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Berkeley ENVECON 131 - Background on WTO and other international agreements

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Background on WTO and other international agreementsWhere we are going (in this set of lectures)?Brief history of international governmental environmental activityBruntland ReportPrinciples of Environmental AgreementsIEA Principles, continuedTools for achieving environmental goals“Trade sensitive” tools to achieve environmental goalsDispute settlement and enforcement in IEAsDescription of WTOFunctions of WTOStructure of WTOWTO Structure continuedDispute SettlementDispute Settlement, continuedGoals of WTOWTO Goals, continuedCore Principle: Non-discriminationWhat are “like products”?Basis for environmental challenge to free trade under WTOApplying Article XXParagraph bParagraph gPolicies must not be arbitraryProhibition of quotasTariffs VS Non-Tariff Barriers (NTBs)Agreement on Technical Barriers to Trade (TBT)The Agreement on Sanitary and Phytosanitary Standards (SPS)SPS continuedImportance of transparency and due processDo governments need a “commitment device” against domestic consumers?WT0 goal: transparency of trade restrictionsTheoretical explanation for WTO “preference” for tariffs over NTBsA sketch of the modelWhat constitutes a “rational” reason for a trade restriction?Explanation of the three graphsLeft panel shows Home’s supply and demand. Right panel graphs domestic demand – domestic supply = domestic imports. pa is Home’s autarchic price (where supply = demand, so imports = 0) and p’ is an arbitrary lower price. By construction, distance a the left and right panels are equal (since right panel shows demand – supply). The two triangles labeled A have the same area, since their base and their height are equal. Recall from earlier lectures that area A in left panel = gains from trade, when country trades at price p’. Conclude from this graph that we can measure the gains from trade by using the “surplus” corresponding to the import demand curve.The “large” country’s incentive to use a tariff to lower price of importsIllustration of the optimal tariff for a large countryWelfare effect of a tariff t. The size of the tariff is t=a+b. Incidence on importing country (Home) is a/t; incidence on exporting country (ROW) is b/t. (Remember what “incidence” means”.) Home’s Gains from Trade falls by areas 1+3 and its tariff revenue = 1+2, so Home’s net gain is area 2 - area 3 > 0 (area 1 cancels out). ROW’s loss in welfare is areas 2 + 4. The aggregate world loss in welfare is area 3 + area 4Ingredients of the modelIllustrate Basics of Game theory: Non-cooperative Nash Equilibrium (NE)Relate example in last slide to tradeWhy does it make sense to use a “non-cooperative” (= self-enforcing) equilibrium?Supergames and trigger strategiesDiscounting (again)Why do we need discounting? (review)Example of trigger strategy applied to previous example of one-shot gameBasic points of self-enforcing cooperationWhat does this have to do with the WTO?Back to the story…The story, continuedThe punch-lineIn other words….1Background on WTO and other international agreementsNovember 1, 20072Where we are going (in this set of lectures)?•Provide a brief history of international institutions for environmental management•Summarize principles on which they are based.•Then summarize functions, structure, goals and provisions of the World Trade Organization (WTO)•Explain WTO preference for tariffs rather than non-tariff barriers.3Brief history of international governmental environmental activity•Stockholm Conference: 1972 UN Conference on Human Environment -- one of early global environmental meetings.•Established UN Environmental Program (UNEP)•UNEP launched several International Environmental Agreements (IEAs) and has administrative responsibility for 7 of them.4Bruntland Report•1985 UN established World Commission on Environment and Development.•Issued report “Our Common Future” (Bruntland Report) in 1987.•Emphasized importance of sustainable development: “meet the needs of the present without compromising the ability of future generations to meet their own needs”.•Basis for 1992 Rio UN Conference on Environment and Development.5Principles of Environmental Agreements•Prevention cheaper than remediation.•Precautionary Principle: lack of conclusive scientific evidence does not justify inaction.•Subsidiarity: action should be taken at “most local” level practical (local solutions for local problems).•Common but differentiated responsibilities: burdens should be different for the rich and the poor.6IEA Principles, continued•Openness and transparency.•Polluter pays principle (PPP). A specific assignment of property rights.Show that in a closed economy, it makes no difference whether production or consumption is taxed. (See online lecture notes “incidence of a tax).Many examples where polluters are subsidized to prevent pollution (Recent EC ag policy), contrary to PPP.The Coase Theorem shows that in some circumstances the outcome (amount of pollution) does not depend on assignment of property rights; see online lecture notes on Coase Theorem. (Mention controversy over doctrine of “regulatory takings” – a topic later this semester.)7Tools for achieving environmental goals•Standards on state of environment (e.g., concentrations of pollutants in air, water)•Emissions standards (Important difference between stocks and flows.)•Product standards (e.g. no lead in paint)•Markets for permits.•Taxes (remember that in some cases these “equivalent” to cap-and-trade).8“Trade sensitive” tools to achieve environmental goals•Standards on Process and production methods (PPMs) regulate the manner in which products are made (e.g. require use of recycled inputs) in order to regulate environmental impact. The CA bill to prohibit import of electricity produced using carbon-intensive methods is a PPM standard.•Performance standards require certain actions, such as environmental impact assessment or labor standards.9Dispute settlement and enforcement in IEAs•Rely primarily on consensus.•Some IEAs, such as Montreal Protocol (goal to reduce ozone-destroying substances) use limited trade restrictions against offending nation, but even this agreement relies more on carrot than stick. A major limitation Kyoto is its lack of enforcement mechanism.•Contrast to dispute settlement in WTO – the next topic.•Failure to abide by trade agreement causes direct harm to other nations. Failure to


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Berkeley ENVECON 131 - Background on WTO and other international agreements

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