PhD defence: Decarbonization, International Trade and Carbon Leakage
Title of thesis
Decarbonization, International Trade and Carbon Leakage: The European Case
A substantial economic literature has investigated the relationship between greenhouse gases (GHG) and trade. Research indicates that unilateral climate change mitigation can lead to carbon leakages due to e.g. reduced competitiveness on domestic and international markets. The literature also shows contrasting results of the impacts of trade liberalization on GHG emissions. Scholars have also studied the combination of decarbonization policy and trade policy, showing that border carbon adjustments (BCA) can potentially contribute to reducing carbon leakages but can result in undesirable consequences, such as risks of retaliations. Results from the literature studying the relationship between GHG emissions and international trade depend critically on sectoral and regional considerations, suggesting the empirical nature of this relationship.
This thesis focuses on the European case, since the European Union (EU) has an ambitious climate agenda (so do UK and Switzerland) and aims at an “open and sustainable” trade policy, thus lending itself well to study the relationship between trade and GHG.
In paper 1, the rich sectoral details from a large bottom-up-built system dynamics model are exploited to formulate 31 European decarbonization pathways towards 2050 and a tailor-made computable general equilibrium (CGE) model is used to evaluate their external effects. The results indicate a positive association between increasing reductions in GHG emissions and worsening external trade balance. Increasingly ambitious supply-side decarbonization measures, while keeping demand-side ambitions constant, lead to larger emission reductions and bigger decreases in trade balance. Ambitious demand-side decarbonization measures can avoid more losses of net exports when coupled with increasingly ambitious supply-side measures.
In paper 2, the focus is on potential supply-side climate change mitigation practices following dietary transitions in Europe towards a more healthy and sustainable diet in 2050. The results show that intensification improves Europe’s trade balance, but does not complement emission reductions in agriculture due to dietary changes. The opposite happens under extensification. Two different trade policy regimes are also investigated in the paper. Implementing Europe’s potential regional trade agreements leads to rising emissions in Europe, whereas a BCA (as designed in the study) can improve Europe’s trade balance and partially shift mitigation burdens to the rest of the world.
In paper 3, a newly developed recursive dynamic CGE model is used to evaluate the implications of two alternative EU BCA designs and three different sets of reactions from non-EU trade partners, under the EU Green Deal’s increased climate ambitions towards 2030. The simulation results show that unilateral EU decarbonization can lead to carbon leakages, especially in energy-intensive and trade-exposed (EITE) sectors. A non-discriminatory EU BCA on EITE imports does not reduce significantly carbon leakages nor it addresses EITE output losses, whereas a more aggressive BCA design does. Retaliatory BCAs by EU’s trade partners offset part of the gains due the EU aggressive BCA, and increased carbon prices in non-EU regions in anticipation of an EU BCA lead to EITE losses in the EU similar to the EU Green Deal scenario. The paper also shows that BCAs as designed in this study do not affect the relative differences in EITE output effects across EU members.
In summary, this thesis improves the understanding of the trade-offs between climate change mitigation efforts and competitiveness that Europe may face, both from aggregate and sector-specific perspectives. The need for policymakers to carefully balance demand- and supply-side efforts, to avoid undesired transboundary effects, both economy-wide and in the agrifood sectors, is highlighted. This thesis also evaluates the effects of BCAs in limiting leakages and net export losses, in the presence of potential retaliations, contributing to the literature in this area in an updated policy framework compared to earlier studies. BCAs are shown to potentially reduce net export losses and leakages, both for agrifood and EITE sectors. However, retaliations can limit the effectiveness of BCAs. Finally, by integrating a top-down CGE model with a system dynamics model, and developing a new recursive dynamic CGE model for trade policy and climate change mitigation policy analysis, this thesis contributes to the CGE modeling literature.
Professor Wusheng Yu, Department of Food and Resource Economics (IFRO), University of Copenhagen
Associate Professor Jesper Sølver Schou, Department of Food and Resource Economics, University of Copenhagen
Professor Luca Salvatici, Roma Tre University, Italy
Expert in Financial Analyses ,Thomas Bue Bjørner, Danish Competition and Consumer Authority
Master of Ceremony
Professor Carsten Daugbjerg, Department of Food and Resource Economics, University of Copenhagen
HYBRID: Von Langen, Rolighedsvej 23, 1958 Frederiksberg C. and Zoom
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