1. Ec 1661 / API 135 Section Climate Change IV: Trade & the Environment, Climate Review Gabe Chan April 29, 2011 1

2. Climate and Trade 2

3. Is Trade Good for the Environment in Theory? 3 tradegrowth gains from trade race to the bottom downward EKC upward EKC

4. Environmental Kuznets Curve (EKC)  In the early stages of growth, environmental degradation increases, but above some level of income per capita, the trend reverses  The EKC is a theoretical relationship between wealth and environmental quality with controversial theoretical and empirical justification Does the EKC apply for localized and/or non-localized pollutants? 4 income / person environmental degradation

5. Environmental Kuznets Curve (EKC)  It depends on what causal mechanism is actually at play a shift from heavy industry to services technological change philosophical / political enlightenment (changing preferences) institutional capacity climbing up Maslow’s hierarchy of needs the environment as a luxury good economies become more efficient with scale more? 5

6. Race to the Bottom  A “race to the bottom” can occur when countries engage in “regulatory competition” effective regulation (for environmental reasons or otherwise) typically increases production costs Porter hypothesis suggests otherwise Countries competing in similar industries can lower their (environmental) regulations to gain competitive advantage The incentives appear to align to perpetually lower (environmental) regulation  Other factors to consider: other comparative advantages costs of shifting productive capacity the power of importing countries / consumers to demand de-facto standards 6

7. Environmental Gains from Trade  Imports of environmentally friendly products  Technological spillovers and cumulative innovation  Standards transmitted through multinational corporations  Consumers / importing countries demand environmental production processes  Trade sanctions can be used for enforcement of multilateral agreements 7

8. Frankel’s “impossible trinity” 8 protectionism multilateral governance unregulated emissions environmental standards globalization national sovereignty

9. Frankel’s “impossible trinity” 9 protectionism multilateral governance unregulated emissions environmental standards globalization national sovereignty targets and timetables race to the bottom national policies

10. Is Trade Good for the Environment - Econometrics  The EKC relationship appears to hold for localized pollutants (e.g. SO 2, PM, water, etc.) But what is the relevant causal mechanism?  Little evidence for CO 2 10

11. WTO and Kyoto  In Kyoto: Parties should “strive to implement policies and measures...to minimize adverse effects on international trade...”  It appears feasible that trade sanctions (to reduce leakage or to incentivize countries to join policy regime) are feasible under the WTO rules  WTO precedent for process and production method (PPMs) targeting has changed in the last decade and it appears countries will be allowed to adopt trade policy to target environmentally damaging PPMs 11

12. Climate Review 12

13. Key Concepts  Science GHG emission sources, global-mixing, atm lifetime, uncertainty, distribution of impacts  International Climate Policy baseline, linkage, CDM, country groupings, leakage, border adjustments, free-rider, policy architectures  National Climate Policy general approaches (tax, C&T, command and control, voluntary, standards), cost containment (banking, borrowing, price ceiling/floor, offsets, etc.), technological change, distributional equity (allocation and independence principal), political feasibility, upstream vs. downstream, economy-wide vs. sectoral  Sub-national Climate Policy preemption, leakage, negative/benign/positive interactions with national policy 13

14. Substantive Knowledge  Science general understanding of the greenhouse effect  International Climate Policy UNFCCC, Kyoto, Copenhagen, Cancun, (Durban), WTO, COPs, alternative venues (G-20, MEFs, etc.), CDM  National Climate Policy Waxman-Markey, (Collins-Cantwell), EPA vs. MA  Sub-national Climate Policy CA AB32, RGGI 14