Week 9 (only 1 lesson) Flashcards
Trade and the Environment – An Introduction
Definition:
- Climate change is a global issue requiring multilateral cooperation. Trade and environmental policies intersect, making trade flows and rules relevant to environmental performance.
Key Context:
- Policymakers face pressure to reconcile economic and environmental priorities in a globally integrated economy.
Key Takeaway:
Effective trade policies can support environmental objectives by reducing emissions and fostering sustainable practices.
CO2 Emissions and Global Trade
Annual Emissions Trends:
- Emissions are higher in middle-income and developing countries, driven by industrialization and tariff reductions.
- CO2 emissions grew rapidly in China after joining the WTO in 2001.
Production vs. Consumption-Based Emissions:
- Developed nations often outsource emissions-intensive production to developing countries through trade.
- Net exporters of emissions, like China, contribute to the global imbalance.
Key Takeaway:
International trade exacerbates the geographic disparity in emissions, requiring coordinated global action.
Dirty vs. Clean Industries
Characteristics of Dirty Industries:
- Higher emissions from direct production and value chains.
- More tradable than clean industries (22% vs. 5% of output traded).
- Examples: petrochemicals, primary metal smelting.
Cleaner Industries:
- Services are less polluting but rely on electricity, which may have indirect emissions.
Key Takeaway:
Trade policies need to address the disproportionate environmental impact of dirty industries.
Trade and Transport
Environmental Impact of Transport:
- Transport emissions account for 23% of global energy-related CO2 emissions.
- Maritime shipping is energy efficient, but air transport for goods like electronics increases emissions significantly.
However,reducing the distance of transportation is not always more environmentally beneficial:
- Roses flown from Kenya to the UK emit fewer emissions than locally grown roses in the Netherlands due to efficient agricultural practices.
Key Takeaway:
Cleaner production methods can offset transportation emissions, highlighting the importance of comparative advantages.
Trade’s Impact on Emissions
Effects of Trade on Emissions:
1. Scale Effect: Increased production due to trade leads to higher emissions.
2. Composition Effect: Changes in the type of goods traded can either raise or lower emissions.
3. Technique Effect: Trade encourages cleaner production methods through technology transfers and environmental regulations.
Key Takeaway:
Trade influences emissions through complex mechanisms, requiring a balance between economic and environmental outcomes.
Pollution Haven Hypothesis
Definition:
- Globalization shifts dirty industries to countries with lax environmental regulations.
Key Factors:
- Environmental policies are not the sole determinant; capital-intensive industries often locate in developed countries.
Example:
The US shifted its production of lead batteries to Mexico which had more lax environmental and health-related regulations. They led to many negative health connotations in Mexico, reducing its birth rate and increasing the number of childen with learning disabilities
Key Takeaway:
Differences in environmental standards can create “pollution havens,” worsening global environmental outcomes.
The Environmental Kuznets Curve
Definition:
- Describes the relationship between income and environmental degradation:
- Low income: Limited environmental degradation.
- Rising income: Increased degradation.
- High income: Improved production efficiency and environmental policies reduce impacts.
Key Takeaway:
Economic development initially worsens, then improves environmental outcomes over time.
Climate Policy and Trade
Major Policies:
1. EU Green Deal:
- Simplifies regulations for green transition industries (e.g., batteries, wind turbines).
- Implements Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage.
2. US Inflation Reduction Act (2022):
- Provides subsidies for green investments and EV production, requiring domestic supply chains.
3. China’s Policies:
- Dominates green industries like solar panels and electric vehicle batteries.
Key Takeaway:
Climate policies reshape global trade dynamics, favoring nations with green industries.
Carbon Border Adjustment Mechanisms (CBAM)
Definition:
- CBAM imposes tariffs on imports based on their carbon footprint to level the playing field with domestic industries.
Key Impact:
- Ensures imports face similar carbon costs as domestic products, preventing unfair competition.
Example:
- The EU’s CBAM applies to industries like steel and cement to reduce carbon leakage.
Key Takeaway:
CBAM integrates climate goals into trade policies, promoting greener global production.
Climate Change’s Impact on Trade Costs
Key Effects:
- Infrastructure Damage: Rising sea levels and extreme weather events reduce transport efficiency and increase trade costs.
- Productivity Losses: Higher temperatures reduce labor and machinery productivity.
Key Takeaway:
Climate change poses significant risks to global trade infrastructure and productivity.
Upstream Clean and Dirty industries
Definition:
- Industries are categorized as clean or dirty based on their environmental impact and emissions intensity.
Key Concepts:
1. Upstream Dirty Industries:
- Sectors with high emissions from direct production and supply chains.
- Examples: Petrochemicals, steel production, mining.
- More tradable, with 22% of output traded globally, compared to 5% for clean industries.
2. Upstream Clean Industries:
- Lower direct emissions but may indirectly contribute through electricity consumption.
- Examples: Financial services, software development.
Implications for Trade and Emissions:
- Dirty industries dominate global trade flows due to their high tradability and importance in supply chains.
- Policies targeting upstream emissions (e.g., carbon pricing, cleaner production methods) are essential for reducing global emissions.
Key Takeaway:
The distinction between clean and dirty industries highlights the need for targeted trade policies to reduce environmental impacts without stifling economic growth.
The technique effect and its significance
Definition:
- The technique effect refers to how trade fosters the adoption of cleaner production methods, leading to reduced environmental impact over time.
Mechanism:
1. Technology Transfers:
- Trade exposes developing countries to advanced technologies and cleaner practices from developed nations.
- Example: Cleaner machinery or energy-efficient production techniques.
2. Incentives for Compliance:
- Trade agreements and export requirements encourage firms to meet stricter environmental standards in global markets.
3. Economic Growth Link:
- Higher incomes from trade allow countries to invest in clean technology and better environmental policies.
Significance:
- The technique effect offsets the scale effect (increased emissions from higher production).
- It plays a critical role in reducing emissions in industrializing countries, where outdated methods are gradually replaced by cleaner ones.
Key Takeaway:
The technique effect demonstrates how trade can drive environmental improvements, making it an essential element of sustainable development.
Impact of Climate Policies on Other Countries
Definition:
- Climate policies adopted by one country or region can have spillover effects on trade partners and global supply chains.
Key Impacts:
1. Carbon Border Adjustment Mechanisms (CBAM):
- Example: EU’s CBAM imposes tariffs on imports based on their carbon emissions.
- Impact: Non-EU countries exporting to the EU must comply with stricter carbon standards, increasing their production costs.
2. Trade Diversion:
- Countries with weaker environmental policies may become pollution havens, attracting emissions-intensive industries.
3. Technology Spillovers:
- Exporters adopt cleaner technologies to maintain market access in countries with strict climate policies.
- Example: Developing nations upgrading production to meet EU green standards.
4. Economic Disruption:
- Climate policies can disproportionately affect developing nations dependent on fossil fuel exports or energy-intensive industries.
- Example: Restrictions on coal-related trade reduce revenues for coal-exporting countries.
Key Takeaway:
Climate policies in one region create global ripple effects, influencing trade, technology adoption, and economic dynamics in other countries. Coordinated global efforts are necessary to balance environmental goals with equitable economic outcomes.
The Inflation Reduction Act (IRA) and Its Impact on Trade
Definition:
- The Inflation Reduction Act (2022) is a US policy aimed at accelerating the green transition by providing subsidies and tax incentives for clean energy and green technology industries.
Key Features:
1. Support for Domestic Green Manufacturing:
- Subsidies for production of electric vehicles (EVs), solar panels, and wind turbines.
- Tax credits require production to occur within the US or in trade partner countries with agreements.
2. Focus on Reducing Emissions:
- Targets a 40% reduction in US greenhouse gas emissions by 2030.
- Investment in carbon capture technologies and renewable energy.
3. Supply Chain Requirements:
- EV tax credits depend on critical minerals being sourced from the US or allies, reducing dependence on China.
Impact on Other Countries:
- Trade Tensions:
- EU and other US allies have raised concerns about discriminatory practices favoring US firms.
- Global Green Competition:
- Incentivizes countries to ramp up their own green policies to stay competitive.
Key Takeaway:
The IRA reshapes global trade dynamics by prioritizing domestic green manufacturing while encouraging allies to adopt sustainable practices to access US markets.
Differences between Dirty and Clean industries
Dirty Industries:
- Definition: Industries with high levels of emissions and environmental impact during production and supply chain activities.
- Characteristics:
- Energy-Intensive: Rely heavily on fossil fuels (e.g., coal, oil, gas).
- Higher Pollution Levels: Generate significant air, water, or land pollution.
- Tradability: 22% of output from dirty industries is traded globally, meaning they are heavily involved in international trade.
- Examples:
- Petrochemicals (e.g., plastic production).
- Steel and aluminum manufacturing.
- Cement production.
- Oil and gas extraction.
Clean Industries:
- Definition: Industries with low direct emissions, often focused on services or technology rather than heavy manufacturing.
- Characteristics:
1. Lower Pollution Levels: Minimal impact on the environment during production.
2. Electricity Reliance: May indirectly contribute to emissions if electricity used comes from fossil fuels.
3. Less Tradable: Only 5% of clean industries’ output is traded globally, meaning they are less involved in international trade.
- Examples:
- Financial services.
- Software development.
- Renewable energy (e.g., solar panel production).
Key Differences:
1. Emissions Intensity: Dirty industries emit more greenhouse gases than clean ones.
2. Environmental Impact: Dirty industries contribute directly to environmental degradation, while clean industries have minimal direct effects.
3. Global Trade: Dirty industries dominate trade flows due to their role in supplying raw materials, whereas clean industries are less traded globally.
Key Takeaway:
- Dirty industries are crucial for global trade but come with significant environmental costs.
- Clean industries offer low-emission alternatives and are vital for a sustainable future but are less prominent in global trade.
Let me know if this clears it up or if you’d like an example to compare
