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Trade and the Environment Debate—WTO, Kyoto, and Beyond. Kristalina Georgieva Director World Bank Russia Office. Introduction. A decade of debates (often contentious)

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trade and the environment debate wto kyoto and beyond

Trade and the Environment Debate—WTO, Kyoto, and Beyond

Kristalina Georgieva


World Bank Russia Office

  • A decade of debates (often contentious)
    • Free traders feared that talk about environmental protection will be used as an excuse by some economic sectors to gain protection for themselves against competition from abroad.
    • Environmentalists feared that talk about free trade will be used as an excuse to give inadequate weight to environmental goals and excessive weight to maximization of GDP.

New developments and new challenges

  • Economic integration (globalization) is ongoing and unstoppable: EU, NAFTA, MERCOSUR, FTAA, AFTA.
  • The environmental policy implications are at the forefront of public debate (WTO Doha round).
  • Kyoto Protocol (climate change) ratified.

Does trade liberalization limit the choice of environmental Policies?

some of the common concerns
Some of the common concerns…
  • Reducing barriers to trade will reinforce the tendency

for countries to export commodities that make use of

resource-intensive production factors (“pollution havens”).

  • Trade liberalization may directly affect environmental

standards (“race to the bottom”).

  • “Environmental tariffs” may be employed against trading

partners deemed to have inadequate environmental


but evidence seems to suggest otherwise
But, evidence seems to suggest otherwise…
  • Countries that are more open to trade adopt cleaner technologies more quickly.
  • Increased real income is often associated with increased demand for environmental quality .
  • Greater openness to trade also encourages cleaner manufacturing (because protection always tends to shelter pollution-intensive

heavy industries).

scale composition and technique effects
Scale, composition, and technique effects

Scale effect: It measures the increase in pollution that would be

generated if the economy were simply scaled up, holding constant

the mix of goods produced and production techniques.

Composition effect: Changes in the relative size of the economic

sectors following a reduction in trade barriers.

Technique effect: Refers to changes in production methods that

follow trade liberalization.

Example: Scale of Economic Activity by 1% raises pollution

concentrations by 0.25-0.5% , but accompanying increase in incomes

per capita drives concentration down by 1.25-1.5%.

trade growth and the environment environmental kuznets curve
Turning Point Income






Per Capita Income

Trade, Growth and the Environment (Environmental Kuznets Curve)

Environmentalist view (all growth is bad!)

Grow-now clean-up later (macroeconomists view?)

“Environmental Kuznets

Curve” literature

environmental kuznets curve policy implications
Environmental Kuznets Curve—policy implications
  • Quality of policies and institutions can significantly reduce

environmental degradation at low income levels and speed up

improvements at high income levels.

  • Those who see economic growth as a way out of environmental

problems are only partially right, as they focus only on abatement

(regulatory) effects of higher income ignoring the corresponding

scale and industrialization effects.

wto and the environment
WTO and the Environment

Preamble: Environmental goals recognized…

  • No country should be prevented from taking measures necessary for the protection of human, animal or plant life or health, of the environment, at the levels it considers appropriate, subject to the requirement that they are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade.

Article XX: Protect Life and Health

    • Sanitary/Phytosanitary Provisions
    • Technical Barriers To Trade
wto environment disputes i
WTO-Environment Disputes (I)

Tuna - Dolphin case

  • US imposed embargo on Mexican tuna in support of its Marine Mammal Protection Act (MMPA).
  • 1991 GATT ruling: MMPA in contravention of trade rules: restriction based on process methods as opposed to product attributes.
  • GATT rules did not allow one country to take trade action for the purpose of attempting to enforce its own domestic laws in another country — even to protect animal health or exhaustible natural resources.
  • Ruling never imposed, due to NAFTA negotiations.
  • 1998- International Dolphin Conservation Program was adopted.
wto environment disputes ii
WTO-Environment Disputes (II)

Shrimp - Turtle case

  • 1998- US closed its market to shrimp caught without turtle exclusion devices to support the US Endangered Species Act .
  • India, Malaysia, Pakistan and Thailand challenged under WTO.
  • WTO ruling and subsequent appeal concluded that US is in violation of WTO rules (not under Article XX for promoting environmental objectives, but because it discriminated between WTO members).
  • In essence, legal reasoning acknowledged that in some circumstances, countries can use trade measures to protect global resources.
  • US still maintains statute, but restricts by shipment, not

by country.

wto and the environment doha round
WTO and the Environment (Doha Round)
  • the relationship between existing WTO rules and specific trade obligations set out in multinational environmental agreements (MEAs).
  • the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services.
  • clarification and improvement of WTO disciplines on fisheries subsidies, taking into account the importance of this sector to developing countries.
  • clarification of environmental labeling (including ecolabeling) policies.
kyoto protocol
Kyoto Protocol
  • The Kyoto Protocol establishes mandatory emission reduction targets below 1990 levels but only for industrialized (Annex I) countries.
    • 5.2 % reduction of emission levels below 1990 levels by 2008-2012 for all industrialized countries.
    • specific targets for various countries.
  • 6 greenhouse “Kyoto gases” are considered: CO2, CH4, N2 O, HFC(hexafluorocarbon), PFC(perfluocarbon), SF6(sulphur hexaflouride).
kyoto protocol14
Kyoto Protocol
  • Emission reductions can be achieved in a variety of ways, country specific or through the use of the so-called Kyoto flexible mechanisms which are:
    • Clean Development Mechanism -- Countries earn credits by investing in emission reduction projects in developing countries.
    • Joint Implementation -- Countries earn credits by investing in emission reduction projects in industrialized countries.
    • International Emissions Trading -- Countries buy and sell emission credits among themselves.
russia and kyoto
Russia and Kyoto
  • The target for Russia is that its combined emissions of “Kyoto gases” should not exceed five times their 1990 levels during 2008-1012.
  • As of 1999, Russia’s combined emissions were 38.4% below 1990 levels; CO2 emissions 32.7% below 1990 levels.
  • To that extent the constraint is ‘non-binding’—even under optimistic estimates of GDP growth and conservative estimates of declining carbon intensity (Lecocq and Shalizi).
  • Russia stands also to benefit from the sale of AAUs and JI.
kyoto and the carbon market
Kyoto and the Carbon Market
  • Ratifying OECD cumulative target reductions will be 5 to 5.5 billion tons of carbon dioxide below 1990 levels by 2012 based on their Kyoto obligations.
  • If half emissions reductions are achieved domestically, the “compliance gap” to be met through trade with developing countries and economies in transition (EITs) through 2012 would be 2.5 – 3 billion tons – 10 times current carbon purchase contracts.
  • Carbon is currently selling for about $5 ton of carbon dioxide, but likely to increase to about $10 ton.
  • At a selling price of $5-$10 per ton carbon payments to developing countries and EITs between now and 2012, trade value will be between $12.5 billion and $25 billion.
structure of the carbon market
Structure of the Carbon Market

Project-Based Transactions

Allowance Markets

UK Emission Trading Scheme





EU Emission Trading Scheme

Chicago Climate Exchange

New South Wales Certificates


Not for Kyoto Compliance

main driver compliance volume traded in project based transactions million tco 2 e
Main Driver: ComplianceVolume traded in project-based transactions, million tCO2e


Kyoto Pre-Compliance


Not Kyoto Pre-Compliance














total value of carbon projects in million u s nominal
Total Value of Carbon Projects(in million U.S.$, nominal)















who is buying in percent of volume purchased since jan 03
Who is Buying? In percent of volume purchased since Jan.03

Australia & New







Other EU








who is selling in percent of volume sold from 2003 to may 2004
Who is Selling? In percent of volume sold from 2003 to May 2004





Latin America







  • Major Development: EU ETS. Single largest market worldwide, potentially major driver.
  • Large scale pledges (by EU governments) to become projects in 04, 05.
  • More CDM Methodologies Approved to reduce transaction costs.
  • Large sellers continue to dominate the market (China, India, Brazil, Indonesia).
  • Russian ratification. Russian energy projects will become a key focus.
  • Likely upper limit of contributionof CO2e and CH4 assets to OECD compliance gap until 2012: 300 Mt CO2e; gap to be filled up by AAUs, HFC23, N20 assets.
world bank carbon finance products
World Bank Carbon Finance Products

Total funds under current management: $420 million

  • Prototype Carbon Fund. $180 million. Multi-shareholder.
  • Bio Carbon Fund. $15 million - target $40 million; Multi-shareholder.
  • Community Development Carbon Fund. $45 million - target of $100 million; Multi-shareholder.
  • Dutch Carbon Fund. $125 million, prospect of $180 million: Dutch Government.
  • Italian Carbon Fund. $15 million, with further $80 million/year under discussion; Italian Multi-shareholder.
  • Netherlands JI Facility. $40 million. Economies in Transition only.
compatibility of carbon trading with international trading regime
Compatibility (of carbon trading) with international trading regime
  • Another win-win situation that benefits both the environment and economy.
  • WTO rules do not apply (so far): emission permits are neither goods nor services. No conflict in this regard.
  • Trade controls or ‘sanctions’ not going to be used to enforce compliance (within Kyoto) or to punish non-members.
kyoto and wto mutual respect
Kyoto and WTO (mutual respect)
  • The Kyoto Protocol text:
    • Parties should “strive to implement policies and such a way as to minimize adverse effects..on international trade...” ;
    • FCCC features similar language.
  • WTO regime is equally solicitous of environment:
    • Article XX allows exceptions for health & conservation.
    • Preamble to 1995 Marakesh Agreement establishing WTO seeks “to protect and preserve the environment;”
    • 2001 Doha Communiqué starting new round of negotiations: “the aims of ... open and non-discriminatory trading system, and acting for the protection of the environment ... must be mutually supportive.”
kyoto and wto potential synergies
Kyoto and WTO(potential synergies)
  • Kyoto Protocol text:
    • “progressive reduction or phasing out of market imperfections and subsidies in all greenhouse gas emitting sectors..” is consistent with multilateral trading arrangements
  • WTO (Doha round) text:
    • “..a multilateral liberalization of goods and services used in environmental efforts (such as air quality improvement)..” consistent with Kyoto Protocol
kyoto and wto potential conflicts
Kyoto and WTO (potential conflicts)
  • Border tax adjustments
    • A country’s border tax adjustments to offset effects of specific domestic GHG taxes on competitiveness of its industry vis-à-vis foreigners.
    • Legitimate when applied against
      • coal itself, or carbon/energy content of manufactures.
    • Not when applied,
      • solely as punishment for free riding, against unrelated products of a non-member.
kyoto and wto potential conflicts28
Kyoto and WTO (potential conflicts)
  • WTO Agreement on Subsidies and Countervailing Measures.
    • Payments under environmental programs (e.g. agriculture) are exempt from restrictions.
  • Possible conflicts when Kyoto Parties:
    • exempt particular favored industries from an energy tax, or
    • give out domestic emission permits in a non-neutral way, or
    • reward their companies with credits for CDM and JI projects.
kyoto and wto potential conflicts29
Kyoto and WTO (potential conflicts)
  • WTO Technical Barriers to Trade (TBT)
    • TBT agreement clearly allows non-discriminatory labeling, e.g., according to energy efficiency.
      • But, it is also possible for such standards to be constructed with the aim of favoring domestic industries.
    • Emission permits are treated neither as goods nor as services: No conflict on that so far.
      • But, they will be subject to GATS in case they are deemed as services: MFN principles will then be violated.
kyoto and wto potential conflicts30
Kyoto and WTO(potential conflicts)
  • Leakage
    • Kyoto implementation may lead to leakage of all carbon-producing activities to non-member countries, thus offsetting the reduction in emission among members.
    • Can trade measures be directed against CO2 emissions in other countries, as embodied in electricity, or in goods produced with it?
      • Theoretically there is a justification for using environmental tariffs, but
      • Use of trade sanctions to enforce PPMs still an exception (shrimp-turtle) and not a norm in WTO.


  • Both Kyoto, and WTO have enormous potential to deliver economic, social, and environmental progress.
  • More complete understanding of the linkages between global pollution and international markets is needed.

Within countries

  • There should be increased understanding of the issues and potential conflicts/problems in order to formulate the necessary legal and regulatory framework.
  • The Ministries of Finance/Trade and Environment must consider ways and means to elaborate coordination of policies and measures taking national circumstances and potential effects into account.