20 June 2010
Linking Climate Change to Trade
America and China are both “Carbon Intensity” first-movers – competing to make commitments that their economic production has falling associated Carbon Dioxide Emissions. The United States, China and Canada all continue to claim that their commitments on Climate Change amount to reductions in “carbon intensity”, rather than actual reductions in levels of emissions. This is a piece of policy propaganda, as proposed by linguistic strategists. A reduced carbon intensity of production would still allow countries to follow a path of economic growth, and increase carbon emissions overall. What is clear is that lower carbon intensities is not enough.
Behavioural economists, who look at both individual behaviour and collective social responses, have concluded a number of useful facts about humankind and its uses of resources. A good summary of what we know is provided by John Gowdy, writing in the Journal of Economic Behavior & Organization 68 in 2008, “Behavioral economics and climate change policy” :-
Some of his policy “clues” point the way.
In section 5.5, he writes, “Policy Clue 2: the ability to cooperate with unrelated others is an almost unique characteristic of the human species”. And then in section 5.8, he writes, “Responding to the climate change threat depends on returning to the level of human cooperation that prevailed in pre-industrial societies. Humans may be unique among mammals in the extent of their cooperation with others, but it is also true that humans are almost unique in the extent to which they are willing to annihilate members of their own species that do not belong to the “in” group. Experiments and observation show that people are more willing to cooperate with “like” others than with outgroup persons. The task of climate change policy is to make our entire species the “in” group. This was Georgescu-Roegen’s admonishment for sustainable behavior: “Love thy species as thyself.””
It will remain vitally important to continue Climate Change negotiations on a global scale, emphasising all sectors of society and business, and emphasising the common risks. We’re doing Climate Change policy not just for the poor, and not just for the poor in Sub-Saharan Africa, Bangladesh and the Maldives; we’re doing it for ourselves, and that includes the poor in Sub-Saharan Africa, Bangladesh and the Maldives, because they are us, and we are them.
But cooperation is not all that is required. In section 5.6, Gowdy writes, “Policy Sub-Clue 2a: cooperation depends on the ability to punish free-riders…These findings and other gametheoretic experiments are valuable in informing climate change policy. [Joseph] Stiglitz (2006) calls for using the international trade framework to impose penalties on countries (such as the U.S. under the Bush administration) that refuse to cooperate in reducing CO2 emissions. He suggests that Japan, Europe, and other signatories of the Kyoto agreement should bring a WTO case against the U.S. for unfair trade subsidization arising from U.S. energy and environmental policies. “With a strong international sanction mechanism in place, all could rest assured that there was, at last, a level playing field” (Stiglitz, p. 2–3).”
This is a strong articulation that Climate Change should be linked tightly to trade, which makes a lot of sense. In the referenced article “A New Agenda for Global Warming”, published by Economists’ Voice, July 2006, Joseph Stiglitz argues for a global carbon tax, which has been contested from many quarters, for a variety of reasons. However, other parts of his proposals seem indispensable : enforcement, cooperation and using the World Trade Organisation as the vehicle.
“The first step is to create an enforcement mechanism to prevent a country like the United States, or any country which refuses to agree to or to implement emission reductions from inflicting harm on the rest of the world. It is, perhaps, predictable that it would be the United Sates, the largest polluter, that has refused to recognize the existence of the problem…Fortunately, we have an international trade framework that can be used to force states that inflict harm on others to behave in a better fashion. Except in certain limited situations (like agriculture), the WTO does not allow subsidies—obviously, if some country subsidizes its firms, the playing field is not level. A subsidy means that a firm does not pay the full costs of production. Not paying the cost of damage to the environment is a subsidy, just as not paying the full costs of workers would be. In most of the developed countries of the world today, firms are paying the cost of pollution to the global environment, in the form of taxes imposed on coal, oil, and gas. But American firms are being subsidized—and massively so.”
Stiglitz goes on to propose “border tax adjustments”, that countries should impose import taxes on American products, but that proposal has received very short shrift from a wide audience, particularly those that argue that American manufacture is much less carbon intensive than (for example) Chinese; yet China as a whole emits far, far less than America, so an import tax would be perverse.
Without setting a global carbon tax, or creating carbon border tax adjustments, it would still be possible to create the “level playing field” that Stiglitz proposes, through several mechanisms in the trade system :-
1. Green Trade
The vast majority of international trade is conducted through contracts of procurement, between companies/firms, or from public sector organisations and companies/firms. It would be possible for the World Trade Organisation to assert that procurement contracts should be based around “green trade” principles as a very basic start. What “green trade” means would need to be ironed out, but it would be easy to make a start. Many local authorities in the United Kingdom have a “green procurement” policy that dictates a large proportion of their spending. This is an excellent model to adopt on the global level.
2. Abolish Fossil Fuel Subsidies and “Dirty” Energy Investment
Since energy is considered a basic utility in most developed countries, its provision is assured by global subsidies on Nuclear, Oil, Gas and Coal energy, offering tax breaks and public infrastructure and plant investment. For example, the United Kingdom Government is likely to offer public money for the liability insurance required from the building and operation of a new fleet of nuclear reactors.
The G20 economic leadership group has made it clear that they would consider phasing out subsidies to fossil fuel industries, and this could become the basis for a more general understanding about what should be invested in and what should not.
A very practical first step would be to ban new coal-fired power plants.
3. Development Rights
In some cases, the exploitation of fossil fuel and other mineral resources causes a “curse” to fall on the countries of extraction – the citizens of the country suffer environmental pollution, but very little in terms of monetary benefit from the exploitation of those resources, often conducted by foreign companies. Examples could include the Niger Delta, Iraq, West Papua, Colombia, and even coal mining areas in industrialised countries. The “resource curse” usually results in a reversal of social and economic development – yet the world has undertaken to uphold the Millenium Development Goals and other targets.
The World Trade Organisation could insist on “conflict-free petrol” or “social development Natural Gas” as a recognition of global development rights.
A lot of the debate around the Kyoto Protocol focuses on development rights – should the global carbon budget be shared per person ? Meaning that poorer, undeveloped people get the opportunity to sell carbon, and the right to continue to grow their economies.
If development rights were enshrined in global trade rules, overcoming the “resource curse”, then this would answer many of the UNFCCC calls, without recourse to universal carbon budgeting.
4. Green Development
The poor have the right to follow an economic development path – but they also have the right to follow a green economic development path. The poor have a human right to access to green energy, and access to green markets.
The way that green energy is delivered to the developing countries will have to be different to the way that energy has been organised in industrial countries – which has been so wasteful and polluting.
For example, in rural Africa, India and China, green electricity may be highly localised and not available on a national grid.
For global support of the growth of green energy systems, international trade must “pay back” for the raw resources from developing countries. Transnational and global companie should be required to pay a certain percentage of their profits towards green electrification in developing countries where they source their cheap raw materials.
The poor need access to green markets. This is best achieved by expanding the Fair Trade system to incorporate green principles.
If these four principles were undertaken, it may not be necessary to enforce border tax adjustments on carbon (which would punish developing countries, perversely), or set a global carbon tax (the effectiveness of which is questionable).
It might even get the Doha Development Round talks re-started :-