Taran Fæhn, Statistics Norway:
Experiences with
analysing the tradeenvironment nexus in
Norwegian CGE models
Common challenge:
International/national pressure towards:
Reduced protection
Environmental regulation
The Norwegian case:
Multinational agreements in both fields
QUESTIONS:
1. Do we achieve the intentions of the
agreements?
2. Do achievements in one of the fields
hamper achievements in the other?
METHOD:
CGE studies
MSG-6
Long tradition (Leif Johansen,1960)
Long and strong basis of
data/statistics/ accounting
QUESTION a):
Does Norwegian participation
in trade agreements harm the
environment?
Fæhn (2002), Economic Systems Research 14/1
Fæhn&Holmøy (2003), Economic Modelling 20/4
QUESTION b):
Are carbon policies harmful to
Norwegian competitiveness
and trade?
Bruvoll&Fæhn (2004),DP 384, Statistics Norway
Selected model characteristics
Economy-wide budget constraints: Including restraints
on the trade balance that prevents foreign debt from
exploding: Our model: Intertemporal budget constraint.
Existing distortions: Reforms interact with existing tax
wedges, policy restrictions, market imperfections.
____________________________________
Trade: Export and import prices develop in the world
markets – and may deviate from domestic price
changes:
– Imported goods are imperfect substitutes for
domestic products (Armington)
– Export markets are segregated from the domestic,
with costs of shifting deliveries between the two
(CET).
The electricity market:
Supply: Hydropower, Gaspower, Import
Demand: Substitution electricity/fuel oils
( cont. )
Selected model characteristics
Environmental indicators:
Emissions to air of 6 green house gases and
6 gases with local/regional effects
– National emissions coefficients linked at a detailed
level to economic activity (consumption activities,
inputs, processes)
Emission leakages included in the definition
– Foreign emissions: Linked to trade:
Import up -> production abroad up
Export down -> substituted by foreign production
– Why included:
 Interaction mechanism trade/environment.
 Nations consider global environment relevant?
– Emission coefficients = Industry- and countryspecific unit emissions; weights: import/export
6
( cont. )
Selected model characteristics
Trade barriers:


PjI  Pjw 1  t j  1  t Pj 1  t Qj

tj = Ad valorem tariff rate
tjP = Protection rate from price-oriented NTBs
tjQ = Protection rate from quantity-oriented NTBs
7
Modelling trade barriers
P  P 1  t 1  t 1  t
w
j
j
j
P
Q
j
j

Qualitative functioning of NTBs:
tiP = Fixed cost of penetrating the border
added to price (endogenous trade)
tiQ = Fixed quantity of trade, i.e. the
protection rate responds endogenously to
market changes
Who collects rents from barriers?
Tariffs: Domestic redistribution
Several NTBs: Redistribution from domestic
consumers to foreigners (technical standards,
Voluntary Export Restraints)
-> terms of trade gain from removal
Measuring trade barriers
TWO APPROACHES:
(Deardorff and Stern 1998, Michigan Press)
i)
Specific measurement methods
(tariffs: Detailed public revenue
accounts)
ii) Price gap method
(most Non-Tariff Barriers, NTBs)
Measures entire gap between the
prices of the product
within the borders, and
before penetrating the border.
NB: Supported by thorough industry and
policy studies to check if protection is
the plausible explanation to the gap.
(cont.) Measuring barriers:
1.
2.
3.
4.
Choice of commodity specification:
- homogeneity/aggregation level
: 7-digit level of the Norwegian NA (1500
commodities)
Choice of inside price:
- only composite of imported and domestically
produced varieties available
: Its price used as inside price
Choice of outside price:
- lowest possible cost of the commodity in case
of free trade
: Import c.i.f. price, or alternatives (if
differentiated trade policies, price before border
affected by barrier, or dumping)
Aggregation:
- Same weights for inside and outside prices
- Weights according to purpose
: Competitiveness -> Production weights
QUESTION a):
Trade liberalisation
?
The environment
The Trade Reforms:
1994: Agreement on European Economic Area
1995: WTO’s Uruguay Round
Potential mechanisms
Scale effects (-) :
Production and consumption rises,
including international transport?
Composition effects (-):
Prod. and Cons. patterns dirtier?
(If not: Pollution leakage?)
A race to the bottom (-):
Lax standards as a surrogate for
protection?
Positive effects?:
Trade promotes technology transfer?
Growth promotes abatement (EKC)?
Environmental
Role of Existing distortions
consequences:
Intertemporal budget
constraint
i) Scale effects:
Role of existing distortions:
Modify scale effects
Production:
Consumption:
0.1 % decrease
1.0 % increase
Story:
Production: Decrease in labour supply: 0.6
%
(because Income up
Demand for leisure up)
Consumption:Existing distortions:
Labour supply is heavily taxed
ii) Composition effects:
Role of intertemporal budget
constraint:
Expansion within manufacture of
Metals, Industrial Chemicals, and
Pulp&Paper:
High emission intensities
 Process emissions from Metal Production
 Combustion (CO2, SO2, NOX, CO)
Energy intensive
Electricity prices increase (7-9%)
=> energy demand shifts towards fossil
fuels.
Story:
Minor trade policy changes!
Gradual income growth + consumption
smoothing
-> Consumers borrow in first periods
Long run: Increased trade surplus required
-> Traditionally export-oriented industries
expand.
Changes in emissions and waste
Kyoto
gases
Percentage Percentage Percentage (1000 tons) (1000 tons)
change
change
change
Absolute
Absolute
from
from
change
change
from
from
Consump. Production
Total Consump. Production
0.89
0.30
61
97
0.42
F P A
Sulphur
dioxide
1.52
2.04
F P
2.02
0.02
0.53
Nitrogen
Oxides
0.78
-0.12
0.04
0.23
-0.17
Ammonia
0.71
-2.75
A
-2.67
0.00
-0.64
NMVOC
0.85
-0.56
-0.03
0.63
-0.69
Carbon
Monoxide
1.01
0.76
F
0.94
5.28
1.41
Suspended
particulates
1.73
-0.53
A
1.04
0.27
-0.04
Waste
generation
0.64
-0.63
0.00
7.40
-7.45
15
QUESTION b):
Tighter climate policies
?
Competitiveness
?
Trade-related emission
leakages
Potential Mechanisms:
Non-regulating countries fear for:
• market access;
Regulating countries fear for:
• de-industrialisation, i.e competitiveness loss to pollution havens
• the efficiency of climate policies in
presence of trade;i.e. leakages
Possible positive effects:
• Trade could imply that abatement
costs are shared with foreigners
• Trade in green products, labelling
• Trade in clean technology (Porter)
Competitiveness:
Empirical Literature:
Jaffe et al. (1995), JEL 33:
Econometric studies find little evidence
Ho and Jorgenson (1998a,b), MIT press:
CGE studies: Substantial, though counteracted in
the longer run by domestic price
falls/depreciations
The role of long run budget constraints
18
COMPETITIVENESS
foreign to domestic price change
Goods
Chemical and Mineral products
(p*/p)
-7
Petrol, diesel and other fuels
Wood and wood products
Metals
Industrial Chemicals
-3
-3
-2
-1
Primary commodities
Hardware and machinery
Fish products
Wholesale and retail trade
0
2
1
3
Finance and insurance
Other private services
Remaining manufacturers
3
3
(3, 2)
Remaining private services
(2, 1)
Emission leakages
Literature:
CGE literature is mainly on carbon leakages, only
(Jacoby et al, 1997, Barker , 1999)
Other leakage problems are studied econometrically
(De Bryun&Opschoor, Muradian et al, Suri&Chapman
Our multi-leakage CGE study finds:
10
5
0
CO2
CH4
N2O
SO2
NOX
CO
NMVOC
NH3
-5
-10
-15
-20
Domestic emission changes
Import-related leakages
Export-related leakages
-25
Global emission changes
20
Conclusions:
TRADE POLICY AND THE ENVIRONMENT
 NTBs differ in important ways from tariffs
 Scale effects on the environment are modest
because of existing distortions (welfare
modified)
 Composition effects on the environment
 little to do with the direct trade reforms
 stem from reallocations to obey the long
run budget constraint of the nation
 In interaction with lax environmental
policy in heavily polluting industries
ENVIRONMENTAL POLICY AND TRADE
 The pollution haven hypothesis is supported,
but counteracting mechanisms due to the
budget constraint crucial in the long run
 In interaction with the trade regime:
Abatement costs to some extent shared
with foreigners
 Environmental costs imposed on
foreigners
21