V. MULTILATERAL TRADE AND ENVIRONMENT AGREEMENTS

[ V | V-A | V-B | V-C | V-D | V-E ]

E. International Commodity-Related Environmental Agreement

[ E | E-1 | E-2 | E-3 | E-4 ]

2. Forms of the International Commodity-Related Environmental Agreement

Depending on market and production conditions for the commodity, an ICREA may take several forms, all of which are intended to promote the use of technologies for sustainable production. Type A involves standard setting without financial transfers; Type B involves financial transfers that enable governments of exporting countries to create and enforce environmental policies related to the commodity. Other types of ICREAs combine elements of the two types such as a standard setting with preferential access to foreign markets.

A standard-setting ICREA applies common standards with regard to production technology and ecological impacts by signatory producers. Participation by importing countries is not necessary except that it could facilitate sanctions for non-compliance. With a Type A ICREA, the majority of important producer countries must participate in order to form an international producers’ cartel for establishing common ecological norms or technology-related standards. Common international standards may be established for production technology, product standards, and performance and emission standards with regard to a particular commodity. Common ambient standards could not possibly be established because different countries have different resource endowments, levels of pollution, waste and absorptive capacities, systems of production, labour and capital intensities, and levels of development as well as because of the reluctance of governments to give up their policy discretion. Harmonization of standards may be very difficult to negotiate because of international diversity in resource endowments and policy preferences.

This type of ICREA is more flexible than the standard-setting Type A. It involves intergovernmental agreement to internalize environmental costs of a specific primary commodity which is internationally traded. Countries have greater flexibility in determining their environmental targets and implementing measures in relation to their environmental impacts, technological options, environmental policy, national conditions and priorities. This type of ICREA involves financial transfers from a fund which is fed by an import levy charged at border crossings in importing countries and administered by an ICREA Secretariat. Governments of producing countries can draw on that fund to (a) strengthen their institutional capacity to implement policies and programmes conducive to sustainable development, and (b) make producers switch to environmentally sound techniques.

There are two justifications for such an ICREA fund. The first is that, for sustainable production and eco-friendlier technology to be adopted at the international level, actions need to be taken in producing countries which would not be undertaken unilaterally. The source contributing to the fund will depend on who the beneficiaries are when internalization of externalities is the crucial issue. Thus, the fund can be viewed as rents or a resource consumption allowance (by analogy with the capital consumption allowance or depreciation) from using the environmental media in the production of the specific commodity. If it is purely a financial-technical issue, sources may not matter because financing may come in the form of contributions from official development assistance, the Global Environmental Facility, the United Nations Environment Programme and/or private sector financing mechanisms.

The second justification for the fund is that domestic demand for capital exceeds supply in many commodity producing countries and the country needs to borrow from abroad. Such borrowing may be undertaken in pursuit of sustainability objectives. In order to avoid borrowing, a country must use resource rents to finance economic diversification into activities that are ecologically friendlier and which are relatively more dependent on labour and human-made capital. Those activities sustain the economy as environmental quality dwindles. Operational issues pertaining to Type B ICREA are not dealt with here but are discussed by Kox (1994).

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