Trade, pollution, and the environment: New international evidence

Jaime de Melo, Nicole A. Mathys, Jean-Marie Grether 28 November 2009

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Much concern has been raised that globalisation and trade liberalisation will lead to competition for investment and jobs, resulting in a worldwide degradation of environmental standards (the `race to the bottom´ effect) and /or in a delocalisation of heavy polluting industries in countries with lower standards (the `pollution havens´ effect – see Copeland and Taylor 2004). Moreover, environmentalists and ecologically-oriented academics argue that the political economy of decision-making is stacked against the environment, and at the international level, environmental activists fear that the dispute settlement mechanism of the WTO favours trade interests over environmental protection.

The possibility of delocalising economic activities implies that international evidence is called for, yet most evidence is from the US (Ederington et al. 2006 or Levinson and Taylor 2008), and in the case of international evidence, based on a rather indirect identification of the forces at work (for sulphur dioxide concentrations, see Antweiler and Taylor 2001; for pollution emissions, see Cole and Elliott 2003). New evidence reported below identifies the effects more precisely and suggests that fears about pollution havens may be exaggerated.

Pollution-generating activities are not footloose

Whatever the type of pollutant considered, six industrial sectors are considered to be the major polluters (three-digit ISIC code in parenthesis): iron and steel (371), non-ferrous metals (372), industrial chemicals (351), non-metallic mineral products (369), pulp and paper (341), and petroleum products (353). Evidence from the US suggests these activities are three times more intensive in their use of energy, have a capital-output ratio twice as high, and are 40% more labour-intensive than the average of all other sectors (Mani and Wheeler 1998). To check that transport costs act as a brake on pollution haven effects, we estimate a standard bilateral trade gravity model for polluting products in cross-section (Grether and de Melo 2004). Our estimates show that the coefficient for distance is one-third higher for the group of polluting industries compared to the rest of manufacturing. Most polluting sectors are intermediate goods, so proximity to users should enter into location decisions more heavily than customs goods that are typically high-value, low-weight industries that can be shipped at relatively low costs.

Sulphur dioxide: Small pollution-haven effects but rising transport-related emissions

The accepted framework to study the growth-trade-environment nexus decomposes changes in production-related emissions into scale, technique and various composition effects within countries, across industries, and across countries (Copeland and Taylor 2003). Implementing this across a large number of countries has proven more difficult mostly because of data limitations on production-related emission intensities across time. We constructed a database on sulphur dioxide (SO2) for 62 countries and 7 to 24 industries over the 1990-2000 period (Grether et al. 2009a). SO2 is a suitable pollutant to study because it is a by-product of goods production with strong regional effects, available abatement technologies, and different regulations across countries. A deeper understanding of SO2 emissions contributes to a better understanding of three environmental problems: air pollution and smog, acid rain, and global climate change.

Grether et al. (2009a) decompose the growth in SO2 emissions into scale, technique and two composition effects – across countries and across industries within a country – over the period 1990-2000. We estimate a scale effect – growth in emissions due to radial manufacturing growth – of 9.5%, and a reduction in emission intensity due to composition effects – 2.4% due to a shift towards cleaner countries and 3.0% due to a shift towards cleaner sectors within countries – and a reduction of emissions of 13.9% due to a shift towards less emission-intensive techniques of production. The sectoral decomposition in Figure 1 shows that non-ferrous metals are the only sector displaying an increase in emission intensity. Over the period, a strong greening of technology emitting SO2 takes place and along with a reverse pollution-haven effect as SO2 intensive activities moved to countries with cleaner technologies.

Figure 1. Sectoral decomposition of worldwide SO2 emissions (1990-2000)

Relating an index of the pollution terms-of-trade – i.e. a country’s pollution content per unit of exports relative to its pollution content of imports – against income provides another perspective on the importance of pollution-haven effects. Following Antweiler (1996), we computed the pollution terms-of-trade for the same data set on SO2 emission coefficients taking into account direct and indirect emissions using input-output data (Grether and Mathys 2009). Our results are reported in Figure 2, where the vertical line is the average GDP per capita for the sample and the horizontal line is the corresponding sample average pollution terms-of-trade normalised at unity and the size of the circle around countries indicates the importance in total emissions. Most observations are clustered in the northwest and southeast quadrants suggesting pollution-haven effects, however, the pattern is also influenced by weight-reducing activities such as copper mining in Chile – hardly a footloose activity.

 

Figure 2. SO2 Pollution terms of trade vs. GDP per capita levels in 2000

Would autarky be any cleaner? We carry out two exercises in Grether et al. (2009b). First, we compute emissions that would have taken place if countries had been forced to produce the bundle they actually consume, thereby eliminating trade. In this no-trade scenario, where production is replaced by observed apparent consumption, opening up to trade leads to an increase of about 10% (3.5%) in emissions in 1990 (2000). On the one hand, subject to the caveat that much of trade in pollution-intensive products is natural-resource-based trade, this supports the pollution-haven view. Indeed, for both years, the largest net exporters tend to be the dirtiest producers. On the other hand, and perhaps more importantly, the results also show that the pollution-haven pattern has almost vanished over time.

In a second exercise, using transport-emission data for trade for 1995, we carry out ‘back-of-the envelope’ estimates of transport-related (rail, road, and ship) SO2 emissions associated with our counterfactual no-trade scenario. International-trade related transport emissions accounted for about 5%–9% of worldwide manufacturing-related production emissions of SO2 – accounting for roughly one third to three quarters of total trade-related emissions across the 1990-2000 period. Adding up emissions coming from trade-related composition effects and trade-related transport activities, trade increased global worldwide manufacturing emissions by 16% in 1990 and 13% in 2000. Thus, the strong decline in the pollution-haven pattern associated with a greening of technologies is estimated to have been almost eaten away by the increase in transport-related emissions.

Environmentalists’ fears about the depletion of resources in countries with weak institutions will always be present. Although there is indeed some evidence supporting the fears about pollution havens through delocalisation of activities for regional pollutants like SO2, their relative magnitude is rather small, and it is likely that international trade has not had a major negative impact on the environment. However the direct effect via the emissions associated with the international transport of goods could contribute as much to global emissions as the composition effects induced by international trade reduce emissions, at least in the case of SO2.

References

Antweiler W. (1996),"The Pollution Terms of Trade", Economic Systems Research, Vol. 8 (4), pp. 361-365.

Antweiler, W., B.R. Copeland and M.S. Taylor (2001), “Is Free Trade Good for the Environment?”, American Economic Review, 91, 877-908.

Cole M. and R. Elliott (2003), "Determining the Trade-Environment Composition Effect: The Role of Capital, Labour and Environmental Regulations" Journal of Environmental Economics and Management, Vol. 46 (3), pp. 363-83.

Copeland, B.R. and, Taylor, M.S. (2003), Trade and the Environment: Theory and Evidence, Princeton University Press.

Copeland, B.R. and Taylor M.S. (2004), "Trade, Growth and the Environment", Journal of Economic Literature, 42(1), 7-71.

Ederington, J, A. Levinson, and J. Minier (2006), “Footlose and Pollution Free”, Review of Economics and Statistics, 87(1), 92-99

Grether, J.-M. and J. de Melo, (2004), "Globalisation and dirty industries: Do pollution havens matter?" in R.E. Baldwin and A. Winters eds., Challenges to Globalisation: Analyzing the Economics, University of Chicago Press, 167-208.

Grether J.-M. and N.A. Mathys (2009), "Measuring the Pollution Terms of Trade with Technique Effects", mimeo, University of Neuchâtel.

Grether, J.-M., N. A. Mathys and J. de Melo (2009a), "Scale, Technique and Composition Effects in Manufacturing SO2 Emissions", Environmental and Resource Economics, 43(2), 257-74

Grether, J.-M., N. A. Mathys and J. de Melo (2009b), "Global manufacturing SO2 emissions: does trade matter?", Review of World Economics, doi: 10.1007/s10290-009-0033-2.

Levinson, A. and S. Taylor, (2008),"Unmasking the Pollution Haven Effect", International Economic Review, Vol. 49 (1), pp. 223-254.

Mani, M. and D. Wheeler, (1998), “In Search of Pollution Havens? Dirty Industry in the World Economy, 1960-95”, in Fredriksson, P. (ed) Trade, Global Policy, and the Environment, WBDP #402, World Bank, Washington, D.C.

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Topics:  Environment International trade

Tags:  emissions, race-to-the-bottom, pollution haven

Senior Fellow, FERDI; Professor, University of Geneva; CEPR Research Fellow

Professor and Dean, University of Neuchatel

Economist at the Swiss Federal Office of Energy and a lecturer at the University of Neuchatel