Trade Competitiveness:
Implications
of Kyoto Protocol
Udit Mathur
umathur@devalt.org
While the fate of the Kyoto Protocol is still uncertain, European
Union has decided to operationalize the EU Emissions Trading Scheme (EU
ETS) from January 2005. It will be by far the world’s biggest programme
of pollution control, potentially worth billions of Euros. This
programme is an important precursor to the implementation of the Kyoto
Protocol and can provide valuable insights into the pros and cons of
both the developed and the developing countries for doing so,
particularly on the trade front. This article examines the estimated
impacts of EU-ETS on the competitiveness of traded goods and the likely
impact on the Indian economy of these changes. This can provide an
analogous situation to the trade scenario when Kyoto Protocol will be in
force.
T he
impact of EU-ETS on the competitiveness of a given sector will depend
upon the policy decisions relating to the price and allocation of
emission allowances, and also upon the sector’s potential exposure. The
potential exposure of a sector, in turn, depends upon its energy
intensity, and the extent to which international competition may
constrain its ability to pass on the increased cost to the consumers.
The power
sector, being one of the main emitters of GHGs, will be forced either to
switch over to cleaner fuels or purchase emission credits to make up for
any shortfall in meeting their reduction targets. This is expected to
raise the industrial electricity prices by anything between 10-40%.
Thus, all sectors consuming electricity will be indirectly exposed to
the impact of EU-ETS. Secondly, sectors in which demand is very
price-sensitive will also face a loss in competitiveness vis-à-vis
products from places where emission caps do not have to be dealt with.
Chart 1 below classifies various sectors according to the two primary
dimensions of competitive exposure - potential value at stake as
indicated through energy intensity and the ability to pass cost changes
through prices.
The chart
shows that while several of the sectors (such as paper, pharmaceuticals
etc.) that have low energy intensity but also low ability to pass on
increased costs may have a marginal impact on their trade
competitiveness, there are several others that have high energy
intensities and high demand elasticity that may face the risk of loss of
competitiveness in international markets.
What this
means for India?
The
European Union is India’s largest trading partner, accounting for almost
22% of India’s exports and 18% of total Indian imports in the year 2003.
During the year 2003, EU’s major items of exports to India consisted of
engineering goods, gems and jewellery, chemical and allied products. All
these items constitute a share of over 77 per cent in EU’s total exports
to India. Other items, which have a considerable share is metal and
metal products (6.77%) and transport equipment (3.55%).
|
Chart 1: Classification of
industrial sectors according to exposure |
| |
High |
Pass-through gains? |
At risks? |
|
Value at stake
based on potential increase in energy costs |
Ø |
Electricity |
|
|
Ø |
Ferrous metals* |
|
Ø |
Cement* |
|
Ø |
Oil refining |
|
Ø |
Glass |
|
Ø |
Aluminium* |
|
Ø |
Chemicals |
|
| |
| |
| |
|
|
| |
Unaffected
|
|
| |
Marginal
impact |
|
Ø |
Paper
(newsprint)* |
|
Ø |
Pharmaceuticals |
|
Ø |
Food
& drink |
|
Ø |
Retail |
|
Ø |
Transport |
|
| |
| |
| |
| |
Low |
|
| |
|
|
High
|
Low
|
|
| Source : Carbon Trust |
|
Ability to pass on
costs
to customers |
|
During the
same period (2003), EU imported from India textiles and clothing
(30.03%), gems and jewellery (10.95%), leather and leather goods
(10.42%), engineering goods (11.88%), chemical and allied products
(9.20%) and agriculture and allied products (6.66%). It is interesting
to note that the items in the high risk category, such as engineering
goods and chemicals, form almost a quarter of India’s exports to the EU,
while those having a marginal impact on their food and drink
(agriculture and allied products) form another 6.66%. While the group of
developing countries like India has been fighting battles at the WTO for
reduction of subsidies in the EU, the EU-ETS (and implementation of
Kyoto Protocol) may help to partially remove this deadlock and negate
the impact of these subsidies, thus enabling developing countries to
access European markets with goods they have comparative advantages in.
A second
source of improvement in trade balances of developing countries is
markets in other countries of the world where goods from developing
countries compete with those from the European ones. In the present
context, when the world prices of metals and alloys like Aluminium and
steel are continually rising, such goods from India have become much
more competitive, partly due to the increase in the production cost (due
to abatement efforts) of European manufacturers.
Trade and
Sustainable Development
Conventional economic theory suggests that trade facilitates development
and economic efficiency as gains from trade is realized by the
countries. The development will, however, be sustainable only if the
sectors benefiting from trade have significant backward and forward
linkages with other sectors of the economy and initiatives are taken to
improve the efficiency of these sectors to make them even more
competitive in the international markets. Sectors such as Aluminium and
steel have significant impacts on the country’s economy and growth and
capital investment in these have considerable impacts on the overall
growth of the country. Table 1 shows the multipliers (i.e. % GDP growth
with 1% growth in a particular sector) for the relevant sectors:
|
Sectors |
Multipliers on the Indian GDP |
|
Aluminum |
0.78 |
|
Steel |
0.8 |
|
Agriculture |
1.5 |
Conclusion
The impact of EU-ETS on Indian
economy can serve as an example of how the ratification and
implementation of Kyoto Protocol can benefit the developing countries
through the commodities trade route, besides trade in emission
reductions through mechanisms such as CDM. This will of course depend on
how the countries structure their emission reduction and the marginal
abatement costs of emitters in developed countries. The signing of the
Kyoto Protocol in CoP10 would clarify a lot of things and help bring
growth and sustainable development in non-Annex I countries.
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