ENVIRONMENT AND TRADE: DO STRICTER ENVIRONMENTAL POLICIES HURT EXPORT COMPETITIVENESS? Catherine L. Mann OECD Chief Economist Joint OECD/LSE GRI workshop London 10

Increasing role of international production fragmentation Rising environmental challenges Will action on environmental goals harm the economy? How to meet both economic and environmental challenges in a global economy? Roadmap 2

Increasing role of global value chains Source: OECD/WTO TiVA database 3

Climate challenge (COP 21) Air pollution costs high globally – social costs estimated ~4% of GDP in OECD, higher in BRIICS; Water scarcity – people living in areas of severe water stress ~1.5 bln … Mounting environmental challenges… 4

… coupled with an increasingly stringent policy response Source: “Extended” EPS indicator, 5

But globally, policy signals are still misaligned Source: OECD, Inventory of Support measures for fossil fuels (2015) for IEA WEO,

Looking forward, environmental policies are likely to further tighten Source: IEA WEO, Projected Energy-related CO2 emissions 7

OECD: – Fears of loss of competitiveness – Policies to support large polluters not uncommon Emerging: – Economic growth crucial to improve well-being – Development goals: no access to improved sanitation (1/3 of global population), safe drinking water (10%), electricity(>10%), – “Pollute now and clean-up later” dilemma? …but can meet resistance due to fears of industry fleeing Source: Worldbank WDI. 8

No export loss for the country as a whole due to environmental policies, but… … environmental policies tilt the comparative advantage towards less pollution intensive activities Winners and losers… … though effects have been “small” New empirical work on the Pollution Haven Hypothesis Source: Kozluk and Timiliotis, (2016), Do environmental policies affect global value chains? A new perspective on the pollution haven hypothesis. 9

There is a pollution haven effect… Source: Kozluk and Timiliotis, (2016), Do environmental policies affect global value chains? A new perspective on the pollution haven hypothesis. 10

More stringent environmental policies have had very small effects on exports Source: Kozluk and Timiliotis, (2016), Do environmental policies affect global value chains? A new perspective on the pollution haven hypothesis. 11

Less stringent policies lead to gains in some industries, but losses in others Source: Kozluk and Timiliotis, (2016), Do environmental policies affect global value chains? A new perspective on the pollution haven hypothesis. 12

The world is not static! Firms (and industries) can “clean” themselves over time. Innovation is key. On the other hand, environmental policy stringency may need to increase more than in the past. Yes, there can be losers. But we have a lot of evidence there will also be winners. Some caveats & notes Source: Kozluk and Timiliotis, (2016), Do environmental policies affect global value chains? A new perspective on the pollution haven hypothesis. 13

More evidence: environmental policies do provide opportunities Source: Sauvage,

Productivity growth (Albrizio et al.) – no long term effects of more stringent policies – most advanced firms gain, while laggards lose – entry and exit may be playing a role Innovation (Dechezlepretre et al.; OECD): – Redirection to “green” innovation – Important spillovers Environmental policies do provide opportunities 15

Advanced firms gain – laggards lose in terms of productivity growth Source: Albrizio et al. (2014) 16

“Green” technologies are on the rise – particularly in most stringent countries Source: OECD Green Growth Indicators.OECD Green Growth Indicators. 17

Flexible (market-based) instruments Predictability of policy signal Well designed R&D frameworks New ideas need to be given a chance: – Avoid barriers to entry, new ideas, technologies, – Avoid favouring incumbents, – Framework conditions for young, innovative firms to grow and attract resources – Transition policies (e.g. labour market) Environmental policies: design and role of good structural policies 18

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Kozluk & Timiliotis (2016), Do environmental policies affect global value chains? A new perspective on the pollution haven hypothesis, OECD WKP 1282.Do environmental policies affect global value chains? A new perspective on the pollution haven hypothesis Albrizio et al. (2014), Do environmental policies matter for productivity growth? OECD WKP 1176.Do environmental policies matter for productivity growth? Botta & Kozluk (2014), Measuring Environmental Policy Stringency in OECD Countries: A Composite Index Approach, OECD WKP 1177.Measuring Environmental Policy Stringency in OECD Countries: A Composite Index Approach Sauvage (2014), The Stringency of Environmental Regulations and Trade in Environmental Goods, OECD TAD WKP 3/14.The Stringency of Environmental Regulations and Trade in Environmental Goods OECD (2015), Inventory of support measures for fossil fuels.Inventory of support measures for fossil fuels IEA (2015), World Energy Outlook 2015.World Energy Outlook 2015 Sources 20