Liberalisation of Trade in Environmental Goods: The Devil in the Details

-Mahesh Sugathan

IISD Mini-symposium on Trade and Investment

Crowne Plaza, Copenhagen, 14 December 2009.

• The Context: The Doha Negotiations on Environmental Goods and Services.

• Identifying and isolating climate-friendly goods to calculate trade flows. (The ‘dual-use’ problem) and other challenges.

• ICTSD’s Mapping Exercise and Trade Analysis in the Renewable Energy and Buildings Sectors.

• What do the trade flows in key RE technologies and select number of Buildings Technologies look like?

• To what extent are trade barriers-particularly tariffs an obstacle to wider dissemination of RE technologies? How do they compare with other policy-related barriers?

• How can incentives to RE be designed so as not to create an unlevel playing field for equipment and service providers?

• How can the UNFCCC help create an enabling environment for the uptake of RE and EE products in developing countries?

Overview

The WTO Window: the DDA Negotiations on EGS

• Doha Ministerial Declaration: Para 31(iii) calls for “ the reduction or as appropriate elimination of tariff and non-tariff barriers to environmental goods and services.”

• No definition exists of what is an environmental good. This has made an agreement difficult to reach.

• A number of goods from a set of 153 products proposed by a few WTO Members for further liberalisation include products relevant to addressing climate change.

• These fall in two categories: (1) RENEWABLE ENERGY PLANT and (2 ) HEAT AND ENERGY MANAGEMENT

• Out of this set of 153,US-EU informal 2007 proposal to liberalise 43 climate friendly goods identified by the World Bank and climate friendly services on an accelerated basis. Zero tariffs on these goods by 2013.

6-digit HS code entry (841360) :

Pumps for liquids, whether or not

fitted with a measuring device; other

rotary positive displacement pumps

Environmental GoodEx-Out:

Pumps for Sewage and Wastewater treatment

Non-environmental good

Other pumps

Non-environmental good

Other pumps

PipesAs an Environmental Good:Used in Solar Hot Water Systems

As a Non-Environmental Good:Used in Oil and Gas Transportation

The Problem of ‘Dual –Use’

Case 2:

Case 1:

Climate-relevant Environmental Goods-What has been going on in the WTO?

• Qatar : includes natural gas fired generation systems and advanced gas-generation systems.

• Saudi Arabia: includes natural gas as well as a range of petroleum-based derivatives and other materials relevant to carbon-capture and storage.

• Canada initially included hydrogen and bio-diesel; New Zealand :methanol and bio-diesel-later dropped.

• Brazil has informally proposed bio-fuels and bio-fuel technologies.

• Glass Insulation (Japan and New Zealand). Fluorescent Lamps (Japan, Canada, New Zealand and the United States).

• Some Members have proposed a ‘review mechanism’ to identify and extend liberalisation benefits to new technologies that would evolve.

• Members still deadlocked with regard to modalities of negotiations; most developing countries yet to identify products of interest.

Other Key Challenges

• Scope of the basket-what to include? Agricultural products, those based on PPMs?

• How to capture evolving technologies and new products?

• Identifying a ‘critical mass’ of exportables for developing countries.

• Technology transfer and special and differential treatment.

ICTSD’s Work on Climate-Friendly Environmental Goods

Technology mapping studies in 4 key mitigation sectors identified by the IPCC

Energy Buildings Transport Industry

Specification of technologies for mitigation and identification of corresponding goods

Definition of HS codes at 6 digit and beyond; options for new classification

Analysis of trade flows, tariff and non-tariff barriers, DCA, GHG mitigation potential

Research and analytical insight into UNFCCC negotiations on (potential for trade to enhance) transfer of technology

• Findings from ICTSD Mapping Studies and Trade Analysis in the Renewable Energy Supply

and Buildings Sectors.

• ICTSD Analytical Exercise conducted with support of

UNEP

Methodology• RE Technologies Mapped by ECN / Buildings by TERI and peer-

reviewed by IPCC experts.• RE classified into 78 product categories ( covering solar, wind,

hydro, geothermal, ocean and biomass). Buildings classified into 35 product catgeories covering building envelope (insulation materials); heating, ventilation, air conditioning and refrigeration (HVAC-R);lighting; renewable-energy use in buildings and stoves

• Some were removed as it was extremely difficult to identify end-use.• Caveat: Not all trade figures are representative of RE supply

products. Because the 6 digit codes often include a number of un-related products these get ‘captured’ in statistics. Further some products like ball bearings are used for instance in wind turbines as well as other purposes. Also plastic foam important for insulation but have other uses. Yet both included as they are important for RE and Builidngs.

Source: COMTRADE using WITS

Exporter (all)

Exports (US million)

Exporter (developing countries*)

Exports (US million)

All countries 240238 Developing countries* 67535 Germany 34587 China 28378 China 28378 Korea, Rep. 6245 Japan 23511 Taiwan, China 5825 United States 22072 Mexico 4606 France 12265 Singapore 4282 Italy 12197 Thailand 3411 United Kingdom 7264 Brazil 3252 Netherlands 7040 Malaysia 2949 Belgium 6283 India 2321 Korea, Rep. 6245 Turkey 1416 Taiwan, China 5825 Philippines 971 Sweden 5240 South Africa 718 Denmark 5220 Viet Nam 590 Mexico 4606 Argentina 443 Spain 4567 Saudi Arabia 264 Singapore 4282 Tunisia 195 Austria 4192 Colombia 173 Switzerland 3693 Pakistan 160 Thailand 3411 El Salvador 145 Canada 3325 Kazakhstan 136 EU-27 116054 Intra-EU-27 70211 EU-27 (excl intra-EU) 45843

Exports of RES products and components that may be used in the RES sector, 2007 ( USD millions)

Imports of RES products and components that may be used in the RES sector, 2007 ( USD millions)

Source: COMTRADE using WITS

Importer (all)

Imports (US million)

Importer (developing countries*)

Imports (US million)

All countries 248080 Developing countries* 95720 United States 30430 China 21179 Germany 22203 Hong Kong, China 8843 China 21179 Korea, Rep. 8667 Spain 8923 Mexico 7016 France 8879 Taiwan, China 5575 Hong Kong, China 8843 Singapore 4541 Korea, Rep. 8667 Saudi Arabia 3553 Japan 8513 Thailand 3438 Italy 8225 India 3434 United Kingdom 7754 Malaysia 2689 Mexico 7016 Brazil 2519 Netherlands 6805 United Arab Emirates 2482 Canada 6638 Viet Nam 2280 Taiwan, China 5575 Turkey 2155 Belgium 5207 South Africa 1365 Singapore 4541 Qatar 1220 Russian Federation 4384 Kuwait 1206 Saudi Arabia 3553 Argentina 1102 Sweden 3542 Nigeria 1056 Thailand 3438 Kazakhstan 965 EU-27 92249 Intra-EU-27 61560 EU-27 (excl intra-EU) 30689

Tariffs on Renewable Energy Technologies, Equipment and Components

0.00 10.00 20.00 30.00 40.00

Australia

Canada

European Union

Japan

Norway

Switzerland

United States

Argentina

Brazil

Chile

China

Hong Kong, China

India

Korea, Rep.

Malaysia

Mexico

Pakistan

Peru

Philippines

Singapore

South Africa

Taiwan, China

Thailand

Turkey

Russian Federation

BND

MFN

Source: WTO Databases using WITS

Some interesting findings on Trade Flows in RE equipment

•Emerging economies important players, though their share of trade is less than half that of developed countries. •Components for solar and wind appear more tradeable than for geothermal, hydro and ocean •Top exporters of RE equipment may not always be top deployers of RE. China’s exports of solar panels to Germany and Spain were driven by favourable policy environment for solar energy generation.•In other cases correlation is clearer as in wind-turbines for Denmark and wind energy generation.•Thus deployment of RE usually depends on favorable ‘enabling’ market environment.

•Regional and preferential trading agreements may affect trade profile for example- Central American and Caribbean countries are top importers of bio-ethanol from Brazil which they export to US as dehydrated ethanol.

Tariffs have been found to be less significant as an explanatory variable for increased exports or imports as compared to the share of renewables in a country’s grid and subsidies.

Summary of Trade analysis and Trends in Major Buildings Product Categories

• Thermal Envelope (Insulation) Major producers European companies. Many

use subsidaries and joint ventures rather than direct exports to supply foreign markets.

Most exports and imports between developed countries. China the exception (4th largest exporter and importer).

Developed countries mostly apply single-digit tariffs. Higher for some developing countries and Russian Fed.

Summary of Trade analysis and Trends in Major Buildings Product Categories

• HVAC Developing countries account for significant portion of

HVAC exports -esp air-conditioners but developed countries predominate in central heating boilers and heat pumps. Top importers predominantly developed countries.

Major exporters tend to comply with standards in export markets and also develop their own MEPs.

Tariffs also mainly in single digits except for a few primarily developing countries.

Summary of Trade analysis and Trends in Major Buildings Product Categories

• Lighting Share of EE lighting has been increasing while that of

incandescent and tungsten lamps falling. Same is true of developing country imports.

China is the world largest exporter of CFL, with a share of 56 per cent of world exports in 2007 (or 75% if intra-EU trade is excluded).China’s share in world exports of incandescent lamps and tungsten halogen filament lamps is only around 15 per cent.

• Lighting (Contd) With regard to tariffs, the European Communities have bound its import

duties at 2.7 per cent ad valorem and the United States at 2.4 per cent. The simple average of the applied tariff is 8.7 per cent and the trade-

weighted (using 2007 import values) average rate is 4.9 per cent. Among the 30 largest importers, Argentina, Brazil, Colombia, India,

Malaysia, Mexico, the Philippines, the Russian Federation, Thailand and South Africa have tariffs (applied rates) of 10 per cent or more.

Some of these countries, however, have their own production of CFL and other highly-efficient lamps and apply other measures than tariffs to discourage the use of inefficient lamps.

For example, applied rates in Argentina and Brazil are 18 per cent ad valorem (the common external tariff for MERCOSUR), but Brazil is subsidizing CFL and Argentina is banning the use of inefficient incandescent lamps.

Summary of Trade analysis and Trends in Major Buildings Product Categories

• Solar energy products• Intra EU trade is highest, Germany, Japan and China are

significant exporters.• In specific products such as solar water heaters which is

most tradeable.China is emerging as the largest exporter. • Regional markets also important, e.g. Mexico exports to

the US, Turkey to Europe, China to Japan. • Tariffs low. Most countries have zero applied tariffs or PV

cells and modules all (except Mexico and South Africa) have bound rates.

• Solar water heaters-many large importing developing countries have higher rates of 20 percent or more.

Summary of Trade Analysis and Trends in Major Buildings Product Categories

• Household stoves

Summary of Trade analysis and Trends in Major Buildings Product Categories

• 2 types identified-solar stoves and wood pellet stoves• World trade was around $ 5 billion in 2007 (only part of this corresponds to

the types of stoves being analysed in this paper). • Developing countries accounted for more than half the value of world

exports excluding intra-EU trade. • Almost half of 2007 world imports of stoves (in value terms, excluding intra-

EU trade) were imported into the United States. • Imports into developing countries and countries in transition in Asia were

worth around $700 million, accounting for only around 18 per cent of world trade.

• The top importers were Venezuela, Saudi Arabia and Kazakhstan, but imports were spread over a large range of developing countries with over 60 developing countries registering imports of over $ 1 million each. This suggests that stoves are largely produced locally, with some imports taking place (perhaps to acquire special stoves or filling local shortages).

• Tariffs are high in many developing countries reaching 50 percent in the case of Morocco.

Summary of Main Market Drivers in Renewable Energy Generation and RE Product Categories

Renewable Energy Generation and RE Products

Renewable Energy Generation and RE Products

•Laws requiring utilities to purchase all electricity generated from renewable sources.•Laws requiring renewables to be a certain percentage of all power generation.•Subsidies for investments in component manufacturing.•Exemptions or reductions in taxes for component manufacturers and preferential tariffs (feed-in tariffs) for electricity from renewables.

•Laws requiring utilities to purchase all electricity generated from renewable sources.•Laws requiring renewables to be a certain percentage of all power generation.•Subsidies for investments in component manufacturing.•Exemptions or reductions in taxes for component manufacturers and preferential tariffs (feed-in tariffs) for electricity from renewables.

Summary of Main Market Drivers in Buildings Product Categories

Building Envelope

(Insulation)

Building Envelope

(Insulation)HVACHVAC Lighting Lighting

Solar StovesSolar

Stoves

RE Use in BuildingsRE Use in Buildings

•EE requirements in building codes.•Incentives esp for building renovations.•High energy prices•Energy Neutral Houses target

•EE requirements in building codes.•Incentives esp for building renovations.•High energy prices•Energy Neutral Houses target

• High energy prices•Regulatory requirements (MEPs) and labelling.•EE requirements in building codes and financial and fiscal incentives for new products. Eg: Heat-pumps and boilers.

• High energy prices•Regulatory requirements (MEPs) and labelling.•EE requirements in building codes and financial and fiscal incentives for new products. Eg: Heat-pumps and boilers.

•Govt regulations and Incentives. Eg: Voluntary market transformation programmes•International initiatives such as efficient lighting initiative (ELI) launched by IFC and GEF

•Govt regulations and Incentives. Eg: Voluntary market transformation programmes•International initiatives such as efficient lighting initiative (ELI) launched by IFC and GEF

•Regulation•Fiscal incentives and subsidies

•Regulation•Fiscal incentives and subsidies

•Financial Incentives and subsidies•Tax-credits

•Financial Incentives and subsidies•Tax-credits

Environment, Market Creation and Fair-trade. Complementary or Contradictory?

Competitive Equipment and

Service Providers

Competitive Equipment and

Service Providers

Markets for RE Goods and Services.

Markets for RE Goods and Services.

Markets for Building Efficiency

Goods and Services.

Markets for Building Efficiency

Goods and Services.

Regulations and Incentives for Renewable

Energy Generation.

Regulations and Incentives for Renewable

Energy Generation.

Regulations and Incentives for Buildings

Energy Efficiency.

Regulations and Incentives for Buildings

Energy Efficiency.

Enables Enables

Supply

Regulations and Incentives Favouring

Domestic RE Equipment Manufacturers or Service

Providers

Regulations and Incentives Favouring

Domestic RE Equipment Manufacturers or Service

Providers

Regulations and Incentives Favouring

Domestic EE Buildings Equipment

Manufacturers or Service Providers

Regulations and Incentives Favouring

Domestic EE Buildings Equipment

Manufacturers or Service Providers

PossiblyDistorting Trade in

PossiblyDistorting Trade in

If de-facto or de-jure link

If de-facto or de-jure link

If de-facto or de-jure

link

If de-facto or de-jure

link

PossiblyDistorting Trade in

PossiblyDistorting Trade in

Adverse effects

Adverse effects

Non-tariff measures: Much work to be done

• Diverse range of non-tariff measures ranging from standards and labelling, customs procedures and immigration formalities may affect delivery of climate-friendly goods and services. So far tariffs have gotten most attention in the WTO.

• At present draft UNFCCC negotiating text includes proposals for countries to “…participate, to the extent possible, in international programmes that support the development and use of common performance standards, testing, verification and certification programmes.”

• The language in the UNFCCC text has echoes of Article 2.4 in the TBT Agreement, which calls on members to base their national standards on international ones, with some limited exceptions.

Conclusions, Way Forward and Fuel for Thought

• Trade liberalisation done in isolation may not lead to a significant uptake in climate-friendly technologies. Needs to be part of a package.

• RE Market creation and energy efficiency may need supportive measures outside WTO. The latter in turn may enhance trade further.

• Some incentives may have a trade-distorting impact if they benefit domestic equipment manufacturers. There may be ‘good’ and ‘bad’ green subsidies.

• Implications for climate change negotiations esp discussions on technology and financing?

• What role can UNFCCC particularly play? What policies should it support? Proposal for international fund to support ‘feed-in’ tariffs for renewable energy. Funds to leverage private-investment.

• Sunset clause for financial support? When? Grid-parity?

ICTSD’s work on Trade in Climate-friendly Goods and Services

• Part of broader work under ICTSD’s Global Platform on Trade and Climate Change

• For papers please visit http://ictsd.net/climate-change/accelerating-trade-and-diffusion-of-climate-friendly-goods-and-services/ or

• Email me at: smahesh@ictsd.ch

Thank You