A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Pierre Pagesse.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.
Focus on issues

Carbon Tax Debate Highlights Importance of Agricultural Sector in Managing “Negative Externalities” at the International Level

07 January 2008

It was in the 1990s that the international community first realized that environmental protection would be a major issue for years to come. The “Earth Summit” conference in Rio de Janeiro in 1992 and the Johannesburg Conference on Sustainable Development in 2002 then placed the environment – and, more generally, the issue of negative externalities – at the heart of worldwide concerns.
Given its effect on all economic sectors, global warming is one of the great challenges of the 21st century, as evidenced by the Kyoto Protocol, which entered into force in February 2005 and aims to reduce carbon dioxide (CO2)1.
The countries that ratified the Protocol committed to bearing the cost of their negative externalities,2 a commitment that falls in line with the “polluter pays” principle defined in 1920 by the liberal economist Arthur Cecil Pigou.
One of the proposals advanced for enforcing this principle is the carbon tax, which would tax all products and activities that produce significant amounts of CO2 and which has garnered widespread interest. Much criticism has nonetheless been voiced over the protectionist deviations that could result from the implementation of such a tool, since the tax could be used for retaliation in international trade.
Regardless of whether one is for or against the carbon tax, the debate has highlighted the critical need for identifying, measuring and assigning a market value to the negative externalities that affect the world’s markets. In fact, odds are that the carbon tax debate will upend certain commonly-accepted principles, including the optimal nature of the free markets so dear to the World Trade Organization (WTO), and will position agriculture as the favored economic sector, given its “natural” and strategic positioning with regard to the environment.

I. The carbon tax debate has highlighted the need to manage negative externalities at the international level

Recently invoked by Nicolas Sarkozy3 as a means, pursuant to the Kyoto Protocol,as a means, pursuant to the Kyoto Protocol,4of pressuring countries that do not contribute to combating climate change, the carbon tax has recently garnered a great deal of interest.

Some believe the carbon tax would serve to combat the “environmental dumping” practiced by certain countries. By taxing imports from those countries, it would re-establish a balance in trade between “more expensive” products (due to the cost of bringing them into compliance with strict environmental legislation) and “less expensive” products imported from non-signatory countries and therefore exempt from any environmental restrictions.

While many agree that the tax would have the benefit of putting a price on air pollution and raising awareness about the need to monitor CO2 emissions, many others consider it to be a new form of “environmental protectionism” that counters the principles of free trade espoused by the WTO, among others.
They therefore worry that it constitutes another obstacle to imports from less-developed countries (LDCs), which already have difficulty complying with international standards, and fear possible retaliatory trade measures from the countries targeted, such as the United States.

While it is still too early to make a call between these two views, which in fact highlight the potential pluses and minuses of any economic measure, the debate does shed light on new issues that are upending commonly-accepted principles and that for now remain unresolved:

> Free trade will not eliminate negative externalities, for distortions of competition do not rise out of commercial factors alone (environmental dumping, social dumping, etc.). What can be done to ensure that the liberalization of international trade is accompanied by a decrease in negative externalities?

> While the origin of a negative externality can be pinned down to a geographic area, its impact is worldwide, which requires a collective and supranational strategy for cooperation. How can negative externalities be managed in a world of unregulated free trade?

In this vein, EU Trade Commissioner Peter Mandelson pointed out that “it is international cooperation, and not coercion, which will strengthen mobilization against climate change.”
Consequently, two things must be done collectively: negative externalities must be minimized and positive externalities must be increased at the global level, from the perspective that international cooperation alone is capable of ensuring fair markets. It appears that the agricultural sector, given its “natural” and strategic positioning, is the sector that is best suited to meet these challenges.

II. The agricultural sector is the most well suited for the launch of a global strategy to combat negative externalities

From an economic and strategic perspective, the agricultural sector is in the “best position” to promote positive externalities and minimize the negative externalities that impact the environment.

Indeed, the agricultural sector covers 65 percent of the world’s land and employs 45 percent of the working population worldwide. The sector also represents a significant share of GDP in most countries worldwide and is also the only economic sector that uses the environment directly as an “input” (biodiversity, land, water, etc.). It can, therefore, better than any other economic sector by its very activity, contribute to biodiversity preservation and land management through, for example, measured use of inputs and well-advised use of water resources.
It is therefore positioned as the principal economic leverage point for generating positive and far-reaching effects on the environment.

Furthermore, from a strategic point of view, the agricultural sector is the sector that is most well suited to boost international cooperation. Whether from the angle of development, poverty reduction, environmental protection or economic growth, “all roads lead to agriculture.” The World Bank,
6 in its 2008 World Development Report, places agriculture at the core of development strategies, because it promotes “worldwide growth and poverty reduction.” The FAO (Food and Agriculture Organization of the United Nations), which has continually alerted public attention to issues related to climate change (with regard to food security in particular), has likewise emphasized the key role of the agricultural sector.

To promote positive externalities and minimize negative externalities, however, international cooperation must draw on credible and relevant indicators capable of identifying the impact of public policies and must compare them by geographic zone, to then allow appropriate measures to be taken at the international level.

Yet currently no indicator exists for assessing the distortions of competition caused by environmental dumping (such as deforestation), economic dumping (such as selling at a loss, made possible by disguised State subsidies) or social dumping (such as child labor). The few indicators that do exist, such as the OECD PSE
7 (Producer Support Estimate) indicator, suffer from their imperfections and obsolescence.
It is nonetheless of utmost importance that we come to a true understanding of the various factors liable to destabilize world markets, all the more so since the progressive liberalization of markets may be accompanied by an elimination of regulatory tools. Indicators must therefore be built, to highlight the “good” and “bad” practices and to minimize the “stowaway” behaviors that drive certain countries that not only do not want to comply with international standards, but also do not want to bear the cost of their negative externalities. This will in fact be the mission of the International Assessment and Rating Agency currently under development at WOAgri and slated for release in 2008.

The debate over the carbon tax, and more generally over environmental protection, underlines the urgent need for international cooperation centered on agriculture. The WTO has neither the legitimacy, the tools (such as a simulation model), nor the indicators needed for it to initiate a strategy that would constitute a response to the issues highlighted by the negative externalities and their impact on the environment.

Even worse, in dismantling the last remaining regulatory tools, the WTO runs the risk of increasing the structural instability of the agricultural markets and promoting a rise in “eco-unfriendly” behaviors in those countries unable to bear such high price volatility.

It is from this perspective that the WOAgri has, since 2005, been setting the stage for the emergence of a global governance of agriculture, integrating the management of negative externalities and developing the tools and indicators needed for the international agricultural markets to run smoothly.

Bastien Gibert & Stéphanie Laffargue

1 The so-called “Annex” signatory countries are committed to reducing their greenhouse gas emissions by 5.5 percent from 1990 levels, over the 2008-2012 period.
2 Negative externalities refer to all costs that impact the well-being of a country’s inhabitants yet are not accounted for in the national budget.
3 “If we do not succeed in getting the United States and the main emerging powers to contribute to combating the greenhouse effect, I would like to see a tax on imported carbon applied to products from countries that are in violation of the Kyoto Protocol,” Nicolas Sarkozy stated.
4 The carbon tax would in particular target the United States, which has yet to ratify the Kyoto Protocol, and China and India, which are not tied to emissions quotas.
5 According to the FAO, “Agriculture carries a high responsibility for the management of water resources in quantitative and qualitative terms.”
6 Read our article, World Bank Wants “Agriculture for Development,” available online in the “Learn and Understand” section.
7 The PSE (Producer Support Estimate) indicator is an economic indicator created by the OECD to measure and compare the domestic supports that farmers from member countries receive. Every year since 1987, the indicator has been evaluated via a rather cursory methodology, which considers only the main payments and supports granted by Member States to their farmers. It neglects the strategic and specific aspects of agriculture and underestimates the distortions caused by U.S. supports. For more information, read our article entitled, The OECD PSE (Producer Support Estimate) Indicator: After the international agricultural models, misinformation continues… dated September 11, 2006, available online in the ‘Analyses and Comments’ section.

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