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DECRG Trade Seminar: What are the Real Costs to Developing Countries of Climate Change Mitigation?

Sponsor: Development Economics and Chief Economist (DEC)

Speaker: Aaditya Mattoo, World Bank

Co-Athours:

  • Arvind Subramanian, The Peterson Institute for International Economics
  • Dominique van der Mensbrugghe, World Bank
  • Jianwu He, World Bank

Abstract: We estimate the impact of any likely international agreement on climate change (IACC) on low and middle income countries’ (LMICs) manufacturing exports and output.  We decompose the impact into three components: the rise in the carbon price due to emission cuts per se; the further rise in this price in LMICs  due to emissions tradability; and the changes due to international transfers (private and public).  Even a modest agreement yields striking results: contraction of India’s and China’s manufacturing exports by 12-15 per cent and manufacturing output by 6-7 percent.  If these structural changes have significant growth costs, we may need a balanced approach to reconciling the carbon externality and growth externality  - with implications for emissions reductions, emissions tradability and financial transfers.

If policy choices by LMICs lead to international differences in carbon prices, then there will be pressure for trade action. Recent US draft legislation could lead to border taxes based on the carbon content in domestic production or in imports. The latter, if applied to all merchandise imports, would reduce LMIC exports by 10 percent. In contrast, the former action would address competitiveness concerns in industrial countries without unduly hurting LMICs’ exports. LMICs’ interests would be served by international rules – ideally codified in an IACC - that prohibit the extreme trade action while allowing the milder variant as a safety valve.

 
For Information: Yasmin D Souza



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