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A Brief Analysis Of The Polluter Pays Principle With Respect To Free Trade

The Polluter Pays Principle has become a very familiar concept in the last few decades. Environmental policies that hold the polluter accountable are necessary to realize the sustainable development goals that have been established and re-established by different countries and organizations on an international level at multiple conferences and conventions.

Similarly, there has been a significant rise in international trade in this century, and the policy of Free Trade removes barriers to international trade through non-application of tariffs or quotas. Governments keep out of the import and export business and let international trade take place naturally.

Liberalization in trade practices does impact the environment and this is where the concept of having the polluter pay for the environmental damage comes in. Free Trade, like all other such liberal practices, is not absolute. There has to be a measure of accountability that seeks to restore environmental balance.

This paper discusses the concept of Polluter Pays Principle with respect to the policy of Free Trade and throws some light on the connection between the two by analyzing the international agreements concerning trade and environment.

The Polluter Pays Principle is the practice which makes the polluter responsible for the damage caused to the environment as a result of their action. This is done to meet the cost pollution control. The principle was adopted by the Organization for Economic Co-operation and Development (OECD) in 1972.

As per the Guiding Principles Concerning International Economic Aspects of Environmental Policies, Polluter Pays Principle means that the polluter should bear the burden of carrying out cost allocation measures for pollution prevention and control, to ensure that the environment is in an acceptable state[i]. These measures are decided by public authorities and the polluter is legally bound to take them to protect the environment.

Environmental pollution is unavoidable. As trade industries grow and globalization gives rise to exchange of goods and services across the globe, the environmental damage caused by persons and such industries increases. So, the cost of the measures of pollution control are reflected in the goods and services that generate pollutants in the course of production and/or consumption.

Free Trade is the policy of non-interference by the government in international trade. Liberalization is at the center of the Free Trade policy but like all liberties and freedoms, the freedom from government intervention in import and export business is not absolute. There has to be a system of regulating the economic activities that take place nationally and internationally to ensure that such activities do not become harmful for human life or the environment.

The most effective instrument of global trade liberalization was the General Agreement on Tariffs and Trade (GATT) which aimed at abolishing quotas and reducing tariffs among contracting nations.[ii] It was replaced by the World Trade Organization in 1995, and the aims are broader and more comprehensive now.

Impact Of International Trade On The Environment

It is true that traders are not limited by the territorial boundaries of their countries anymore and trade has expanded throughout the global platform. Naturally, this expansion impacts the environment. There also comes the question whether trade liberalization is good or bad for the environment.

Trade can affect the environment both in the positive and the negative manner.

Economic growth that results from trade expansion can have an apparent direct impact on the environment by an increase in pollution or degradation of natural resources. In addition to this, trade liberalization may lead to specialized pollution-intensive activities in some countries if environmental policy severely varies across countries [iii].

International trade involves transportation through air, land, or water, and transportation is a major cause of pollution of these three elements of nature. The damage caused in the process of export and import, particularly from the transport of goods and services, adds to the harm done to the environment as a consequence of human actions and activities attached to what we call a progressive life.

Despite all this, the trade trend of expanding the scale of production for the global market means that the volume of pollution and environmental damage will most likely increase and impact the quality of living of all beings. There can also be indirect environmental effects of trade, for example when peasant farmers are displaced by larger-scale export agriculture onto marginal lands such as hillsides and forest margins [iv].

However, increased trade can also contribute to a greater capacity to manage the environment more effectively by supporting economic growth, development, and social welfare. More importantly, open markets can result in improved access to new technologies that make local production processes more efficient by diminishing the use of inputs such as energy, water, and other environmentally harmful substances.

Similarly, liberalization in trade and investment provide firms and companies with incentives to adopt better and higher environmental standards. As a country integrates itself within the world economy, it exposes its export sector to the environmental requirements that leading importers present. Changes needed to meet these requirements, consequently, flow backwards along the supply chain, encouraging the use of cleaner production processes and technologies.

Subsequently, trading nations may come under pressure to improve environmental standards when product quality or transboundary impacts are at issue. So, looking at the positive impacts of free trade on the environment as a whole, we can find that trade industries can avoid the cost of pollution prevention and control if the positive outcomes of their trade supersede the negative ones.

Trade Agreements And The Environment

Over the last few decades, several trade agreements have been signed and have come into force to facilitate international trade with minimum restrictions and interventions so that the concept of Free Trade can be realized fully. They have also touched upon the environmental perspective of liberalizing trade, and have approached the concept of making industries responsible for the damage caused to the environment.

The World Trade Organization
Under the General Agreements on Trade and Tariff (GATT), which later became the World Trade Organization in 1994, rounds of trade agreements have worked to retain the over-achieving policy goal of free and liberalized trade.

Although economic growth may lead to increased capabilities of nations to promote environmental protection, avoiding unacceptable levels of environmental damage requires specific policies to reduce pollution. Although the WTO recognizes a special exception to trade rules under Article XX for resource conservation and environmental protection, its panel rulings have interpreted this narrowly. WTO authorities tend to be suspicious of green protectionism - the use of trade barriers to protect domestic industry from competition under the guise of environmental regulation. They are also not very sympathetic to nations' efforts to use trade measures to affect environmental policy outside their borders.

Looking at it from the WTO perspective, the responsibility for environmental policy should remain at the national level and as far as possible, decisions regarding international trade policy should not be complicated with the involvement of environmental issues. This is according to the economic principle of specificity rule which says that policy solutions should be targeted at the source of the problem, and not get sidetracked.

The use of trade measures to accomplish environmental-related goals is somewhat secondary and not as impactful.
So, the use of an economic proposition like getting the polluter to pay for the damages is only a half-measure, because it relies on the possibility, which although highly likely, is only an after-effect, of the individual or the industry to pollute or cause damage to the environment.

The North American Free Trade Agreement (NAFTA)
In 1993, the United States, Canada, and Mexico signed the NAFTA agreement, which was aimed at lowering the trade barriers across the continent. During the agreement, negotiations were done where environmental groups argued that liberalizing the trade beyond a point and giving traders strong freedom could result in negative impacts on the environment. Consequently, the North American Agreement on Environmental Cooperation (NAAEC), which was a side agreement, set up the tripartite Commission for Environmental Cooperation (CEC)[v].

The NAAEC promotes sustainable development based on cooperation and mutually supportive environmental and economic policies, and fosters the protection and improvement of the environment in the territories of the Parties for the well-being of present and future generations[vi].

This specific attention to social and environmental aspects of trade was remarkable and likely unprecedented in trade agreements.

Naturally, the Polluter Pays Principle acts as a tangent to both economic and environmental policies. Trade freedom cannot and should not be absolute. Policies that keep any arbitrary and harmful trade activities in check are required to keep the environmental damage in control.

The European Union
The European Union is unusual in being a free-trade area that has its own legislative and administrative institutions. Unlike the North American CEC, the European Union has the power to set environmental standards which have binding power on its member countries. This is referred to as the harmonization of environmental standards [vii].

However, this policy involves more than free trade; it encompasses the creation of a supranational authority[viii] with the power to set environmental standards. Regional trade area policies also compared the ideas of harmonizing up and harmonizing down.

Countries may need to change their policies to meet the EU standards. For some it would mean tightening their rules, for others it may mean losing some of the command. For example, a law that required returnable bottles in Denmark was overturned by the EU for the reason that it was a trade barrier. On the other hand, Norway decided not to join the EU fearing that they would have to modify some strict environmental regulations.

According to Jonathan Harris[ix], it is not common for trade agreements to include the kind of enforceable supranational environmental regulations that exist in the EU. Even though the Standards Code that was adopted after the Uruguay Round negotiations in 1992 encourages international harmonization regarding environmental standards, the process is voluntary.

Multilateral Environmental Agreements (MEAs)
It has long been recognized that some environmental problems require international solutions. The first international treaty dealing with trade and the environment was the Phylloxera agreement of 1878, which restricted trade in grapevines to prevent the spread of pests that damage vineyards. In 1906 an international convention was adopted banning the use of phosphorus in matches.

Phosphorous was responsible for serious occupational disease among match workers, but it was the cheapest ingredient for matches. An international convention was required to prevent any exporting country from gaining competitive advantage by using phosphorus in match production. Since then, numerous international treaties have been adopted to respond to specific environmental issues.

These include conventions protecting fur seals, migratory birds, polar bears, whales, and endangered species. Transboundary and global environmental issues have been addressed in the Montreal Protocol on Substances that Deplete the Ozone Layer (1987), the Basel Convention on Hazardous Wastes (1989), the Antarctic Treaty (1991), and the Convention on Straddling and Highly Migratory Fish Stocks (1995).

In 1997 the Kyoto Protocol on Climate Change established guidelines for reducing greenhouse gas emissions, including important trade-related measures. These international treaties have addressed the environmental impacts of production methods in ways that individual nations cannot.

The local imposition of PPM standard on domestic manufacturing industry is obviously a national prerogative, but it should not be used to restrict imported products, whatever the process used for their production. This kind of action would prove to be contradictory with the GATT. If PPMs[x] are included as appropriate measures within an Multilateral Environmental Agreement (MEA), however, this would be much more acceptable, as their imposition would be multilateral rather than unilateral. [xi]

The question of the compatibility of MEAs with the WTO rules still remains doubtful, especially regarding precedence during a conflict. For example, the Kyoto protocol encourages the subsidized transfer of energy efficient technology to developing nations - but this provision could be in violation of the WTO's prohibition of export subsidies. Whereas national laws such as the U.S. Marine Mammal Protection Act have been found incompatible with WTO rules, there has so far been no major test case involving conflict between an MEA and a trade agreement.

The Issues
The Polluter Pays Principle is still a much more vague principle than the Free Trade Principle. It's impact is not as significant as that of the Free Trade principle. More attention has been paid to defining this principle and what it means in the global market in the last few years of trade and environment discussions than in the twenty years since its adoption.

The Polluter Pays Principle has a very specific definition in the OECD context, including how its implementation is to be proceeded with. In the present context, the Polluter Pays Principle is a cost allocation or non-subsidization principle which is intended at guiding governments in addressing domestic pollution[xii].

Groups and organizations have been on the works to expand the extent of the scope of this principle, and naturally, their ideas often conflict with one another regarding its application to the trade market. However, interpreting it in a broad and idealistic manner would bring the effectiveness and development to the same old status of a general slogan.

The fact that the debate on environment and trade becomes a blame-game rather than a discussion on possible solutions and future steps is an issue that results in stagnancy in the whole process of liberalizing trade and protecting the environment.

After evaluating a history of trade and environmental movements, it can be concluded that environmental conservation in our time needs to be based on more than a policy by-product. This paper describes the conflicts that arise between environmentalism and advocacy for trade liberalization. Even though instances of countering climate change with trade policy are present, the underlying principle of minimizing pollution suggests that we treat the polluter pays approach and the trade liberalization approach separately.

Often, governmental measures against trade liberalization are disguised as green measures supposedly aimed at environmental conservation. These domestic protectionist measures restrict exports and encourage domestic imports by citing an environmental benefit to preferring domestic production over foreign production that may not comply with environmentally sound standards. The World Trade Organization has aptly expressed discontent over disguising trade protectionism as these environmentally conscious actions.

NAFTA is another example of international cooperation in balancing trading freedoms with environmental concerns. As explained before, the NAAEC supplements the trade liberalization aspects of NAFTA with environmental cooperation, thus making trade in North America a balanced affair. This mutual cooperation among the USA, Canada, and Mexico ensures that the environment is not sidelined while trade is being promoted.

The approach taken by the European Union can be simplified as the Polluter Pays Principle. The EU, being more than just a multilateral treaty, can practically enforce its decisions on member states. The administrative powers resting with the EU allow it to mandate individual states to curb their carbon emissions and other forms of pollution.

While we cannot pinpoint an international policy yet to counter pollution created during movement of goods through global supply chains, we can employ a mixture of trade and environmental measures to obtain the best possible results. Depending on the geographic region, industries, and international relations of polluting units, any variation of the polluter pays principle can be utilized in addition to other approaches mentioned in this project.

  1. OECD/LEGAL/0132 (Adopted on 14.11.1974)
  2. Britannica, The Editors of Encyclopaedia. "General Agreement on Tariffs and Trade". Encyclopedia Britannica, 22 Nov. 2019, (Accessed 20 Feb 2021).
  3., Trade and Environment (Accessed 20 February 2021).
  4. Jonathan M. Harris, Trade and the Environment (Houghton Mifflin, 2002)
  5. Ibid.
  6. United States Environmental Protection Agency, EPA's Role in the North American Commission for Environmental Cooperation (CEC) (Accessed on 21.02.2021).
  7. Jonathan M. Harris, Trade and the Environment (Houghton Mifflin, 2002)
  8. A supranational organization is a multinational association in which member countries cede authority/sovereignty on at least some internal matters to the group, whose decisions are binding on its members.
  9. Jonathan M. Harris is Senior Research Associate at the Tufts University Global Development and Environment Institute.
  10. Parts per Million- mass of a chemical or contaminate per unit volume of water.
  11. Duncan Brack, Trade and Environment: Conflict or Compatibility, 1998.
  12. Candice Stevens, Interpreting the Polluter Pays Principle in the Trade and Environment Context

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