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International Trade and Climate Change: World Bank Report

Published March 2008

The findings from this World Bank report state,

"Industrial competitiveness in KyotoProtocol–implementing countries suffers more from energy efficiency standards than from carbon taxation policies.

Though the Kyoto Protocol didn’t come into force until 2005, in the 1990s most OECD countries had already established regulatory and fiscal policies, emissions trading systems, and voluntary agreements to combat GHG emissions. Efforts by countries to reduce emissions to meet and exceed Kyoto targets have raised issues of competitiveness in countries that are implementing these policies. The analysis in chapter 2 suggests that efficiency standards are more likely to adversely affectindustrial competitiveness than carbon taxes. Some industries—such as metal products and transport equipment—are more severely affected by the increasing efficiency requirements. For those industries, the analysis also suggests that it does not matter whether such standard requirements are imposed by the exporting country, the importing country, or both.

The effects of carbon taxation policies on industrial competitiveness are often offset by “policy packages.” Though competitiveness issues have been much debated in the context of carbon taxation policies, the study finds no evidence that industries’ competitiveness is affected by carbon taxes. In fact, the analysissuggests that exports of most energy-intensive industries increase when a carbon tax is imposed by the exporting countries, or by both importing and exporting countries. This finding gives credence to the initial assumption that recycling the taxes back to the energy-intensive industries by means of subsidies and exemptions may be overcompensating for the disadvantage to those industries.

A closer examination of specific energy-intensive industries in OECDcountries shows that only in the case of the cement industry has the imposition of a carbon tax by the exporting country adversely affected trade. In the case of the paper industry, trade actually increases as a result of a carbon tax. Results also suggest that trade is not affected when both countries impose the tax.

Some evidence supports relocation (leakage) of carbon-intensive industries to developing countries. A gradual increase in the import-export ratio of energy intensive industries in developed countries—and a gradual decline in the ratio in some developing regions—indicates that energy-intensive production is gradually shifting to developing countries as a result of many different factors, including climate change measures in developed countries. Although the trend is converging, the import-export ratio is still greater than 1 in developing countries and less than1 for developed countries, suggesting that developing countries continue to be net importers of energy-intensive products. Lack of strong evidence of relocation suggests that while the overarching objective of climate policies is to reduce emissions,these policies have been designed to shield the competitive sectors of industrialized economies. More stringent climate policies in industrialized countries coal-driven economies like China and India , investments are critical in clean coal technology and renewable energy such as solar and wind power generation. Detailed analysis undertaken for the study in chapter 3 suggests that varied levels of tariffs and NTBs are a huge impediment to the transfer of these technologies to developing countries. For example, energy-efficient lighting in India is subject to a tariff of 30 percent and a nontariff barrier equivalent of 106 percent."