Lecture VII (Environment) ECN220 PDF

ECN220 Evolution of the Global Economy @ 2024. All rights reserved Dr. Hakan Toksoy Objective Chapter-13 Global Economy and Environment Is Free Trade Anti- Environment? Is Free Trade Anti- Environ...

ECN220 Evolution of the Global Economy @ 2024. All rights reserved Dr. Hakan Toksoy Objective Chapter-13 Global Economy and Environment Is Free Trade Anti- Environment? Is Free Trade Anti- Environment? International trade is accused of worsening environmental issues. Trade restrictions can sometimes increase pollution, as seen when U.S. limits on Japanese cars in the 1980s led to more sales of fuel-inefficient vehicles, raising emissions. Similarly, protective policies in agriculture often drive excessive pesticide and fertilizer use, harming the environment. In contrast, free trade can encourage global adoption of sustainable practices and eco-friendly techniques, potentially reducing environmental damage Free trade through may efficiency. increased lead to production moving to countries with weaker environmental standards, creating "pollution havens" and increasing global pollution. Environmental compliance costs are generally low, and factors like comparative cost advantages and transportation costs play a larger role in location decisions. The Environmental Impact of Freer Trade The Uruguay Round trade agreements illustrate that freer trade shifts production and consumption patterns, impacting pollution. Trade can drive two opposing environmental effects: (i) increased production may raise pollution, and (ii) higher incomes could boost demand for stricter environmental standards, encouraging cleaner practices. Assessing the net effect on environmental quality depends on whether economic growth or demand for sustainability has a greater influence. Environmental Harm with Rising Income per Person Environmental harm declines with rising income: In some cases, as incomes rise, the demand for better environmental quality surpasses the negative effects of increased production, resulting in improved environmental conditions. Environmental harm rises with rising income: For other issues, environmental damage costs are overlooked, and the rise in production and consumption outweighs the demand for better quality, resulting in increased harm as income grows. Inverted U-shaped relationship: In some cases, environmental harm initially rises with income, as low-income populations may accept damage for economic growth. However, as incomes increase, the demand for environmental protection strengthens, prompting stricter regulations and reducing harm, even with continued production growth. Environmental Harm with Rising Income per Person Declining Increasing Inverted-U Environmen Environmen Relationshi tal Problem tal Problem p Environmenta Environmenta Environmenta l Harm l Harm l Harm National National National Income per Income per Income per Person Person Person Environmental Harm with Rising Income per Person The composition effects of freer trade influence pollution levels differently across regions. In the United States, EU, and Japan, freer trade generally increases pollution as capital- and skill-intensive industries—such as steel, chemicals, and petroleum— expand. In developing countries, however, pollution tends to decrease as less-skilled- labor-intensive industries, like textiles and apparel, grow. the Heckscher-Ohlin model predicts that trade shifts pollution-heavy industries to developed nations while reducing them in low-income countries. The Environmental Impact of Freer Trade (the Uruguay Round) In developed countries, pollution from sulfur dioxide, suspended particulates, and carbon monoxide tends to decline. But, nitrogen dioxide levels are rising in the EU and Japan since their income levels have not yet reached the turning point for that pollutant. Pollution in developing countries is increasing due to income levels that fall below the turning points for various pollutants. Overall, the environmental impacts of the Uruguay Round are minimal. Even in cases where pollution rises, the economic benefits of freer trade significantly outweigh the associated environmental costs.. Free trade is not inherently detrimental to the environment; shifts in production to evade environmental regulations are minimal, and the overall impact of freer trade on pollution is relatively small. Is The WTO Anti-Environment? While free trade is not inherently harmful to the environment, critics claim that WTO rules restrict governments from enforcing robust environmental protections. However, governments can still implement measures to reduce environmental harm without breaching WTO regulations. The WTO, like its predecessor the GATT, primarily aims to liberalize trade but does recognize environmental issues. Article XX provides exceptions within the free-trade framework, allowing for trade barriers when justified by environmental concerns, despite worries about potential misuse for protectionist reasons. Environmental Exceptions under WTO Rules 1-The World Trade Organization (WTO) permits countries to establish product standards or consumption limits for health, safety, or environmental reasons, even if these measures lead to a reduction in imports. However, these policies must be applied equally to both domestic and imported products. The World Trade Organization (WTO) prohibits countries from using environmental standards as a means of disguised protectionism. 2-The World Trade Organization (WTO) permits countries to restrict imports of products made using environmentally harmful methods, but this is subject to strict conditions. The WTO aims to facilitate environmental protection while preventing disguised protectionism that may be masked as environmental concerns 3-Global environmental challenges often necessitate international cooperation and multilateral agreements. Some agreements, like the Convention on International Trade in Endangered Species and the Montreal Protocol, utilize trade bans to achieve environmental objectives, even impacting non-signatory countries. Special Policies on Trade and Environment An externality arises when an activity imposes costs or confers benefits on individuals not directly involved in the marketplace decisions related to that activity. If an activity inflicts harm—such as pollution—on someone not part of the transaction, it is considered an external cost. If it provides a benefit to an outsider, it is labeled as an external benefit. To effectively address environmental impacts like pollution, special policies are necessary to manage these externalities. Externalities create distortions in the market by causing a gap between private and social costs or benefits. Without government intervention, competitive markets may result in either excessive or insufficient levels of an activity. This occurs because decision-makers typically consider only their private Special Policies on Trade and Environment Pollution is an externality that imposes costs on individuals not involved in the production or consumption decision-making processes. This creates a disparity between social and private costs, where the social marginal cost (SMC) exceeds the private marginal cost (MC). In a competitive market, prices reflect private marginal costs and benefits, which fails to account for broader social costs, resulting in overproduction. This oversight of external costs leads to market inefficiency. Government Policies on Trade and Environment Taxes and subsidies The government can impose taxes to make individuals and businesses account for the external costs their actions (like pollution) impose on others. It can provide subsidies to reward behaviors that generate external benefits. Changing property rights By assigning ownership of resources, including the right to pollute, market forces can determine how resources are used. The owner would decide whether to pollute based on what others are willing to pay to avoid it, creating a market for resources that previously caused externalities. Policies should ideally target the externality directly, such as increasing the costs associated with pollution or resource depletion. However, this is often impractical, leading policymakers to implement measures that affect related economic activities, like production, consumption, or trade in goods Government Policies on Trade and Environment Source of Examples Policies under Policies under our External Costs the entire world Nation alone Harming Our were governed Nation by a single authority Just our own Chemicals Tax our production Tax our production production Just foreign Acid Rain Tax foreign Tax foreign import production across production borders World Production CO2 Tax world Tax world production production (or and import consumption) Our own and Tobacco Tax our Tax our consumption Foreign consumption consumption Source: McGraw Hill LLC. World CFCs Tax world Tax our consumption Consumption consumption (or and export production Trade and Domestic Pollution Unregulated domestic pollution can lead to two unexpected consequences in international trade. First, free trade might diminish a country's overall well-being because of unresolved pollution issues. Second, the country may find itself exporting products that it should actually be importing. Although this approach increases profits and offers affordable products, the associated pollution imposes external costs on others, such as damaging ecosystems. The analysis reveals that when these external costs—known as marginal external costs (MEC)—are overlooked, the actual social costs of production are underestimated. Trade and Domestic Pollution Price ($ per 𝐒𝐝 unit) 𝟏.𝟏𝟎 a 𝟏. 𝟎𝟎 𝐃𝐝 𝟏.𝟖 𝟐 𝟐.𝟑 Quantity Marginal external cost from domestic production ($ per product) 𝐌𝐄𝐂 b 𝟐 𝟐.𝟑 Quantity  Trade and Domestic Pollution A country can mitigate the distortion caused by pollution by enacting policies that require polluters to internalize the external costs of their actions. Implement a pollution tax Establish property rights, granting individuals ownership of natural resources, such as water; polluting firms would then have to compensate these owners for the right to pollute. The government could create a limited number of pollution permits that firms Themust challenges purchasedomestic to pollute,firms face thereby when required establishing to pay a market for pollution for pollution control. taxes or rights. These costs raise their production expenses and reduce their output, making them less competitive. Additionally, they confront imports priced at $1.10 from countries without similar pollution regulations. Domestic firms frequently perceive these imports as unfair competition, contending that the absence of environmental regulations in other countries acts as Trade and Domestic Pollution The disparity between foreign pollution policies and those of the importing country can be justified by several factors. A foreign country may have more lenient pollution regulations if its production results in lower pollution, its environment is less impacted, or its citizens prioritize economic growth due to poverty and are willing to tolerate some pollution. For instance, the foreign production process might generate less pollution, or the country may possess abundant natural resources, enabling it to absorb more pollution without significant harm. If the foreign country has overly lax pollution standards, it would be advantageous for both the country and the global community to enforce stricter regulations. Implementing import limits on goods from countries with weaker pollution Transborder Pollution the Home Country Marginal costs of Price ($ per waste dumping unit) F (Loss of services 𝟕𝟐𝟎 in the Foreign Country E B Home country’s benefit from dumping waste 𝟒𝟎𝟎 C A Millions of tons of chemical 𝟎 𝟖𝟎 𝟏𝟖𝟎 waste dumped by the Home Country The impact of paper production in the Home Country on the Foreign Country is significant when both countries share the same river. When pollutants from one country impact neighboring nations. These issues pose significant challenges for governments, as the harmful effects of pollution extend beyond the borders of the country where it originates.  Transborder Pollution the Home Country Marginal costs of Price ($ per waste dumping unit) F (Loss of services 𝟕𝟐𝟎 in the Foreign Country E B Home country’s benefit from dumping waste 𝟒𝟎𝟎 C A Millions of tons of chemical 𝟎 𝟖𝟎 𝟏𝟖𝟎 waste dumped by the Home country Point A illustrates a critical environmental issue in the Foreign Country, as the damage to the river increases along the marginal cost curve From a global perspective, the situation is inefficient because any pollution exceeding 80 million tons results in more harm than benefit to the paper company. A total ban on waste dumping would be inefficient, as a complete cleanup, while satisfying downstream users, would incur excessive costs.(Point C)  Transborder Pollution the Home Country Marginal costs of Price ($ per waste dumping unit) F (Loss of services 𝟕𝟐𝟎 in the Foreign Country E B Home country’s benefit from dumping waste 𝟒𝟎𝟎 C A Millions of tons of chemical 𝟎 𝟖𝟎 𝟏𝟖𝟎 waste dumped by the Home country Permitting the paper company to dump up to 80 million tons of waste into the river improves global well-being because the benefits to the Home Country outweigh the costs imposed on the Foreign Country. (Point B) 80 million tons represents the "optimal amount of pollution" according to economists, as it strikes a balance between benefits and costs. While this may seem counterintuitive to those who prioritize clean water, both zero pollution and excessive pollution are not optimal solutions.  Transborder Pollution the Home Country Marginal costs of Price ($ per waste dumping unit) F (Loss of services 𝟕𝟐𝟎 in the Foreign Country E B Home country’s benefit from dumping waste 𝟒𝟎𝟎 C A Millions of tons of chemical 𝟎 𝟖𝟎 𝟏𝟖𝟎 waste dumped by the Home country To achieve the balance, the Home paper company needs to be informed about the costs associated with its pollution. The government can implement a targeted policy, such as a pollution tax. By imposing a tax of 400 euros per ton, the company would be incentivized to dump exactly 80 million tons, as the benefits would outweigh the tax cost up to that level. This approach effectively balances the company's use of the river with the Transborder Pollution A pollution tax could be effective if the Foreign Country, the country impacted by the pollution, could impose it on the Home Country paper mill. But, since this issue is international, the Foreign Country lacks the authority to tax a company based in the Home Country. The responsibility for taxation rests with the Home government, which may choose not to impose any tax. From the Home Country standpoint, allowing the mill to dump 180 million tons (point A) is more beneficial than enforcing a pollution tax that would limit waste to 80 million tons (point B), the globally optimal level. Transborder Pollution Efficient pollution solutions can be achieved by assigning property rights. A World Court could determine whether the river belongs to the Home paper company or Foreign. If Home Country owns the river, the Foreign Country would compensate the company to reduce pollution. If the Foreign Country owns it, the Home firm would pay for the right to pollute. In either case, pollution would be capped at 80 million tons, provided property rights are enforced. But, a major issue with this approach in international disputes is the absence of a global authority to enforce property claims across borders. Next Best Solution If international negotiations fail, the Foreign Country must consider independent measures to address pollution from the Home Country. the Foreign Country might restrict imports of paper from the Home Country, particularly from the polluting firm, which could reduce the Home Country paper production and, subsequently, pollution in the common river. Despite facing deadweight losses from limiting imports, the Foreign Country may still benefit if the reduction in pollution outweighs these costs. if the Foreign Country exports paper to the Home Country, it could subsidize those exports to decrease the Home production and pollution. However, this strategy encounters a significant hurdle: the World Trade Organization (WTO) generally prohibits raising tariffs or subsidizing exports, with NAFTA, the USMCA, and the Environment Environmental challenges along the Mexico–U.S. border underscore the complexities of managing transborder pollution, a significant issue during the North American Free Trade Agreement (NAFTA) negotiations. While Mexico has environmental laws comparable to those in the U.S., enforcement is often weak due to limited resources and competing economic priorities. Pollution from Mexican industries, including hazardous waste, air and water contamination, and inadequate infrastructure, has caused damage on both sides of the border. Critics of NAFTA expressed concerns that it would exacerbate environmental issues; however, a side agreement established a commission and the North American Development Bank to support cleanup efforts. In 2020, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA), which introduced stronger environmental provisions. The USMCA mandates that the countries enforce their Global Environmental Challenges Transborder pollution becomes even more complex when global economic activities create external costs affecting the entire world. Two key global environmental challenges are the depletion of the ozone layer and global warming caused by greenhouse gas emissions. Other global challenges include species extinction and the depletion of common resources like fish stocks. Global environmental issues necessitate coordinated global solutions. If each country establishes its own policies, they may reduce their harmful emissions but overlook the negative impacts on others, resulting in inadequate overall action. Countries facing net losses from stricter environmental policies may oppose  Extinction of Species Human activities, including habitat destruction, pollution, and overhunting, have significantly driven species extinction. While initiatives like protected parks and sustainable management are effective in preventing extinction, a comprehensive international agreement to promote these solutions is lacking. A key agreement is the 1973 Convention on International Trade in Endangered Species (CITES), which seeks to prevent international trade from threatening endangered species. As of 2020, CITES had 184 member countries and imposed a ban on commercial trade for approximately 1,100 endangered species. Long-term success may hinge on promoting sustainable use of wildlife through tourism, hunting, or regulated trade, aligning economic incentives with conservation goals. Ultimately, CITES' effectiveness may rely on its capacity to support these sustainable management practices. Overfishing Overfishing The world's oceans and marine life are vital global resources, yet they face significant challenges due to a lack of ownership, leading to overfishing. Since 1990, global fish catches have remained stable, with over a third of fish stocks being overfished. While most fish species are not threatened with extinction, their populations are diminishing. This scenario illustrates the "tragedy of the commons," where unrestricted access to fishing leads firms to overexploit the resource without regard for sustainability. Even if one firm tries to limit its catch, others will continue to deplete the resource, resulting in overall decline. Government subsidies for the fishing industry often worsen this problem by creating excess capacity in fishing fleets—sometimes up to double what is sustainable. CFCs and Ozone (Cont.) In the 1940s, chlorofluorocarbons (CFCs) were widely adopted across various industries, including refrigeration, foam production, aerosol propellants, and dry cleaning. By the early 1970s, research revealed that CFCs and halons, while not directly toxic, were depleting the ozone layer in the upper atmosphere. This depletion posed significant risks, such as increased skin cancer rates, reduced agricultural yields, and potential climatic changes. By 1985, observable ozone holes were identified over the poles. In response to environmental concerns, over 50 nations signed the Montreal Protocol in 1987 to ban the production and trade of CFCs and halons. By 2022, the number of signatories had increased to 198 countries. The protocol implemented outright bans and production limits rather than relying on pollution taxes, due to the significant social costs linked to CFC emissions. This legislative approach was considered more effective for achieving CFCs and Ozone The Montreal Protocol has been largely successful; concentrations of chlorine compounds in the stratosphere peaked in 2000 and have since begun to decline. Several factors contributed to the protocol's success, including: Clear scientific evidence linking CFCs to ozone depletion. A limited number of products involved, for which viable substitutes were available at minimal cost. Concentration of CFC production among a few countries (primarily the U.S. and the EU) and large firms like DuPont, facilitating agreement and enforcement. The countries most affected by ozone depletion were also the primary producers and consumers of CFCs, creating a strong incentive for compliance. Greenhouse Gases and Global Warming Greenhouse Gases and Global Warming Human activity is increasing the concentration of carbon dioxide (CO2) and other greenhouse gases in the atmosphere, causing global warming through the greenhouse effect. Unlike the successful Montreal Protocol, which phased out CFCs, reducing greenhouse gas emissions is much more challenging because these gases are essential to many activities, and the damage is spread unevenly and unpredictably across the globe. The scientific understanding of the greenhouse effect is less definitive compared to the established facts surrounding CFCs and ozone depletion. However, it is evident that CO2 concentrations have increased by over 50% since 1750, primarily due to human activities like fossil fuel consumption. Additionally, international trade is neither the root cause nor a viable solution to this problem. Greenhouse Gases and Global Warming Relatively palatable policy changes will not be enough to stop the buildup of CO2 Removing fossil fuel subsidies: Eliminating the $500 billion in global subsidies would cut emissions by no more than 10%, but CO2 buildup would continue. Afforestation: Reforestation can absorb CO2 for several decades but becomes ineffective once forests mature, only buying time for broader emission reductions. Relying on fossil fuel depletion: Waiting for fossil fuels to run out will not work since Earth has abundant supplies. International trade policy alone cannot effectively reduce greenhouse gas emissions. Greenhouse Gases and Global Warming The Kyoto Protocol and Paris Agreement The Kyoto Protocol, established in 1997, aimed to reduce greenhouse gas emissions in developed countries but encountered several challenges: many countries did not meet their targets, the U.S. opted out, and emissions from developing nations, especially China, surged. By 2010, global emissions had increased by 39%, rendering the Protocol's impact minimal. In contrast, the Paris Agreement, signed in 2015, aimed to limit the global temperature rise to below 2°C, with a target of 1.5°C. It included commitments from nearly all countries, but these commitments are voluntary and lack enforcement mechanisms. Nations are required to report progress every five years and set new targets, yet the revised pledges in 2021 remain inadequate to prevent significant temperature increases.