The World Bank
June 18, 2007
There is increasing global recognition of the economic, social, and developmental consequences of climate change. The Kyoto Protocol remains the key international mechanism under which the industrial countries have committed to reduce their emissions of carbon dioxide and other greenhouse gases. There are a number of issues that still need to be resolved with regard to efficient implementation of emission reduction goals.
Although a total of 172 countries and a regional economic integration organization (EEC) are parties to the agreement (representing over 61 percent of emissions), only a few industrialized countries are actually required to cut their emissions (see Annex I for a list of Kyoto Protocol members and their emission targets). The United States, which is the world’s largest emitter, and Australia have not ratified the protocol. The United States has conditioned its entry on further engagement of major developing country emitters, such as India and China.
This has fueled issues of competitiveness and other economic impacts in countries that have began to implement the Kyoto regime. Businesses in many Kyoto-implementing countries have already started to put pressure on their governments to ease competitive pressures through measures such as a border tax. Unlike some other global environmental treaties—such as the Montreal Protocol on Substances that Deplete the Ozone Layer—the Kyoto Protocol does not contain explicit trade measures to enforce compliance. While this supports the World Trade Organization’s (WTO) global trading principles, the protocol does not stipulate specific methods by which the members should design and implement policies to address climate change commitments. This leads to much speculation about a potential conflict between the Kyoto and WTO regimes.
While developed countries remain the largest per capita emitters of greenhouse gases today, the growth of carbon emissions in the next decades will come primarily from developing countries, which are following the same energy and carbon-intensive development path as did their rich counterparts. Among the developing countries, the main growth in carbon emissions will emanate from China and India because of their size and growth. Between 2020 and 2030, it is projected that developing country emissions of carbon will exceed that of developed countries. Any kind of post-Kyoto international regime that will emerge to address climate change cannot ignore these startling facts.
- [F]or example, a multilateral liberalization of renewable energy sources or an agreement to remove fossil fuel subsidies would equally serve climate change objectives.
- The WTO negotiations on environmental goods and services could potentially be used as a vehicle for broadening trade in cleaner technology options and thereby help developing countries to reduce their greenhouse gas emissions and adapt to climate change.
- A more transparent and justifiable labeling and standards regime could similarly serve the interests of both trade and global environmental objectives.
- A more uniform pricing of energy under the UNFCCC framework, given the common but differentiated responsibilities, could negate some trade issues regarding competitiveness and leakage.
In the context of these implications on linkages between trade and climate change, this study assesses the following:
- What are the main policy prescriptions for reducing greenhouse gases that are employed by OECD countries and how do they impact the competitiveness of their energy-intensive industries?
- On account of the impact on competitiveness, is there is leakage of energy intensive industries from OECD countries to developing countries?
- Under what conditions can one justify trade measures under the WTO regime?
- What are the impacts of levying trade measures on trade flows and emissions?
- What are the underlying trade and investment barriers to the use of clean energy technologies in developing countries?
- In addition to tariff and nontariff barriers, are there other issues impacting the diffusion of clean energy technologies in developing countries?
- Is liberalization of renewable and clean coal technologies a plausible solution to assisting developing countries in achieving a low-carbon growth path?
- The Doha Round of negotiations on environmental goods and services provides an opportunity for addressing clean technology transfer issues over the businessas-usual scenario. What conditions are necessary for negotiating a “climate-friendly” package under the current WTO framework?
Simulation analysis undertaken for the study finds that the potential impact of such EU punitive measures could result in a loss of about 7 percent in U.S. exports to the EU. The energy-intensive industries such as steel and cement, which are the most likely to be subject to these provisions, would be most affected and could suffer up to a 30 percent loss. Actually, these are conservative estimates, given that they do not account for trade diversion effects that could result from the EU shifting to other trading partners whose tariffs could become much lower than the tariffs on the U.S.
Some developing countries have already taken some measures to unilaterally mitigate climate change; for instance, they have increased expenditures on R&D for energy efficiency and renewable energy programs. It is important that these countries identify cost-effective policies and mitigation technologies that contribute to long-term low carbon growth paths. Especially for coal-driven economies like China and India, investments are critical in clean coal technology and renewable energy like solar and wind power generation. Analysis suggests that varied levels of tariffs and NTBs are a huge impediment to the transfer of these technologies to developing countries...
...A closer examination of the “policy bundle” associated with energy taxation is warranted.
Firms sometimes avoid tariffs by undertaking foreign direct investment (FDI) either through a foreign establishment or projects involving joint ventures with local partners. While FDI is the most important means of transferring technology, weak intellectual property rights regimes (IPRs) (or perceived weak IPRs) in developing countries often inhibit diffusion of specific technologies beyond the project level. Developed-country firms, which are subject domestically to much stronger IPRs, often transfer little knowledge along with the product, thus impeding widespread dissemination of the much-needed technologies. Further, FDI is also subject to a host of local country investment regulations and restrictions. Most Non-Annex I countries also have low environmental standards, low pollution charges, and weak environmental regulatory policies. These are other hindrances to acquisition of sophisticated clean coal technologies.
By eliminating tariff and nontariff barriers in 18 high-GHG-emitting developing countries, trade liberalization results in huge gains in trade volumes, as illustrated in Table 3.2. It is worth noting that the change in trade volumes ranges from 3.6 percent to 63.6 percent across the four technologies identified for the study, on account of the varied level of tariffs on the technologies; the nontariff barriers, namely quotas and technical regulations; other investment barriers related to intellectual property rights; and the import elasticity of demand for these products. (p.51)
The wind power market has been historically dominated by dedicated wind-turbine manufacturing companies. More recently, large equipment manufacturers like GE and Siemens have entered the wind market by acquiring other companies. The top six manufacturers are Vestas (Denmark, merged with NEG Micon in 2004), Gamesa (Spain), Enercon (Germany), GE Energy (U.S.), Siemens (Denmark, merged with Bonus in 2004), and Suzlon (India).
A key development in the global wind power market is the emergence of China as a significant player, both in manufacturing and in the addition of wind power capacity. Five of the largest electrical, aerospace, and power generation equipment companies began to develop wind turbine technology in 2004, and four signed technology-transfer contracts with foreign companies. Such big players are bringing new competencies to the market, including finance, marketing, and production scale, and are adding additional credibility to the technology. In China, there are two primary turbine manufacturers, Goldwind and Xi’an Nordex, with market shares of 20 percent and 5 percent respectively (75 percent of the market being imports). Harbin Electric Machinery Co., one of the biggest producers of electrical generators in China, recently completed design and testing of a 1.2 MW turbine and was working toward production. Harbin’s turbine was entirely its own design, to which it claimed full intellectual property rights, the first such instance by a Chinese manufacturer. Dongfang Steam Turbine Works began producing a 1.5 MW turbine and installed four of these in 2005 (REN21 2006).
The industry is also witnessing a rapid globalization of its operations, with many companies considering investments overseas to be competitive. As noted by Brewer (2007), firms sometimes avoid tariffs by undertaking FDI inside the foreign market. Sometimes these projects involve local partners in joint ventures, in which there is the potential for inter-firm as well as international technology transfer in both directions. Vestas of Denmark, the leading manufacturer with 30 percent of the global market, opened a blade factory in Australia and planned a factory in China by 2007 to assemble nacelles and hubs. Nordex of Germany began to produce blades in China in 2006. Gamesa of Spain is investing $30 million to open three new manufacturing facilities in the U.S. Gamesa, Acciona of Spain, Suzlon of India, and GE Energy of the U.S. were all opening new manufacturing facilities in China, with Acciona and Suzlon each investing more than $30 million. The top exporters and importers based on the WIT’s data is presented below (Table 3.5).