WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

image credit: WTO

By Elio Nilsson and Andreas Knapp

On 2 October 2024, we were pleased to welcome Ralph Ossa, Chief Economist and Director of the Economic Research and Statistics Division at the World Trade Organization (WTO) in Geneva. The lecture was held as part of a series of lectures that we jointly organise with the Oesterreichische Nationalbank (OeNB) on topics related to the global economy. 

OeNB Governor Robert Holzmann delivered a welcoming address that provided an initial framework for the current issues surrounding trade and sustainability. Robert Stehrer, Scientific Director of wiiw, then introduced the evening’s speaker along with his academic credentials. Over the course of his career, Ossa has covered a range of topics, including trade wars, economic integration agreements, trade negotiations, and the relationship between trade and environmental solutions.

Introducing a carbon tax: maximising impact through trade

Ossa began his presentation by summarising its main conclusion, namely, that encouraging countries to specialise based on their environmental comparative advantage could be an effective strategy for reducing global CO₂ emissions.

Contrary to the common belief that increased international trade inevitably leads to higher CO₂ emissions, the research paper underpinning the lecture offers an alternative perspective. In ’Greening Ricardo: Environmental Comparative – Advantage and the Environmental Gains from Trade’, Ossa and his coauthors demonstrate how trade can serve as a highly effective tool for reducing global emissions in absolute terms.

The study finds that the environmental benefits of trade could account for over one third of the emission reductions achieved by a carbon tax, highlighting trade’s role as a powerful force multiplier for environmental policy. As an example, the study models the impact of a carbon tax set at USD 100 per tonne of CO₂.

According to the paper, the positive impact of trade is further strengthened by the robustness and resilience of its effects. These effects are robust enough to persist across a wide range of carbon pricing regimes and resilient enough to maintain a stable ratio of global production to global trade volumes even after the introduction of a carbon tax. Consequently, even highly ambitious climate policies will not reduce global trade volumes but will instead alter the composition of this trade.

From ‘brown’ to ‘green’ countries

In this model of environmental comparative advantage, trade facilitates a shift in production from ‘brown’ countries (i.e. those with high carbon emissions) to ‘green’ countries (i.e. those with lower-carbon industries). This transition exerts pressure on countries that have not yet shifted to low-carbon production, thereby incentivising them to adapt. Much like the Ricardian theory of comparative advantage, according to which nations specialise in those goods that they can produce most efficiently, this model suggests that countries will increasingly specialise in low-carbon industries to remain competitive.

According to the paper, in the agricultural sector, the introduction of a carbon tax could lead to a reallocation of around 8% of global production to different countries, resulting in an estimated 23% reduction in emissions. For example, production could shift from emission-intensive countries, such as Brazil, to more sustainable ones, such as the United States, China or India. Notably, the reduction in emissions would be disproportionately large compared to the shift in trade, meaning that even modest changes in production locations could lead to significant reductions in emissions.

During an intensive Q&A session following Ossa’s presentation, one particularly thought-provoking question was discussed in detail: What would be the economic impact on less developed economies that have not yet had an opportunity to adopt green production methods?

Mr Ossa concluded his lecture by emphasising the importance of avoiding trade tensions in the implementation of climate policy, particularly as such tensions can be counterproductive – including from an environmental standpoint – due to the aforementioned increase in emission reductions facilitated by trade. The 75 different carbon taxes and emissions trading schemes (ETSs) currently in place around the world, along with border adjustment mechanisms to prevent carbon leakage, present challenges for smaller economies and businesses.

Given these circumstances, Ossa stated his belief that it is crucial to establish a shared understanding of carbon pricing. He also noted that the WTO offers a clear policy framework for industrial policy, which could help mitigate frictions between wealthy and developing nations in both current and future climate policies.