The impact of international trade liberalisation on the emissions of agricultural greenhouse gases

Abstract

Agriculture has been critical to the New Zealand economy since the arrival of European settlers in the nineteenth century. Agricultural exports currently contribute around 50 percent of New Zealand's export earnings. Furthermore, since the mid-1980s, New Zealand producers receive no government financial support, although they compete with heavily subsidised producers in international markets. Therefore the New Zealand agricultural sector is a strong advocate of the liberalisation of trade. Agricultural support has been an issue since the Uruguay Round of GATT, and continues to the present under the Doha Round of the WTO to reduce trade distorting policies. In addition, concerns regarding animal welfare, the environmental impacts of production and certain human health issues have led to a switch from production-oriented support policies in some countries to what are known as agri-environmental policies, particularly in the EU.

These changes in trade and support policies will affect patterns of international trade and hence also patterns of production. This in turn will have an impact on the externalities associated with agricultural production, such as negative environmental effects. One of the by-products of agricultural production is the emission of the greenhouse gases methane and nitrous oxide. The increased emission of these gases is linked to anthropogenic climate change and New Zealand has ratified the Kyoto Protocol on Climate Change, which commits ratifying countries to limit their emissions of these and other gases. The effect of changes in international agricultural trade policy on the ability of New Zealand and other countries to meet their Kyoto Protocol commitments is as yet unclear, but could have important financial as well as political implications. Agri-environmental policies are also likely to have an impact on the greenhouse gases emitted during agricultural production.

This research therefore analyses the impact of changes in agricultural trade policy on the emissions of methane and nitrous oxide from livestock agriculture in four major developed country agricultural trading countries/blocs (Australia, the EU, NZ and the US). A partial equilibrium net trade model, the LTEM (Lincoln Trade and Environment Model), is extended to include agricultural greenhouse gas emissions. The four countries selected are not only major agricultural trading competitors and partners, but also differ considerably in their agricultural support policies and commitment to climate change policy: The EU and the US are heavily subsidised in agriculture while Australia and particularly NZ receive little or no assistance; NZ and the EU have ratified the Kyoto Protocol and have obligations to reduce their GHG emissions, while the US and Australia have withdrawn from the agreement and therefore have no legal requirements to reduce GHGs.

Detailed trade policy and agri-environmental policy scenarios are simulated in order to predict their effect on GHG emissions, as well as on standard economic variables such as producer returns and trade. The results show that for New Zealand, the economic - impacts of trade policy liberalisation are expected to be considerable, depending on the type of liberalisation policy simulated. However the associated increase in greenhouse gas emissions is significant and could seriously undermine New Zealand's ability to reach its Kyoto Protocol target. The implementation of agri-environmental type policies in New Zealand would provide a mechanism for reducing greenhouse gas emissions and if they were implemented in conjunction with trade liberalisation elsewhere, would not result in reduced producer returns. The impact of trade liberalisation on EU producer returns as well as greenhouse gas emissions is negative - but assists the EU in meeting its Kyoto Protocol commitments. Australia is affected similarly to New Zealand. However this is of less concern to them as they have not ratified the Kyoto Protocol. The effect on the US is mixed depending on the type of liberalisation occurring however again they are not bound by Kyoto Protocol commitments.

The results are then analysed in terms of the impact on net greenhouse gas emissions across the countries studied. The effect on New Zealand and the ED if they had to pay or were compensated for the difference in emissions above or below the base year is also calculated at various values of carbon.

The research highlights the fact that although trade liberalisation is likely to be economically beneficial for New Zealand, it will also have potentially negative environmental consequences. The NZ government should have a comprehensive strategy in place to minimise increases in emissions while taking advantages of the benefits arising from trade liberalisation.