Some environmentalists would like to use trade policy to discourage environmentally harmful production, such as by imposing tariffs based upon the carbon intensity of goods. The assumption seems to be that existing trade rules are environmentally “neutral.” But what if that assumption is wrong?
A new study by economist Joseph Shapiro of the University of California at Berkeley, “The Environmental Bias of Trade Policy,” suggests that existing trade policy is actually biased against low-carbon production. If he’s correct, merely making trade policies more “neutral” would have environmental benefits and reduce greenhouse gas emissions.
Here’s the abstract:
This paper documents a new fact, then analyzes its causes and consequences: in most countries, import tariffs and non-tariff barriers are substantially lower on dirty than on clean industries, where an industry’s “dirtiness” is defined as its carbon dioxide (CO2) emissions per dollar of output. This difference in trade policy creates a global implicit subsidy to CO2 emissions in internationally traded goods and so contributes to climate change. This global implicit subsidy to CO2 emissions totals several hundred billion dollars annually. The greater protection of downstream industries, which are relatively clean, substantially accounts for this pattern. The downstream pattern can be explained by theories where industries lobby for low tariffs on their inputs but final consumers are poorly organized. A quantitative general equilibrium model suggests that if countries applied similar trade policies to clean and dirty goods, global CO2 emissions would decrease and global real income would change little.