Select Committee on Treasury Written Evidence

Memorandum submitted by Professor Eric Neumayer


  Globalisation has many facets. Most people have economic aspects in mind when they talk about globalisation, particularly the increased openness of countries to foreign trade (both imports and exports) and foreign investment (both inward and outward). I will concentrate on these, giving only brief thought to the political dimension of globalisation (policy convergence, spread of multilateral environmental agreements, concerted action by civil society groups).


  Environmentalists are mainly concerned about two issues related to investment and environment: pollution havens and regulatory chill.

Pollution havens

  Public opinion seems to have it that any country with less strict environmental standards than one's own country is guilty of providing a pollution haven. But such a definition would be misleading as countries cannot, in general, be expected to have the same environmental standards all over the world—independently of whether or not they want to attract foreign capital. What is clear is that countries are guilty of providing pollution havens if they either deliberately set inefficiently low environmental standards in order to attract foreign capital or set efficient standards, but fail to enforce them. (Loosely speaking, efficient environmental standards are those in accordance with the preferences of people living in a country.) There are several reasons why, on average, this may be the case in some, particularly developing, countries:

  First, pollution beneficiaries can influence the political process and will be able to do so the more undemocratic the country. All developed countries are democracies, whereas many developing countries are not. Second, if the political system is characterised by corruption and is easily amenable to manipulation by powerful and wealthy special interest groups, then the beneficiaries of pollution are likely to be more influential than the comparatively less wealthy environmental pressure or consumer groups. On average, developing countries are more corrupt than developed ones. Third, bias against environmental preferences can stem from political-institutional failure of a country. There is evidence that a country's overall institutional environmental performance as measured by environmental awareness, scope of policies adopted, scope of legislation enacted, control mechanisms in place and the degree of success in implementation is positively correlated with its income per capita and the development of its legal and regulatory system.

  Surprisingly, despite the expectation that pollution havens should be a widespread phenomenon, there is very limited empirical evidence that they are. Why? Possible reasons include:

    1.  Some of the dirtiest industries cannot migrate as they are dependent on being close to their consumer markets, for example, electricity generation.

    2.  The costs of environmental compliance might be too low to play a significant role in investment decisions. Potential environmental cost savings might very well be too small to induce foreign investors to move to pollution havens for two reasons. First, because migration itself is costly because of dismantling, transportation and new establishment costs. This applies much less to new investment, however. Second, because the recipient country might have disadvantages in other respects, for example, poor infrastructure, political instability, badly trained workforce and so on. Doing business carries many more risks in developing as opposed to developed countries. However, there are two caveats to keep in mind. First, how high pollution abatement expenditures are varies substantially from sector to sector. Second, should environmental compliance costs in high standards countries rise further in the future, then things could dramatically change from what they were before.

    3.  Even where environmental compliance costs are significant, international investors might not be deterred, as long as the environmental standards provide clear and reliable rules that apply equally to everybody. What investors dislike most is uncertainty about the future and unreliability of policy makers.

    4.  Rational forward looking investors might anticipate that environmental standards in currently low standards countries might very well increase over time.

    5.  If MNCs have similar plants in both high standards and low standards countries, then it might be cheaper to install the same pollution abatement technology as in the high standards countries everywhere.

    6.  Foreign investors might fear for their international reputation if they are perceived as cenvironmental villains exploiting low standards in developing countries. In investing in these countries, it might therefore be worth while to voluntarily exceed local environmental standards.

  There are several policy options for dealing with the elusive phenomenon of (potential) pollution havens: Harmonization of environmental standards; minimum environmental standards; enforcement agreements; trade and capital restrictions; eco-labels; non-binding declarations; assistance for political-institutional capacity-building and local empowerment. Judged against a set of criteria (measures should be effective, politically realistic, development friendly, closed to abuse and not unnecessarily restrictive), Neumayer (2001: 56-66) argues that efforts at promoting capacity-building and local empowerment come on top.

Regulatory chill

  If policy makers in developed countries fear that high environmental standards will induce internationally mobile capital to move to low standards countries then they might themselves lower their standards to keep this capital or—perhaps more realistically—at least fail to raise environmental standards by as much as they would otherwise do over time. This is the "regulatory chill"—hypothesis: developed countries fail to raise standards over time because of feared capital flight. Four points to note:

    1.  For the "regulatory chill"-hypothesis to hold it does not matter whether pollution havens in developing countries are real phenomena. It is sufficient that policy makers in developed countries believe that pollution havens exist to potentially scare them away from raising environmental standards—and in spite of its shaky evidence they actually do seem to believe in pollution havens.

    2.  Policy makers in developed countries might see capital flight into other developed countries to be the much more relevant danger. Therefore they might fail to raise environmental standards if other developed countries do not also raise environmental standards simultaneously.

    3.  One would expect "regulatory chill" to be more prevalent with respect to environmental standards concerning pollutants affecting the so-called global commons, such as the global climate, the ozone layer, and biodiversity.

    4.  Because the hypothesis refers to the absence of something that would otherwise have happened (namely, the raising of environmental standards) it makes in effect a counter-factual claim for which systematic statistical evidence is, almost by definition, difficult, if not impossible, to gather. There is anecdotal evidence, however, that regulatory chill prevents policy makers from taking more decisive action against climate change.

  There are several policy options for dealing with (potential) regulatory chill problems: Harmonization of environmental standards; minimum environmental standards; enforcement agreements; multilateral trade restrictions; border tax adjustements; subsidies. On the basis of the same set of criteria as introduced above regarding pollution havens, Neumayer (2001: 72-78) argues that no policy option comes out clearly on top, but harmonization and multilateral trade sanctions are relatively preferred.


  Environmentalists are mainly concerned about two points with respect to the links between trade and the environment. The first one is that trade liberalisation might lead to an increase in environmental degradation if strong environmental policies are not in place. The second one is that the multilateral trade regime is insensitive to environmental concerns and makes the enactment of strong environmental policies impossible as they would clash with countries' obligations under the multilateral trade regime.

Trade liberalisation and the environment

  Both theoretical reasoning and empirical evidence show that trade liberalisation can lead to a global increase in resource depletion and to a global increase in environmental pollution. These effects are more likely to occur and are more likely to be stronger if property rights over resources are ill defined and if the environment is not optimally managed (ie standards are inefficient or efficient, but not enforced). There is ample evidence that, especially in many developing, but also in developed countries, environmental management is non-optimal and property rights over natural resources are ill defined. As concerns the so-called global commons (for example, the climate), property rights are practically non-existent and open access prevails leading to excessive resource depletion and pollution. In sum, trade liberalisation can indeed exacerbate the existing high levels of environmental degradation.

The World Trade Organisation (WTO) and the environment

  The WTO has done much less to hinder or damage environmental protection policies than its critics believe. WTO jurisprudence has become increasingly environmentally friendly over time:

    1.  The WTO agreements put few restrictions on environmental regulation of consumption externalities, which refer to damage to the environment or human health connected to the consumption of goods. The one important exception is if the damage is highly uncertain and somewhat speculative. Otherwise as long as these restrictions are applied fairly, even-handedly and without discrimination against foreign producers, they are compatible with WTO agreements even if they completely ban a certain product. Where WTO disputes have decided against measures aimed at consumption-externalities, this has been because the measures served more to protect domestic industries than the environment.

    2.  Production externalities refer to damage to the environment or human health connected to the production of goods. Panels used to decide against regulations aimed at so-called process and production methods (PPMs) outside the regulating country's own proper jurisdiction. The latest jurisprudence changed things fundamentally, however, in ruling that regulations aimed at PPMs in foreign countries need not necessarily violate WTO rules as long as the country imposing the restrictions has undertaken good-faith efforts at reaching a multilateral agreement, has applied the restrictions in a fair, non-arbitrary and non-discriminatory manner, giving affected countries some flexibility in how to achieve the aim of natural resource protection.

    3.  WTO rules have so far not hindered, let alone blocked, any multilateral environmental agreement (MEA).

    4.  Where trade exacerbates environmental degradation, the fault lies with non-existing or insufficiently ambitious environmental protection measures. However, the WTO cannot be blamed for this. Much of the anger and frustration of environmentalists is wrongly channelled at the WTO and its representatives, whereas policy makers in the WTO member countries are truly to blame.

    5.  Two valid criticisms raised against the WTO is that it currently does little to actually promote environmental protection and that it fails to adequately integrate the precautionary principle into its agreements. This is unlikely to change due to political resistance by developing countries and the United States.


  Non-economic aspects of globalisation have typically received less attention, despite the fact that many of these are likely to have a positive impact on the environment. There is, for example, policy convergence typically toward the better practice types as policy makers find it easier to learn from the experience of other countries. There is a trend toward dealing with international environmental problem with the help of multilateral environmental agreements, even though their effectiveness is somewhat questionable. Lastly, civil society groups can communicate and co-operate with each other, thus exerting concerted pressure on policy makers and business groups. Arguably, civil society pressure has had a major impact on the WTO's willingness to take environmental considerations more seriously.


  Eric Neumayer (2001): Greening Trade and Investment: Environmental Protection without Protectionism. London: Earthscan.

October 2006

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