THE STRINGENCY OF ENVIRONMENTAL REGULATIONS AND TRADE IN ENVIRONMENTAL GOODS AND SERVICES Measuring...

THE STRINGENCY OF

ENVIRONMENTAL REGULATIONS

AND TRADE IN ENVIRONMENTAL

GOODS AND SERVICES

Measuring Progress on “Greening” the Economy: Policies and Practices — UNEP-Eurostat-EEA-ILO workshop

Geneva, 14-15 May 2014

Jehan SAUVAGETrade Policy AnalystOECD, Trade and Agriculture Directorate

2OECD Trade and Agriculture Directorate

Trade in EGS is increasing at a rapid pace…

70

80

90

100

110

120

130

140

150

2007 2008 2009 2010 2011

World imports of CLEG products World merchandise imports

World imports of Core CLEG products

(2007 = 100)

Source: OECD based on data obtained from the UN Comtrade database and WTO (2013).


…driven mostly by the power sector and waste and water activities

Environmental medium or themeShare in world imports of

environmental goods (2011)

Air pollution control (APC) 7%

Cleaner or more resource efficient technologies and products (CRE)

6%

Environmentally preferable products based on end use or disposal characteristics (EPP)

<1%

Heat and energy management (HEM) 6%

Environmental monitoring, analysis and assessment equipment (MON)

10%

Natural resources protection (NRP) <1%

Noise and vibration abatement (NVA) 6%

Renewable energy plant (REP) 37%

Clean up or remediation of soil and water (SWR) 1%

Waste water management and potable water treatment (WAT) 19%

Management of solid and hazardous waste and recycling sytems (SWM)

9%

82%

4

1. Trade liberalisation– Import-tariff reductions, removal of NTBs, services

commitments, etc.

– Ongoing trade negotiations in various fora (APEC, WTO, etc.).

2. Stringent environmental regulations– Stringent environmental regulations, together with

economic growth, spur demand for EGS.

• Lots of attention given to the first engine, but what about the second?

OECD Trade and Agriculture Directorate

The twin engines of EGS trade

5

• Different regulatory instruments can be used by governments to correct environmental market failures: market-based instruments (e.g., taxes or permits), emission standards, information disclosure, etc.

• This generates a market for equipment and services in relation to pollution control and abatement as firms seek new solutions.

“In contrast to financial, telecommunications or transport services, there is no genuine demand for environmental services. Relevant markets are essentially created through government regulation. Who would purchase, for example, sewage or air-cleaning services out of sheer altruism?” (Adlung, 2009)


Environmental regulations and EGS market size

• Answering this basic question requires indicators for measuring:

– The degree of stringency of environmental regulations

– Countries’ performance in EGS trade

OECD Trade and Agriculture Directorate 6

Hence the basic question:

Stringent environmental

regulations

EGS trade

?


Measuring the stringency of environmental regulations (i)

Implementation

Enforcement

Environmental laws are designed andimplemented….

… to alter firms' (and consumers') behaviour

… and achieve "cleaner"outcomes

E.g. Event based approach, composite indicators

E.g. Survey ofexecutives

E.g. Shadow prices, survey of firms abatement costs

E.g. Environmental performance data

Environmentalpolicy

instruments

1

Perceptions of Environmental

policies

2

Changes in agents' behaviour

3

Changes in environmental

outcomes

4

Source: OECD (2014, forthcoming).

8

1. Actual regulatory instruments

2. Perceptions of policies

• Aggregation and multi-dimensionality

• Market-based vs. non-market-based instruments

• Enforcement and implementation

• Usually surveys• Cognitive problems• Lack of time variation• Identification issues


Measuring the stringency of environmental regulations (ii)

3. Changes in agents’ behaviour

4. Environmental outcomes

• How firms and households react to changes in the regulations

• Surveys of PACE or shadow costs

• Accounts for enforcement• Identification issues

• Generally good availability• Accounts for incidental

abatement of emissions• Accounts for enforcement• Acute identification issues

9

Code Environmental theme or medium Share of HS lines

APC Air pollution control 5%

CRE Cleaner or more resource efficient technologies and products 19%

EPP Environmentally preferable products based on end use or disposal characteristics 2%

HEM Heat and energy management 10%

MON Environmental monitoring, analysis and assessment equipment 15%

NRP Natural resources protection < 2%NVA Noise and vibration abatement < 2%REP Renewable energy plant 22%

SWM Management of solid and hazardous waste and recycling systems 10%

SWR Clean up or remediation of soil and water < 2%WAT Waste water management and potable water treatment 13%


Measuring trade in environmental products: the CLEG

10

• Results are obtained using a standard index of revealed comparative advantage (RCA) in environmental goods:

• This index accounts for country size.

• It can be used as a guide to what causes actual trade patterns, including policies that may not be intended to influence trade, but that might do so unintentionally.


Measuring trade in environmental products: the RCA index


Broad-based analysis


The EPS index

Composite indicator of environmental policy stringency

Market-based policies Non-market based policies

• CO2• NOx• SOx• Diesel

Taxes

• CO2• Renewable Energy Certificates• Energy Efficiency Certificates

Trading Schemes

• Solar• Wind

FITs

• Deposit & Refund Scheme

DRS

• Emission Limit Values:• NOx• SOx• PMx• Diesel content limit (Sulphur)

• Govt. R&D expenditure on Renewable Energy

StandardsR&D

Subsidies

0.5 0.5

0.25 0.5 0.50.25 0.25 0.25

Source: OECD (2014, forthcoming).


The EPS index and RCA in CLEG products


The sources of comparative advantage in CLEG products

(1) RCA (2) RCA (3) RCA (4) RCA (5) RCA

All CLEG All CLEG All CLEG All CLEG All CLEG

EPS index 0.569*** 0.592*** 0.547*** (3.89) (4.11) (3.62) EPS index (3-year lag) 0.488***

(3.09)EPS index (5-year lag) 0.489*** (2.84)Export concentration index -0.770*** -0.768*** -0.800*** -0.837*** -0.925***

(-5.40) (-5.65) (-5.64) (-5.45) (-6.90)Average import tariff applied on CLEG products

-0.0176** -0.0216** -0.0214**-

0.0248***-

0.0297*** (-2.52) (-2.73) (-2.77) (-3.01) (-3.87)Capital-labour ratio -0.175 -0.239 -0.312* -0.430***

(-0.91) (-1.42) (-1.93) (-3.74)Secondary education or more (% labour force)

0.391** 0.547*** 0.643***

(2.64) (3.85) (5.49)Constant 2.529*** 4.579** 3.600* 3.655* 4.599***

(7.21) (2.07) (1.91) (1.95) (3.16)Year dummies Yes Yes Yes Yes YesObservations 256 256 224 161 116Adjusted R-squared 0.584 0.599 0.673 0.698 0.752F Statistic 10.14 12.60 51.79 25.56 35.52


The municipal-solid-waste (MSW) sector

16

• Regulations on MSW-management are complex and often sub-national (e.g., local landfill taxes, bans, EPR).

• Landfilling is often the worst option from an environmental standpoint.

• Heterogeneity among OECD countries. OECD Trade and Agriculture Directorate

The share of MSW landfilled as an indicator of stringency for waste

Source: US EPA.


MSW landfilled and RCA in waste-related products


Urban wastewater treatment


• There are different levels of wastewater treatment:– Primary (e.g., mechanical)

– Secondary (e.g., biological)

– Tertiary or advanced (e.g., phosphate removal)

• Instruments for regulating the treatment of wastewater are both supra-national and sub-national (e.g., the UWWTD, local tariffs and levies, basin-level standards).

• More heterogeneity among OECD countries than in the case of drinking-water regulations (e.g., WHO guidelines and health considerations).

The level of wastewater treatment as an indicator of stringency for water


The TRT indicator


The TRT indicator and RCA in water-related products

22

• Markets for and trade in EGS are regulation-led.

• Countries having stringent environmental regulations tend to export environmental products relatively more.

• Environmental regulations and trade barriers have opposite effects on EGS trade.

• Ambitious environmental policies imply losers but also winners from a trade angle.

• Trade liberalisation alone does not suffice.

• More work needed on indicators for services related to the environment.


Key messages

23

• Visit our website: www.oecd.org/trade/envtrade/

• Contact us: – [email protected] – [email protected]

Thank you for your attention!

Trade and Agriculture Directorate


Back-up slides

25

• New trade theory highlights the importance of domestic (home) market size for exports in the context of product differentiation, economies of scale, and transportation costs.

• Bottom line: net exports can increase with the size of the home market, and stringent regulations determine domestic market size in the case of EGS.

• Adding dynamics reinforces this idea: learning-by-doing, knowledge spillovers, etc.


The home-market effect (i)


The home-market effect (ii)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Intra-industry trade in environmental goods (2007-11)(1 = full intra-industry trade; 0 = full inter-industry trade)


The EPS index and RCA in Core CLEG products


The sources of comparative advantage in waste-related products


SWM SWM SWM SWM SWM

MSW landfilled (% MSW generation)-

0.0635***-

0.0510***-

0.0414***

(-4.08) (-3.68) (-3.89)

MSW landfilled (3-year lag)-

0.0379***(-3.48)

MSW landfilled (5-year lag)

-0.0415***

(-3.64)Export concentration index -0.830*** -0.832*** -0.760** -0.724** -0.790***

(-2.97) (-2.88) (-2.62) (-2.69) (-2.94)Capital-labour ratio 0.163 0.190 0.205 0.232 (1.21) (1.40) (1.42) (1.58)Secondary education or more (% labour force)

0.888** 0.982** 0.906**

(2.28) (2.60) (2.71)Constant 2.616*** 0.709 -3.313 -3.640 -3.793 (4.11) (0.54) (-1.21) (-1.25) (-1.37)Year dummies Yes Yes Yes Yes YesObservations 356 336 303 203 140Adjusted R-squared 0.360 0.378 0.430 0.404 0.428F Statistic . . 11.31 9.395 7.370


The sources of comparative advantage in water-related products


WAT WAT WAT WAT WAT

TRT indicator 0.279** 0.457*** 0.452*** (2.19) (5.78) (5.16) TRT indicator (3-year lag) 0.585***

(7.20)TRT indicator (5-year lag) 0.604*** (7.72)

Export concentration index-

0.685***-

0.503***-

0.477***-

0.445***-

0.415***(-4.53) (-4.31) (-4.68) (-3.86) (-2.92)

Capital-labour ratio -0.115 -0.117 -0.153 -0.121 (-1.26) (-1.22) (-1.52) (-1.12)Secondary education or more (% labour force)

0.0306 0.0476 0.197

(0.14) (0.17) (0.48)Constant 1.976*** 2.976*** 2.916** 2.857 1.776 (3.83) (2.78) (2.05) (1.61) (0.74)Year dummies Yes Yes Yes Yes YesObservations 271 248 223 175 127Adjusted R-squared 0.481 0.551 0.559 0.701 0.753F Statistic 9.612 32.74 23.71 40.91 40.62

THE STRINGENCY OF ENVIRONMENTAL REGULATIONS AND TRADE IN ENVIRONMENTAL GOODS AND SERVICES Measuring...

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