CAP-AND-TRADE SCHEMES WILL HASTEN THE ADOPTION OF CLEAN TECHNOLOGIES

Cap-and-trade mechanisms for putting a price on greenhouse gas emissions – such as the European Union’s carbon trading scheme – are more likely to speed up the adoption of clean technologies across all industries than to penalise individual industries. That is one of the findings of research by Stratford Douglas and Shuichiro Nishioka.

Their study, presented at the Royal Economic Society’s 2010 annual conference, studies the intensity of carbon emissions of production and trade in 48 industrial sectors across 32 countries, includingBrazil, China, India, the European Union, Japan and the United States.

In line with expectations, they find that more developed countries have the lowest carbon emissions intensity, with Scandinavian countries leading the way and China close to the bottom. But more surprisingly, they find that emissions intensity depends more on how a country produces – its production techniques – than on whata country produces. So although developing countries use dirtier technology, they do not specialise in dirtier industries.

This is important because it suggests that a country need not worry that cap-and-trade will cause an entire industry (for example, steel) to move to another country.Instead, it may be able to adapt by making its production technology more efficient overall or by changing from coal-fired power plants to natural gas or nuclear. Government policies should encourage the adoption of these cleaner technologies.

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Most nations of the world would like to reach an agreement that effectively limits greenhouse gas emissions.If they are able to reach an agreement, it is most likely that it will set a price on greenhouse gas emissions, either through an emissions tax or a cap-and-trade mechanism.

Putting a price on greenhouse gas emissions will affect the nature and distribution of trade and industry worldwide, but we don’t know exactly how.To find out, we need to know which countries and industries create the most emissions per unit value of their production, which ones import and export products embodying the most emissions, and why.

The answers matter because they will largely determine the distribution of financial gains and losses from any international agreement to limit greenhouse gases.Because participation in an international agreement is voluntary, that distribution of gains and losses is also likely to determine the agreement’s structure and prospects for success.

Our research uses empirical tools of international trade economics to find out who produces and trades emissions, and why some countries produce and trade more emissions than others.We develop data on emissions from 48 industrial sectors in 32 countries and estimate the carbon emissions intensity of production and trade in each sector and nation.

Our data set includes Brazil, China, India, the European Union, Japan and the United States.Since conflict on climate agreements is often ‘North versus South’, our data set includes both developing and developed countries.

We find strong evidence that the emissions intensity of a country’s production and exports depends more on how it produces (its production techniques) than on what it produces.Thus, for example, although we find that developing countries use dirtier technology, we find that they do not specialise in dirtier industries.

This matters for several reasons.First, it suggests that a country need not worry that cap-and-trade will cause an entire industry (for example, steel) to move to another country.Instead, it may be able to adapt by making its production technology more efficient overall, or by changing from coal-fired power plants to natural gas or nuclear.

Thus, emissions pricing is more likely to speed up the adoption of clean technologies through every industry, rather than penalise particular industries.Also, it suggests that countries wanting to reduce their carbon emissions should implement policies that speed up technological change and diffusion.

We find evidence of an inverse relationship between level of development and the emissions intensity of production.Scandinavian and Western European countries (along with Brazil and Indonesia) use the least emissions-intensive technology, while East and South European countries, Australia, and China have the world’s highest emissions intensity.(Poland and Australia use technology that is three times as emissions-intensive as that of Norway or the UK, while Chinese technology is only twice as emissions intensive.)

The United States is the world’s largest emissions importer, but the industries from which it imports are less emissions-intensive than its domestic industries.Developed countries in East Asia, North America and Oceania trade preferentially with emissions-intensive countries, while those in Northern and Western Europe do not.

ENDS

‘International Differences in Emissions Intensity and Emissions Content of Global Trade’ by Stratford Douglas and Shuichiro Nishioka(Department of Economics, West Virginia University)

Contact:

Stratford Douglas,

Tel: +1(304) 293-7863

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Shuichiro Nishioka

Tel: +1(304) 293-7875

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