Kraemer, R.A., Hinterberger, F., Tarasofsky, R. (2007)

In: Parliament, E. (Ed.), European Parliament, Brussels

Trade policy presents an area of opportunity for the EU to address the problem of global climate change. One approach is implementing measures to increase trade in environmental technologies and green services, as EU Trade Commissioner Peter Mandelson has identified in his call for a WTO-level initiative that would allow a 0% tariff deal for such goods and services. Of even greater potential significance are trade policies that help ensure countries’ own climate-change initiatives do not put them at a competitive disadvantage in the international marketplace.

International trade is significant in size and continues to grow. Between 1990 and 2005, world trade volumes increased by 5.8% annually, while total economic output grew by 2.5% per year. Growth in trade was highest for manufactured products (6.4%), followed by agricultural products (3.8%) and fuels and mineral products (3.5%). Alongside this increase in trade volume, CO2 emissions—especially from the transport sector—have also increased. Emissions from the European transport sector increased by 20% between 1990 and 2001. Also, international trade in climate-specific instruments is already underway, spurred on by the linking mechanisms that join the EU European Trading System (EU ETS) to the flexible JI/CDM project-based mechanisms of the Kyoto Protocol.

This report covers three different but related issues in international trade and climate change. First, by comparing the climate impacts of specific EU-produced goods with their imported counterparts, the report quantifies some of the ways in which international trade contributes to increased global greenhouse gas emissions. Secondly, the report examines ways in which market-based policy instruments could be employed within the context of trade policy. Lastly, the report examines the legal opportunities and obstacles to employing trade-related measures as a means of combating climate change, including the possibilities for altering the WTO rules. The climate impacts of trade are substantial and key mechanisms exist that could help deal with these impacts, although full realisation of these opportunities requires the establishment of clear institutional and legal frameworks.

Key Findings

• Trade, transport and CO2 emissions. CO2 emissions related to trade are steadily increasing. A shift in emissions from developed to developing and emerging countries is also occurring, due to the relocation of resource-extraction and production activities through international trade. This “CO2 leakage” is in many cases accompanied by increasing levels of overall emissions due to less efficient overseas production processes.
• Efficiency vs. total quantity in emissions. Sea-based shipping emissions are 40 times lower than air freight emissions per ton-kilometre of freight. However, due to the fact that sea-based shipping currently accounts for 90% of world freight transport, it contributes twice the overall level of CO2 emissions compared to freight transport by air.
• Carbon emissions from traded versus EU-produced goods. For most empirical case studies in this report, producing and delivering goods within Europe is less CO2 intensive than importing from overseas, with this difference driven mainly by transport emissions. In some cases, however, higher production-related emissions in Europe outweighed the lower transport emissions.
• Impact of overseas relocation on unit costs of production. The impacts of the EU ETS on unit production costs are most significant in energy-intensive sectors due to the pass-through of ETS-permit costs from electricity producers to electricity users. However, the contribution of EU ETS prices is still small when compared to other cost factors, such as labour.
• Consumer vs. producer countries. The total cost of production for the four sectors examined in this study (i.e. steel, aluminium, newsprint, cement) would increase between Page 1
  1.3% and 3.7% in Europe, assuming an EU ETS price of CO2 of 10 € per tonne. These costs increases would not be faced by non-Annex B (developing) countries (which lack Kyoto-mandated carbon caps). Thus the cost advantages of these countries are also in the range of 1.3% to 3.7% due to the EU ETS system.
• EU European Trading System (EU ETS) and Kyoto Protocol. The EU ETS dominates the global carbon market, representing 74% of volume and 87% of value as of September 2006. The EU ETS is the key driver of international demand for project-based emission reduction projects through the CDM/JI flexible mechanisms of the Kyoto Protocol.
• Market based instruments (MBIs). Recent experience in using market-based instruments in environmental policy has demonstrated their ability to improve environmental performance in a cost-efficient way. Climate-related MBIs could also be effectively implemented in the context of trade policy, provided the appropriate institutional and legal frameworks are put in place.

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