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Module 1The environment,

the economy and trade: The importance of

sustainable development

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The environment, the economy and trade: The importance of sustainable development1

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1 Introduction

Climate change is the most important global en-vironmental challenge of our century. In order to analyse climate change and climate change-re-lated policies from an economist’s point of view, readers need to be equipped with some general conceptual tools. These tools, briefly introduced in this module, allow them to (a) understand that human beings affect the climate because the economy and the environment are related and interdependent; (b) identify the factors that determine the size of the impact an economy has on the environment; (c) describe what can hap-pen if this impact becomes too severe, (d) under-stand the fundamental importance of the com-prehensive concept of sustainable development in today’s context of climate change; (e) analyse why many see trade as an important enabler of sustainable development; and (f) assess the over-all impact of trade on the environment.

Section 2 investigates the general relationship between the economy and the environment and the ways in which they interact. The environment provides four key services to the economy: it serves as a natural resource base, provides life support services, provides amenity services, and acts as the economy’s waste sink. In turn, the economy affects the environment through these four key services. This section shows that climate change is the result of the negative impact caused by the economy’s use of the environment’s resource and waste services. It then explains the factors that influence the overall size of an economy’s impact on the environment using a simple model and applying it to the emissions of CO2, a particularly important greenhouse gas that will be discussed extensively in the remainder of this teaching ma-terial.

Having examined how the economy affects the environment and which factors determine the overall size of this impact, Section 3 starts by ask-ing what could happen if the size of this impact were to become too large. It shows that some societies collapsed in the past because of their excessively negative impact on the environment: this illustrates that economic systems need to be sustainable. Consequently, the section highlights the importance of sustainable development in today’s world.

While trade is currently viewed by many as an important enabler of sustainable development, various concerns have been voiced in recent decades with regard to the effects of trade on the environment. Section 4 therefore attempts

to provide answers to the question of whether international trade harms or benefits the en-vironment. After taking a first glance at data, it introduces the reader to a comprehensive theo-retical framework that allows for assessing dif-ferent channels through which trade affects the environment. These theoretical tools are then ap-plied to review recent empirical evidence on the impact of trade on CO2 emissions.

At the end of this module, readers should be able to:

• Describe why economic activities can affect the climate by discussing the general linkages between the economy and the environment and understanding why and how the two sys-tems are considered to be interdependent;

• Use a simple model to analyse the effects of changes in population, affluence and technol-ogy on the size of an environmental impact such as GHG emissions;

• Understand the potential consequences of unsustainable human behaviour that ignores environmental constraints by referring to ex-amples of collapses of past societies;

• Describe the fundamental importance of sus-tainable development for humankind and as-sess the role of trade as a key enabler of sus-tainable development;

• Identify the main effects that trade has on the environment;

• Analyse important empirical contributions on the impact of trade on emissions;

• Assess the role of trade in the transfer of green technologies by discussing the role of environmental goods and services in the world economy.

To support the learning process, readers will find several exercises and discussion questions in Sec-tion 5 covering the issues introduced in Module 1. Useful data sources and additional reading ma-terial can be found in Annexes 1 and 2.

2 Theeconomyandtheenvironment: Unravellingthelinks

The economy and the environment are intercon-nected and interdependent systems, and both have an impact on economic and social devel-opment. Economic activities can therefore have an impact on the environment and vice versa. This section explains how the environmental system influences the economy, how economic activities affect the environment, and what fac-tors determine the size of the economy’s envi-ronmental impact.2

2 The structure of this section was partially inspired by Chapter 2 of Perman et al. (2011) and Chapters 4 and 7 of Common and Stagl (2004).

The environment, the economy and trade: The importance of sustainable development 1

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2.1 Linksbetweentheeconomy andtheenvironment

As shown in Figure 1, the economic system and the environmental system are closely related and influence one another.3

Theeconomyandtheenvironment:TwointerdependentsystemsFigure 1

Source: Author's elaboration based on Common and Stagl (2004: 112).Note: G&S: goods and services; L: labour; K: capital; I: investments; R: natural resources.

Rest of the universe

Environmentalsystemboundary

Economic systemboundary

Energy

ResourcesAmenities

Recycling

Life support

Capital Stock

Production by firms

Consumption by households

Waste sink

LR

K I

G&S

It is fundamental to understand that the eco-nomic system is a part, or sub-system, of the en-vironmental system (in simple terms, the earth and its atmosphere). This can be seen graphi-cally in Figure 1, as the boundary of the economic system lies entirely within the environmental system’s boundary. The environmental system, with the economic system inside, is in turn part of a larger system – the rest of the universe, with which it exchanges energy.4

Within the economic system, one finds house-holds that buy and consume goods and services (G&S) produced by firms, and that provide la-bour (L) to firms. Firms use labour (L) provided by households, capital (K) from the capital stock, and natural resources provided by the environmental system (R) as inputs to produce goods and ser-vices. They sell a part of the goods and services they produce to households and other firms, and invest (I) the other portion in the capital stock. Firms and households both produce waste that is partially recycled and reused by firms and par-tially discharged into the environment.

The environmental system, which consists of planet earth and its atmosphere, provides servic-es to the economy. Common and Stagl (2004) de-fine four classes of environmental services, each of them represented by a green box in Figure 1. In particular, the environment provides natural

resources, amenity services, and life support ser-vices to the economy, and acts as the economy’s waste sink. At the same time, the economy af-fects the environment by using these services. Each of the services is analysed in a greater detail in the sections that follow.

2.1.1 Providing natural resources to the economy

Firms extract natural resources from the environ-mental system and use them as inputs in their production processes. Natural resources can be classified according to a common classification system used in recent textbooks on natural re-source economics or ecological economics (Com-mon and Stagl, 2004; Perman et al., 2011). This classification system is based on the two ques-tions presented in Figure 2.

The first question is whether the current use of a resource influences the future availability of that resource. If the current use of the resource reduces its availability in the future, the resource is called a stock resource. For instance, the future availability of animal species, healthy soil, fossil fuels, or minerals is affected by the current use of them. If firms extract coal, they will reduce the remaining quantity of coal available for future usage. Firms can thus affect the environment by extracting stock resources and thereby changing their future availability. If the current use of the

3 When using the terms “eco-nomic system” or “economy” in this section, we are always referring to the world eco-nomic system or the world economy.

4 The environmental system receives energy inputs from the rest of the universe (in the form of solar radiation emitted by our sun) and emits energy outputs to the rest of the universe (as thermal radiation). Refer to Module 2 for a detailed discussion.

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resource does not affect the quantity of the re-source available for future use, that resource is called a flow resource. Typical examples of flow resources are wind or solar radiation. No matter how much solar radiation firms use today, or no matter how many wind turbines the economy deploys today, there is strictly no impact on the quantity of solar radiation or wind that will be

available tomorrow. The distinction between flow and stock resources is fundamental – stock resources can be completely depleted by the economic system, while flow resources cannot. As we will see in Section 3, completely depleting stock resources like healthy soils or forests can have devastating effects on the economic system.

ClassificationofnaturalresourcesFigure 2

Does the current useof a resource affect

future availability of that resource?

Flowresource

Stockresource

Does the resource

regenerate itself?

Non-renewable stock resource

Renewable stock resourceYes Yes

No No

Source: Author's elaboration based on the classification in Common and Stagl (2004) and Perman et al. (2011).

When it comes to stock resources, there is a second question to ask: does the stock resource regener-ate itself? If it does, the stock resource is called a renewable resource. If it does not, it is called a non-renewable resource. Fossil fuels are examples of non-renewable resources. No oil will be available for further use once the economic system has de-

pleted all current oil reserves.5 Animal species like fish are examples of renewable resources. Fish do reproduce at a certain rate, which is often called a natural growth rate. Consequently, as long as the amount of fish the economy extracts (the fish harvest rate) is equal to the fish natural growth rate, the fish stock remains stable over time.

PatternsofworldtradeinnaturalresourcesBox 2

From a trade statistics perspective, natural resources are difficult to define precisely. The World Trade Organi-zation (WTO, 2010: 46) defines natural resources as “stocks of materials that exist in the natural environment that are both scarce and economically useful in production or consumption, either in their raw state or after a minimal amount of processing.” Based on this definition, WTO (2010) classifies fish, forestry products, fuels, ores and others minerals, and non-ferrous metals as natural resources.

Worldtrade,exportsandimportsbybroadcategoryFigure 3

Agriculture Natural Resources Manufacturing0

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Agriculture Natural Resources ManufacturingImportsExportsImportsExportsImportsExports

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Agriculture Natural Resources ManufacturingImportsExportsImportsExportsImportsExports

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Source: UNCTAD (2015: 17–18).Note: BRICS: Brazil, Russia, India, People's Republic of China and South Africa; LDCs: least developed countries.

5 Note that this is not entirely correct. While the natural growth rate of oil stocks is indeed zero if we consider human time scales (e.g. years, decades, centuries), there are positive growth rates for lon-ger time horizons (millions of years).

200420112014

Developed countriesDeveloping countries

BRICSLDCs


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PatternsofworldtradeinnaturalresourcesBox 2

Natural resources are unevenly distributed over the planet’s surface. Several resources are highly concen-trated in specific geographic areas. Trade in natural resources is thus unsurprisingly substantial. The share of natural resources in world merchandise trade rose from 11.5 per cent in 1998 to 23.8 per cent in 2008 (WTO, 2010). While manufacturing remained by far the largest broad category of goods traded in 2014, with a share of almost 70 per cent, natural resources were the second largest. In addition, unlike developed countries, de-veloping countries export more natural resources than they import (see Figure 3). Moreover, natural resources still represent a large share of developing countries’ exports, particularly in energy-exporting countries in the Middle East and primary commodity-exporting countries in Africa (UNCTAD, 2015).

Source: Author's elaboration based on UNCTAD (2015) and WTO (2010).

2.1.2 Providing life support services

The second class of environmental services iden-tified by Common and Stagl (2004) are life sup-port services, i.e. basic conditions that enable hu-man life. These conditions include, for instance, liveable temperatures, gravity levels, oxygen levels, etc. Without these services, no human life could exist on earth.

2.1.3 Providing amenity services

The environmental system provides amenity services to households. Such services are diverse: the joy of taking a walk in a forest, or the pleas-ure of swimming in a lake are just two examples. These amenity services often do not need any transformation and can be directly consumed by households. Moreover, consuming environmental amenity services does often not have an impact on the future availability of these services. Enjoy-ing flora and fauna by looking at it does not reduce its future quantity or quality. There are however exceptions. Mass tourism or illegal harvesting of endangered species, for instance, can have a nega-tive impact on wildlife and thus affect the envi-ronmental system if organized unsustainably.

2.1.4 Serving as the economy’s waste sink

The environmental system acts as the economy’s waste sink. Households and firms create waste, an unwanted by-product of economic activity. Waste is understood as a rather broad category contain-ing such items as chemical, paper, plastic and metal waste from consumers, organic food waste, CO2 emissions, smoke from burning biomass, etc. It is important to understand that waste dis-charges into the environment are direct and nec-essary consequences of the extraction and use of resources from the environment. In physics, the law of conservation of mass explains this phe-nomenon. Economists often refer to it using the term “material balance principle,” which states that matter can neither be created nor destroyed. Economic activity can thus only transform inputs into outputs but can never create or destroy mat-

ter. Consequently, all extracted material will have to return to the environment in some form and at some point in time. One can therefore look at the waste sink function as a type of complement of the resource extraction function.

Waste can be partially recycled and subsequently reused as an input in the production process (see Figure 1). Unrecyclable or unrecycled waste discharged in the environment may accumulate as a stock. Environmental processes may subse-quently reduce the waste stock. Whether or not the particular stock is increasing depends on the type of waste, the rate of discharge, and the en-vironment’s capacity to reduce the waste stock. Take, for instance, plastic waste discharged into oceans. The stock of this particular type of waste is growing fast because the world economy’s rate of discharge is high and the environment’s ca-pacity to biochemically transform plastic – and thereby reduce the plastic stock – is low.

Waste is often not harmful to the environment, but in some cases it induces chemical or physical changes that can harm living organisms. This is another example of how the economy affects the environment by using one of the four environ-mental services. There are a variety of relation-ships between the quantity of waste and result-ing environmental damage. Sometimes, waste discharged into the environment has no damag-ing impact until a certain threshold is reached. Sometimes damage increases gradually with the quantity of waste discharged. Take, for instance, CO2 emissions. CO2 itself is not a priori harmful to living organisms. After all, humans and other animal species produce CO2 by breathing, and plants consume it in their respiration and photo-synthesis processes. However, although CO2 does not have direct effects on biological systems, it does have a direct physical impact on the earth’s atmosphere. When emitted in large quantities, CO2 triggers a greenhouse effect (a phenomenon that will be discussed in detail in Module 2) that contributes to changing the climate of the planet and poses a threat to a wide range of living or-ganisms, including humans.

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2.1.5 Interaction among environmental services: Fossil fuel extraction, CO2 emissions, and climate change

The sections above discussed the links between the economic and environmental systems sepa-rately for the four classes of environmental ser-vices. In reality, however, in addition to interact-ing with the economic system, these services also interact among themselves, which makes the overall picture even more complicated. Let us take a first glance at climate change, which is a good example of such multiple interactions.6 Currently, our economic system relies heavily on energy from fossil fuels. Firms extract fossil fuels like coal, petroleum or natural gas from the en-vironment. These resources are then consumed and, as a by-product, emissions of CO2, a major greenhouse gas, are released into the atmos-phere where they accumulate. This is an illustra-tion of a typical interaction between the environ-ment’s resource service (firms extract fossil fuels) and its waste sink service (firms emit CO2 from fossil fuel combustion into the atmosphere). The increased concentration of CO2 in the atmos-

phere then leads to the so-called greenhouse ef-fect, and thus to climate change.

Climate change in turn affects the four environ-mental services in numerous ways. It can induce an increase in extreme weather events like se-vere droughts, which can, for instance, reduce the availability of healthy soils. It can also cause changes in temperature and precipitation, alter-ing life support services and thus causing losses of biodiversity and instability of ecosystems. Amenity services can be affected by the retreat of glaciers, shortened ski seasons, and unusual heat waves during the summer. And the waste sink function of rivers can be altered by changes in the assimilative capacity of rivers due to the rise in temperatures. This illustrative list of potential in-teractions could be extended almost indefinitely given the wide range of effects predicted by the IPCC (2014). Finally, it is important to note that all these changes in turn affect economic activities, for example by slowing economic growth, lower-ing agricultural productivity, reducing tourism activity, decreasing food security, and making it more difficult to reduce poverty.7

6 A second example of interactions among environ-mental services is provided in Box 3.

7 Refer to Module 2 for a detailed discussion.

Interactionsamongenvironmentalservices:TheGangaRivercase

Shortsummary

Box 3

An illustrative example of interacting environmental services is provided by the pollution of the Ganga River in India. For centuries, the Ganga River has served as a major resource base for India’s population by providing fish, water, trade routes, etc. The Ganga basin also provides important amenity services, such as the Hindus’ use of the river for mass bathing and ritual ceremonies that include cremation of dead bodies. Moreover, the Ganga basin also increasingly serves as a major waste sink for domestic and industrial waste. Over 1.3 billion litres of sewage per day and an estimated 260 million litres of largely untreated industrial wastewater pass directly into the river (Behera et al., 2013). At the same time, the Ganga ecosystem plays an important part in providing various life support services for numerous animal species, including endangered ones like the Ganga River dolphin. The Ganga ecosystem has thus been under considerable pressure due to the inflow of household and industrial waste, intensive water and fish extraction, and the religious usage of the river that regularly floods it with remains of the dead. These complex interactions of the Ganga’s waste sink, resource extraction, and amenity service functions has led over recent decades to severe levels of pollution that not only threaten different resource stocks (e.g. water quality) but also the possibility of benefitting from amen-ity services (e.g. health risks associated with taking a bath in the river). Moreover, current pollution levels have an impact on the life support function of the river and threaten the existence of entire species like the Ganga River dolphin (Behera et al., 2013). Awareness of the problem has been increasing over recent decades. Since 1985, several policy initiatives have been put forward, and in 2011 the World Bank decided to support the Indian National Ganga River Basin Authority with a US$1 billion project called the National Ganga River Basin Project.Source: Author's elaboration based on Behera et al. (2013).

Section 2.1 shed some light at the complex interrelationship between the economic and environmental sys-tems, which in turn has an impact on economic and social development. Readers learned that the environ-mental system provides four key services to the economy, and that the economy has an impact on the envi-ronment by using these services. A first glance at climate change showed that this phenomenon is the result of such impacts. The example of climate change also showed how these services can affect one another and lead to severe cases of environmental damage, in turn affecting economic activities.


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8 Note that an identity is an equation that is always true by definition (see footnote 11).

9 See Chertow (2000) for an overview on the history of the IPAT identity.

10 Depending on the appli-cation, there are a variety of sets of units that can be used with the IPAT identity. Accor-ding to Common and Stagl (2004), I can be measured in tons or litres, depending on the particular impact one attempts to analyse. P is always measured in numbers of people. A is measured as the total economic output in currency units (often gross domestic product – GDP - in US dollars) divided by the number of people. T is mea-sured as units of impact (for instance tons or litres) per US dollar of GDP.

2.2Environmentalimpactofeconomic activities

Section 2.1 showed that the economy affects the environment by using the four environmental ser-vices, and illustrated this mechanism using the ex-ample of climate change. However, we have not yet addressed the important related question of tim-ing. Why is climate change the biggest environmen-tal problem of the 21st century rather than having been the biggest problem during the 19th or 20th centuries? Which factors explain why today’s GHG emissions are at levels that start to threaten the climate system of the entire planet? Or, put more generally, which factors explain the magnitude of the environmental impact of economic activities?

Assessing the role of factors that influence the magnitude of the environmental impact of eco-nomic activities is a challenging endeavour. It is therefore useful to rely on simplified models that allow us to identify the main factors that influ-ence the magnitude of such an impact. These models can also be used to simulate future im-pact and thereby provide useful information about potential future scenarios. The following two sections discuss two of these models and ap-ply them to the analysis of the size of one particu-lar impact of economic activity: CO2 emissions.

2.2.1 Unravelling the role of main drivers of environmental impacts by using the IPAT identity8

A simple but very useful way to think about the size of any environmental impact is provided by the Environmental Impact, Population, Affluence and Technology (IPAT) identity. IPAT emerged dur-ing a debate on drivers of environmental impact between Paul R. Ehrlich, John Holdren, and Barry Commoner, three leading ecologists of the 1970s.9 The IPAT identity states that three factors jointly determine the size of any environmental impact (I): population (P), affluence (A), and technology (T). Intuitively this seems rather straightforward. All else being equal, the larger the population, the higher the average per capita consumption, and the more resources a production technology uses and/or the more waste a technology gener-ates, then the more one can expect an economy’s impact on the environment to be bigger.

Let us take a look at the climate change exam-ple discussed above. One generally expects that more fossil fuels are extracted and more CO2 emissions from fossil fuel combustion are emit-ted if more people live on the planet. This is rela-tively easy to understand, as more people means, for instance, increased demand for cars. As most of the cars run on energy from fossil fuels, this will increase CO2 emissions. At the same time, one expects that CO2 emissions will increase if these people are more affluent, i.e. they consume more per person. Higher per capita consumption implies, for instance, increased industrial pro-duction, which requires more energy and in turn increases CO2 emissions from fossil fuel combus-tion. Finally, CO2 emissions are expected to be higher the dirtier the production technology. Put differently, if production technology evolves and becomes cleaner, one would expect, all else be-ing equal, fewer CO2 emissions. If factories start to use machines that require less energy to do the same job, this should reduce CO2 emission levels.

IPAT allows us to visualize the relationship be-tween population, affluence, technology, and the magnitude of the environmental impact they can create. The general form of the IPAT identity captures the three main factors driving the size of environmental impact and can be written as:

where, as stated earlier, I stands for environmen-tal impact, P for population, A for affluence, and T for technology.10

The general IPAT identity can be applied to a va-riety of different environmental effects. Depend-ing on how I is defined, IPAT allows for analysing insertions into the environment (e.g. GHG emis-sions) and extractions from the environment (e.g. fish or coal extraction).

To illustrate how one can use the IPAT identity, we will continue to focus on one specific envi-ronmental impact – CO2 emissions – and apply the IPAT identity to global anthropogenic (i.e. hu-man-induced) CO2 emissions. The sources of data used in this analysis are detailed in Table 1.

I P* A* T,

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Worldpopulation,affluenceandtechnology,2014Table 1

Variable Variable description Year Value Source

P World population 2014 7,260,710,677 persons World Bank’s Data Catalog

A World GDP (PPP, constant 2011 international dollars) per capita 2014 14,287

international dollars/person World Bank’s Data Catalog

TWorld CO2 emissions1 per

world GDP (PPP, constant 2011 international dollars)

2014 0.00000034 kilotons/ international dollars

The Netherlands Environmental Assessment Agency (see Oliver

et al., 2015)

Source: Author.1 CO2 emissions include CO2 emissions generated by the use of fossil fuels and industrial processes but exclude CO2 emissions generated by short-cycle and large-scale biomass burning. Note: PPP: purchasing power parity. International dollar is a hypothetical unit of currency widely used in economics. By construction, it has the same purchasing power parity that the US dollar had in the United States at a given point in time (in this case, 2011).

Using the data for P, A, and T we can calculate the impact I as

I = 7,260,710,677 persons * 14,287

= 35,684,418.06 ktons,

* 0.000000344persons $

$ ktons

A TP

and find that the world economy emitted 35,684,418.06 kilotons of CO2 in 2014. At this point, it is important to note that IPAT is an accounting identity and thus holds by construction.11

Applying IPAT to a particular year allows us to understand how the identity works, but it is by far more interesting to apply the method over a longer time horizon. By doing so, one can analyse which of the three factors have contributed to increase or reduce emissions in the recent past. Figure 4 shows the change in anthropogenic CO2 emissions from the use of fossil fuels and indus-trial processes over the period of 1970-2013. CO2 emissions from fossil fuel use and industrial processes increased by roughly 125 per cent over the last four decades. Figure 4 also shows the de-composition of these emissions into factors that caused them, namely P, A and T. World population and world affluence have been increasing fast (by 97 per cent and 89 per cent, respectively) while technology has become cleaner (by 39 per cent).

Overall, Figure 4 reveals that the emission-reduc-ing effect of cleaner technology has not been able to offset the emission-generating effects of in-creased population and affluence. In other words, the sharp increase of CO2 emissions over recent decades has mainly been driven by population growth and increased affluence. Thus, to answer our initial question, climate change is the biggest environmental problem of the 21st and not the 19th or 20th century because of the joint evolution of population, affluence, and technology: world pop-ulation and affluence have been increasing rapidly and are currently at their highest levels in human history, while technology is still relatively dirty and cannot yet cancel out the emission-increasing ef-fects of population and affluence. Together, these three factors explain why CO2 emissions in the early 21st century have risen to such high levels, causing accumulations of CO2 in the atmosphere that threaten the climate of our planet.

IPAT can thus be very useful in identifying which factors contributed to increasing or reducing the overall size of the economy’s environmental impact. Box 4 shows a related decomposition us-ing the Kaya identity, which provides additional interesting insights into the drivers of past CO2 emissions. Section 2.2.2 will show that IPAT can be used not only to analyse the past, but also to glance at the future.

CO2–IPATdecompositionFigure 4

Source: Author's elaboration based on data on population and GDP at market prices (constant 2005 US dollars) from the World Bank’s Data Catalog, and on CO2 emissions data from The Netherlands Environmental Assessment Agency (Oliver et al., 2015).

1970 1980 1990 2010

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Year

1970=100I = CO2 emissions

P = Population

A = GDP/population

T = CO2/GDP

11 To see this, note that we calculated . The IPAT identity thus collapses to CO2=CO2, which by definition always holds.

T = GDPCO2

CO2=Population * PopulationGDP

A TI P

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Population

TPES/GDP

CO2 emissions

GDP/population

CO2 /TPES (ESCII)

Interactionsamongenvironmentalservices:TheGangaRivercaseBox 4

The IPAT identity discussed in this section has been extended by the Japanese economist Yoichi Kaya (1990) to provide additional insights in the context of CO2 emissions. This identity is frequently used to decompose CO2 emissions (Nakicenovic and Swart, 2000). The so-called Kaya identity can be expressed as follows:

where CO2 = anthropogenic CO2 emissions; P = population; A = GDP per capita; E = primary energy consump-tion; and GDP = gross domestic product.

The Kaya identity decomposes IPAT’s technology variable T into two parts: energy intensity of GDP (E/GDP) and carbon intensity of the energy mix (CO2/E). IEA/OECD (2015) use the Kaya identity and decompose CO2 emis-sions for two groups of countries: Annex I and non-Annex I countries of the UNFCC.1

Figure 5 displays the decompositions by country group. According to IEA/OECD (2015), the recent decline in emissions in Annex I countries was driven by a significant reduction in the energy intensity of GDP (TPES/GDP), and by a slight fall in the CO2 intensity of the energy mix (CO2/TPES). These two emission-reducing ef-fects have offset the emission-generating effects of the growth in GDP per capita and in population. In non-Annex I countries the growth in CO2 emissions was mainly driven by the increase in GDP per capita and to a lesser extent by the increase in population.

Kayadecomposition:AnnexIcountries(leftpanel)andnon-AnnexIcountries(rightpanel)Figure 5

CO2 = P * A * GDP

EE

CO2*

TT

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1990=100

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1990 1995 2000 2005 2010 201350

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1990=100

1990 1995 2000 2005 2010 201360

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1990=100

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1990 1995 2000 2005 2010 201350

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1990=100

Source: IEA/OECD (2015: xx)Note: TPES: total primary energy supply. ESCII: energy sector carbon intensity index.1 The UNFCCC divided countries in two broad groups – Annex I and non-Annex I countries – depending on their 1992 commit-ments to fight climate change. Annex I countries consist of countries that were members of the Organisation for Economic Co-operation and Development (OECD) in 1992 plus countries with economies in transition in 1992, such as the Russian Fed-eration. Non-Annex I countries are the remaining ones, mostly developing, countries that signed the convention (see Module 4 for more information about the different groups of countries and their commitments).

Source: Author’s elaboration based on IEA/OECD (2015) and Kaya (1990).

2.2.2 Assessing potential future scenarios of environmental impact using the IPAT equation

The previous section showed that population growth and increased affluence caused a sharp increase in CO2 emissions. This section uses IPAT to glance at the future and analyse the potential impact on emissions of expected future changes in population and affluence. The IPAT framework can help answer a number of questions: What could happen to total emissions if world popu-lation continues to increase? How could differ-ent GDP per capita growth scenarios affect total

emissions? What role do technological improve-ments play in moderating the effects of increased population and affluence on total emissions?

Let us start with population growth. According to 2015 world population projections from the United Nations Department of Economic and Social Affairs (UNDESA) Population Division (Fig-ure 6), world population, currently at 7.35 billion, is unlikely to stop growing this century. On the contrary, the UN estimates that there is an 80 per cent probability that world population in 2100 will be between 10.03 billion and 12.44 billion (with a median of 11.21 billion). How could this

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expected growth in population affect emissions? To address this question we assume that GDP per capita (A) and technology (T) stay at their 2014 levels, and we use the projected UN population data to simulate CO2 emissions using IPAT. Figure 7 displays observed annual CO2 emissions from

1970 to 2014 and then adds the three IPAT-based emission scenarios using the UN population projections. All other factors fixed, the predicted population growth could result in an increase of 38 to 72 per cent of annual CO2 emissions be-tween 2014 and the end of the century.

UnitedNations2015worldpopulationprojection

IPAT:TheimpactofprojectedpopulationgrowthonCO2emissions

Figure 6

Figure 7

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illio

ns)

Year

Median

95 per cent

prediction interval

80 per cent

prediction interval

CO2, observed

CO2, median population

estimate

CO2, low population

estimate

CO2, high population

estimate

Source: Author's elaboration based on data from UNDESA (2015).Note: The 95 (80) per cent prediction interval means that the UN estimates a 95 (80) per cent probability that this situation will occur.

Source: Author's elaboration based on data from UNDESA (2015), World Bank (2016), and the Netherlands Environmental Assessment Agency (see Oliver et. al., 2015).

1971 2014 21002050

30

40

50

CO2

Year

60

20

A related question is how different GDP per capita growth paths might affect emissions if population and technology were to stay at their 2014 levels. To provide an answer we rely on the baseline long-term global growth projection for 2010–2060 published by the OECD (2014).12 We complement this projection (which predicts an average yearly GDP per capita growth rate of slightly below 2.5 per cent) with a low-growth

scenario (with a yearly growth rate of only 1 per cent) and a high-growth scenario (with a yearly growth rate of 4 per cent). Figure 8 shows ob-served CO2 emissions from 1971 to 2014, as well as those under the three GDP per capita growth rate scenarios. As we see, with fixed 2014 population and technology levels, the OECD GDP per capita projection would result in an increase of 200 per cent in CO2 emissions by 2060 with respect to

12 See Johansson et al. (2013) for the model underlying this projection.


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IPAT:TheimpactofprojectedGDPpercapitagrowthonCO2emissionsFigure 8

Source: Author's elaboration based on data from the OECD (2014), World Bank (2016), and the Netherlands Environmental Assessment Agency (Oliver et. al., 2015).

2014. The high-growth scenario would result in an increase of more than 500 per cent, while the

low-growth scenario would result in an increase of roughly 60 per cent.

1971 2014 2060

50

100

150

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200

0

CO2, observed

CO2, 4 per cent GDP

growth rate

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baseline projection

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growth rate

The analysis in Figure 7 and Figure 8 revealed that the predicted growth of population and GDP per capita are both likely to increase CO2 emissions considerably over the next couple of decades. The impact of the combined effects of population growth and increased affluence on emissions will be even bigger. This raises the question of how humanity will be able to significantly re-duce CO2 emissions without limiting population or affluence growth. Technology, the third deter-minant of the size of the overall impact within the IPAT model, might be the answer. In the prior

analysis, we held technology fixed at the 2014 lev-el. However, as population and GDP per capita are both expected to increase significantly over the coming decades, technological improvements will have to play an important role if humanity intends to curb CO2 emissions and thereby sta-bilize CO2 concentrations in the atmosphere. To offset the effects of a growing and increasingly affluent population, it will therefore be crucial to rely on cleaner technology that can significantly reduce CO2 emissions per produced US dollar.

Shortsummary

In Section 2.2, readers learned how to use the simple IPAT model to analyse forces influencing the size of the environmental impact of an economy. Higher population levels and increased affluence generally increase the magnitude of the environmental impact, while technology improvements have the potential to decrease the size of that impact. The IPAT model was used to decompose a particular environmental impact, CO2 emis-sions, leading to a conclusion that the observed increase in CO2 emissions was due to an increase in popula-tion and affluence that was not offset by the effects of cleaner production technology. Subsequently, IPAT was used to glance at the future by establishing carbon dioxide scenarios based on various predictions of popula-tion growth and increased affluence.

3 Sustainabilityoftheeconomic system

The previous section showed how an economy affects the environment and discussed different factors that influence the magnitude of the world economy’s environmental impact. This section starts by investigating what could happen if the size of such an impact were to become too large. It shows that some societies in the past collapsed be-cause of their devastating impact on the environ-

ment. It thus illustrates why an economic system should be sustainable. In this context, it introduc-es the concept of sustainable development and shows why trade is currently viewed by many as an important enabler of sustainable development.

3.1 Ecocide:Lessonsfromhistory

As a subsystem of our environmental system, the economic system faces a variety of environmen-tal constraints that, if systematically disregarded,

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could potentially have devastating effects on hu-man societies.13 In 1798, economist Thomas Mal-thus published his famous book An Essay on the Principle of Population in which his central hy-pothesis was that population growth will eventu-ally outpace food production due to diminishing returns in agriculture. Malthus was convinced that the land’s capacity to produce food – an envi-ronmental constraint – could not keep up with hu-man reproduction rates. In his view, this would in-evitably lead to important food shortages, which in turn would significantly reduce human popu-lation and force those who remain to live at sub-sistence levels. Since the Industrial Revolution, we have known that Malthus’s predictions in terms of food production were wrong because innovations enabled increased food production to feed a grow-ing population. Nevertheless, this does not imply that environmental constraints have disappeared.

Economic systems that ignore environmental constraints face problems that might even lead to a collapse of the entire system. In his book Collapse: How Societies Choose to Fail or Survive, Jared Diamond (2006) analysed the role of envi-ronmental constraints in the collapse of past so-cieties like the Vikings, Greenland’s Norse society, Easter Island’s Polynesian society, North Ameri-ca’s Anasazi society, the Mayans, and others.

Diamond (2006: 3) defines collapse as “a drastic decrease in human population size and/or po-litical/economic/social complexity, over a con-siderable area, for an extended time.” According to him, unintended ecological suicide – ecocide – is a major explanatory factor for the rapid de-cline of several past societies. Diamond identi-fies a common pattern of the decline of these collapsed societies. The process started with the growth of population and the intensification of agricultural production (through improved technology and geographical expansion of ag-riculture to agriculturally marginal lands). Un-sustainable agricultural practices then led to a variety of environmental degradation processes (e.g. deforestation, water mismanagement, ero-sion, overhunting, etc.) that forced people to abandon the agriculturally marginal lands, with food shortages and starvation often resulting. People started wars over the remaining resourc-es and overthrew governing elites. Population levels declined and, in parallel, the complexity of the society in terms of economics, politics, and culture decreased. This led in some extreme cases to a complete collapse of the society, with the entire population dying or emigrating. Box 5 illustrates such a collapse using the example of the Mayan society.

13 Environmental constraints are limits imposed on humankind by the environ-ment. For instance, a river’s capacity to absorb toxic waste is limited, which is an environmental constraint that restricts the amount of toxic waste humans can discharge into the river without destroying it. If humans disregard this constraint systematically (e.g. by pumping large quantities of toxic waste into the river), the river’s ecosystem might be destroyed, which in turn might affect the humans and their economic activities. Another environmental constraint, which is very important in the context of climate change, is the limited capacity of the atmosphere to absorb greenhouse gases.

TheecocideoftheMayansocietyBox 5

The ecocide of the Mayan society is a particularly interesting example of a collapse discussed by Diamond (2006). The Maya were one of the culturally most advanced societies of their time in Central America. The classical age of Mayan society begun around the year 250. The Mayan population increased exponentially and reached its peak in the 8th century and then declined rapidly in the 9th century.

Why did the Mayan society collapse? Diamond explains the collapse using the example of the city of Copán studied by Webster et al. (2000). Copán was a small, densely populated city in today’s western Honduras. Fertile land was concentrated in the river valley surrounded by relatively unfertile steep hills. Starting in the 4th century, Copán’s population started to grow rapidly. According to Webster et al. (2000), agricultural production was intensified to satisfy increased demand due to population growth. By the mid-6th century, the productive capacity of the fertile valley land was exhausted and people started to cultivate on the steep hilly land around the valley. They cut down the forests on the hill slopes that had previously protected the hills from erosion. After some time, hill slopes eroded and the quality of soils deteriorated. Consequently, people had to move back into the valley. The infertile acidic hill soils started to spread into the valley and partially covered the fertile valley soils, further reducing the productive capacity of the land. Diamond argues that the deforestation may also have begun to cause a man-made drought in the valley because the water-cycling functions of the forests were reduced as more and more trees were cut down. During this period, the population continued to grow rapidly while the productive capacity of the land diminished equally rapidly. This led to fights over land and food that culminated in the destruction of the royal palace around the year 850. Population size dropped and after 1250, there were no more signs of humans living in the Copán valley.

According to Diamond, Copán’s collapse is a good example of the mechanisms behind the collapse of the entire Mayan society. Population growth outpaced available resources and led to deforestation and erosion, which further reduced the size of fertile lands and potentially triggered local man-made climate change that increased the risks of droughts. Fighting over scarce resources and an inability of the governing elite to ad-dress the problems finally ended in a total collapse of the Mayan society.

Sources: Author’s elaboration based on Diamond (2006) and Webster et al. (2000).


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Diamond (2006: 7) identified several processes through which past societies transgressed en-vironmental constraints and damaged the en-vironment up to the point that these societies collapsed. These processes include overuse of renewable stock resources (e.g. through defor-estation, overhunting, overfishing) and misuse of renewable stock resources (e.g. soil degradation, water mismanagement, adverse effects of intro-duced species on native species). These processes still play a major role today. Moreover, according to Diamond, new environmental problems have been added to the ones that threatened past so-cieties. Climate change is one of these new prob-lems and is arguably the most dangerous one for humanity in the 21st century. Humankind has been systematically ignoring the environment’s limited capacity to absorb greenhouse gases. This unsustainable behaviour is threatening the entire climate system of the earth and will have important consequences for humankind un-less sufficient actions are taken to reduce GHG emissions. With the adoption of United Nations Agenda 2030, the Paris Agreement at the 21st Conference of the Parties, and relevant outcomes of other international summits, the international community has reached agreement to collec-tively address the imminent and present danger of environmental and climate change through national and global actions in the next 15 to 30 years.

3.2 Sustainability

As Diamond (2006) showed, ignoring environ-mental constraints by engaging in unsustain-able economic behaviour at times resulted in the total collapse of entire societies. Cohen (2009) argues that the sustainability question today is even more important than ever. He advances the argument that past competition of different organizational forms of the economic system – some more efficient than others – has almost come to an end and resulted in today’s domi-nance of a single form of economic organization: the modern market economy. Thus, according to Cohen, it is the absence of a viable alternative to the modern market economy that makes the question of its sustainability crucial.

There are various definitions of sustainability that differ depending on the context.14 The Ox-ford English Dictionary states that “sustainabili-ty” is a derivative of the word “sustainable,” which is defined as “able to be maintained at a certain rate or level” or “able to be upheld or defended.” In ecology, the definition of sustainability focuses on the continued productivity and functioning of ecosystems and often involves requirements to

protect genetic resources and biological diversity (Brown et al., 1987). In environmental economics, sustainability is often defined with respect to the continued coexistence of the economic and envi-ronmental systems. We follow this strand of defi-nitions in this material. Common and Stagl (2004: 8) define sustainability as follows: “Sustainability is maintaining the capacity of the joint economy-environment system to continue to satisfy the needs and desires of humans for a long time into the future.” Processes that are threatening the joint economy-environment system in a way that current and future needs and desires of humans cannot be satisfied are thus by definition called unsustainable processes. Processes that do not threaten the joint economy-environment system are called sustainable processes.

3.3 Sustainabledevelopment: Theinternationalawakening

The importance of a sustainable world economy has long been neglected. This changed in 1987 with the publication of the World Commission on Environment and Development (WCED) re-port entitled Our Common Future (WCED, 1987). This report, now frequently called the Brundtland report (after the chair of the commission, Gro Harlem Brundtland), has become a milestone in terms of durably placing sustainability questions on the international policy agenda.

The Brundtland report outlined the complex interactions between the economic and envi-ronmental systems, stressed the importance of environmental constraints, and argued that the current path of economic growth cannot be continued. Acknowledging the need to eradicate poverty and raise per capita income worldwide, the report suggested an alternative pathway of economic growth that it called “sustainable de-velopment.” The report defined sustainable de-velopment as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts: the concept of ‘needs,’ in particular the essential needs of the world’s poor, to which overriding priority should be given; and the idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs.” (WCED, 1987: 45)

Sustainable development is thus presented as the solution that would simultaneously (a) allow for meeting the needs of the present generation through continued economic growth, thereby raising standards of living worldwide, and (b) maintain the capacity of the joint economy-en-

14 For an overview of dif-ferent usages of the concept of sustainability, see Brown et al. (1987).

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TradeinenvironmentalgoodsandservicesBox 6

vironmental system to meet the needs of future generations. Sustainable development is thus seen as the tool to enable us to steer the world economy towards a sustainable path that serves both people (present and future generations) and the planet.

Since the publication of the Brundtland report, the definition of sustainable development has further evolved and is today considered to be a combination of three pillars: environmental protection, economic development, and social development. Following the 2012 United Nations Conference on Environment and Development (UNCED) conference in Rio de Janeiro, which was a direct consequence of the Brundtland report, this definition of sustainable development was widely adopted by international organizations (Lehtonen, 2004). Twenty years later at the Rio+20 UN Conference on Sustainable Development, the three pillars of sustainable development were elevated to global prominence with the agree-ment to develop sustainable development goals. Today, sustainable development plays a key role in combating climate change and provides the framework within which the Paris Agreement aims to “strengthen the global response to the threat of climate change, in the context of sus-tainable development and efforts to eradicate poverty” (Paris Agreement, Article 2, §1). Module 4 of this teaching material reviews policies pro-moting sustainable development in the context of human-made climate change. The module explains in detail how the current carbon-based economic system is supposed to be transformed into a low-carbon economy.

3.4Tradeasakeycomponentofsustainable development

The previous section argued that sustainable de-velopment is the solution to maintain the capac-ity of the joint economy-environmental system for current and future generations and simulta-neously raise standards of living worldwide. In this context, the international community – in-cluding the United Nations Conference on Trade and Development (UNCTAD), the WTO, the United Nations Environment Programme, and various multilateral environmental agreements – have highlighted the role that trade can play in achiev-ing sustainable development.

Paragraph 6 of the WTO’s Doha Ministerial Decla-ration stipulates that its member countries “are convinced that the aims of upholding and safe-guarding an open and non-discriminatory mul-tilateral trading system, and acting for the pro-tection of the environment and the promotion of sustainable development can and must be mutually supportive.” The contribution of trade to sustainable development has also been recog-nized during several international conferences, including the 1992 UNCED conference in Rio de Janeiro, the 2002 World Summit on Sustain-able Development in Johannesburg, and the 2012 Rio+20 Conference. In the 2030 Agenda for Sus-tainable Development, the international commu-nity recently renewed its commitment to making trade a key enabler of sustainable development.

According to the WTO (2011), increased trade openness leads to increased resource efficiency, higher growth rates, and higher income levels. Trade is thus seen as supporting sustainable de-velopment objectives by affecting at least two of the sustainable development pillars: economic development and environmental protection. By promoting production efficiency, offering new op-portunities for the sale of products, and increas-ing the availability of high-quality and low-price inputs, trade is viewed as helping to reduce pov-erty by stimulating economic development. Trade can also directly affect the environmental protec-tion pillar of sustainable development by (a) in-creasing the efficiency of natural resource use due to a trade-induced increase in competition and resulting efforts to reduce costs by reducing consumption of natural resources, thereby sup-porting conservation efforts; and (b) making ac-cess to environmental goods and services easier for all countries, thereby acting as a channel for green technology transfers (WTO, 2011). Liberali-zation of trade in such eco-efficient technologies might help to support sustainable development globally. This is certainly an important topic, given that Section 2.2.2 showed that technologies will need to moderate the impact of expected increas-es in population and affluence on CO2 emissions. Box 6 takes a closer look at trade in environmental goods and services. Moreover, as UNCTAD (2014) points out, trade can play an important indirect role in sustainable development by mobilizing fi-nancial resources that might be used to finance sustainable development objectives.

One of the ways in which trade can effectively support sustainable development is by facilitating access to environmental goods and services (EGS). Trade in these goods and services is frequently assumed to have the potential for “win-win” outcomes, generating both environmental benefits (by disseminating environmental goods and services) and trade gains for countries involved (UNCTAD, 2003).


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TradeinenvironmentalgoodsandservicesBox 6

The EGS sector only emerged in the 1990s as a distinct sector, but it has since grown and changed rapidly. The relative newness of the concept makes defining the sector difficult. While there are several national definitions that vary in scope, the OECD and Eurostat took the lead at the international level to define the sector (UNCTAD, 2003). According to OECD/Eurostat (1999), the EGS sector consists of “activities which produce goods and ser-vices to measure, prevent, limit, minimize or correct environmental damage to water, air and soil, as well as problems related to waste, noise and ecosystems.” By their nature, EGS are scattered across an array of different economic sectors. Despite the difficulty of defining the sector, there have been attempts at estimating the size – in other words the total value produced – of the EGS market. Using its own definition of the sector, Environ-mental Business International (2012) estimated the global size of the EGS market at US$832.2 billion in 2011, rep-resenting roughly 1.2 per cent of global GDP. While developed countries still dominate the market in absolute terms, developing countries from Africa, the Middle East, and Asia show the highest growth rates in that year.

Global exports of environmental goods as classified by the OECD list of environmental goods and services increased by almost 190 per cent, from US$231 billion to US$656 billion, over 2001–2012 (Bucher et al., 2014).1 These figures would be even higher if one took trade in environmental services into account. In 2012, trade in EGS was dominated by trade between developed countries. During 2008–2013, eight of the 10 leading export-ers and seven of the 10 leading importers of EGS were developed countries (Bucher et al., 2014). It is interesting to note, however, that the People's Republic of China is already now the second largest exporter and importer of EGS. Moreover, other developing countries like the Republic of Korea, Mexico, Brazil, Malaysia, and the Rus-sian Federation also play an increasingly important role in the global EGS market. Generally speaking, most analysts expect that developing countries will significantly increase their global export and import shares over the years to come (Bucher et al., 2014). Hamwey (2005) identifies significant export strengths and po-tential for developing countries in environmentally preferable products, EGS from the manufacturing and chemical sector, and environmental services.

Given the importance of the EGS sector for the environment and its high market growth rate, trade liberali-zation of the sector is considered to be an important issue. During the 2001 Doha WTO Ministerial Confer-ence, WTO member states codified their agreement to open negotiations on “the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services” in paragraph 31 (iii) of the Doha Ministerial Declaration. The declaration emphasizes that negotiations should enhance the mutual sup-portiveness of trade and the environment in terms of both environmental benefits and trade gains for the parties involved (UNCTAD, 2003). Lamy (2008) argues that agreement on paragraph 31 (iii) would be a direct and immediate contribution of the WTO to fighting climate change.

Nevertheless, no WTO agreement on EGS trade liberalization has been reached to date, and important tariff and non-tariff barriers continue to exist in this sector. Much of the environmental goods negotiation has revolved around finding an acceptable sector definition among WTO members, and coming up with a list of EGS for which tariffs and barriers would be reduced. Several proposals have been submitted, most of them based on list approaches,2 but none have gained a consensus due to conflicting interests on product cover-age and negotiation modalities among the negotiating parties (UNCTAD, 2009/2010). Developing countries in particular expressed concerns related to the definitions of EGS, the potential inclusion of dual-use goods, liberalization approaches, environmental regulation, and technology transfer.3

While multilateral negotiations seem stalled, plurilateral negotiations on EGS are taking place. In the Asia Pacific Economic Cooperation (APEC) 2012 Vladivostok Declaration, APEC members announced a reduction in tariffs on 54 environmental goods to a maximum of 5 per cent by 2015. Details of the implementation of these cuts were published in early 2016. Bucher et al. (2014) argue that this particular initiative might provide new impetus for WTO efforts in this area.

1 The OECD list of environmental goods and services covers 164 HS-6 products and includes product categories such as pol-lution management, cleaner technologies, and products and resource management. For an overview of the OECD list and a comparison with other lists of environmental goods and services, see Steenblik (2005). 2 List approaches try to identify sets of products to be considered environmental goods and services. Identification is mostly based on the Harmonized Commodity Description and Coding Systems (HS). Different lists have so far been put forward, for ex-ample by Japan, APEC, OECD, and UNCTAD. According to Ramos (2014), these lists, with the exception of the UNCTAD list, mainly reflect the export interests of developed countries in non-agricultural trade.3 See Ramos (2014) for a discussion and a list of studies identifying these concerns.

Source: Author.

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Although trade is seen by many as an important enabler of sustainable development because of its ability to disseminate environmental goods and services, several civil society environmental groups have raised concerns about negative ef-fects of trade on the environment. These voices

have been particularly loud in the 1990s and 2000s. The following section therefore reviews evidence on this issue by looking at theoretical models and empirical results about the effect of trade on the environment.

Shortsummary

In Section 3, readers learned that unsustainable behaviour played an important part in the decline and col-lapse of some past societies, reminding us to take climate change seriously, as it is this century’s biggest global environmental problem. We illustrated the fundamental role of environmental constraints in the de-velopment of economic systems and societies at large, and thus demonstrated the importance of a sustain-able economic system. We introduced the concept of sustainable development as a means of creating a sus-tainable world economy and showed why trade plays an important role in current sustainable development strategies.

4 Impactoftradeontheenvironment

The previous sections of this module (a) showed that human beings can affect the climate be-cause the economy and the environment are in-terrelated and interdependent; (b) identified the factors that determine the size of the impact an economy has on the environment; (c) illustrated what can happen if these effects become too damaging; (d) introduced the concept of sustain-able development as a means of avoiding ecocide while simultaneously helping reduce poverty; and (e) showed that trade is viewed as an impor-tant enabler of sustainable development.

Over recent decades, especially around the start of the new millennium, numerous environmen-tal groups opposed further trade liberalization, fearing a negative impact on the environment (Copeland and Taylor, 2003). The idea that trade negatively affects the environment is also wide-spread among the general public. A 2007 survey conducted in countries covering 56 per cent of the world population found that in several coun-tries a majority of people perceive trade to be bad for the environment. In none of the surveyed countries did large majorities believe that trade is beneficial for the environment (The Chicago Council on Foreign Affairs and World Public Opin-ion, 2007). In this context, this section aims to provide theoretical tools and empirical insights to shed light on the fundamental question that has been at the heart of these debates: Is inter-national trade good or bad for the environment? Given the overall thrust of this material, the focus will be on climate change.

Section 4.1 introduces the topic by looking at the data on trade openness and CO2 emissions. Sec-tion 4.2 presents a conceptual framework to sys-tematically examine how increased trade open-

ness affects the environment. This theoretical framework is then used in Section 4.3 to discuss several important empirical contributions on the impact of increased trade openness on the envi-ronment.

4.1 Trade,tradeopennessandtheenvironment: Afirstglanceatthedata

Does increased trade openness have an impact on the environment? If so, is this impact positive or negative? To help answer these questions, this section focuses on a particular environmental impact – CO2 emissions – and looks at descriptive statistics about CO2 emissions and trade open-ness. While this type of analysis does not allow for making causal statements, it is a good start-ing point to obtain a general idea of the nature of the relationships at work.

When analysing the question of whether in-creased trade openness increases CO2 emissions, we first examine whether trade openness (meas-ured here as exports and imports as a percentage of GDP, and merchandise exports and imports as a percentage of GDP) and CO2 emissions evolve in a similar manner over time.15 In other words, we look at whether an increase (decrease) in trade openness is paralleled by an increase (decrease) in CO2 emissions. If this is the case, we would have a first hint that trade openness and the particu-lar environmental impact we are looking at (CO2 emissions) could be connected. Results of this initial descriptive analysis are shown in Figure 9.

The left panel of Figure 9 displays the evolution of world CO2 emissions and the two indicators of world trade openness. CO2 emissions and both trade openness indicators have been steeply ris-ing since 1960. While total exports and imports represented 25 per cent of world GDP in 1960,

15 It is important to distin-guish between measures of trade (i.e. the absolute volume of trade flows) and measures of trade openness. Measures of trade openness can either indicate the actual importance of trade in the economy (these are called measures of trade openness in practice) or quantify the number and/or importance of trade policy measures in place (measures of openness in policy). We use here two indicators of measures of trade openness in practice. For an overview of different measures of trade and trade openness, see UNCTAD (2010: 18–21).


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they corresponded to 59 per cent in 2014. Mer-chandise exports and imports rose from 18 per cent of world GDP in 1960 to almost 49 per cent in 2014. Over the same time period, CO2 emis-sions increased by roughly 270 per cent. Both trade openness indicators and CO2 emissions thus seem to evolve in a similar manner. Annual changes in the three variables are displayed in the right panel of Figure 9. Growth rates of CO2 emissions are positively correlated with growth rates of trade openness (correlation coefficients equal 0.26 for total exports and imports and 0.32 for merchandise exports and imports). This means that, on average, CO2 emissions increased

(decreased) in the same year as trade openness increased (decreased). This is a second hint that trade openness and environmental effects could be connected. At first glance it thus seems that increased trade openness goes hand-in-hand with increased CO2 emissions. It is important to note, however, that the results from Figure 9 do not allow for making any causal statement on the relation between trade openness and emissions, as we are only considering correlations. Never-theless, these results provide a clear rationale for a more detailed analysis, as trade openness and CO2 emissions seem to be linked, which could po-tentially reflect a causal relationship.

TradeopennessandCO2emissions,1960–2014Figure 9

Source: Author's elaboration based on data from World Bank’s World Development Indicators database.

1990 2000 20101960 1970 1980

Per c

ent o

f GDP

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CO2 emissions, millions

of kilotons

Exports and imports

(per cent of GDP)

Merchandise exports and

imports (per cent of GDP)

CO2 emissions growth rate

Growth rate of exports

and imports

Growth rate of merchandise

exports and importsGiven that the results from Figure 9 suggest that trade openness and CO2 emissions are positively associated, we use cross-section data – captur-ing one point in time (here the year 2011) for sev-eral countries – to identify potential underlying reasons for this positive relationship. Following the methodology suggested by Onder (2012), we look at the relation between trade openness (as measured by merchandise exports and imports as a percentage of GDP) and different factors that could explain the link we found in the previous analysis. The results are displayed in Figure 10 which contains four different panels.

The upper left panel shows that there is a positive correlation between trade openness (as meas-ured by the GDP share of merchandise trade) and CO2 per capita emissions. In other words, coun-tries that trade more extensively seem to emit on average more CO2 per person than countries that are less open to trade. This result is in line with the results we found in Figure 9 . Which fac-tors could potentially explain this positive asso-ciation? The remaining three panels offer several possible explanations of this result.

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TradeopennessandCO2emissions,2011Figure 10

CO2 e

mis

sion

s (m

etric

tonn

es p

er ca

pita

)In

dust

ry, v

alue

add

ed (p

er ce

nt o

f GDP

)

GDP

per c

apita

(PPP

; con

stan

t 201

1 int

. $)

CO2 in

tens

ity (k

g of

oil

equi

vale

nt e

nerg

y use

)

Coefficient of correlation .202

Coefficient of correlation .106Coefficient of correlation .221

Coefficient of correlation .077

150 2000 50 100Merchandise exports and imports (per cent GDP)

10

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80


20

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015

0000


5000

010

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Source: Author's elaboration based on data from the World Bank’s World Development Indicators database. The figure reproduces Figure 2 from Onder (2012) with more recent data. Note: Countries with oil rents higher than 30 per cent of GDP were excluded (oil rents correspond to the difference between the value of crude oil production at world prices and total costs of production). In addition, three outliers (Singa-pore, Aruba, and Hong Kong (China)) with high trade openness indicators were also excluded. Sample sizes differ due to data availability. The sample includes 195 countries in the top panels, 184 in the lower left panel, and 149 in the lower right panel. PPP: purchasing power parity.

A first potential explanation is provided in the upper right panel of Figure 10, which explores the relation between trade openness and GDP per capita. We see that countries that are more open to trade consume and produce more per person than countries with less openness to trade. As we have seen in the previous sections, higher per capita consumption and production (in other words, greater affluence) tends to increase the impact on the environment. Therefore, it is possi-ble that trade indirectly affects the environment by increasing economic output.

A second potential explanation is found in the lower left panel of Figure 10 which analyses the relation between trade openness and the share of value added produced in the industrial sector. This panel shows that countries with a relatively high trade openness ratio seem to produce a larg-er proportion of their value added in industrial sectors, which are typically relatively energy-in-tensive. This could mean that the sectoral compo-sition of countries that trade frequently is biased

towards energy-intensive goods, which also pro-duce more CO2 emissions. One could interpret this observation as an empirical hint that trade affects the sectoral composition of countries, which in turn indirectly affects the environment.

Finally, a third potential explanation is found in the lower right panel of Figure 10 which analy-ses the relation between trade openness and CO2 emission intensity (CO2 emissions per dollar produced). This panel shows that countries with higher trade openness ratios seem to have higher average CO2 emission intensity. In other words, it is possible that countries that are relatively more open to trade use more polluting technologies in their production processes than countries that are less open to trade. This observation could be an empirical hint that trade somehow affects technology and thereby indirectly influences the environment.

The first cursory look at data in Section 4.1 reveals two important findings on whether increased

Linear fit

95 per cent confidence interval


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trade openness increases CO2 emissions. First, trade openness and CO2 emissions evolved in par-allel over recent decades, and per capita CO2emis-sions are higher for countries with greater trade openness. Evidence thus seems to indicate that there is at least a positive correlation between trade openness and CO2 emissions. Second, with-out being able to make any causal statement, data provide preliminary evidence for at least three different possible explanations for this positive correlation: (a) higher trade openness seems to go hand-in-hand with increased per capita production; (b) the sectoral composition of countries that trade frequently seems to be bi-ased towards energy-intensive goods, which pro-duce more CO2 emissions; and (c) countries that trade frequently seem to employ more polluting technologies than countries that trade less. The following section will take a look at theoretical concepts that could explain these preliminary empirical results. 4.2Environmentalimpactoftrade: Whatwecanlearnfromtheory

The analysis in Section 4.1 revealed several rea-sons that might explain why CO2 emissions are different for countries with different degrees of trade openness. The theoretical framework out-lined in this section aims to explain these results and serve as a starting point for empirical work on the environmental impact of trade.

4.2.1 Scale, composition and technique effects

The current theoretical discussion on trade and the environment is framed by the concepts intro-duced by Grossman and Krueger (1993) in their now-famous work analysing the environmental impact of the North American Free Trade Agree-ment. The authors distinguish three effects that economic activities such as trade can have on the environment: the scale effect, the composition ef-fect, and the technique effect (Table 2). The scale effect is rather straightforward: if the overall scale of economic activity increases, all else being equal, the environmental impact will increase. Besides the overall scale of activities, the production mix of an economy is also important. All else being equal, a shift in the composition of an economy in terms of the share of clean and dirty sectors will affect the overall environmental impact of that economy. If an economy changes its industry mix and starts to produce relatively more dirty goods, the overall environmental impact increases. The opposite will happen if an economy’s production mix shifts towards cleaner industries. This effect is called the composition effect. Finally, technol-ogy also matters – if the scale and composition of the economy are fixed, but production technology becomes cleaner, then the overall environmental impact of the economy decreases, and vice versa. This is called the technique effect. Box 7 shows how these effects can be derived formally. Each of these effects and their relation to trade are analysed individually in the sections that follow.

Adecompositionofscale,compositionandtechniqueeffectsBox 7

Scale, composition and technique effects as introduced by Grossman and Krueger (1993) can be formally de-rived. Let us focus again on CO2 emission. Furthermore, let us make our life easier by assuming that an econ-omy produces only two types of goods, dirty goods and clean goods, and that emissions are only a by-product of the production process of dirty goods (clean goods do not produce any emissions). We can then express total CO2 emissions of the economy (E) as the product of total economic output (Y) times the share of dirty goods in total output (S) times emissions per unit produced of the dirty good (A):

Let us take logarithms and use the properties of the logarithm to obtain:

And finally, let us totally differentiate the above equation, which yields:

From the above, we see that the percentage change in emissions is equal to the percentage change in total output plus the percentage change in the share of dirty goods in the economy plus the percent-age change in the emissions per unit produced of the dirty good . We see that the scale effect (a change in the overall scale of the economy , the composition effect (a change in the composition of the economy in terms of dirty and clean goods , and the technique effect (a change in emissions per produced unit of the dirty good all affect overall emissions .

E = Y* S* A

ln(E) = ln(Y) + ln(S) + ln(A)

+= +ΔEE

ΔYY

ΔSS

ΔAA

Source: Author’s elaboration based on Grossman and Krueger (1993).

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4.2.2 Trade-induced scale effect

It is often claimed that increased trade openness stimulates economic growth, and hence the scale of economic activities (production, consumption, and transportation) in trading countries.16 Conse-quently, if nothing else changes, these increased economic activities will in turn have a higher to-tal impact on the environment. (See Section 2.2.2 for an example of how GDP growth can affect CO2

emissions.) Grossman and Krueger (1993) called this mechanism the trade-induced scale effect. Researchers generally expect trade-induced scale effects to have negative consequences for the environment. Since the seminal contribution of Grossman and Krueger, numerous empirical pa-pers (Antweiler et al., 2001; Copeland and Taylor, 2003; Frankel and Rose, 2005; Managi et al., 2009) have attempted to analyse the existence and size of trade-induced scale effects. Some of this em-pirical evidence is reviewed in Section 4.3.

4.2.3 Trade-induced composition effect

Increased trade openness not only influences the scale of economic activities but also the sec-toral composition of trading economies. Stand-ard trade models assume that countries that increase their openness to international trade specialize in sectors where they have a compara-tive advantage.17 Thus, opening up to trade may change a country’s sectoral structure. The coun-try may specialize in relatively clean sectors if it has a comparative advantage in these sectors, or in relatively “dirty” or polluting sectors if it has a comparative advantage in those sectors. Increased trade openness worldwide may there-fore lead to a change in production patterns across countries and thus modify the impact of the world economy on the environment. The question then is whether trade-induced changes in economies’ sectoral composition increase or reduce overall environmental impacts.

From a theoretical point of view, this depends on the sources of the countries’ comparative advan-tage. The literature (De Melo and Mathys, 2010; Grossman and Krueger, 1993; Managi et al., 2009) frequently distinguishes two types of trade-in-duced composition effects. The first type, factor-endowment effects, arises from classical sources of comparative advantage (factor abundance and technology differences). The second type, pollution-haven effects, results from differences in environmental policy stringency in different countries.

Taken in isolation, the potential net environmen-tal impact of factor-endowment effects is un-

clear. Theory predicts that developed countries with relatively high capital-labour ratios tend to specialize in capital-intensive sectors after open-ing up to trade. As production technologies in capital-intensive industries are often resource- and/or pollution-intensive (Managi et al., 2009), this tends to increase the environmental impact in these countries. Developing countries with rather low capital-labour ratios tend to special-ize in labour-intensive sectors after opening up to trade. This tends to decrease the environmen-tal impact in these countries. The net impact of factor-endowment effects on the world environ-ment is thus ambiguous.

Theory generally predicts a negative net envi-ronmental impact of pollution-haven effects. Pollution-haven effects tend to increase the com-parative advantage of developing countries in polluting industries because environmental reg-ulations are often less stringent in these coun-tries. This can lead to shifting the production of these industries from developed countries where industry is heavily regulated to developing coun-tries where there is less regulation. Such a shift would lead to an increase of the environmental impact worldwide.

While explaining these mechanisms, theory can-not help in determining whether the overall im-pact of trade-induced composition effects is pos-itive or negative for the environment. Everything depends on the net impact of factor-endowment effects and the relative strength of factor-endow-ment and pollution-haven effects. Section 4.3 will look at several empirical studies that have con-tributed to this debate.

4.2.4 Trade-induced technique effect

Trade can also influence the environment through the so-called trade-induced technique effect, which refers to the fact that production technology may change after a country opens up to trade. If technology changes, it is possible that the amount of resources used or the amount of emissions generated per unit produced also change. This would in turn affect the overall environmental impact of trade. Grossman and Krueger (1993) identify two mechanisms through which trade can alter production technology: trade-induced technology transfers, and changes in environmental policies. Both mechanisms are particularly important for developing countries.

The first mechanism concerns trade-induced technology spillover effects. Firms may bring new technologies to economies that have opened up to trade. As newer technologies are frequently

16 The link between trade and growth has long been one of the key questions in econo-mics. Numerous theoretical models have been tested by an armada of empirical contributions. While there are many theoretical arguments in favour of a positive rela-tionship between trade and growth, one also finds various arguments against the existence of such a positive relationship. Empirical tests of these arguments have so far not been conclusive, sometimes showing a positive and sometimes a negative relation between trade and growth. For an introduction to this topic, see UNCTAD (2010), Chapter 1 of Module 2.

17 For an overview of different trade models, see UNCTAD (2010), Chapter 1.


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assumed to be cleaner than older ones, trade-in-duced technology transfers are generally expect-ed to have a positive impact on the environment.

The second mechanism is indirect. Environmen-tal quality is usually assumed to be a normal good (Antweiler et al., 2001). In economics, a good is referred to as normal when the demand for that good increases with increased incomes. Saying that environmental quality is a normal good means that demand for it increases when

per capita income increases. One of the reasons for such an increase of per capita income can be opening to trade (see Section 4.2.2). Rising per capita income then increases the demand for improved environmental quality in the countries concerned. Their citizens put pressure on their governments to tighten environmental regula-tions, which in the end is beneficial for the en-vironment. Stricter environmental regulations might thus be an indirect consequence of greater openness to trade.

18 Note that while emissions correspond to the amount of a gas released into the atmosphere from a specific source and over a specific time interval, a concentration is the amount of the gas in the atmosphere per volume unit at a specific point in time.

Trade-inducedscale,compositionandtechniqueeffectsTable 2

Channel Theoretical mechanism Expected net effect

Trade- induced scale effectIncreased trade openness increases the overall scale of eco-nomic activities. All other factors fixed, this increases overall production, consumption, and transport.

All else being equal, the effect on the environment is expected to be negative.

Trade-induced composition effect

Factor-endowment effect: after opening up to trade, economies specialize in sectors in which they have a comparative advan-tage due to differences in factor endowments or technology. Capital-abundant countries specialize in capital-intensive industries, thus increasing their environmental impact, and labour-abundant countries specialize in labour-intensive indus-tries, thus reducing their environmental impact.

The net effect on the environment is ambiguous.

Pollution-haven effect: after opening up to trade, economies specialize in sectors that do not have strict environmental regulations and outsource production of strictly regulated industries to less regulated countries.

All else being equal, the effect on the environment is expected to be negative.

Trade-induced technique effect

Technology transfers: increased trade openness leads to the transfer of newer and cleaner technologies.

All else being equal, the effect on the environment is expected to be positive.

Environmental policy: increased trade openness increases per capita income, which in turn increases the demand for environmental quality, thus leading to stricter environmental regulations.

All else being equal, the effect on the environment is expected to be positive.

Net effect of trade on the environment

The net effect of trade openness on the environment is a com-bination of the trade-induced scale, composition and technique effects.

No clear theoretical prediction regarding the net impact of trade on the environment can be made.

Source: Author's elaboration based on the theoretical framework of Grossman and Krueger (1993) and on the distinction in De Melo and Mathys (2010) between factor-endowment and pollution-haven effects.

4.3 Environmental impact of trade: What we can learn from empirical evidence

Before the seminal work of Grossman and Krue-ger (1993), which outlined the theoretical founda-tions that allow for systematically analysing the effects of trade openness on the environment, few empirical contributions had been made in the field. Since then, however, empirical research to assess the effects of trade on the environment has been growing rapidly. Most of the research has so far focused on local pollutants (De Melo and Mathys, 2010). Recently some authors also started to analyse the effects of trade on defor-estation or water use (see Box 8). In line with the focus of this material, this section contin-ues to concentrate on the empirical evidence on trade openness and CO2 emissions, the most researched greenhouse gas to date. Our review, however, also includes a second gas, sulphur di-

oxide (SO2), which is the gas responsible for acid rain. While SO2 is not a greenhouse gas, SO2 and CO2 emissions are highly correlated, with the same energy-intensive industries being the main emitters (De Melo and Mathys, 2010). It is there-fore meaningful to include SO2 in the analysis.

Antweiler et al. (2001) analyse the impact of in-creased trade openness on concentrations of SO2.18 They estimate scale, composition and tech-nique effects and show for the first time that these effects can actually be measured using available data and therefore are not just abstract theoretical concepts. Their sample covers 43 countries over the period 1971–1996. The empiri-cal results reveal the existence of a trade-induced composition effect that is lowering SO2 concen-trations, i.e. SO2 concentrations decrease due to a trade-induced change in the sectoral composi-tion of the average economy. Moreover, they find

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evidence for a scale effect (SO2 concentrations in-crease when GDP increases) and a technique ef-fect (SO2 concentrations decrease when per cap-ita income increases). According to their results, if an increase in trade openness generates a 1 per cent increase in income and output, then pol-

lution concentrations will fall by approximately 1 per cent due to the joint impact of scale and technique effects. Overall, their results suggest that increased trade openness seems to have a beneficial effect on reducing SO2 concentrations.

SelectedempiricalevidenceontheimpactoftradeondeforestationandwateruseBox 8

While Section 4.3 discusses the empirical evidence on the influence of trade on selected air pollutants, it is im-portant to note that trade also affects other aspects of the environment, such as water use and deforestation. However, the empirical literature on the impact of trade on other aspects of the environment is still scarce, and more research is needed.

The links between deforestation and trade have been empirically assessed by Frankel and Rose (2005) and Van and Azomahou (2007). These contributions do not find a significant effect of trade openness on deforestation and are thus inconclusive. However, in analysing the effects of increased trade openness on deforestation for 142 countries over 1990–2003, Tsurumi and Managi (2012) find a significant effect: their results indicate that trade-induced changes in the sectoral composition of economies accelerated deforestation in developing countries but slowed deforestation in developed countries.

The effects of increased trade openness on water use (the degree to which water is withdrawn and consumed) have been analysed by Kagohashi et al. (2015). Their sample covers 43 countries over 1960–2000. Their results indicate that trade increased water use through the scale and composition effects. However, these two effects are more than offset by the water use reducing technique effect. Overall, their results suggest that a 1 per cent increase in trade openness reduces water use by roughly 1 to 1.5 per cent on average. Thus trade seems to promote efficient water use. The authors argue that their results can be explained by the role of trade in diffusing water-saving technologies and modifying industrial composition.

Source: Author.

Building on Antweiler et al. (2001), several other papers used a similar empirical approach to es-timate scale, technique and composition effects for different gases and different countries. The findings of some of these papers are summarized in Table 3. The first finding is that the overall effect of increased trade openness on the environment depends on the gas. For SO2, the results from Ant-weiler et al. (2001) have been partially confirmed. Overall, increased trade intensity seems to lower SO2 emissions. However, more trade seems to in-crease CO2 emissions. The second finding is that the impact of trade on emissions differs substan-tially depending on the countries considered. Managi et al. (2009) find that trade decreases SO2 and CO2 emissions in OECD countries but

increases them in non-OECD countries. Finally, the third finding is that the sign and magnitude of scale, composition and technique effects also depend on the combination of the gas and the country considered: trade seems to increase emissions through scale effects and lower them through technique effects. Depending on the gas and the country, these two effects can offset one another. The impact of composition effects related to the change of economic structures to-wards cleaner or more polluting production are gas-specific and rather small, which Cole and Eliot (2003) attribute to the simultaneous exist-ence of pollution-haven and factor-endowment effects that cancel each other out.


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SelectedempiricalresultsontradeandairpollutionTable 3

Study Gas Countries Effects Net effect of trade

Antweiler et al. (2001) SO2

All countries in sample

Scale: concentration increasing Technique: concentration decreasing

Composition: concentration decreasing

Decreases SO2 concentrations

Cole and Eliot (2003)

SO2All countries in

sampleCombined scale and technique: emissions decreasing

Composition: emissions increasing Unclear

CO2All countries in

sampleCombined scale and technique: emissions increasing

Composition: emissions increasingIncreases CO2

emissions

Managi et al. (2009)

SO2

Non-OECD countries

Combined scale and technique: emissions increasingComposition: emissions increasing

Increases SO2 emissions

OECD countries

Combined scale and technique: emissions decreasing Composition: emissions increasing

Decreases SO2 emissions

CO2

Non-OECD countries


Increases CO2 emissions

OECD countries


Decreases CO2 emissions

Source: Author.Note: The “Effects” column reports the observed impact of scale, technique and composition effects on the concentrations or emissions of the gas. Not all papers separated the scale and technique effects – sometimes combined scale and technique effects are reported.

In short, empirical contributions show that while trade does have an effect on the environ-ment, it is not possible to make a generally valid statement that this effect is positive or negative. Sometimes, more trade seems to have a positive

impact on the environment, while other times it seems to have a detrimental effect. As results differ from one case to another, further research is needed on a case-to-case basis to deepen our understanding of this important question.

Shortsummary

Section 4 addressed the question of whether trade is harmful or beneficial to the environment, using the example of CO2 emissions. After showing that trade openness and CO2 emissions are correlated, the section discussed three theoretical effects through which trade could affect the environment. Table 2 summarized the expectations with regard to the environmental impact of each of these effects. While theory provides a frame-work that enables us to conceptualize the effects of trade on the environment, it cannot by itself make a final prediction as to whether trade is harmful or beneficial to the environment. The section therefore reviewed selected empirical work relevant in the context of climate change, concluding that trade seems to sometimes have a positive impact and sometimes a negative impact on the environment.

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1 Whyaretheeconomyandtheenvironmentconsideredtobetwointerdependentsystems?Describetheservicestheeconomyprovidestotheenvironment.

2 Howcanyouclassifynaturalresourcesintoflowresources,non-renewablestockresources,andrenewablestockresources?Classifythefollowingnaturalresourcesandexplainyourreasoning:

(a) Poweroftides (b) Coal (c) Powerofwind (d) Cattle (e) Petroleum (f) Wood (g) Solarradiation (h) Fish (i) Cobalt

3 DescribethegeneralformoftheIPATidentityanddiscusstheroleofeachcomponent(P,A,andT).

4 Download the Excel dataset from http://vi.unctad.org//tenv/files/data_exercise.xlsx. The dataset covers1970–2014 and contains three variables: world population (P); world GDP per capita (A); and world CO2emissionsperworldGDP(T).

(a) UsingtheIPATidentity,calculateworldCO2emissionsforeachyearinthedataset. (b) Plotallfourvariablesovertime,anddiscusstheeffecteachdriver(P,A,andT)hasonemissions(I). (c) Supposetheworldwantstostabilizeitsemissionsatthe1970level.Supposefurtherthattheworld

canonlyinfluenceTtoachievethisobjective(i.e.theevolutionoftheworldpopulationandworldGDP per capita for the years 1970–2014 is fixed as given by the data). Calculate how much emission intensity of technologies (T) would need to decrease each year to achieve the objective, given the growthinpopulationandGDP.Hint:Foreachyeart,calculatethetechnologylevelTtneededtokeep emissionsatthe1970level,giventhepopulationandGDPpercapitalevelsinyeart.

(d) CompareanddiscusstheobservedevolutionofTandthehypotheticalevolutionofTt.

5 UsingtheexamplesprovidedbyDiamond(2006),illustratewhyeconomicsystemsthatignoreenvironmen-talconstraintsfaceproblems.Canyouthinkofotherexamplesnotmentionedinthisteachingmaterial?

6 Definesustainabledevelopment.Discusspotentialimplicationsofsustainabledevelopmentfordevelop-ingcountries.

7 Identifykeyenvironmentalgoodsandservicesproducedinyourcountry.

8 HowcantradeaffectCO2emissions?Distinguish,define,anddiscussthescale,compositionandtechniqueeffects.

5 Exercisesandquestionsfordiscussion


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ANNEX 1

ANNEX 2

Database Description Link

Davis et al. (2011) dataset on trade and carbon dioxide

These data represent a consistent set of carbon accounts at points of extraction (of fuels), production (of emissions), and consumption (of goods) for 112 nations/regions and 58 sectors, including trade linkages.

https://supplychainco2.dge.carnegiescience.edu/data.html

World Bank (2016) Data Catalog

The data catalogue covers a wide range of indicators relevant to the environment, including data on pollution, emissions, forests, and biodiversity. It also covers a wide range of general economic indicators including data on trade.

http://data.worldbank.org/indicator

Emissions Database for Global Atmospheric Re-search (EDGAR)

EDGAR provides data on global anthropogenic emissions of greenhouse gases and air pollutants at the country level. Data are also available at a high spatial resolution, allowing for detailed spatial analysis.

http://edgar.jrc.ec.europa.eu/

OECD environmental indicators

The OECD environmental indicators, modelling and outlooks database contains data on a range of environmental topics covering mostly OECD countries.

http://www.oecd.org/env/indicators-modelling-outlooks/

Topic

Links between the economy and the environment

Chapters 2–4 and 7 of Common M and Stagl S (2004). Ecological Economics – An Introduction. Cambridge University Press. Cambridge, MA.

Chapters 2.1–2.4 of Perman et al. (2011). Natural Resource and Environmental Economics, Fourth Edition. Pearson Education Limited. Essex, UK.

Chapter 1 of Kolstad C (2000). Environmental Economics. Oxford University Press. Oxford, UK.

Chapters 1 and 2 of Tietenberg T, and Lewis L (2012). Environmental and Natural Resource Eco-nomics, Ninth Edition. Pearson International Edition. Addison Wesley. Boston.

Sustainability

Chapter 2.5 of Perman et al. (2011). Natural Resource and Environmental Economics, Fourth Edi-tion. Pearson Education Limited. Essex, UK.

Chapters 5 and 20 of Tietenberg T, and Lewis L (2012). Environmental and Natural Resource Economics, Ninth Edition. Pearson International Edition. Addison Wesley. Boston.

Chapters 1.4, 4.11, 9.5, and 10 of Common M, and Stagl S (2004). Ecological Economics – An Intro-duction. Cambridge University Press. Cambridge, UK.

Strange T, and Bayley A (2008). Sustainable Development, Linking Economy, Society, Environment. OECD Publishing. Paris.

Diamond J (2006). Collapse: How Societies Choose to Fail or Survive. Penguin. London.

Trade and the environment

Chapter 10 of Perman et al. (2011). Natural Resource and Environmental Economics, Fourth Edi-tion. Pearson Education Limited. Essex, UK.

Copeland BR, and Taylor MS (2003). Trade and the Environment: Theory and Evidence. Princeton University Press. Princeton, NJ and Oxford, UK.

Someusefuldatabases

Selectedadditionalreadingmaterial

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Module 1 The environment, the economy and trade: …2modoule1 u3ou46d4modo7 u 3.d8u9d4189o0d2mode35...

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