Diversifying Exports in the Context of Climate Change Overcoming the new physical and regulatory constraints Jodie Keane Research Officer, Trade Program Panel: Designing New Development Strategies for LDCs in 2011-2020 EADI/DSA Conference “Rethinking Development in an Age of Scarcity and Uncertainty” University of York, 22 nd September 2011
Climate Change and Changing Trade Patterns Climate change will necessitate changes in: what is produced, what is traded, and how it is traded. In addition to the physical effects of climate change, changing rules and regulations are likely to shape trade in a future carbon constrained world. This could include global and national efforts to price carbon and other greenhouse gases (GHGs) at the point of production, or consumption which may have related impacts on global trade flows. How will the physical and regulatory impacts of climate change affect export diversification strategies in the future? Will climate change hinder export-oriented growth strategies? Where are the new opportunities? How do existing strategies need to adapt?
Effects on Export Diversification Strategies Diversifying exports is a necessary part of the process of development and structural change. It is particularly important for small countries, given the constraints of their domestic market. It is always a difficult process which may become more so because of the physical impacts of climate change. New regulatory measures to reduce global greenhouse gas (GHG) emissions may impose new constraints. But there may also be new market opportunities, which are less sensitive to overall levels of income. Strategies in the past were underpinned by shifting patterns of production, open markets and trade preferences. Recent contributions to the literature offer insights into how we expect production structures to evolve in the absence climate change (Hesse, 2009). But tends to ignore more macro- and policy-related constraints, as well as opportunities, e.g. trade preferences and FDI. Although some ingredients from successful strategies in the past may be relevant, late industrialisers now face a different trade environment.
How do Existing Strategies Need to Adapt? Broadly defined, strategies will need to adapt in terms of: increasing the resilience of existing productive structures; moving into new products and services related to global climate change mitigation efforts; and making full use of rights provided by the international trade regime. Adapting in this way means that existing export diversification strategies may be strengthened Requires a comprehensive growth and development strategy to be in place.
The New Physical Constraints How to increase resilience of existing productive structures Increased uncertainty : Increases in temperature and reductions in rainfall. Increased frequency of shocks : Flooding, droughts, extreme weather events. Because adverse shocks are likely to become more frequent mechanisms to help commodity exporters cope will need updating and enhancing: – ex ante rather than ex poste – new indicators of vulnerability Other insurance schemes, e.g. Global Index Insurance Facility (GIIF), payments triggered on rainfall, variation of temperature. Need to climate-change proof existing investments. Increase the resilience of existing productive structures. Could be linked to existing trade facilitation instruments, such as Aid for Trade.
Vulnerability of the Agricultural Sector to the Physical Effects of Climate Change Figure 1b. Estimated impact on agricultural Figure 1a. Estimated impact on agricultural Exports (% increase/decrease) production (% increase/decrease) 15 10 10 5 5 0 0 -5 -5 -10 -10 -15 -15 -20 -25 -20 -30 -25 Malawi Kenya Ethiopia Mali Mozambique -35 -40 Without carbon fertilization With carbon fertilization Without carbon fertilization With carbon fertilization Note: Based on the estimates of Cline (2007); Source: WDI; UNComtrade for nearest year
Agricultural Sector and Carbon Markets Figure 2: Total CO2e emissions by region (2000) 14,000 Total GHG emissions (MTCO 2 e) 12,000 10,000 8,000 6,000 4,000 2,000 0 E.Asia & Europe & L.America M.East & N.America S.Asia SSA Pacific C.Asia & Carib. N.Africa Excluding LUCF Including LUCF Source: Derived from data obtained from World Bank (2009b) and WRI (2009).
Institutionalising Funding for Carbon Source: Vatn and Angelsen (2009) in Angelsen et al. (2009)
The New Regulatory Constraints: How to overcome these and create new opportunities The WTO does not have specific provisions to deal with climate change. There is serious uncertainty regarding the post-2012 UNFCCC regime. Unless a comprehensive agreement is reached, countries may resort to various unilateral trade measures. Both the revised EU Emissions Trading Scheme (ETS) Directive and the recent US Clean Energy and Security Act will require importers to participate in emissions trading schemes. This is even if importing countries are under no obligation to reduce their emissions under the Kyoto protocol . If importers don’t purchase these allowances, border tax adjustments (BTAs) will be levied. Likely to violate WTO non-discrimination rules because they discriminate between products based on where and how they are produced. Remedy: WTOs dispute settlement mechanism? Or levying a carbon exports tax - result in revenue being retained rather than being transferred.
Accessing New Markets In the absence of an ambitious new international climate agreement, the EU’s Emissions Trading Scheme (ETS) will allow certified emissions reductions credits (CERs) obtained from new Clean Development Mechanism (CDM) projects only from LDCs as of 2013. The EU’s ETS and carbon market has been the major purchaser of CERs under the CDM established by the Kyoto Protocol, to date. CERs from deforestation and forest degradation (REDD) essentially represents a new market for existing products, to be included from 2020. CERs can be obtained through improving the management of forestry reserves and enhancing carbon sequestration processes. There may be a need for trade related assistance in order to access new carbon market opportunities: technical and financial barriers.
Reducing Distortions in Others Firms within emissions trading schemes being allocated permits for free Inclusion of the aviation industry within the EU’s ETS likely to be highly contentious, particularly if permits are allocated for free to the European aviation industry. Could violate the WTO agreement on subsidies and countervailing measures because it is a type of subsidy. Subsidies to support renewable energy Concerns have been raised over the level of subsidy provided to producers of biofuels in the EU and US. Standards Biofuels sustainability schemes developed by the US and EU introduce social and environmental criteria. Shifting production to the most carbon efficient producers will not happen if LDCs cannot demonstrate their lower carbon costs. The UNFCCC has already developed guidelines on how to measure the carbon content of land which suggests that further links could be made between the trade and climate change regimes.
Concluding remarks New factors are likely to shape comparative advantages in a carbon constrained world. These opportunities include soil carbon markets, certified low carbon products, and other climate-change related services. LDCs may need assistance to tap into new trade opportunities related to global efforts to mitigate climate change. – Assist diversification efforts; – reduce vulnerability to physical effects of climate change Should make full use of their rights at the WTO and UNFCCC. It is crucial that the post-Kyoto climate change regime is designed so as to minimize potential areas of conflict with the multilateral rules of trade. Policy makers need to address the regulatory gaps and potential clashes between the trade and climate change regimes Develop the potential synergies between the regimes. Ensure the post-2012 climate change regime facilitates rather than hinders the process of export diversification and structural change.
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