Leverhulme Centre for Research on Globalisation & Economic Policy

Leverhulme Centre 6th Form Conference 2007

Trade and the Environment

Dr. Tim LloydSchool of Economics

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Introduction

We are in a critical time in history

Growth vs. Environment

Not a case of one or the other . . .We must have both

Far from being agent of disaster . . . International trade holds the key

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Trade & Economic Growth Most economists argue . . .

trade is ‘good’ and . . . free trade is better.

Both trading parties benefitConsumption higher than without trade

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Trade & Economic Growth

Environmentalists retort . . .

trade is bad for the environment and free trade worse.

Encourages greater pollution Resource exploitation Destruction of wildlife & habitats

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Trade & Economic Growth

Debate is one of the contentious yet vital of our time

Polarisation of views

Resolution needs understanding of the problems and opportunities

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After all, common sense . . . If we ignore the environment we will

irreversible damage (destroy) planet

Without economic growth, the world’s population resigned to poverty

Growth is not inimical to environment

Doomsday scenarios possible but not necessarily inevitable

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Economists can play a role Understanding trade-offs

opportunity costs

Markets Demand & Supply of pollution Prices

Property rights Externality - environment

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Why does trade boost growth? ‘Comparative advantage’

Engine of tradeLogic underlying all exchange Individuals . . firms . . Countries

David Ricardo (1817) England (wool) Portugal (wine)

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Where did all the Neanderthals go? Horan et al. (2005)

Existed for 250,000 years

Became extinct 35,000 BC

Wars/disease not responsible

Perpetrator none other than . . .

Neanderthal

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Where did all the Neanderthals go?

Neanderthal Modern Man

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Where did all the Neanderthals go?

Modern Man Homo Sapiens had a special weapon . . .

social interaction

First to exploit the competitive edge from specialisation and trade

Homo Sapiens were weaker but by specialisation and trade their calorific intake & fertility was higher

Survival of smartest

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But what of today’s humans? Will the same forces lead to:

Resource exploitationEnvironmental degradationEventual ecological catastrophe

Doomsday scenario seems inevitable (?)

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The Doomsday Scenario

PollutionPer capita

Economic Activity per capita

Economic growth causes environmental degradation

End of the

World

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Doomsday hypothesis too simplistic?

In the past, environment ignored Treated as if virtually infinite supply Poorly defined ‘property rights’

(ownership) Environment is a classic ‘externality’

Used as if it’s price were zero Over-use/degradation of environment

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Recent research . . . Shows what happens when we

‘internalise the externality’

Copeland and Taylor (2003)Economic growth affects the environmentthrough causal mechanisms :

Scale Effects Composition Effects Technique Effects

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Scale of the economy Economic activity increases pollution ceteris

paribus

Structural composition of the economy Composition of clean or dirty industries

As share of dirty industries falls so does pollution ceteris paribus

Techniques used in production Clean and dirty techniques of production exist

Clean techniques reduce pollution ceteris paribus

In model, pollution depends upon . .

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An Alternative Scenario . . .

Industrialisation

PollutionPer capita

Economic Activity per capita

End of the World

Services

Demand for environmental quality

Poverty alleviation Tougher standards

Green technologies

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“The Environmental Kuznets Curve”

Industrialisation

PollutionPer capita

Economic Activity per capita

Services

Demand for environmental quality

Poverty alleviation Tougher standards

Green technologies

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Environmental Kuznets Curve EKC Hypothesis:

“as per capita incomes rise , pollution will initially rise, reach a turning point and then fall”

‘n’ shaped (‘Kuznets’) relationshipSo-called after the famous economist who found same ‘n’ shaped relationship between income and income inequality

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Empirical Evidence of EKC?

Grossman and Krueger (1995) Urban air quality (smoke;CO;SO2) River contamination (heavy metals)

Turning point varies by pollutant Air quality ~$11,000/captia Water quality ~$15,000/capita

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The EKC for US Air Quality

Turning point $9,000

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And for Global Warming? Stern Review (2006)

stark warning

CO2 turning point ~$50,000/capita

Turning point has not been reached Emissions are still

worsening CO2 growth continue 2050

despite catastrophic consequence

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An Invisible Threat Current trends: 2-3 oc rise

by 2050

200 m permanently displaced

Rising sea levels Aridity

Threat of resource wars (water)

<40% species extinction

Malnutrition, heat stress, disease

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Stern Review (2006) Understanding the problems

offers opportunities for resolution

International co-ordination essential Economic carrots (subsidies) &

sticks (taxes)

Monumental but not impossible task Sustainable 80% of 2000

emissions

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Sleep walking in to Catastrophe

Why aren’t we abating CO2 more?

Unlike other pollutants, CO2

Only recognised as pollutant 1980s Long lag between cause & effect ‘Non-point pollutant’ Classic ‘Free-rider’ problem

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Four Important messages Growth need not be inimical to

environmental degradation

Global warming - a new kind of threat

Trade & its governance offer mechanism for sustainable growth World Trade Organisation

Economist have a role to play . . . and can make a difference

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Further readingHoran, R., E. Bulte and J. Shrogen (2005) ‘How Trade

Saved Humanity from Biological Exclusion: An Economic Theory of Neanderthal Extinction’ Journal of Economic Behaviour and Organisation, 58:1-29.

Copeland, B.R. and S.M. Taylor (2003) Trade, Growth and the Environment: Theory and Evidence. Princeton, NJ, Princeton University Press.

Grossman, G. and A. Krueger (1995) ‘Economic Growth and the Environment’, Quarterly Journal of Economics, 110: 353-377.