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International trade and climate change

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Abstract

This paper provides a selective review of the interaction between international trade, international trade policies, environmental policies and climate change. The focus is on the role that international trade and the existence of countries have on the generation of emissions leading to greenhouse gas stocks in the atmosphere and hence, potentially, to climate change and on the role of trade and environmental policies in dealing with this global externality. We first review the question of whether trade exacerbates or contributes to the climate change problem by increasing global emissions, a particularly important issue being the pollution haven problem. Then we consider environmental policies and trade. We analyse non-cooperative environmental policies and investigate whether trade undermines the effectiveness of unilateral environmental policies, in which carbon leakage and international competitiveness are of particular importance. To deal with climate change, cooperation among countries is important. In this aspect, we review the interactions between trade and environmental policies, border tax adjustment policies, and the role of the World Trade Organization in combating climate change arising from economic activities.

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Notes

  1. To emphasize the impacts from human activities, the United Nations Framework Convention on Climate Change defines climate change as “a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods” (http://unfccc.int/essential_background/convention/background/items/1349.php)

  2. The model developed below extends earlier models of trade and emission externalities by Turunen-Red and Woodland (2004) and Copeland (1994).

  3. An extension of the model to deal with emissions of multiple greenhouse gases with z becoming a vector is straightforward.

  4. The results reported in this paragraph are taken from WTO (2009, p. xi).

  5. Even in the context of a two-country, two-product world, the outcome is unclear. If country A has a comparative advantage in the dirty good (and, hence, a comparative disadvantage in the clean good), lower trade barriers will increase emissions in A as it shifts resources into greater production of the dirty good and away from production of the clean imported good. In country B, resources move away from production of the dirty good so its emissions fall. Whether global emissions rise or fall depends on how dirty production is in each country and upon the changes in production levels.

  6. The importance of the endogeneity of environmental policy has been highlighted by Markusen (1975) and subsequently by Grossman and Krueger (1995), Copeland (2005) and Copeland and Taylor in various papers. An important point is that income itself does not directly change environmental quality, so its effect must be indirect through changes in the environmental policies. As Grossman and Krueger (1995, p. 372) put it, “the strongest link between income and pollution in fact is via an induced policy response”. This shows us the important role of income-induced policy change. Copeland (2005) has a good summary of the importance of making environmental policies endogenous.

  7. To our best knowledge, Copeland and Taylor (1995) was the first pollution haven paper that focussed on global pollution.

  8. This distinction is not quite accurate in that Copeland and Taylor (1995) and Antweiler et al. (2001), cited in the previous section, treat environmental policies endogenously in their analyses of the environmental effects of freer trade. Nevertheless, the previous section focused on trade policy whereas the current section focuses upon environmental policy.

  9. The issue of leakage is different from (but closely related to) the pollution haven hypothesis. Both predict relocation of polluting industries, but they differ in the starting point: while the pollution haven hypothesis argues that trade liberalization causes production relocation, the leakage issue is about whether tightening up environmental policies in a subset of countries causes relocation to low-regulation countries.

  10. These and other related modeling studies of carbon leakage have been more extensively reviewed by Karp (2011).

  11. Another issue with similar logic concerns the effects of environmental regulations on foreign direct investments (FDI). As pointed out in Keller and Levinson (2002), some economists express concerns that some governments (those of developing countries in particular) might try to attract foreign investments by relaxing their environmental regulations and lowering their environmental standards. Empirically, however, the evidence supporting the impact of environmental regulations on the location of FDI is not strong (List and Co 2000; Keller and Levinson 2002).

  12. Other evidence supporting capital–labour hypothesis can be found in Antweiler et al. (2001), Cole and Elliott (2003) and Elliott and Shimamoto (2008).

  13. Chua (2003) surveys empirical studies that find ambiguous results concerning whether leakage is positive or negative.

  14. While environmental policies can induce technological innovation within each firm, firm-level R&D might also affect the design of environmental policies (Weber and Neuhoff 2010).

  15. For example, border tax adjustment, as discussed in more detail below, is a trade measure aimed to sustain voluntary cooperation among countries.

  16. Here we use the term carbon as shorthand for all greenhouse gases (listed in Sect. 1).

  17. More details about forms of BTA can be found in Bagwell and Staiger (2001a, 2001b), Cosbey (2008) and Goh (2004).

  18. More legal details of BTA, with associated WTO rules, can be found in Ismer and Neuhoff (2007) and Goh (2004), among others.

  19. Heyes and Maxwell (2004) investigate how the existence of NGOs might have some political pressures upon WEO policy making.

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Acknowledgements

This paper has benefited considerably from the comments of the anonymous referees and the editors. We are particularly grateful for the detailed and insightful comments of Christos Kotsogiannis and Brian Copeland. Alan Woodland gratefully acknowledges the financial support provided by the Australian Research Council through its Discovery Grants program for this research. Views expressed here should not be attributed to the Australian Research Council.

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    Xiao Chen & Alan Woodland

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Chen, X., Woodland, A. International trade and climate change. Int Tax Public Finance 20, 381–413 (2013). https://doi.org/10.1007/s10797-012-9244-x

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