UC Berkeley professor finds ‘environmental bias’ in trade policies

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Joseph Shapiro, an associate professor in the UC Berkeley department of agricultural and resource economics, found that higher carbon-emitting industries pay lower import taxes than cleaner industries do.

Shapiro’s working paper, which appeared in UC Berkeley’s Energy Institute Working Paper Series on May 4, looks at the likely causes and outcomes of his findings. Shapiro, who is also an associate professor in the campus economics department, analyzed 20 variables, including unionization, shipping costs and firm size, to determine what is causing the differences in trade policies across industries.

“There seems to be a systematic pattern,” Shapiro said. “That’s a surprising finding, and most people haven’t asked the question before, so they haven’t found that answer before.”

“Upstreamness” — which measures the “economic distance” between an industry and the final consumer — most effectively explains the trends, Shapiro said.

Upstream industries sell to other companies, while downstream industries sell to individual customers. Import taxes tend to be lower for upstream companies because large companies are more equipped to lobby for lower tariffs, while it is more difficult to organize millions of individuals to lobby, according to Shapiro.

Shapiro added that this “environmental bias” is hidden in the trade policies of most countries and results in an implicit subsidy of between $550 billion and $800 billion per year for upstream industries.

The paper also shows that there is a strong relationship between upstreamness and pollution emissions. Upstream industries tend to be more “dirty” — which Shapiro measured by the amount of carbon dioxide emitted per dollar of output — while downstream industries tend to be more “clean.”

Campus agricultural and resource economics professor Larry Karp said the paper will be “interesting” for policy makers.

“It provides an example of how policy has an unintended consequence,” Karp said. “The tariffs are not designed in order to subsidize carbon-emitting activities, but Shapiro shows that they have this effect.”

Shapiro also discussed potential environmental outcomes of changing trade policies. He developed a mathematical model to determine what would happen to greenhouse gas emissions if every country changed its trade policies to be equal for all industries.

According to the analysis, this would result in a decrease in emissions similar in magnitude to that of the world’s two largest climate change policies — the European Union Emissions Trading System and the American Clean Energy and Security Act.

Shapiro suggests in his paper, however, that how the policies change across industries is not the most important factor in decreasing the trade policies’ environmental bias.

“You could decrease the protection on clean industries or increase the protection on dirty industries or average both of them, and I find all of those decrease overall greenhouse gas emissions,” Shapiro said. “The key issue is getting rid of the difference in trade policy between clean and dirty industries.”

Emma Rooholfada is the lead research and ideas reporter. Contact her at [email protected] and follow her on Twitter at @erooholfada_dc.