Could globalisation save the climate?

January 16, 2023

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The widely held view that globalisation is not good for the climate is based on two premises. First, with globalisation, productive specialisation based on comparative advantage and the quest for competitiveness at any cost give countries with loose environmental norms and standards a competitive edge. Access to cheaper fossil fuels is thus thought to result in greenhouse gas-emitting activities being relocated to “pollution havens” in an environmental race to the bottom that is not without its adverse effects on the climate. Second, openness to trade promotes growth, leading to an increase in pollutant emissions and the extraction of natural resources, adversely affecting the environment.

From a theoretical standpoint, however, the first effect, known as a composition effect, arising from the specialisation that results from international trade, is not always harmful to the climate. If specialisation is based on factor endowments rather than differences in legislation, the composition effect can be fairly favourable to the environment, resulting in optimum (though not necessarily sparing) use of natural resources. The best way to prevent natural resources being overexploited is to internalise the cost of climate damage by levying a tax in proportion to their use or environmental impact so as to put a price on a hitherto free resource and thus encourage mindful consumption. Meanwhile, a carbon border adjustment mechanism such as that officially adopted by the European Union is a good way to combat climate dumping and safeguard against the risk of carbon leakage through regulatory arbitrage.

The second effect, known as a scale effect, is also counterbalanced by a so-called technical effect when free trade – which, for emerging countries, is synonymous with economic openness – results in transfers of cleaner technology. By standardising their production processes worldwide, multinational firms can export more environmentally friendly technologies to third countries with a positive impact on the climate, particularly if these transfers of expertise prove long-lasting. Lastly, trade liberalisation, when it is a source of development and income growth, often goes hand in hand with greater public awareness of water, air and soil quality, resulting in citizens calling for stricter standards. As shown by the work of Grossman and Krueger1, there is thus an inverted U-shaped relationship between growth and environmental degradation, making the environment a superior good for which demand rises with income, like healthcare and culture. 

Above all, though, the climate and biodiversity are global public goods whose preservation calls for coordinated action by states on cross-cutting issues that transcend national borders. Deglobalisation – the fruit of a fragmented world under strain – cannot be conducive to the conclusion of cooperation agreements if there is a prevailing mutual suspicion of free-riding where non-compliance with climate rules confers a strategic advantage. Conversely, openness – where goods, people, technologies and ideas circulate freely – fosters dialogue and mutual understanding, making it possible to better assess climate action, encourage countries to honour their commitments and help propagate environmental best practice and green innovation.

Furthermore, transitioning to a low-carbon economy requires drawing on significant mineral resources, notably metals, which can be exploited for geostrategic purposes, with the potential to trigger a resource war at the planet’s expense. The priority given to issues of sovereignty based on geographical proximity or shared values, leading to greater fragmentation of trade, is supposed to make trade more secure by reducing dependencies on nefarious suppliers. Such strategies could, however, prove counterproductive if they result in risks being more highly concentrated among a limited number of participants, however reliable they might be, posing a potential threat to a smooth environmental transition. Global diversification offers a better guarantee of security where local or regional markets could prove particularly vulnerable to idiosyncratic shocks.

Ideally, global supply chains should incorporate a number of suppliers in different parts of the world across the various different value segments so as to make them more resilient to the failure of any one participant, while the supply of commodities would be more secure in a well connected and freely accessible global market. One might – slightly cheekily – conclude that globalisation, often seen as a problem for the climate, is also a common good to be protected for the good of the planet.


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January 16, 2023

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