Sustainability and Trade

The cost of mitigating climate change is hard to put a finger on. That’s one conclusion from a recent conference on climate change and macroeconomics at the Peterson Institute for International Economics in Washington. Many of the economists who spoke argued that there is no conflict between sustainability and prosperity; in their view, keeping global temperatures at 1.5 degrees Celsius above pre-industrial levels, as urged by the Intergovernmental Panel on Climate Change, will require minimal economic sacrifice, at least in most countries. Others forecast that higher temperatures and more frequent severe weather events will make output and prices more volatile, or that the cost of renewable energy will retard economic growth. At this point, you can pick whichever conclusion you prefer.

What I found most notable about this meeting was that international trade wasn’t on the table. To me, it seems likely that concerns about climate change will depress trade. Measures like the European Union’s Carbon Border Adjustment Mechanism and proposed U.S. legislation requiring studies of the emissions intensity of many imports will erode some of the cost advantage of foreign products. In addition, shipping powered by sustainable fuels may be far more expensive than shipping is today. For trade in liquor and tablet computers, higher freight costs may not matter, but shipping low-value goods long distances — the United States exported 4 million metric tons of hay last year — may become prohibitively costly.

The importance of international trade in stimulating innovation, increasing competition, and making economies more dynamic is no secret. If measures to control climate change prove to be a drag on trade, they are likely to be a macroeconomic drag as well. That’s a possibility economists concerned with sustainability should not ignore.

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