In sum, while there is evidence that trade has resulted in the transfer of CO2 emissions to low-income countries according to comparative advantage (see below), there is little evidence that environmental and trade policies have validated the PHH.

# **4.2 Climate Change Mitigation, Leakages and Border Tax Adjustments**

<u>Comparative-advantage-based shifts in CO2 emissions. Throughout the Kyoto Protocol</u> (KP) negotiation period (1990-2008), CO2 emission transfers from developing to developed countries through trade were 1.2Gt, an estimate that exceeded the target KP1 emission reductions (Peters et al. 2011) indicating that, as feared by environmentalists, virtual trade in carbon has adverse unintended consequences for climate policy. Other estimates also conclude that the pattern of trade between developed and developing countries has been shifting with a rising import-export ratio of energy-intensive products in high-income OECD countries (especially the US) and the opposite in low and middle-income countries (especially China).<sup>16</sup> The upshot is that, contrary to what is reported in the production-based UNFCC statistics, Annex B countries have continued to contribute to the growth in emissions.

These estimates suggest three remarks. First, the territorial-based caps under the KP have thus far allowed Annex B countries to meet their target because of their positive BEET, so that any cap on emissions should be on consumption and not on production (as under the Montreal Protocol). Second, developing countries whose exports are carbon-intensive can be expected to continue opposing joining a successor to KP. Third, the importance of carbon-intensive exports by developing countries to developed countries suggests that countries like China might be willing to undertake more substantial climate-mitigation commitments in exchange for firmer trade disciplines that would guarantee them access to carbon-intensive markets in the OECD.<sup>17</sup>

- <u>Policy induced leakage estimates. The above estimates can be considered passive or</u> comparative-advantage based (as opposed to policy-induced and subject to leakage). Turning to policy –induced leakage estimates, Kee et al. (2010) use a gravity model to estimate the effects on exports of OECD countries of carbon taxes and energyefficiency standards, both captured by dummy variables using 3-digit ISIC data for manufacturing exports over the period 1988-2005. They find no evidence of a loss of competitiveness from a carbon tax for energy-intensive industries when exporting countries impose a carbon tax, but a significant reduction in bilateral trade the year that efficiency standards are applied, whether the efficiency standard is applied by the exporting or by the importing country. They conclude that this evidence suggests that subsidies and exemptions to the energy-intensive industries must have compensated

> 16See World Bank (2008, figures 2.2,2.3,2.4)

> 17Using a Leontief-type multi-region input-output model, similar to the method used by Peters et al. (2011) in their calculations, Atkinson et al. (2010), compute first-order effects from applying a 50$/ton tax on the carbon content of imports across all countries. They estimate that this tax would amount to an export tax rate of around 10% for China’s exports across destinations. In comparison, EU exports would face an average export tax rate of 1.2% and the US of 3.1%. This just confirms that taxing CO2 is a tax on developing countries. It also explains why, some countries, like China are already starting to tax their exports of CO2 intensive goods since it is better to collect the tax oneself than to handover the revenue to foreigners.

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