Trade in Environmental Services: The Quiet Revolution

A significant number of WTO members have taken steps to revive the discussions on the role that traded environmental goods and services could play in a green recovery. This is encouraging. While technology offers significant opportunities for a green recovery, more needs to be done on the trade policy side to reap the benefits of the digital transformation of environmental goods and services. Key trade policy areas are cross-border data flows from the Internet of Things, movement of people for installation, maintenance and repair, and public procurement.

Building back better means paying more attention to the environment

Major recessions have sometimes triggered technological revolutions and transition to a new way of organizing production and consumption. The recovery from the Covid-19 crisis is such an opportunity for change. The technology for a green recovery has matured over the past decade or so, and popular demand for change has grown louder while “building back better” has become a mantra in the mainstream policy debate.

For example, electricity from renewable energy sources now competes favourably with fossil fuels in many places and applications. Renewable energy is abundant and increasingly reliable as battery and other storage technologies improve. But such technologies do not operate by themselves: they need to be designed, constructed, operated, monitored, maintained, and ultimately decommissioned, their component parts disposed of or recycled. In other words, they require environmental services.

The underlying infrastructure providing environmental services such as water, sewerage, sanitation and waste management nowadays comes with sensors that monitor its performance in real time (Internet of Things, IoT). Data from sensors installed on equipment also allow proactive interventions to prevent downtime and disruption of services and services quality.

The ability to offer diagnostic and operational services remotely and from across borders has, for example, given rise to companies that monitor leaks and backflows in municipal water systems; that remotely control renewable-energy power generating plants, such as wind turbines; and that monitor emissions or leaks from sites undergoing soil remediation.

In both developing and developed countries, lack of maintenance of environmental infrastructure is one of the main causes of poor services quality. Thus, it often turns out that a dollar spent on maintenance improves welfare and equality more than a dollar spent on new investments. [1] Digital technology has the potential to reduce the cost and improve the efficiency of maintenance and thus improve the quality and reliability of core environmental services with substantial benefits to health and well-being.

Services trade must work with the grain of green recovery

The need to ensure that international trade works with rather than against the grain of a green recovery was a major motivation for 53 members [2] of the World Trade Organization (WTO) to launch a new forum for dialogue and discussions in November 2020, the Trade and Environmental Sustainability Structured Discussions (TESSD). The TESSD held its first (virtual) meeting on 5 March 2021. Among the topics for future discussions suggested in several of the participants’ formal submissions to that meeting is how the WTO should address the liberalization of environmental goods and services.

That a significant number of WTO members appear to be interested in reviving discussions at the multilateral level on the role that traded environmental goods and services could play in a green recovery is encouraging. A first step towards an agreement is a definition of what we mean by environmental goods and services. The discussions on environmental goods can benefit from the existence of the list of candidate goods that had been drawn up in negotiations on an Environmental Goods Agreement (EGA), launched by 18 WTO members in 2014.

By contrast, no such agreed list exists yet of the wide range of environmental services that are currently traded. What we argue here is that environmental services merit as much attention by the trade community — and the environmental policy community — as do environmental goods.

In the WTO classification list of services, environmental services are narrowly defined as sewage, refuse disposal, sanitation, cleaning of exhaust gases, noise abatement, nature and landscape protection, and other. There is, however, a case for expanding the list to include certain environmentally related construction and engineering activities as well as other technical business services. Such services are essential for developing sustainable material technology, designing more energy-efficient production processes, less waste and managing the environmental goods and services supply chain.[3]

Healthy growth in trade of business services, including broadly defined environmental services

Services trade statistics are available only at a relatively aggregate level. Global trade in “Other business services”, which include R&D, engineering, technical services, and waste management — but also a number of other services, such as accounting and legal services, has grown by about 25% between 2014 and 2019 (Figure 1). Their share of total services exports has also increased during this period.

Figure 1. Global exports of other business services

Source: OECD

“Other business services” are traded in all modes of supply (Figure 2). Establishing a commercial presence — i.e., through a foreign affiliate or branch office — is the most important mode of supply, but its relative importance has declined slightly over time. Cross-border trade, by contrast, has increased from 30% in 2005 to 33% in 2017. [4] This shift largely reflects the digitization of business services, which allows them to be traded across borders over electronic networks. The temporary movement of people to provide a service to a foreign customer accounts for about 10% of the total and has also increased slightly from 2005.

Figure 2. Trade by mode of supply in other business services, 2017

Source: WTO

But less growth and numerous obstacles to trade in some essential environmental services

Trade through the movement of people is heavily restricted in most countries. Labour market tests are often required for stays longer than three months, and for occupations for which a certificate or license is required, recognition of foreign certificates can be a time-consuming and costly process, if possible at all. [5] For environmental services such restrictions limit access to affordable high-quality services. Thus, although the digital transition may have shifted trade from commercial presence to cross-border trade, few services can be provided cross-border alone. Service suppliers also need to deploy their staff at the premise of the customer from time to time to install or repair equipment and provide customer support.

Maintenance and repair services are key to keeping core environmental infrastructure in good repair. Such services are hardly traded at all (Figure 3), accounting for less than 2% of total services trade and more than 90% of it is trade through consumption abroad, suggesting that repair of ships and aircraft account for most of it. Trade growth in construction services was only 3% during the period 2014-2019, and the share of construction in total services exports fell sharply from 2% to 1.8% during the same period.

Figure 3. Global exports of maintenance and repair services

Source: OECD

According to UN estimates, achieving the UN Sustainable Development Goals (SDGs), half of which relate directly to the environment, will require annual investments of an estimated $5-7 trillion a year, plus subsequent expenditure on operations and maintenance. Trade can help unlock investments supporting the SDGs and a green recovery from the Covid-19 crisis in a cost-effective manner.

There is a large potential for growth in cross-border trade in environmental services as the IoT becomes ubiquitous and environmental infrastructure, air quality and water quality can be monitored remotely. Reaping the full benefit of the digital transformation requires cross-border data flows subject to strong privacy and cyber-security protection (“data flows with trust”) as well as movement of people to make the necessary interventions in a timely manner.

Services trade policy for environmental sustainability

Although the trade barriers facing goods and services differ, remaining barriers to trade in services can undermine the effect of liberalizing trade in environmental goods and vice versa. It would therefore be an advantage to negotiate trade and investment in environmental goods and services together, and to define the environmental services included broadly. That is the approach being taken in the six-nation negotiations on an Agreement on Climate Change, Trade and Sustainability (ACCTS), which started in 2020. Cross-cutting issues that need to be addressed are:

• Take a broad view on defining environmental services for future multilateral, regional and bilateral negotiations on environmental services.
• Ensure that data from sensors monitoring the performance of environmental goods and infrastructure in real time can flow freely across borders subject to protection of privacy and security.
• Build capacity on public procurement at the municipality level to ensure universal access to sustainable, cost-effective environmental services using technology suitable for local conditions.
• Strengthen regulatory cooperation and commit to adopting international standards where relevant.
• Reform with a view to eliminating fossil fuel subsidies, which artificially reduce incentives to conserve energy and improve energy efficiency and undermine markets for non-fossil alternatives in the transport sector as well as for providing heat or electricity.

 

 

[1] See Gibson and Rioja (2017). Public infrastructure maintenance and the distribution of wealth. Economic Inquiry, 55(1), 175-186.

[2] Missing from the group are several of the largest WTO members — notably Brazil, China, India, and the United States.

[3] For further discussions see Kyvik Nordås and Steenblik (2021).  Environmental Services in the APEC Region: Definition, Challenges and Opportunities, Asia-Pacific Economic Cooperation.

[4] A complete set of bilateral trade by broad sector is available from the OECD and WTO for the period 2014-2019, while an experimental database on trade by sector and mode of supply is available from the WTO for the period 2005-2017.

[5] See Kyvik Nordås and Steenblik (2021) as above and OECD (2021). OECD Services Trade Restrictiveness Index: Policy Trends up to 2021. Paris: OECD Publications.