Background and Importance of the Climate Smart Goods

The CSG forms part of the broader group named 'environmental goods and services (EGS). The Environmental goods and services industry consists of activities which produce goods and services to measure, prevent, limit, minimize or correct environmental damage to water, air and soil, as well as problems related to waste, noise and eco systems. This includes cleaner technologies, products and services which reduce environmental risk and minimize pollution and resource use.

An Environmental good can be understood as equipment, material or technology used to address a particular environmental problem or as a product that is itself 'environmentally preferable' to other similar products because of its relatively benign impact on environment. Environmental services are services provided by eco systems or human activities to address environmental problems. EGS can be also classified as Environmental Goods comprising of pollution management products, cleaner technologies and products, resource management products and environmentally preferable products. EGS also has Environmental services comprising of sewage services, refuse services, sanitation and similar services and others. The EGS were first discussed as part of the liberalizing agenda in the DOHA round of the multilateral trading round in 2001. The countries had wanted the tariff and non-tariff barriers to go down for trade of such EGS as this may lead to adoption of cleaner and cost effective technologies by firms and country at large and possibly mitigate climate change and improve energy efficiency. Liberalization has followed three routes namely the list approach, project/integrated approach and request for offer approach. Environmental Goods were always part of trade agenda but were subsumed within industrial or agricultural negotiations.

CSGs constitute low carbon technologies such as solar photovoltaic systems (Industry Codes 850720, 853710, 854140), wind power generation (industry codes 848340 and 848360), clean coal technologies (840510) and energy-efficient lighting (853931)6, among others. Trade and investment in CSGs and climate-smart services have recently received much attention as a triple win scenario where trade, climate and environment, and development all benefit (UNESCAP, 2011,a,b). Climate Smart Goods and technologies allows for production processes that have no or minimum Green House Gas(GHG) emissions and negative impact on environment and which are at least economically efficient and acceptable. Climate Smart Technologies consists of technology that improve efficiency and conservation of conventional fossil energy and enable the commercial and efficient use of renewable energy sources.

Promoting CSG trade has become important because of the need of such goods by countries in the wake of recent financial crisis in Europe and after events in Japan recently. Countries want to concentrate on low energy consumption and save themselves from relying entirely on nuclear energy which may be prone and be affected by natural disasters like what happened in Japan. Our Gravity analysis has shown that there is potential for trade in CSG by Ecuador and trading nations alike.

Countries need to design sustainable and climate smart growth that entails sharply reduced GHG emissions to a level of 450 ppm( or may be lower) and that limits the global temperature rise to not more than 2 degrees Celsius by the end of the century. The study below lists such policies and is not confined to trade policies alone. Trade policies related to CSG though are the main focus of this study. The entire set of policies which can reduce GHG emissions and limit climate change can be structured into regulatory measures( including regulations, standards and labeling), economic incentives( including taxes, tradable permits and subsidies conforming to WTO laws and provisions), trade and investment policies and financial, energy and enterprise development policies, among others. Appendix Table XII lists the various efforts made by international community to tackle the Climate Change. These include the Rio Meet in 1992,Kyoto Protocol of 1997, Copenhagen accord in 2009, the COP 16 meeting, the Bali Action Plan of 2007 and the very ambitious, the Durban meeting of 2011. These meetings are besides the DOHA agenda on liberalizing trade in environmental goods and services. This study believes that economic growth, higher trade and environment sustainability, all three are possible at the same time and there is limited trade off between them. The debate on trade, growth and environment sustainability have arisen as trade and environment sustainability are not always positively related. Grossman and Krueger(1994) argues that trade affects environment through scale effects, technique effect and composition effect. With the rapid increase of trade and investment in recent decades as a result of sustained liberalization, the ecological footprint - including GHG emissions - has also risen sharply. This is called the "scale effect". When renewable energy replaces traditional fossil fuels, trade and investment are no longer associated with Green House Gas(GHG) emissions. Instead trade and investment become principal components of efforts to mitigate climate change. The other two identified effects are the composition and technique effects. The composition effect refers to the way trade liberalization changes countries' comparative advantages towards emission-intensive or emission-friendly industries. For example, a changing comparative advantage as a result of trade liberalization may lead carbon-intensive industries to relocate from countries with strict regulations to countries (often developing countries) with less stringent regulations, which are known as "pollution havens" (and, thus, provide a large comparative advantage), leading to "carbon leakage". The net global composition effect of trade opening on GHG emissions is therefore not necessarily positive. The technique effect refers to the manner in which technological improvements may be adopted to increase production efficiency and reduce emission intensity as a result of trade and trade liberalization. This may happen in two ways: (a) trade liberalization increases the availability of climate-smart technology; and (b) trade income increases incomes and wealth - people with more wealth tend to be more concerned about other aspects of well-being, including a clean environment (Grossmann and Krueger, 1994).

The value of World CSG exports were worth 410 billion US $ in 2008. Ecuador's export share in World exports of CSG has remained less than 0.02 % in 2002 through 2010. The Leading Exporters Japan, US, Countries in the EU, China and Hong Kong's export share is more than 3 % in World Exports of CSG.

World Trade Organization (WTO) has recognized 153 environmental goods which have been broadly classified under the following headings:

• Air pollution control

• Management of solid and hazardous waste and recycling systems

• Clean up or remediation of soil and water

• Renewable energy plants

• Heat and energy management

• Waste water management and potable water treatment

• Environmentally preferable products (based on end use or disposal characteristics)

• Natural risks management

• Natural resources protection

• Noise and vibration abatement

World Bank has identified 43 products out of the '153' products list proposed by proponents of Environmental Goods liberalization in the WTO. These 43 products comprise diverse products from wind turbines to solar panels to water saving shower. Also there has been a rapid growth in their imports and exports. What is common in all the lists floating around is that they consist of goods which tend to have benign impact on environment and lead to low carbon emanating processes.

Trade and investment in CSG offers opportunities to export international standards, promote the rule of law and good governance, and close the gap between the rich and poor. Trade in CSG will help Ecuador to promote alternative industries in the face of Global Economic Downturn. Also, it will help country to look for safe, alternative and reliable energy source rather than believing in trade of crude and Petroleum Oil only or investing a great deal in nuclear energy. Nuclear energy was in the brink of being affected in Japan due to recent Earthquake in Japan. Ecuador can direct its social spending in promoting small industries which can provide CSG goods at low cost. Countries can gain in terms of their comparative advantage and establish new industries. Positions keep changing in terms of the advantage of producing goods and services. Based on our analysis and review of studies done on CSG(UNESCAP,2011,a,b, ICTSD, WTO and World Bank) one may conclude that various national and international policies can be followed by Ecuador and its trading partners to promote trade of CSG goods for increasing welfare, diversification and promoting alternative sources of energy.

Definition of Research:

a) The Research will focus on Ecuadorian Trade Relations in CSG and Other Specialized Products and its liberalization efforts with all its trading partners but focusing more on MERCOSUR and ANDEAN Community, India, EU27, China, Japan and the US

b) The time period for research is 2002 through 2010. SMART and Gravity analysis is done for 2010.

c) Trade and Tariff Data will come from the WITS data base. SMART analysis is in WITS. The url is wits.worldb

d) Gravity analysis for working out the basis of trade of CSG and specialized products. The data will come from various sources.

Import data to and from Ecuador of CSG goods-one category made of the list of 64 goods (under 6 Digit HS Combined) is taken from WITS data base for 2010

GDP data of trading partners is expressed in billions of US dollars and the basic source of data is the IMF, World Economic Outlook (April 2011 edition)

Distance data is taken from the dist_cepii.xls file of CEPII data base (

Tariff data is applied weighted tariff (%) on CSG goods for each country available from the TRAINS data (within WITS data base)

Intercountry dispersion is product oftwo terms si *sj where si=GDPi/(GDPi+GDPj) and sj=GDPj/(GDPi+GDPj). Si and Sj are constructed from GDP data of trading partners. The product has an inverse relationship with variance of country's share of income in total group income. Variance of country's share of income in total group income is inversely related to volume of trade between countries

Prices data of reporter (importer) and partner (exporter) from the GDP deflators available from the World Bank World Development Indicators available at the World Bank website for 2010(Index Numbers)

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