12.2.4.4 Macro-economy and trade

Macro-economic policies such as exchange rate policies, fiscal policies, government budget deficits, or trade policies may have profound impacts on the environment, even though they are designed for other purposes. This link has been extensively studied in the past decades, notably in the context of the evaluation of structural adjustment programmes in developing countries. A key finding from this literature is that the relationship between macro-economic policies and the environment are often complex and country-specific, and depend on whether or not other market or institutional imperfections persist (Munasinghe and Cruz, 1995; Gueorguieva and Bolt, 2003). No case studies discuss the impact of structural adjustment on GHG emissions, but some discuss the relationship between structural adjustment and deforestation and thus, by extension, GHG emissions from land-use change. Again, the effects depend on the mix of policies adopted as part of the structural adjustment programmes, and of country-specific characteristics. For example, Kaimovitz et al. (1999) report that the structural adjustment programmes implemented in Bolivia in 1985 strongly increased profitability of soybean production, and led to massive deforestation in soybean producing areas. Symmetrically, Benhin and Barbier (2004) find that a structural adjustment programmes implemented in Ghana in 1983 led to a reduction of deforestation linked to extension of cocoa culture because, among others, of increased producer price for cocoa, higher availability of inputs, and other measures aimed at rehabilitating existing cocoa farms. Another channel through which structural adjustment programmes could impact on deforestation is through the timber market. Pandey and Wheeler (2001) analyse cross-country data on the markets for wood products in countries where World Bank supported adjustment programmes were implemented. They find that these programmes greatly affect imports, exports, consumption and production in many forest product sectors, but that the impacts on deforestation tend to cancel out. If domestic deforestation does not increase, however, imports of wood products do, suggesting increased pressures on forest in other countries. Finally, as also noted above, Pandey and Wheeler (2001) find that currency devaluation strongly increases the exploitation of forest resources.

Among macro-economic policies, trade policies have attracted particular attention in recent years, due to the fact that international trade has increased dramatically over the past decades. There is a general consensus that, in the long-run, openness to trade is beneficial for economic growth. However, the pace of openness, and how to cope with social consequences of trade policies are subject to much controversy (Winters et al., 2004). Trade has multiple implications for GHG emissions. First, increased demand for transportation of goods and people generates emissions. For example, freight transport now represents more than a third of the total energy use in the transportation sector (see Section 5.2.1). Secondly, trade allows countries to partially ‘de-link’ consumption from emissions, since some goods and services are produced abroad, with opposite implications for the importing and exporting countries. For example, Welsch (2001) shows that foreign demand for German goods accounts for nearly a third of the observed structural changes in the composition of output and decrease in emissions intensity of West Germany over the period 1985-1990. At the other end, Machado et al. (2001) report that inflows and outflows of carbon embodied in the international trade of non-energy goods in Brazil accounted for some 10% and 14%, respectively, of the total carbon emissions from energy use of the Brazilian economy in 1995. And the game is often not zero-sum, when production technologies are less carbon-efficient in the exporting country than in the importing one. For example, Shui and Harriss (2006) estimate that USA-China trade represents between 7% and 14% of China’s total CO₂ emissions, and that USA-China trade increases world emissions by an average of 100 MtCO₂-eq per year over the period 1997-2003 because of higher emissions per kWh and less efficient manufacturing technologies in China. Finally, policies favourable to trade have been accused of favouring the relocation of companies to ‘pollution heavens’ where environmental constraint would be lower. Empirical analysis, however, do not confirm the ‘race to the bottom’ hypothesis (Wheeler, 2001). See also Section 11.7.