Do Tougher Environmental Policies Impact Competitiveness?

           Energy Markets

A new report from the Organisation for Economic Co-operation and Development (OECD) has found that tougher environmental policies do not impact a country’s overall competitiveness. The report, titled “Do Environmental Policies Affect Global Value Chains?”, concludes that, while countries with stringent environmental policies may see a 3% reduction in exports for energy intensive industries, low-polluting industries saw a 3% increase in exports.

The report compared exports between 1995 and 2008 from Denmark, Germany, and Switzerland to the BRIICS countries (Brazil, Russia, India, Indonesia, China, and South Africa) and found that high-polluting industries lost 3% of their export to BRIICS, whereas low-polluting industries saw a 3% increase, and so there was no export loss for a country as a whole.

Significantly, this means that emerging economies such as China could tighten their environmental policies and not lose their overall share of the export market. The report found that other factors such as tariffs, workforce, and market conditions were likely to have a greater impact on exports than environmental policy.

Industries in the UK have been arguing that tighter environmental policies can lead manufacturers to relocate to countries with softer regulation, often referred to as “carbon leakage”. Under this scenario, although emissions are reduced in the original country, they have not actually been cut, just relocated. The OECD report states that relocation is not directly observable, and so it focuses on the exports of goods as an indicator of the effect on these higher-polluting industries. It agrees that energy-intensive industries such as chemicals and steelmaking “would suffer a small disadvantage from further tightening of regulations, but this would be compensated by growth in exports from less polluting activities”.

Data presented by the OECD shows that the global market for environmental goods is growing as tighter legislation leads to greater innovation and a move towards green goods. In 2013, growth in the world trade of environmental goods was approximately 20% higher than for the average of world merchandise (Sauvage, 2014).

Around the world, environmental policy is becoming stronger overall. The OECD indicator shows that over the period from 1990 to 2012, environmental policy became more stringent in all OECD and BRIICS countries with Finland, the Netherlands, and Denmark having the tightest policies in place. The indicator is compiled from information on carbon taxes, trading schemes, feed-in tariffs, emission limits, and research and development.

It should be noted that although the effect of environmental policy on exports is small for the thirteen year period to 2008, the cost of environmental policies has increased since that time. For example, the carbon price floor, which maintains a minimum level for the price of carbon, was introduced in the UK in 2013. The UK government has initiated a compensation scheme to help offset the increasing costs of environmental policies for energy-intensive industries that are at greatest risk of carbon leakage. The OECD report acknowledges that the issue of outsourcing of domestic production by highly polluting companies needs further investigation. An update of the effect of policies on exports would also be welcome, given that environmental policies are only expected to tighten as a direct result of the COP21 agreement to maintain global warming at 2°C or less. The full OECD report can be found here.

Nikki Wilson

Nikki joined Alfa Energy in September 2015 as a Carbon Management Consultant where she advises clients on legislation, compliance, and the implementation of carbon management schemes. She is a Practitioner member of IEMA, has a postgraduate diploma in Environmental Decision Making, and has over 15 years’ experience in energy consultancy.