Contemporary business development
How does trade affect greenhouse gas emissions?
Trade economists have developed a conceptual framework for examining how trade opening can affect the environment. This framework, first applied to study the environmental impact of the North American Free Trade Agreement (NAFTA), separates the impact of trade liberalization into three independent effects: scale, composition and technique. This framework can be used therefore to study the link between trade opening and climate change.
The “scale” effect refers to the impact on greenhouse gas emissions from the increased output or economic activity resulting from freer trade. The general presumption is that trade opening will increase economic activity and hence energy use. Everything else being equal, this increase in the scale of economic activity and energy use will lead to higher levels of greenhouse gas emissions.
The “composition” effect refers to the way that trade liberalization changes the mix of a country’s production towards those products where it has a comparative advantage. This re-allocation of resources within a country is how trade improves economic efficiency. The effect on greenhouse gas emissions will depend on the sectors in which a country has comparative advantage. The composition effect will result in less greenhouse gas emissions if the expanding sectors are less energy intensive than the contracting sectors. Whether the composition effect results in higher or lower greenhouse gas emissions is therefore difficult to predict in advance.
Finally, trade opening can lead to improvements in energy efficiency — the “technique” effect — so that the production of goods and services generates less greenhouse gas emissions. This decline in emission intensity can come about in two ways. First, freer trade will increase the availability and lower the cost of environmentally-friendly goods, services and technologies. This is particularly important for countries that do not have access to these goods,
Trade economists have developed a conceptual framework for examining how trade opening can affect the environment. This framework, first applied to study the environmental impact of the North American Free Trade Agreement (NAFTA), separates the impact of trade liberalization into three independent effects: scale, composition and technique. This framework can be used therefore to study the link between trade opening and climate change.
The “scale” effect refers to the impact on greenhouse gas emissions from the increased output or economic activity resulting from freer trade. The general presumption is that trade opening will increase economic activity and hence energy use. Everything else being equal, this increase in the scale of economic activity and energy use will lead to higher levels of greenhouse gas emissions.
The “composition” effect refers to the way that trade liberalization changes the mix of a country’s production towards those products where it has a comparative advantage. This re-allocation of resources within a country is how trade improves economic efficiency. The effect on greenhouse gas emissions will depend on the sectors in which a country has comparative advantage. The composition effect will result in less greenhouse gas emissions if the expanding sectors are less energy intensive than the contracting sectors. Whether the composition effect results in higher or lower greenhouse gas emissions is therefore difficult to predict in advance.
Finally, trade opening can lead to improvements in energy efficiency — the “technique” effect — so that the production of goods and services generates less greenhouse gas emissions. This decline in emission intensity can come about in two ways. First, freer trade will increase the availability and lower the cost of environmentally-friendly goods, services and technologies. This is particularly important for countries that do not have access to these goods,