The potential impact of environmental goods trade liberalization on trade and emissions

Abstract

We combine econometric estimation with quantitative modeling to generate projections on the trade, GDP, and emissions effects of a potential trade liberalization agreement involving energy-related environmental goods (EREGs) and environmentally preferable products (EPPs). Trade liberalization can contribute to reduced emissions in two ways in our projections: (i) a reduction of import prices of goods promoting energy efficiency; and (ii) a reduction in the costs of intermediate and capital goods used in the production of electricity from renewable-energy sources. Four scenarios are evaluated, combining reductions in tariffs and non-tariff measures (NTMs) for EREGs and EPPs. Using simulations with the WTO Global Trade Model we find (i) an increase in exports of EREGs and EPPs both at the global level and in most regions; (ii) a modest increase in GDP in all regions because of falling tariffs, NTMs, and increased energy efficiency; and (iii) a modest reduction in global emissions of about 0.6%. The dominant channel is energy efficiency, whereas the costs of EREGs as intermediates in renewable energy production play a minor role, with or without end-use control.