Abstract
The paper empirically investigates whether developing countries may use trade policy as an alternative to environmental policies in order to control carbon emission. It measures the effectiveness of the existing ‘Most Favored Nations’ (MFN) tariff rates applicable to lower-middle income countries and for countries sorted on the basis of manufacturing-to-trade shares, in lowering carbon emission. By applying a fixed effects panel regression method over 16 years, it is found that the MFN tariff rate helps these economies to reduce carbon emission substantially. In addition, the role of foreign direct investment as purveyor of clean products is explored at the cross-country level. The results, at least on the ground of better environmental standards, indicate the need to re-evaluate the choice for protection under the domain of multilateral trade negotiations.
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Notes
A recent study on trade openness and national environment protection at the Yale Center for Environmental Law and Policy (2013) suggests that decision-making needs to move beyond the broad definitions of “trade openness” and “environmental performance”. Instead, it should recognize the importance of a more refined interplay between international trade flows, liberalization policies, good governance, and disaggregated environmental factors. The last factor includes environmental health, ecosystem degradation, and climate change.
Source: First article of the General Agreements on Tariff and Trade, see Basic Principles of Trade under WTO. We explain further on this in Sect. 1.1.
As an extension we also work with other countries on the basis of respective trade share in the world market.
Previously, it has been shown that high subsidies as a form of protection practiced in OECD countries can be explained by the adverse effects of ‘uniform tariffs’ across agriculture and industry in the developed countries (Marjit et al. 2007). The current study offers a greater degree of generality in terms of tariffs applicable to agriculture and manufacturing. In this structure (see Panagariya and Rodrik 1991) uniform tariff refers to a simplified and harmonized rate of tariff applied to imports from agriculture and industry, as opposed to differential rates. Uniform tariffs are usually advocated in the context of a small, open economy. It is suggested that for many developing countries, this constitutes a reasonable assumption. Panagariya and Rodrik (1991) note that the assumption allows one to abstract from positive optimal tariffs resulting purely from market power in the world markets.
PPM stands for Parts per Million.
The source is: The Role of Renewable Energy in Mitigating Climate Change in the ESCWA Region, U.N., New York (2012).
Regarding biases in relatively shorter panels for fixed effects model, see Buddelmeyer et al. (2008). In our case, \(N\) equals 5 and \(T\) equals 16.
This refers to internal combustion in diesel engines.
Acharyya (2009) examines the impact of FDI on carbon emission for India. Also see Feridun (2006). Acharyya (2009) finds that the long run growth impact of FDI inflow on carbon emissions is quite large. It is then expected that, \(\gamma _1 <0\). Other papers (viz. Smarzynska and Wei 2001; Hassabella 2013) find that the relationship is either non-negative or zero.
It should be pointed out that agricultural products (we do not include livestock) also emit other harmful greenhouse gases, such as, ammonia, nitrous oxide, etc. We look into these effects in a separate study.
We have referred to CGE models in Sect. 1.1, where changes in the stock of various factors of production, change in prices including trade reforms and inter-sectoral links provide more intricate theoretical results to be considered for empirical research in future.
We thank an anonymous reviewer for this suggestion.
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Acknowledgments
The authors are grateful for very constructive comments by two anonymous reviewers of this journal. The paper has also benefited from presentations at the Delhi School of Economics and IIFT, New Delhi. The usual disclaimer applies.
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Kar, S., Majumdar, D. MFN Tariff Rates and Carbon Emission: Evidence from Lower-Middle-Income Countries. Environ Resource Econ 64, 493–510 (2016). https://doi.org/10.1007/s10640-015-9918-9
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DOI: https://doi.org/10.1007/s10640-015-9918-9