Leverhulme Centre 6th Form Conference 2007
Trade and the Environment
Dr. Tim Lloyd
School of Economics
Leverhulme Centre for Research on Globalisation & Economic Policy
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 benefit
 Consumption 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 trade
 Logic 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)
Neanderthal

Existed for 250,000
years

Became extinct
35,000 BC

Wars/disease not
responsible

Perpetrator none
other than . . .
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Where did all the Neanderthals go?
Neanderthal
Modern Man
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Where did all the Neanderthals go?




Homo Sapiens had a
special weapon . . .
social interaction
Modern Man
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
exploitation
 Environmental degradation
 Eventual ecological catastrophe
 Doomsday
scenario seems
inevitable (?)
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The Doomsday Scenario
Pollution
Per capita
End of the
World
Economic growth causes
environmental degradation
Economic Activity per capita
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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 environment
through causal mechanisms :



Scale Effects
Composition Effects
Technique Effects
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In model, pollution depends upon . .

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
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An Alternative Scenario . . .
End of
the World
Pollution
Per capita
Industrialisation
Poverty
alleviation
Services
Demand for
environmental quality
Tougher standards
Green technologies
Economic Activity per capita
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“The Environmental Kuznets Curve”
Pollution
Per capita
Industrialisation
Poverty
alleviation
Services
Demand for
environmental quality
Tougher standards
Green technologies
Economic Activity per capita
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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’) relationship
So-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 reading
Horan, 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.
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