Competitiveness and the pollution haven effect

subsidies, technology and innovation, and international financial flows (OECD, 2017[88]).

The OECD also applies its indicator tracking expertise through the OECD Action Plan on the SDGs, endorsed by the OECD Council in December 2016. It uses a unique methodology for measuring the distance that OECD countries would need to travel in order to meet the SDG targets, set with reference to the level of ambition embodied in the wording of 2030 Agenda for Sustainable Development wherever possible. Where no clear target level is indicated in the 2030 Agenda, the plan relies on international agreements and expert opinion, and on benchmarking against the top performing 10% OECD countries. The indicators were gradually expanded in coverage between 2016 and 2019, when preliminary evidence on how these indicators have changed over time was also presented (OECD, 2019[89]). They are closely aligned with those in the UN Global Indicator List drawn from OECD sources and the UN’s SDG Global Database.

As shown by this overview of work carried out in the last twelve years, the context for developing trade and environmental indicators is particularly dynamic and supportive, generating a growing set of indicators from which trade and environment indicators can be selected and refined. The current set of indicators has already proved useful to advance empirical analysis on several of the issues covered in this report. These issues often intersect at the crossroads between several broad areas of study: environmental policy tools, trade policy instruments and international competitiveness, where qualitative approaches need to be bolstered by quantitative analysis and modelling. There is considerable potential to exploit existing indicators for further analytical work. In addition, some trade and environment themes could benefit from the development of new and more precise indicators to help with policy design and evaluation (see Chapter 6).

COMPETITIVENESS AND THE POLLUTION HAVEN EFFECT

The JWPTE’s interest in the effect of environmental measures on competitiveness dates back to its inception. It completed empirical research as early as 1993 on the pollution haven effect, i.e., whether increasing the costs of polluting through environmental policies incentivises industries to relocate to countries with laxer environmental regulations or to source inputs from these countries. The last fifteen years have seen this issue pushed up the trade and environment agenda by more ambitious unilateral environmental policies and goals. In particular climate change mitigation policies, adopted or envisaged, have repeatedly been the focus for concern that unilateral measures to reduce GHG emissions could penalise domestic firms, especially those that are energyintensive and exposed to competition from countries with lower levels of regulation.

A 2011 study for the JWPTE examined the topic of Trade-Related Measures Based on Processes and Production Methods in the Context of Climate-Change Mitigation (Moïsé and Steenblik, 2011[7]). The motivation for the study was that policies targeting adverse environmental impacts created in foreign lands as a result of producing goods for export were gaining prominence in the climate change debate. The ostensive purpose of PPMs is to promote better environmental outcomes and ensure that domestic climate change policies and incentives do not inadvertently undermine other objectives. Even though the general objectives of the reviewed regulations and private schemes are comparable (e.g. the promotion of renewable-energy sources, or provision of information on the carbon footprint of goods), the approaches, level of detail, choices of instruments and targeted environmental characteristics vary considerably from country to country and from scheme to scheme. Some regulations rely more or less extensively on market mechanisms, attaching price premiums to certain types of products. Others introduce command-and-control provisions limiting the use of certain PPMs, variously defined in different countries. Still others target certain types of fuels eligible for public support, with varying eligibility criteria. Private schemes mainly use environmental sustainability claims to secure consumer preference. The choice of different instruments presumably entails different trade impacts. PPM-based trade-related instruments include:

l direct regulation such as import or export restrictions on products not conforming to certain PPM requirements;

l public authorities’ market-based interventions or economic instruments, such as fiscal measures, environmental charges, taxes or subsidies, border-tax adjustments and countervailing duties;

l attempts to enable informed consumer choice that could in turn influence production patterns, notably

ELIS.

The survey found provisions focussing on nonproduct-related PPMs in a number of climate change regulations, although by no means in the majority of them. Most of these PPM-based requirements related to the sustainability characteristics of PPMs, which generally rely on life-cycle assessments but are defined and calculated in quite a different manner in various countries. Fewer of these requirements focus on GHG emissions characteristics. Preferences in government procurement based on PPM specifications were rare in regulations and were generally applied in the context of specific calls for tender. Mandatory carbon-footprint labels were still experimental at the time of the survey and to this day they remain voluntary schemes that are not used in mandatory ELIS (see Chapter 5).

The 2013 Environment Working Paper Addressing Competitiveness and Carbon Leakage Impacts Arising from Multiple Carbon Markets (Lanzi et al., 2013[90]) was produced as a follow up to the OECD Environmental Outlook to 2050 (OECD, 2012[24]). The climate change chapter of the Outlook had presented an analysis of global climate mitigation scenarios and their economic costs. It showed that lack of international co-operation on climate change could result in additional costs for reducing GHG emissions. With many of the major economies of the world contemplating unilateral or plurilateral action to restrict their carbon emissions, asymmetries in the stringency of climate policies could result in carbon leakages, with domestic emission reductions partially or wholly counterbalanced by increased emissions elsewhere in the world, undermining the effectiveness of climate policies.

This follow-up modelling assessment of the competitiveness and carbon leakage impacts arising from multiple carbon markets examined macroeconomic and sectoral competitiveness, as well as carbon leakage impacts associated with a range of stylised mitigation policy scenarios, with an emphasis on energy-related economic activities. The scenarios chosen represented carbon markets with different linkages, coverage (i.e. number of countries participating, types of emissions and sectors) and carbon pricing policies. The paper also investigated policies to address competitiveness and carbon leakage issues, including Border Carbon Adjustments (BCAs) as well as direct and indirect (offset-based) linking of carbon markets (Box 6). The results showed that in presence of multiple carbon markets, competitiveness can fall in countries that adopt climate policies, leading to carbon leakage. Competitiveness loss and leakage can be reduced when more countries and emission sources are covered, and when climate mitigation policy is harmonised across countries. It was also found that responses such as BCAs and linking carbon markets can address some, but not all, of these leakage issues. One of the findings of the report is that BCAs are more effective at addressing carbon leakage concerns than linking carbon markets, and that the latter are more effective at protecting the welfare of countries that have not implemented climate mitigation measures. Direct and indirect linking may be preferable to BCAs because it ensures that all least-cost emission reduction measures are adopted globally, suggesting that linking may be a better option from a global welfare perspective.

The JWPTE requested a literature review of BCAs and alternatives to BCAs to investigate what has been concluded about their effectiveness, from both a trade and an environmental perspective. The resulting Trade and Environment Paper Border Carbon Adjustment and International Trade: A Literature Review analysed BCAs proposed in the academic literature or in draft climate legislation, including levying a border tax or requiring importers to surrender carbon permits (Condon and Ignaciuk, 2013[91]). The review found little empirical evidence that BCAs have effects on leakage and competitiveness, mainly due to the fact that no BCAs had actually been implemented.

As noted in the first section of this chapter, the JWPTE has recently developed three indicators that relate to carbon emissions embodied in trade (Garsous, 2019[13]):

l the amount of carbon emissions from fossil fuel combustion embodied in imports and exports, which is useful to determine whether the relocation of the domestic production is caused by cross-country differences in environmental policy stringency;

l the hypothetical amount of carbon emissions from fossil fuel combustion embodied in imports if imported goods were produced with a carbon intensity (i.e. emissions factors) equal to that of the importing country at a given, which gives a sense of whether such a relocation occurs in more carbonintensive countries;

l the estimated growth in imported emissions of a country derived from: (i) changes in the volume of imports; (ii) changes in the composition of imports;