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Can preferential trade agreements enhance renewable electricity generation in emerging economies? A model-based policy analysis for Brazil and the European Union

Author

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  • Yadira Mori-Clement

    (University of Graz, Austria)

  • Stefan Nabernegg

    (University of Graz, Austria)

  • Birgit Bednar-Friedl

    (University of Graz, Austria)

Abstract

Preferential trade agreements with climate-related provisions have been suggested as alternative to a New Market Mechanism due to its potential not only to achieve Nationally Determined Contributions (NDCs) in emerging economies but also to lead to more ambitious targets in the first UNFCCC global stocktake in 2023. The objective of this research is therefore to analyze the effectiveness and quantify the economic impacts of such a trade agreement between Brazil and the European Union that aims to support renewable electricity generation. Using a multi-regional computable general equilibrium model, we find that the environmental effectiveness of a preferential trade agreement targeting renewable electricity generation strongly depends on its design. In particular, preferential trade agreements require additional elements to effectively contribute to mitigation as the sole removal of import tariffs on renewable energy technology is quite ineffective in scaling up the share of wind, solar, and biomass in Brazil. In contrast, a preferential trade agreement triggering FDI flows towards renewable electricity generation is effective in increasing the share of renewables in the generation mix and in reducing CO2 emissions, while positively affecting the Brazilian economic performance. Finally, we compare the two previous approaches to a domestic energy policy: a combination of higher fossil fuel taxes and subsidies to renewable electricity generation. We find that although this domestic energy policy is more effective in mitigation terms than the FDI policy, economic performance is negatively affected in several sectors. When such economic costs are socially not acceptable, as it is likely in many emerging economies, properly designed preferential trade agreements could therefore be a suitable instrument for supporting the achievement of NDCs, and potentially increase their stringency for the next stock taking period.

Suggested Citation

  • Yadira Mori-Clement & Stefan Nabernegg & Birgit Bednar-Friedl, 2018. "Can preferential trade agreements enhance renewable electricity generation in emerging economies? A model-based policy analysis for Brazil and the European Union," Graz Economics Papers 2018-19, University of Graz, Department of Economics.
  • Handle: RePEc:grz:wpaper:2018-19
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    More about this item

    Keywords

    Preferential Trade Agreements with climate-related provisions; environmental goods; renewable energy; FDI; emerging economies; Brazil; European Union;
    All these keywords.

    JEL classification:

    • Q27 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Issues in International Trade
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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