Warming aid, chilling trade?

This paper discusses the mechanisms available for the enforcement of the Kyoto Protocol, and specifically the potential role of trade sanctions as a means of enforcement.

Because they are entangled in regulation, European businesses may be less efficient and competitive than their international counterparts. The author speculates that European countries might employ the Kyoto Protocol as a barrier to trade with countries who have not ratified the agreement, such as the USA and Australia. There is now an evolving conflict between multilateral environmental agreements, such as Kyoto, and the rules-based trading system of the World Trade Organization.

Environmental organisations wish to limit trade on the basis of how goods are produced, and have been joined in coalition by businesses who face increasingly stringent regulations, and thus become less and less competitive as a result. The paper argues the contrary: If the Kyoto Protocol is used to restrict trade, it will lead to poor decisions about the use of natural resources, higher consumer prices, lower economic growth, less expenditure on high value environmental protection and lower welfare for Europeans and others.

The paper suggests three tests that policies intended to limit trade for environmental reasons must pass:

• they must show that the environmental degradation brought about by free trade is truly brought about by trade rather than some other factor, and of greater consequence than the losses of human well-being that would ensure from restricted trade
• they must show that production-related damage is a legitimate feature of the importing nations’ loss of well-being
• they must show that a trade restriction is the most cost effective way of bringing about the change in the product or process which gives rise to the externality.

In concluding, the author emphasises that trade measures are rarely, if ever, a desirable, efficient, or effective means of achieving environmental goals. Arguably the Kyoto Protocol is itself not an efficient or effective means of dealing with the problem of climate change. In light of these facts, it would be unwise to permit the use of measures to restrict trade in goods on the basis that they are produced in countries that have not ratified the Kyoto Protocol.