The global population is set to reach 9.6 billion by 2050, bringing with it increased demand for energy and making the global goal of containing CO2 even harder. Likewise, other environmental challenges — such as the availability of clean water or the estimated tripling in global waste by 2100 from 2000 levels — are becoming international priorities.[1] Against this backdrop, trade in environmental goods and services has come to the fore of the international trade agenda. Decoupling economic growth from environmental impact calls for increased international trade in order to accelerate the diffusion and uptake of environmental goods and services, as few developing countries currently have the resources, technology and expertise to switch to a green economy.
Contrary to widespread opinion, a trade-off between economic growth and environmental sustainability is not inevitable: shifting to a green economy that ensures the socio-economic wellbeing of a growing population is both possible and profitable. Trade in environmental goods and services is on the rise. Global exports in environmental goods have risen from roughly US$ 231 billion in 2001 to US$ 656 billion in 2012.[2] The market for environmental goods and services was estimated to have reached US$ 866 billion in 2011, and is expected to rise to US$1.9 trillion by 2020, according to the German Institute for Economic Research.[3] The rapid overall growth of the global market means that there is likely to be strong green-job-creation for the foreseeable future, and long-term profitability for environmental businesses.
Source: Environment Business Journal
Trade in environmental goods is sometimes misconstrued as solely the business of developed economies, such as the European Union, Japan and the United States of America. While it is true that their market share remains the greatest, in reality, many economies are actively engaged in this trade and there are business opportunities for all economies. Several emerging economies, especially in East Asia, are significant exporters as well as import markets. China, the Republic of Korea, Mexico, Brazil, the Russian Federation, Hong Kong (China), Malaysia, Singapore, Chinese Taipei and Thailand are all significant global players.
Demand for environmental goods and services is meanwhile growing fastest in developing countries - in Asia, the Middle East and in Africa. With an efficient regulatory framework and access to market information on the rapidly evolving sector, developing country enterprises can benefit from the swell in demand as the transition to a global green economy occurs.
Opportunities for developing countries
In some developing countries, notably middle-income countries, burgeoning environmental industries are already providing competitive goods and services domestically and increasingly to neighbouring countries. However, many developing countries lack the resources, expertise and technology to switch to a green economy. Developing countries may have strongest immediate export potential in ‘non-infrastructure’ environmental goods and services relating to consulting services that require less capital and are more often performed by small and medium-sized enterprises (SMEs). In 2011, Environmental Business International (EBI) estimated this particular services market segment at US$ 54.8 billion globally.[4] SMEs from developing countries can also benefit from opportunities provided by joint ventures and other strategic alliances with foreign environmental firms. This creates knowledge spill-overs and enhances SME access to lead foreign firms’ investment. Linking into global value chains, including importing environmental goods and services, in order to improve the competitiveness of other export sectors such as tourism, can be an effective strategy for growth for developing countries.
The global value chain phenomenon, in which production is increasingly fragmented across national boundaries into its separate component goods and services ‘tasks’, is evidenced in many environmental sectors, such as the photovoltaic industry, which frequently outsources parts of the production process to other countries.
The Philippines, for example, has increased its exports of photovoltaic cells from a minor base in 2006 to just over US$ 1 billion in export value in 2013. This development can be attributed to a number of foreign companies, such as the American firms SunPower and Solaria outsourcing parts of their manufacturing processes. The considerable experience of Philippine companies in the production of semi-conductors, which requires a similar set of labour skills and infrastructure, facilitated the diversification into the photovoltaic cell-manufacturing sector and attracted related inwards investment. A highly educated workforce, including large numbers of engineers, makes the Philippines an attractive business environment. In addition, the conditions appear to be good for Philippine SMEs and employees to benefit from technology-transfer through participation in GVCs and apply this knowledge to diversify their products and services in the domestic Philippine market and potentially other export markets.
Government support and efficient regulation have also enabled this expansion of the environmental sector. Philippine companies have access to innovative finance schemes, such as the ‘sustainable energy finance program’ of the Bank of the Philippines. The Renewable Energy Act (REA), in force since 2008, also incentivizes private-sector engagement in the renewables sector.
Source: ITC Trade Map, Using OECD Classification of Environmental Goods.
Developing countries can also benefit from importing environmental goods and services, particularly where alternative domestic environmental inputs for industry are expensive or non-existent. The economic arguments in favour of improving environmental performance in manufacturing and other economic sectors are significant. Estimates in Peru, for example, have shown that costs resulting from poor environmental management are equivalent to 3.9% of national GDP, while in Morocco estimates are as high as 8% of annual GDP.[5]
Focusing on regional trade is often a sensible strategy. Despite being less restricted by geography, services trade is nonetheless often regional in nature. For example, since the conclusion of the United States-Morocco Free Trade Agreement (FTA) in 2006, two-way services trade (unlike trade in goods) has hardly grown. One reason attributed is a lack of cultural affinity between the two partners. European services firms, however, are very active in the Moroccan market. In determining environmental services trade potential, cultural and linguistic proximity may have a greater role to play than formal trade agreements.
In countries where a lack of regulation has dampened demand for the formal provision of services, the informal sector often helps bridge gaps in services delivery. This is particularly notable in recycling services and waste collection. It is estimated that in Morocco, for instance, the informal sector undertakes 90% of scrap metal collection activities. Governments can build on employment and enterprise in the informal sector. These sectors would benefit from formalization and regulation, which could improve hazardous working conditions.
Challenges
There remain several challenges to be overcome if developing country SMEs are to benefit from the potential new business opportunities offered by this sector. Understanding of the market remains inadequate. In addition, environmental regulation in developing countries is often weakly enforced, dampening demand domestically for environmental goods and services.
With regards to improving business understanding of the market, a particular challenge is the lack of an internationally certified definition and classification of what constitutes an ‘environmental’ good or service, making data capture and comparability difficult. This is in part due to the size and complexity of the sector and the heterogeneity of products and services required to achieve an environmental objective. Environmental goods and services broadly consist of activities ‘that produce goods and services to measure, prevent, limit, minimise or correct environmental damage to water, air, soil, as well as problems related to waste, noise and eco-systems.’ While a consensus may exist on the overall importance of this objective, obtaining an agreement on a precise classification or grouping has so far remained elusive. Some goods, such as photovoltaic cells, may have self-evident environmental applications, while others, like hydrated lime or pumps, have both environmental as well as non-environmental applications.
The absence of an internationally certified classification for this sector has also stalled progress on international agreements to lower trade barriers in the sector. There have been a number of lists proposed in an attempt to fulfil the 2001 World Trade Organization (WTO) Doha mandate, which called for the elimination of tariffs and non-tariff barriers to trade in environmental goods and services. Amongst these, the Organisation for Economic Co-operation and Development (OECD) environmental goods and services list, the Asia-Pacific Economic Cooperation (APEC) environmental goods list, and the United Nations Conference on Trade and Development (UNCTAD) ‘environmentally preferable products’ are among the more widely discussed.
Arguably the most concrete international agreement on environmental goods trade to date, the APEC 2012 Vladivostok Declaration made commitments to reduce tariffs to less than 5% by 2015. The progress that the APEC group achieved in terms of a classification of goods and in setting a clear target for tariff reductions is reinvigorating the multilateral discussions. The first indications of new momentum building were seen at the Davos meeting of the World Economic Forum in January 2014. A group of economies including APEC members, Costa Rica, the European Union, Norway and Switzerland agreed to ‘build on the ground-breaking commitment to reduce tariffs on the APEC list of environmental goods by the end of 2015…to achieve global free trade in environmental goods.’
The APEC list sets out 54 HS-6 products and, unlike the OECD list which has 164 HS-6 products and was conceived primarily for conceptual or analytical purposes, has proved more suitable for international negotiations. On the other hand, the APEC list does not yet include environmental services, which EBI have estimated comprise approximately 65% of the market and are often inextricably bound to the provision of goods. Increased demand for photovoltaic modules, for example, suggests increased demand for related installation and maintenance services. Data collection and comparability of standards are, therefore, very difficult in this market.
Regulation, and its effective enforcement, is fundamental in ensuring the growth of the environmental goods and services market. Its absence is the main reason behind the gap between actual market demand and business potential. Efficient environmental regulation and sustainability standards-setting creates markets that can both provide benefits for the environment and create business opportunities. In South Africa, for example, there are residual stockpiles and deposits from mining waste. There is an opportunity for waste re-use, but this requires the development of standards for storage and disposal. Standardization of ash toxicity is pre-requisite to ensure that the re-use of waste materials in brickmaking, for instance, or as a cement-extender, does not negatively impact health.[6] Until such regulations are in place, the incentives for commercial activity remain limited.
Developing and emerging economies often lag behind others in environmental regulation-making and enforcement processes, as well as in providing incentives for development of the sector. Such changes can take time where environmental concerns compete with other pressing policy issues. Innovation in and uptake of environmental goods and technologies is heavily dependent on the incentives in place for the private sector both to produce and to apply new technologies to adjust production processes in the interests of the green economy.
While regulation is one of the main drivers enabling greater private sector participation, transparency and predictability of the regulatory requirements are also needed to ensure growth in the sector. Private sector operators need to be aware of the licenses, procedures (such as environmental impact assessment) and other standards with which they must comply. In developing countries, these are often still in progress or undergoing changes, increasing the risk for private sector actors, both domestically and internationally.
A further challenge for developing countries is the existence of pockets of steep trade barriers. While these may only affect a few products or services, given the strong synergies between environmental goods and services, a barrier in one may impede trade and inflate costs in another.
Ultimately, deeper understanding of this dynamic sector is required. There are several measures that developing countries can take to increase their overall competitiveness. Foremost is participation in GVCs, facilitating imports and developing export capacity. Future international trade agreements pending, developing countries should build competitiveness domestically by strengthening regulation and ensuring transparency and predictability in national regulatory frameworks, while supporting services sector business associations and including environmental goods and services in national and regional trade strategies.
*This article was authored by Jane Drake-Brockman and Max Thompson, International Trade Centre (ITC). For full bibliographic references see ITC publication Bucher et al., (2014). Trade in Environmental Goods and Services: Opportunities and Challenges. ITC Technical Paper, Geneva.
Available from:
[1] World Bank estimate in Hoornweg, Perinaz (2012).
[2] ITC Trade Map: trademap.org
[3] Environmental Business International (2012) for 2011 estimate, Blazejczak, J., Braun F., Edler D. (2009) for 2020 estimate.
[4] Environmental Business International (2012).
[5] Peruvian estimate cited in UNIDO (2013). Moroccan estimate cited in Touahri (2009).
[6] Department of Environmental Affairs, Republic of South Africa (2010).
