Topic 2: The impact of environmental provisions on trade and CO2 emission levels in the agricultural sector
Objective
Topic 2 centers on the question whether trade induced by PTAs adversely affects the environment and if so, whether EPs in PTAs mitigate possible negative trade effects on CO2 emissions. It builds on the methodology and results from Topic 1 but focuses on environmental provisions in PTAs and trade effects in the agricultural industry. Applying the same counterfactual scenarios as in Topic 1, we intend to feed the trade effects identified for agricultural trade into a quantitative multi-country, multi-industry general equilibrium international trade model (KITE) that allows to identify CO2 emissions embodied in the production of goods.
Methodology
The empirical analysis will be based on structural gravity model estimation and quantitative general equilibrium model simulations applied to similar research questions in Topic 1. The KITE model is able to account for embedded emissions in internationally traded products. The analysis makes use of an extended version of the KITE model. It is similar to Shapiro's model (2021) and takes into account production-induced CO2 emissions which are caused by fossil fuel combustion. Fossil fuels can be viewed as internationally traded goods and as production inputs. The CO2 emissions caused in a country are measured via the consumption of these fuels.
In the quantitative international trade model applied, pollution levels and trade flows are inter-linked, and this linkage is used in the proposed analysis to evaluate the environmental impact of changes in trade flows induced by EPs in PTAs. We particularly test for differences in the CO2 effects of PTAs with more stringent versus less stringent EPs.
To identify CO2 emission effects of EPs in PTAs for production and trade in the agricultural sector, we intend to apply the same counterfactual scenarios as outlined in Topic 1:
- Scenario 1 – “Current EPs”: provides insights into the effects of EPs in PTAs introduced so far.
- Scenario 2 – “USMCA - most comprehensive EPs”: offers insights into the potential trade and CO2 effects that would ensue if the most comprehensive existing PTA in terms of environmental provisions were universally adopted across all other existing PTAs. This refers to the 2020 United States-Mexico-Canada PTA (USMCA).
- Scenario 3 – “ECAM - deepest PTA”: provides insights insight into potential trade and CO2 effects if all countries were to implement all provisions from the deepest PTA. Specifically, this refers to the 2012 EU-Central America Association Agreement between the EU and Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua and Panama.
Data
We mostly build on the dataset constructed for the analysis presented in Topic 1. Thus, data on international and domestic trade stems from the new International Trade and Production Database (ITPD-E) and from GTAP11 (Global Trade Analysis Project, Version 11). Information on EPs in PTAs is obtained from TREND in combination with the collection of trade agreements as well as their depth from the Design of Trade Agreement (DESTA) database. The distinction between different types of EPs will follow the same reasoning as in Topic 1: EPs related to climate change, trade liberalising EPs, trade restricting EPs and legally enforceable EPs.
The classification of green and dirty products according to their emission intensities follows Ederington et al. (2022).
Data on CO2 embodied in production will measure direct and indirect CO2 emissions. Direct emissions correspond to the Intergovernmental Panel on Climate Change (IPCC) "Tier 1" method of calculating CO2 emissions that are caused if an industry burns fossil fuels to produce output. GTAP11 data covers these direct CO2 emissions. By inverting the input-output matrix, total emissions can be calculated to reflect how many US-Dollars of coal, oil and natural gas are required in the production of 1 US-Dollar of output in each industry from each country, including the fossil fuels embodied in intermediate goods. The difference between total and direct emissions provides an estimate for indirect emissions included in final products.
