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Big Picture There are three big questions related to trade and environment 1) If we make trade freer, is our own environment going to deteriorate? 2) If.

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Presentation on theme: "Big Picture There are three big questions related to trade and environment 1) If we make trade freer, is our own environment going to deteriorate? 2) If."— Presentation transcript:

1 Big Picture There are three big questions related to trade and environment 1) If we make trade freer, is our own environment going to deteriorate? 2) If an open economy tightens its domestic regulations, are (a) local firms going to lose their competitiveness? (b) local consumers going to be able to simply circumvent the regulations by importing polluting goods from abroad instead? Antweiler, Copeland and Taylor (2001), Copeland and Taylor (2003) and Frankel and Rose (2005) attempt to answer question 1. Ederington, Levinson and Minier (2005) are an example of an answer to question 2a. Next: Levinson (2010) tries to answer 2b by assessing whether the pollution content of US trade has indeed been growing over time

2 Offshoring Pollution: Is the United States Increasingly Importing Polluting Goods? Arik Levinson Review of Environmental Economics and Policy 4(1): 63–83 (2010)

3 Specific Question Posed has the composition of U.S. imports shifted toward more polluting goods? (p.64) i.e. are [they] importing proportionately more or fewer polluting goods, regardless of the cause? (p.64)

4 Pp 65-67 gives highlights from US politics regarding trade and environment Mentions infamous Lawrence Summers memoLawrence Summers memo – Suggests that rich countries should have their polluting done by poor countries Begs question as to whether rich countries are indeed having someone else do their polluting for them

5 Two different ways to measure pollution Use pollution abatement and control costs as a proxy for pollution – ceteris paribus, we expect the most polluting industries to have the highest control costs – US PACE: Pollution Abatement and Control Expenditures (US Bureau of the Census) Measure/impute emission intensities (per dollar of output) – create a pollution inventory

6 Levinsons (2010) Approach No regressions A simple accounting exercise

7 The US Bureau of Economic Analysis (BEA) input-output tables tell us a ij = how much of good j is required to produce one unit of good i using US production techniques IPPS coefficients to find out how much pollution is generated directly when unit of output X is produced

8 The direct+indirect emission coefficient (DIEC i -- my terminology) for good i is e i +Σ j a ij e j [Y j -X j ]/[Y j -X j +m j ] where Y j is domestic production of that input, X j measures exports, and m j is imports of input j. Then – Multiply imports of good i by DIEC i – sum over all the goods i=1,..., M – Do this for every year to get a time series for pollution avoided via imports Levinson calls this the pollution content of imports

9 Several useful comparisons

10 Between 1972 and 2004, US imports grew by 574%. If imports grew proportionately, then wed expect a 574% increase in pollution over same period: red

11 Green plots pollution actually avoided via imports over same period


13 Compare actual pollution avoided via imports--- green--- with what we would think was avoided if only looked at the direct emission coefficients --- yellow:

14 Why is the gap between green and yellow growing? US is increasingly importing more finished products and few intermediate inputs – the adjustment matters more for imports of finished products (because thats when we are most likely to ignore intermediate pollution)

15 Tables Column 2 tells us how much lower the green line is than the red line: i.e. by how much embodied pollution has fallen relative to what we would have predicted back if used 1972 import patterns

16 Tables Column 4 compares total pollution embodied in US manufacturing to the amount of pollution US would have produced if its manufacturing mix had stayed same as in 1972. Real value of US manufacturing grew by 60% over 1972-2001 period, but direct+indirect emissions only rose by 17% i.e. US production reoriented toward less polluting sectors

17 What is causing the Green Shift in imports? Likely: US import patterns have changed: – imports of highly polluting industries...grew faster than domestic production, – [but] they grew more slowly that imports in general. – [In contrast,] clean imports grew faster than domestic production, – but clean imports also grew faster than overall manufactured imports – in many cases domestic manufacturing of relatively clean industries actually declined. " (p.79)

18 US production of labor intensive goods actually fell – Apparel imports grew 9.8 percent annually, while domestic apparel production declined by 0.4 percent. – Shoe imports grew 6.2 percent annually, while domestic production declined 4.8 percent. – Imports of games and toys grew 12 percent annually, while domestic production declined 1.1 percent (p. 79)

19 Levinsons Conclusions there has been a large green shift, whereby US imports have lower pollution content now than they did 40 years ago the shift in imports (54%) has been larger than the green shift in US manufacturing production (27%)

20 Criticisms (many of them self-levied) Only focuses on 4 air pollutants – but most other studies also restrict attention to air pollutants

21 Whats the right measure? Levinson calculates pollution avoided by imports – if the US had produced all these goods, instead of importing them, by how much would its own pollution rise? Thats not the same as the pollution content of imports – How much pollution was generated in order to produce the goods that the US imported?

22 Embodied Pollution To measure pollution actually embodied in pollution, youd need to know the DIECs for foreign production, not US production Recall Weber & Matthews (2007) – found CO2 embodied in U.S. imports doubled... between 1997 and 2004, while U.S. imports grew 67 percent. (p.78) – Suggests shift was brown, not green

23 What could explain this? Different dependent variables: C02 versus unweighted sum of SO2, NOX, CO, and VOCs

24 US trade partners are shifting into production of goods that are clean (relative to other US production) but dirty (relative to other foreign production) abroad suggests a negative correlation between US and foreign DIECs – but Gamper-Rabindran 2006 finds positive correlation between US and Mexican direct emission coefficients (of between.54 and.62)

25 Do we want to look at correlation coefficients for all goods being produced/traded? No. We should look at the correlations between the goods that have seen the largest changes in their export share

26 Thought experiment Let * denote Chinese production; no asterisks indicates US production Suppose could partition set of all possible products into two sets: {V} and {Z} whereby for any two goods i and j in set Z, e i */e j * = e i /e j – that is, theres a perfect correlation between relative pollution intensities but, for goods in set Z, you see negative correlations between the relative intensities, i.e there exist goods k,l in set V such that e k * e k

27 Question if trade frictions fall, in which goods are you likely to see trade expand the most? It might well be the ones in which youve got a comparative advantage? what drives comparative advantage? – one source: differences in the es should see the greatest expansion occur in V set, because these are the ones where China has a bigger emission advantage than the US

28 Simultaneous Green shift and Brown Shift So trade grow fastest for goods in which US emission coefficient is lower than average but Chinas is higher – see US pollution avoided via US imports fall, but Chinese pollution embedded in US imports rise

29 But do we really think that differences in the es are what drive comparative advantage?

30 Other sources of comparative advantage relative factor endowments (Copeland and Taylor) labour costs in constrast, PACE are small – US EPA estimates env'l control costs amount to 2 percent of US GNP.

31 Other factors that determine firm location and pollution intensity

32 Blueprint costs In a 1990 UN survey of MNCs, most MNCs claim they follow the health, environmental and safety standards as set in their home countries. Knogden (1979) finds 90% of the W. German firms operating in LDCs make this claim too, on the grounds that re-engineering is more costly than overcomplying.

33 Expectations re future regulations We expect environmental regulation to get stricter over time in developing countires – so firms would rather design clean overseas plants now than pay to retrofit later

34 Raising Rivals Costs Since rich-country MNCs have the green technology already, they have comparative advantage in setting up in LDCs that have stricter env'l policies. So while they might set up in LDCs rather than DCs because of variation in other costs, they'll choose the greener of the LDCs and let the locals do more of the investment in the brown LDCs.

35 Other issues that need to be considered when testing for PH Effects

36 Endogeneity of Pollution Taxes Suppose MD is increasing in production/pollution – should see stricter policies in regions with more production because they have more pollution. Empirical implication: – if you treat pollution taxes as exogenous, you might well observe a positive correlation between pollution tax rates and total pollution

37 Levinson (1999) State Taxes and Interstate Hazardous Waste Shipments, AER 1999State Taxes and Interstate Hazardous Waste Shipments Looks at state-level taxes on hazardous waste disposal and total amount of waste being disposed Baseline approach: – treat tax rate as independent variable – conduct cross-sectional regression finds positive correlation between a state's hazardous waste taxes and its imports of hazardous waste

38 Re-runs regressions putting in state-level fixed effects – the fixed effects should pick up time-invariant suitability of certain states as sites for waste dumps (and hence to have higher waste disposal taxes) – finds sign of correlation is reversed: higher waste taxes have a negative impact on interstate waste shipments for disposal – but is statistically insignificant also conducts 2SLS and uses a natural experiment – In each case, also see sign on tax rate flip (relative to baseline model)

39 Next: Environmental Policy in an Open Economy with Market Failures

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