1. THE STRINGENCY OF ENVIRONMENTAL REGULATIONS AND TRADE IN ENVIRONMENTAL GOODS AND SERVICES Measuring Progress on Greening the Economy: Policies and Practices UNEP-Eurostat-EEA-ILO workshop Geneva, 14-15 May 2014 Jehan SAUVAGE Trade Policy Analyst OECD, Trade and Agriculture Directorate

2. OECD Trade and Agriculture Directorate 2 Trade in EGS is increasing at a rapid pace… (2007 = 100) Source: OECD based on data obtained from the UN Comtrade database and WTO (2013).

3. OECD Trade and Agriculture Directorate 3 …driven mostly by the power sector and waste and water activities 82%

4. 1.Trade liberalisation – Import-tariff reductions, removal of NTBs, services commitments, etc. – Ongoing trade negotiations in various fora (APEC, WTO, etc.). 2.Stringent environmental regulations – Stringent environmental regulations, together with economic growth, spur demand for EGS. Lots of attention given to the first engine, but what about the second? OECD Trade and Agriculture Directorate 4 The twin engines of EGS trade

5. Different regulatory instruments can be used by governments to correct environmental market failures: market-based instruments (e.g., taxes or permits), emission standards, information disclosure, etc. This generates a market for equipment and services in relation to pollution control and abatement as firms seek new solutions. In contrast to financial, telecommunications or transport services, there is no genuine demand for environmental services. Relevant markets are essentially created through government regulation. Who would purchase, for example, sewage or air-cleaning services out of sheer altruism? (Adlung, 2009) OECD Trade and Agriculture Directorate 5 Environmental regulations and EGS market size

6. Answering this basic question requires indicators for measuring: – The degree of stringency of environmental regulations – Countries performance in EGS trade OECD Trade and Agriculture Directorate 6 Hence the basic question: Stringent environmental regulations EGS trade ?

7. OECD Trade and Agriculture Directorate 7 Measuring the stringency of environmental regulations (i) Source: OECD (2014, forthcoming).

8. 1. Actual regulatory instruments2. Perceptions of policies Aggregation and multi- dimensionality Market-based vs. non-market- based instruments Enforcement and implementation Usually surveys Cognitive problems Lack of time variation Identification issues OECD Trade and Agriculture Directorate 8 Measuring the stringency of environmental regulations (ii) 3. Changes in agents behaviour 4. Environmental outcomes How firms and households react to changes in the regulations Surveys of PACE or shadow costs Accounts for enforcement Identification issues Generally good availability Accounts for incidental abatement of emissions Accounts for enforcement Acute identification issues

9. CodeEnvironmental theme or medium Share of HS lines APCAir pollution control5% CRECleaner or more resource efficient technologies and products19% EPP Environmentally preferable products based on end use or disposal characteristics 2% HEMHeat and energy management10% MONEnvironmental monitoring, analysis and assessment equipment15% NRPNatural resources protection< 2% NVANoise and vibration abatement< 2% REPRenewable energy plant22% SWMManagement of solid and hazardous waste and recycling systems10% SWRClean up or remediation of soil and water< 2% WATWaste water management and potable water treatment13% OECD Trade and Agriculture Directorate 9 Measuring trade in environmental products: the CLEG

10. Results are obtained using a standard index of revealed comparative advantage (RCA) in environmental goods: This index accounts for country size. It can be used as a guide to what causes actual trade patterns, including policies that may not be intended to influence trade, but that might do so unintentionally. OECD Trade and Agriculture Directorate 10 Measuring trade in environmental products: the RCA index

11. Broad-based analysis OECD Trade and Agriculture Directorate11

12. OECD Trade and Agriculture Directorate 12 The EPS index Source: OECD (2014, forthcoming).

13. OECD Trade and Agriculture Directorate 13 The EPS index and RCA in CLEG products

14. OECD Trade and Agriculture Directorate 14 The sources of comparative advantage in CLEG products (1) RCA(2) RCA(3) RCA(4) RCA(5) RCA All CLEG EPS index 0.569***0.592***0.547*** (3.89)(4.11)(3.62) EPS index (3-year lag) 0.488*** (3.09) EPS index (5-year lag) 0.489*** (2.84) Export concentration index -0.770***-0.768***-0.800***-0.837***-0.925*** (-5.40)(-5.65)(-5.64)(-5.45)(-6.90) Average import tariff applied on CLEG products -0.0176**-0.0216**-0.0214**-0.0248***-0.0297*** (-2.52)(-2.73)(-2.77)(-3.01)(-3.87) Capital-labour ratio -0.175-0.239-0.312*-0.430*** (-0.91)(-1.42)(-1.93)(-3.74) Secondary education or more (% labour force) 0.391**0.547***0.643*** (2.64)(3.85)(5.49) Constant 2.529***4.579**3.600*3.655*4.599*** (7.21)(2.07)(1.91)(1.95)(3.16) Year dummies Yes Observations 256 224161116 Adjusted R-squared 0.5840.5990.6730.6980.752 F Statistic 10.1412.6051.7925.5635.52

15. The municipal-solid-waste (MSW) sector OECD Trade and Agriculture Directorate15

16. Regulations on MSW- management are complex and often sub-national (e.g., local landfill taxes, bans, EPR). Landfilling is often the worst option from an environmental standpoint. Heterogeneity among OECD countries. OECD Trade and Agriculture Directorate 16 The share of MSW landfilled as an indicator of stringency for waste Source: US EPA.

17. OECD Trade and Agriculture Directorate17 MSW landfilled and RCA in waste- related products

18. Urban wastewater treatment OECD Trade and Agriculture Directorate18

19. There are different levels of wastewater treatment: – Primary (e.g., mechanical) – Secondary (e.g., biological) – Tertiary or advanced (e.g., phosphate removal) Instruments for regulating the treatment of wastewater are both supra-national and sub-national (e.g., the UWWTD, local tariffs and levies, basin-level standards). More heterogeneity among OECD countries than in the case of drinking-water regulations (e.g., WHO guidelines and health considerations). OECD Trade and Agriculture Directorate19 The level of wastewater treatment as an indicator of stringency for water

20. OECD Trade and Agriculture Directorate20 The TRT indicator

21. OECD Trade and Agriculture Directorate21 The TRT indicator and RCA in water- related products

22. Markets for and trade in EGS are regulation-led. Countries having stringent environmental regulations tend to export environmental products relatively more. Environmental regulations and trade barriers have opposite effects on EGS trade. Ambitious environmental policies imply losers but also winners from a trade angle. Trade liberalisation alone does not suffice. More work needed on indicators for services related to the environment. OECD Trade and Agriculture Directorate 22 Key messages

23. Visit our website : www.oecd.org/trade/envtrade/ Contact us : – Jehan.SAUVAGE@oecd.org – Ronald.STEENBLIK@oecd.org 23 Thank you for your attention! Trade and Agriculture Directorate

24. Back-up slides OECD Trade and Agriculture Directorate24

25. New trade theory highlights the importance of domestic (home) market size for exports in the context of product differentiation, economies of scale, and transportation costs. Bottom line: net exports can increase with the size of the home market, and stringent regulations determine domestic market size in the case of EGS. Adding dynamics reinforces this idea: learning-by-doing, knowledge spillovers, etc. OECD Trade and Agriculture Directorate 25 The home-market effect (i)

26. OECD Trade and Agriculture Directorate 26 The home-market effect (ii) Intra-industry trade in environmental goods (2007-11) (1 = full intra-industry trade; 0 = full inter-industry trade)

27. OECD Trade and Agriculture Directorate 27 The EPS index and RCA in Core CLEG products

28. OECD Trade and Agriculture Directorate28 The sources of comparative advantage in waste-related products (1) RCA(2) RCA(3) RCA(4) RCA(5) RCA SWM MSW landfilled (% MSW generation) -0.0635***-0.0510***-0.0414*** (-4.08)(-3.68)(-3.89) MSW landfilled (3-year lag) -0.0379*** (-3.48) MSW landfilled (5-year lag) -0.0415*** (-3.64) Export concentration index -0.830***-0.832***-0.760**-0.724**-0.790*** (-2.97)(-2.88)(-2.62)(-2.69)(-2.94) Capital-labour ratio 0.1630.1900.2050.232 (1.21)(1.40)(1.42)(1.58) Secondary education or more (% labour force) 0.888**0.982**0.906** (2.28)(2.60)(2.71) Constant 2.616***0.709-3.313-3.640-3.793 (4.11)(0.54)(-1.21)(-1.25)(-1.37) Year dummies Yes Observations 356336303203140 Adjusted R-squared 0.3600.3780.4300.4040.428 F Statistic..11.319.3957.370

29. OECD Trade and Agriculture Directorate29 The sources of comparative advantage in water-related products (1) RCA(2) RCA(3) RCA(4) RCA(5) RCA WAT TRT indicator 0.279**0.457***0.452*** (2.19)(5.78)(5.16) TRT indicator (3-year lag) 0.585*** (7.20) TRT indicator (5-year lag) 0.604*** (7.72) Export concentration index -0.685***-0.503***-0.477***-0.445***-0.415*** (-4.53)(-4.31)(-4.68)(-3.86)(-2.92) Capital-labour ratio -0.115-0.117-0.153-0.121 (-1.26)(-1.22)(-1.52)(-1.12) Secondary education or more (% labour force) 0.03060.04760.197 (0.14)(0.17)(0.48) Constant 1.976***2.976***2.916**2.8571.776 (3.83)(2.78)(2.05)(1.61)(0.74) Year dummies Yes Observations 271248223175127 Adjusted R-squared 0.4810.5510.5590.7010.753 F Statistic 9.61232.7423.7140.9140.62