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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.