at this important topic.

When we liberalize trade, this increased trade provides an important boost to our economy.  This increase in the “scale” of economic activity will also increase the scale of energy use and environmental damage, including through the greenhouse gas emissions coming from transportation.

Historically, most trade-driven growth since the Industrial Revolution has come from the developed OECD countries which are responsible for 77% of the total greenhouse gas emissions in the past.  However, economic growth and greenhouse gas emissions and environmental damage by emerging and developing countries, especially in East Asia is now increasingly significant.  Global greenhouse gas emissions have roughly doubled from the beginning of the 1970s to 2005.  It is estimated that two-thirds of new carbon emissions are from non-OECD countries and the future growth in emissions will be much greater from non-OECD countries than from OECD countries.  Over the past 3 decades, China has had the world’s fastest economic growth, about 10% a year on average.  China is now the world’s largest greenhouse gas emitter, and according to the World Bank, China has 16 of the world’s 20 most polluted cities.

In fact, most of emerging Asia has a dirty environment.  According to an Environmental Performance Index, most of emerging Asia has low world rankings.  Malaysia was 26th, Taiwan 40th, Korea 51st, Thailand 53rd, Vietnam 76th, Indonesia 102nd, China 105th and India 120th.  They are at least better off than the poor countries at the bottom of the scale -- Mali, Mauritania, Sierra Leone, Angola, and Niger.

These Asian economies are following the same policy that the West did decades before -- “grow now, clean up later”.  London used to be famous for its "pea soup" fog from the 14th to the 20th Century.  London was naturally prone to fog, and the combination of coal smoke and fog created a brownish, gritty smog that came to be known as "pea soup."

At the same time, this increase in prosperity provides us with the capacity to clean up environmental damage.  But just because we have the financial capacity to clean up the environment does not mean that we will automatically do it.  Our societies and governments must want to clean up environmental damage.  Thus, it is not surprising that environmentally conscious countries, like Switzerland, Sweden, Norway, and Finland have the best global rankings in the Environmental Performance Index.

Fortunately, as we become wealthier, many citizens pressure their governments into cleaning up the environment (however, this effect is much weaker for global issues like climate change, rather than national environmental problems – this is the classic free-rider problem as greenhouse gas emissions are released into the “global commons”).  Citizens can also pressure governments into applying “polluter pays policies” through abolishing subsidies and implementing environmental taxes such as by putting a price on carbon.   This is the key.  And as we become wealthier, our societies usually become more democratic and non-governmental organizations (like Greenpeace, Friends of the Earth and World Wide Fund for Nature) are allowed to play a role, including lobbying for better environmental policies.

These NGOs play an important role because in some countries powerful business groups and selfish consumers do not care sufficiently about the environment.  BP is committed to a sustainable environment, but does not have a good record as the recent incident in the Gulf of Mexico shows.

The United States is an interesting case in point.  It is ranked 39th in the EPI.  The US score reflects top-tier performance in several indicators, including provision of safe drinking water, sanitation, and forest management. But poor scores on greenhouse gas emissions and the impacts of air pollution on ecosystems dragged down the overall US rank.  In fact, 22 of the EU’s 27 members outrank the US.  Japan ranks 21st.

There is even more to it than that.  As economic development proceeds, industrialization will usually transform itself from dirty to cleaner industrial activity as we move up higher technology activities.  And as development goes even further, the services sector takes over from the manufacturing sector as the main part of our economy.  The services sector is usually more environmentally friendly, although computer waste is becoming an increasing problem.  This is one of the reasons why the rich countries do so well on the EPI.  It is not just good policies.  It is also sometimes facilitated by the fact that we can outsource dirtier activities to developing countries which may be “pollution havens” because of weaker environment regulations.

Importation of environmentally sound technologies and environmental goods and services can bring many environmental benefits to the whole world as 90 per cent of the global environmental goods and services industry is located in OECD countries.  Indeed, trade in such goods and services has increased dramatically over the past decade or so.  These benefits come through four ways: import of capital and intermediate goods which a country could not have produced; increased communication opportunities between countries allowing developing countries to learn about production methods and design from developed countries; trade can increase the available opportunities for adapting foreign technologies to meet local conditions; and the learning process made possible by international economic relations.

In fact, a large number of climate change mitigation technologies exist, but are not used to their full potential.  A study by the International Energy Agency demonstrates how employing technologies that already exist or that are currently being developed could bring global energy-related CO2 emissions back to their 2005 levels by 2050.  Another study shows how emissions may be stabilized until 2050 based on existing technologies including improved fuel economy in cars, reduced reliance on cars, more energy-efficient buildings, improved power plant efficiency, substituting coal with natural gas, and carbon capture and storage in power and hydrogen plants respectively.  Technology is also central to the challenge of adapting to climate change such as infrastructure for dykes, sea walls, harbours, railways, and building design and development of drought-resistant crops.

One of the reasons is why these technologies is not fully exploited is that there are too many trade barriers which impede the transfer and implementation of technologies.  Import tariffs on solar thermal panels are particularly high in Brazil (20%) and China (35%).  Technical regulations which differ from international standards in some countries hinder trade in solar heating and cooling systems.  Non-tariff barriers for energy efficient motor systems also hold back trade.  Sometimes public procurement of district heating and cooling systems favours domestic suppliers, but results in less effective technologies.  Concerns over respect of intellectual property rights also mean that some exporters are refusing to sell climate change mitigation technologies to certain countries like China, India and Korea.  The current Doha trade negotiations aim to open markets for environmental goods and services like wind and hydropower turbines, solar water heaters, photovoltaic cells, tanks for the production of biogas, and landfill liners for methane collection.

Overall, some argue that there is an “environmental Kuznets curve”, meaning that although trade opening and GDP growth may lead to an initial deterioration in the environment, as GDP growth continues to increase the environment will start to improve again.  However, most studies suggest that for CO2 emissions there is no such curve as carbon emissions continue to increase.

Overall, there are three dimensions to the scale of environmental problems caused by economic growth.  There are environmental problems at the national level which should be addressed by national policies.  There are regional problems like acid rain in East Asia caused by SO2 emissions from China.  And there are global environmental problems like climate change caused by CO2 and other greenhouse gas emissions.  International cooperation is necessary to pressure governments into implementing the necessary polluter pays principle policies at the regional and global levels.

(ii) Impact of the environment on trade.

Climate change and other environmental damage can also have an effect on international trade:

. Agriculture is one of the sectors most vulnerable to climate change, and countries with a comparative advantage in agriculture like Australia and many African countries could see the comparative advantage adversely affected through desertification.  Other colder parts of the world in the mid- to high-latitudes will benefit.

. Trade infrastructure like ports, roads, railways, airports and bridges can be dangerously at risk of damage from rising sea levels and increased instances of extreme weather.

. New sea routes are becoming accessible like the Northwest Passage, the shortest shipping route between the Atlantic and the Pacific, which was free of ice and navigable for the first time in modern history in 2007.  The duration of the navigation season for the Northwest Passage is expected to increase.

. Many tourist attractions rely on natural assets – like beaches, clear skies, tropical climate or abundant snowfall.  A rise in sea levels or changes in weather patterns might deprive countries of these natural assets.

(iii) Environmental concerns regarding traded goods

Many developed countries impose environmental and health regulations on imports like limits on pesticide residues in tea leaves.  This is fair enough unless such regulations are being used as another form of murky protection.  Poor developing countries need to be able to export in order to develop.  We should therefore help these developing countries understand these regulations, and be better able to adapt their products in consequence.  But developing countries often complain that such regulations change frequently, and that they are very different between different markets.

Production and process methods are another similar issue.  An interesting case was the import of shrimp into the US a few years back, as reported by the OECD.  American consumers love shrimp, but they did not love the fact that endangered sea turtles were drowned in shrimp trawl nets.  An American NGO took the government to court, which ruled that shrimp trawl nets operating in US waters should be fitted with cages (known as “turtle excluder devices”, or TEDs).

But environmental groups and the US shrimp-fishing industry were unsatisfied.  US shrimp fishers felt that the measure gave foreign fishing fleets an unfair advantage in their market, while environmental groups wanted to see the scheme enforced on an international level.  Thus, the US imposed an embargo on shrimp imports from any country without a turtle protection scheme similar to that of the United States.  A number of Asian countries took the US to the WTO Appelate Body which made clear that according to WTO rules, countries have the right to take trade action to protect the environment (in particular, human, animal or plant life and health) and endangered species and exhaustible resources.

Fine, but the TEDs imported into Costa Rica from the US were soon found to be unsuitable for use in the shallow, debris-clogged waters in which Costa Rican fishermen trawled. Heavy, blocked-up cages meant that more fuel had to be consumed and fewer shrimp were caught.  The Costa Rican authorities came up with a modified TED that better suited their own local conditions, and were eventually able to convince the US authorities that their device offered an equivalent level of turtle protection.

Cases such as the one on TEDs show that there may be scope for designing regulations that can more easily be adapted to local conditions while still satisfying the environmental objective. A general problem for developing countries, however, is lack of capacity to meet such requirements.  We need to provide developing countries with sufficient time to react to a regulation, and even consult with foreign exporters or taking other steps to ensure that their proposed new regulations do not come as a surprise.

(iv) Can environmental policies harm our competitiveness?  Should we beware of green protectionism?

As countries are now implementing or considering the implementation of carbon taxes or cap-and-trade schemes, the issue has arisen of the possible resultant competitive disadvantage of industries (especially energy intensive industries) in those that implement such climate policies versus industries in countries that do not implement climate policies.  This can occur where for example one group of countries commits themselves to specific targets for emissions reductions, while others do not adopt targets.

This factor can distort trade flows, and it can also encourage "carbon leakage", meaning that investment moves from countries with climate policies to countries without carbon policies (the latter being called "pollution havens").  Where carbon leakage takes place, the climate policies implemented by one countries may not lead to a reduction in global carbon emissions.  Indeed, it could lead to an increase in carbon emissions, if the pollution haven country is much less carbon-efficient.

In response to this, some countries are discussing the possible implementation of a "border carbon adjustment" (BCA) to level the playing field between domestic producers facing costly climate change measures and foreign producers facing very few.  (BCAs are not the only possible policy measure -- this issue could be addressed through corporate taxation rates, R&D tax credits, depreciation rates, etc.)  Where a country has a carbon tax, a BCA could charge imported goods the equivalent of what they would have had to pay had they been produced domestically including the carbon tax, in the manner of a border tax adjustment.  Such a scheme might also rebate the paid carbon tax to exporters, thereby ensuring that they are not disadvantaged in international markets.  In the case where a country has a cap and trade scheme, importers would need to buy emission rights for the carbon content of their imports, even though their imports are produced abroad.  Exports would be able to sell some of their emission rights acquired for production.

It is argued that a BCA would eliminate the distortion in trade flows, and minimise the risk of carbon leakage.  It might reduce domestic political opposition to climate policies.  Further, it might act like a trade sanction, and pressure countries that do not commit to emissions targets to do so, thereby addressing the free rider problem of the global climate change negotiations.

Which countries countries could the target of a BCA?  If for example Europe and Japan commit to specific emissions targets in the post-Kyoto framework, but the US does not, Europe and Japan would seem to have a good case for implementing a BCA.

What about the case where China and India do not commit to specific emissions targets?  These countries bear very little responsibility for the historical accumulation of carbon emissions.  But China is now the world's biggest carbon emitter and both these countries have rapidly growing emissions.  Also, they are likely destinations for carbon leakage.  So, there is a good case for a BCA for trade from these countries.  It might push them into adopting specific carbon emission targets.  But of course both of these countries would complain that this is just "green protectionism".

What about the case of the less developed poorer countries?  These countries have very low carbon emissions and are very unlikely to commit to specific carbon emissions targets.  But could also become destinations for carbon leakage.  Nevertheless, we should avoid applying a BCA to these countries who need every chance they can have to develop, and bear no historical responsibility for the buildup in carbon emissions.

What products should be the target for BCA?  Carbon-intensive (ie, energy intensive) products should be the main target for a BCA, products like chemicals, iron and steel, cement, glass, lime, some pulp and paper products, and non-ferrous metals such as aluminium and copper.  But in reality it is very difficult to calculate the degree of energy intensity, particularly with complex supply chains where different components are traded across borders.  If one country implements a BCA, trade from developing countries to that country could be simply re-routed through another developed country to avoid a BCA.

In addition, the BCA has mainly arisen in the context of climate change.  This argument could also apply to all other environment policies (and indeed other policies like social and labour policies) where developed countries have stronger policies than developing countries.  Indeed, it can be used to argue that the very differences between countries, which are the basis of comparative advantage, are unfair.

In short, the risk with BCA and other potential “green countervailing protection” is that it can lead us down the dangerous path of murky protectionism.  Too many companies are trying to use such arguments to implement all sorts of unjustifiable green protectionism.  Many developing countries are vitriolic in their opposition to BCAs, and there is no doubt that they elicit retaliation.

References:

Trade and Environment at the OECD: Key Issues Since 1991 by Michel Potier and Cristina Tebar Less, OECD Working Paper on Trade and Environment, No. 2008-01

http://www.oecd.org/dataoecd/21/1/41279373.pdf

A Survey of the Trade and Environment Nexus: Global Dimensions by John Beghin, David Roland-Holst and Dominique van der Mensbrugghe.  OECD Economic Studies No.23, Winter 1994

http://www.oecd.org/dataoecd/1/43/33930956.pdf

Trade and environment: Striking a balance by Ronald Steenblik and Dale Andrew, OECD Trade Directorate.  OECD Observer

http://www.oecdobserver.org/news/fullstory.php/aid/787/Trade_and_environment:_Striking_a_balance.html

Facilitating Trade in Selected Climate Change Mitigation Technologies in the Energy Supply, Buildings and Industry Sectors by Ronald Steenblik and Joy Aeree Kim

OECD Trade and Environment Working Paper No. 2009-02

http://www.oecd.org/dataoecd/24/22/42738759.pdf

How clean are you?  www.mrglobalization.com

http://mrglobalization.com/index.php?option=com_content&view=article&id=182:how-clean-are-you&catid=39:environment&Itemid=58

Trade and Climate Change.  A report by the United Nations Environment Programme and the World Trade Organisation.  t

http://www.unep.ch/etb/pdf/UNEP%20WTO%20launch%20event%2026%20june%202009/Trade_&_Climate_Publication_2289_09_E%20Final.pdf

BP and sustainability

http://www.bp.com/sectiongenericarticle.do?categoryId=2312&contentId=7061112

Border Carbon Adjustment, Aaron Cosbey, International Institute for Sustainable Development

www.iisd.org

Climate Protection and Border Tax Adjustment: Economic Rationale and Political Pitfall of Current US Cap and Trade Proposals, Katrin Jordan-Korte & Stormy Mildner.  FACET Analysis No. 1 -- June 2008

www.facet-online.org

On the effectiveness of carbon-motivated border tax adjustments, John Whalley.  Asia-Pacific Research and Training Network on Trade Working Paper Series, No. 63, March 2009

www.artnetontrade.org