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Climate change and competitiveness: a survey of the issues

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From the outset, the Kyoto Protocol and the UNFCCC have had to contend with perceived tension between effective action to slow climate change, and maintenance of competitiveness. This short background paper explores competitiveness concerns associated with efforts to mitigate climate change, dissecting them and assessing the need for concern.Two basic areas of concern are explored:The non-Party problem: implementation will create an uneven playing field, with firms and sectors from non-Annex B Parties enjoying an unfair advantage because they are not subject to carbon constraints. This argument is expressed most pointedly with respect to the US and large developing countries, and the potential loss of competitiveness this might entail in implementing country firms and sectorsThe implementation problem: Annex B Parties may create unfair competitive advantages for domestic industry by the manner in which they implement their Kyoto commitments. This argument has recently been considered in the context of the EU, where a highly integrated market spans countries that have the flexibility to elaborate very different national plans for allocating their emissions reductionsThe paper finds that:the types of competitiveness concerns surveyed are real, with potential to cause economic damage, and therefore deserve attention as political obstacles to Kyoto implementationthat said the authors do not believe that the final impacts will be large in most sectorsin those sectors where impacts may be important, flexibility in the allocation of obligations at the national level may be able to mitigate most studies looking at the costs of implementation do not take account of the potential for endogenous improvements as a result of regulation itself. Strong environmental regulation may lead to improvements in technology and know-how that may in and of themselves drive improved ability to meet Kyoto obligations at low costPrepared for the March 2005 workshop on Climate Change, Trade and Competitiveness hosted by IISD and Chatham House.