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Warming up to Trade? Harnessing International Trade to Support Climate Change ObjectivesThe World Bank
June 18, 2007
EXECUTIVE SUMMARY
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.
While there is potential for conflict in a number of areas between trade and an emerging global environmental regime to combat climate change, this also provides an opportunity for aligning policies that could stimulate production, trade, and investment in cleaner technology options. For example, a number of issues currently on the agenda of the WTO could potentially be harnessed to promote broader global environmental objectives:
- [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.
(p.7)
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?
In an attempt at advancing the trade and climate change agendas, the key findings and recommendations of this report are:
Findings
...Industrial competitiveness in Kyoto implementing countries suffers more from energy efficiency standards than from carbon taxation policies.
...Industrial competitiveness affected by carbon taxation policies are often offset by “policy packages.”
(p.8)...Some evidence supports leakage of carbon-intensive countries to developing countries.
...Trade measures can be justified only under certain conditions.
...Articles XX(b) and (g) allow WTO members to justify GATT-inconsistent measures if these are either necessary to protect human, animal or plant life or health, or if the measures relate to the conservation of exhaustible natural resources, respectively. However, Article XX requires that these measures not arbitrarily or unjustifiably discriminate between countries where the same conditions prevail, nor constitute a disguised barrier to trade.
...The proposed EU “Kyoto Tariff” may hurt the United States’ trade balance.
There is increasing industry pressure in the EU to sanction U.S. exports for not adhering to the Kyoto targets. This has resulted in calls for a “Kyoto tariff” on a range of U.S. products to compensate for the loss in competitiveness.
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.
(p.9)
...Varied levels of tariffs and NTBs are impediments to clean energy technology diffusion in developing countries.
[T]the rising share of developing country emissions resulting from fossil fuel combustion will require future commitment and participation of developing countries, particularly large emitters like China and India.
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...
...Recommendations
...A closer examination of the “policy bundle” associated with energy taxation is warranted.
The results emerging from analysis in chapter 2 suggest that carbon taxation policies do not impact on the competitiveness of energy-intensive industries. This suggests that complementary policies (implicit subsidies, exemptions etc.)—which are used in conjunction with carbon taxation policies levied by these countries, particularly on energy-intensive industries—could be negating any impact of carbon taxation. A more detailed study of this issue is warranted, as it will yield a greater understanding of the implicit subsidies/costs that are associated with each industry. The importance of this finding cannot be understated...
...It would be useful at the outset for trade and climate regimes to focus on a few areas where short-term synergies could be exploited.
The energy efficiency and renewable energy technologies needed to meet future energy demand and reduce GHG emissions below current levels are largely available...
...Removal of tariff and nontariff barriers (NTBs) can increase the diffusion of clean technologies in developing countries.
...a removal of tariffs and NTBs for four basic clean energy technologies (wind, solar, clean coal, and efficient lighting) in 18 of the high GHG emitting developing countries will result in trade gains of up to 13 percent.
(p.10)
...Intellectual property rights, investment rules and other domestic policies should be streamlined for widespread assimilation of clean technologies in developing countries.
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.
(p.11)
FULL REPORT
...Conclusions
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)
...While the impact of tariffs and other cost factors on technology transfers does vary across markets, and depends largely upon the tariffs applied, the scenario highlighted here illustrates that liberalizing trade can encourage clean coal technology transfer. However, this result does not capture all the other unquantifiable barriers. Trade-related intellectual property rights regimes and investment barriers significantly affect technology diffusion, but are not reflected in tariff or nontariff values. Encouraging technology transfer needs other policy measures such as protecting intellectual property rights and complying with licensing and royalty agreements...[For example,] in China...an impediment to the expansion of clean technology markets exists on account of lax environmental standards and a weak intellectual property rights regime.
(p. 56)
...Box 3-4 A Case of Other Barriers to Technology Diffusion: The China Study
Weak Intellectual Property Regime (IPR) Regimes for IPR tend to vary widely, especially between developed and developing countries, due to differing interests, cultures, and administrative capacities. Industrialized countries, which are the main exporters of technologies, tend to see IPR as a primary means for promoting technology development by offering inventors protection to reap the benefits from their invention. Developing countries are more concerned with access to existing technologies at affordable costs, and to make them more widely available. Consequently, developing countries tend to have far weaker IPR laws than industrialized countries. Case studies on environmental markets in China (CESTT 2002) mention IPR infringements as a problem, though they are not characterized as a major obstacle. (p.57)
...Market Trends in Wind Power Technology
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).
(p.58)
[RECENT MEDIA REPORTS CONFIRMS AND FURTHER ELABORATES UPON THE RAPIDLY EVOLVING EUROPEAN & CHINESE WIND POWER INDUSTRIES. THEY INDICATE THAT THE CHINESE COMPANIES ARE POSITIONING THEMSELVES TO DIMINISH THEIR EUROPEAN COMPETITORS' DOMINANCE IN THE GLOBAL WIND POWER MANUFACTURING MARKET. See also: How Can Obama Deliver Millions of U.S. 'GREEN COLLAR' Renewable Energy (Wind) Manufacturing Jobs If They Are Mostly Owned/Outsourced By/To Europe?, ITSSD Journal on Energy Security, at: http://itssdenergysecurity.blogspot.com/2008/09/how-can-obama-deliver-millions-of-us.html ; How Can Obama Deliver Millions of 'GREEN COLLAR' Jobs If Most Windmill Manufacturing Jobs Will be Outsourced to China and India?, ITSSD Journal on Energy Security, at: http://itssdenergysecurity.blogspot.com/2008/09/how-can-obama-deliver-millions-of-green.html ].
...Recommendations
...Intellectual property rights, investment rules, and other domestic policies should be streamlined for widespread assimilation of clean technologies in developing countries. 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 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.
(p. 93)
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