TRADE AND ENVIRONMENT AND INTERNATIONAL COMPETITIVENESS IN THE MEDITERRANEAN REGION SELECTED CASE STUDIES.DOC

Interactions between Moroccan Textile Exports and Environmental Regulations: A Case Study on Water Pollution Policy Brief – English……….... Case Study – English……… Estimation of the Impac

A METAP Project Implemented by the

Harvard Institute for International Development

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The views and interpretations reflected in this document are those of theauthors and the individual project teams They do not necessarily reflectthe opinion of the Mediterranean Environmental Technical AssistanceProgram, the World Bank, the Harvard Institute for InternationalDevelopment, or Harvard University

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MEDITERRANEAN ENVIRONMENTAL TECHNICAL ASSISTANCE

PROGRAM

MEDPOLICIES INITIATIVE

The MedPolicies Initiative assists non-European Union Mediterranean countries gainthe skills and understanding needed to develop sustainable environmental andeconomic policies The project is funded by the World Bank under the auspices ofthe Mediterranean Environmental Technical Assistance Program (METAP) andimplemented by the Harvard Institute for International Development (HIID) atHarvard University since its inception in 1997

The MedPolicies Initiative focuses on three pressing issues affecting environmentaland economic policy-making in the Mediterranean region:

 Trade and environment;

 Privatization and the environment; and the

 Social and economic aspects of air quality

MedPolicies addresses these themes through a work program that espouses a sectoral, analytical, and empirical approach to environmental and economic policy-making Specifically, the themes are examined and discussed through a series ofcase studies, technical workshops, national roundtables, and regional policyseminars designed to engage both public and private sector stakeholders in thepolicy development process The project targets three groups of stakeholders in thebeneficiary countries: decision-makers and parliamentarians; the public, private,and financial sectors; and the NGO community

cross-MedPolicies has conducted its activities within the context of METAP’s operatingprinciples by: (1) giving METAP National Focal Points and local policy groupsownership over the choice and development of case studies; (2) managing theproject through country-based lead analysts and a MedPolicies office in Beirut; (3)consulting with public and private stakeholders on case study findings andcoordinating project activities with regional organizations focusing on similarthemes; (4) organizing regional policy seminars, national roundtables, and technicalworkshops to discuss case study findings; and (5) conducting site visits andassessments of project effectiveness through meetings with local counterparts.This country-based approach emphasizes both the process and product ofidentifying sustainable environmental policy measures for the Peoples of theMediterranean region

* * * * * * *The MedPolicies Initiative is a project of the Mediterranean Environmental TechnicalAssistance Program (METAP) METAP was established in 1990 to assist beneficiarycountries (Albania, Algeria, Croatia, Cyprus, Egypt, Jordan, Lebanon, Morocco, Syria,Tunisia, Turkey, Slovenia, and the West Bank and Gaza) respond to increasinglycomplicated environmental challenges The program focuses on capacity buildingand human development; arresting and controlling emerging pollution hot spots;and integrated water resource management

In addressing these issues, METAP channels technical assistance and grant funding

to the Mediterranean region through a process that seeks country ownership andmanagement decentralization of projects Consultation with local stakeholders anddonors on resource mobilization is integral to the program, as are the monitoringand evaluation of activities to ensure maximum impact on the ground

METAP is jointly sponsored by the European Commission, the European InvestmentBank, the United Nations Development Program Bureau for Arab States, the United

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Nations Development Program Capacity 21 Unit, the Swiss Development Agency,the World Bank.

For more information on METAP activities, please contact:

Sherif Arif

Regional Environmental Coordinator/METAP Coordinator

Rural Development, Water & Environment Department/Middle East & North Africa Region

The World Bank

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TABLE OF CONTENTS

Forward………

…

Acknowledgements…………

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Abbreviations……….………

………

PART I: I NTRODUCTION Introduction to Environment and Trade Competitiveness in the Mediterranean Region. Theodore Panayotou The Impact of Environmental Regulations on Exports: An Overview and Synthesis of the MedPolicies Case Studies……….

Bruce A Larson PART II: C ASE S TUDIES ON T EXTILE AND L EATHER BASED I NDUSTRIES The Effect of Environmental Legislation in the EU on Syria's Export of Raw Cotton and Cotton Based Textile Products to the EU Policy Brief – English………

Policy Brief – French………

…………

Case Study – English………

Interactions between Moroccan Textile Exports and Environmental Regulations: A Case Study on Water Pollution Policy Brief – English………

………

Policy Brief – French………

………

Case Study – French………

Environment and Trade Relationships affecting the Tanned Leather Industry in Cairo Policy Brief – English………

………

Policy Brief – French………

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Case Study – English… ………

The International Competitiveness of Turkish Leather Exports Policy Brief – English………

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Policy Brief – French………

……

Case Study – English … ……….…………

PART III: C ASE S TUDIES ON F ERTILIZERS AND A GRICULTURAL E XPORTS

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The Effect of Environmental Legislation on Fertilizer Exports: The Case of Jordan

Policy Brief – English………

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Policy Brief – French………

………

Case Study – English……… ………

The Effect of Environmental Regulation on Potato Production in Cyprus Policy Brief – English………

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Policy Brief – French………

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Case Study – English………

Estimation of the Impact of Environmental Regulations on Agricultural Exports in Tunisia: The Case of Increasing Water Prices and Packaging Policy Brief – English………

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Policy Brief – French………

………

Case Study – French………… ………

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Carol Chouchani Cherfane

Regional Coordinator

METAP III MedPolicies Initiative

Harvard Institute for International DevelopmentBeirut Office

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This volume, based on case study reports completed during the first phase

of the MedPolicies Initiative, was made possible by the support andassistance of several committed individuals

METAP National Focal Points in each beneficiary country served as the

project’s government counterparts and helped to identify case study topic to

be addressed, as well as review the final reports The National Focal Pointsalso served as a liaison between projects staff and government officials inministries involved in environmental and economic affairs They also helped

to coordinate national roundtables organized during the case studydevelopment to discuss the case study findings and recommendations withpublic and private stakeholders These public and private sectorrepresentatives are also thanked for their input in finalizing the case studyreports

MedPolicies Lead Analysts in each beneficiary country, representing

non-governmental organizations, universities, and private institutions, comprisednational lead analyst teams Each team consisted of one to three nationalexperts in the field of environmental and/or economic affairs The leadanalyst teams compiled the information for the analysis through in-countryconsultations with local stakeholders and access to national data sources.They also served as the principle authors of the case studies reports, whichform the basis for the chapters presented in this volume

HIID Theme Leaders served as the coordinators for case studies completed

within each project theme Bruce Larson served as the Theme Leader forTrade and Environment, Randy Bluffstone was the Team Leader forPrivatization and Environment; and Peter Rogers served as the ThemeLeader for the Social and Economic Aspects of Air Quality The themeleaders provided National Focal Points and Lead Analysts with themethodological framework and analytical tools needed to complete the casestudies They also provided technical assistance to the lead analyst teamsand provided critical reviews the draft and final reports Their experienceand expertise were invaluable components of the case study developmentprocess

The MedPolicies Project Team based at HIID allowed to this regional,

multi-disciplinary project to work Theodore Panayatou served as Project Directorproviding guidance and technical insight during case study developmentand regional policy seminars Jordan Kimball’s tireless efforts during thefirst phase of the project facilitated the administrative and logistical aspects

of coordinating studies and roundtables in thirteen countries, as well asregional policy seminars in Slovenia and Tunisia The effectiveorganizational and administrative support of Leticia Orti and Catherine Timssubsequently helped to wrap-up the case study reports and prepare forfollow-up activities The HIID Contracts and Finance Offices are also thankedfor their assistance

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It must be recognized that the MedPolicies Initiative would not have beenmade possible without the assistance and financial support of the WorldBank and METAP The guidance and advise of Sherif Arif throughout thecase study development process helped to direct the project towardsobjectives that would best serve the Mediterranean region and to keep theproject focused on METAP goals J.B Collier’s assistance in coordinatingactivities in the region via the World Bank METAP Secretariat also served as

an ever-helpful resource for the HIID Project Team

Finally, the completion of this publication was facilitated by the dependabletranslation services of Marie Goubran Chouchani and publication experience

of Fady Jabre, both of whom greatly assisted the Regional Coordinator to editand finalized this volume

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ENGLISH ABBREVIATIONS

(Syria)

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NORM Naturally Occurring Radioactive Materials

Infrastructure Division

l’habillement

d’échantillonnage)

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DT Dinar tunisien

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INTRODUCTION TO ENVIRONMENT AND TRADE

COMPETITIVENESS

IN THE MEDITERRANEAN REGION

Theodore Panayatou MedPolicies Initiative Project Director

The simmering tension between the world’s pursuits of free trade and acleaner environment became an open clash in the WTO meetings in Seattle

in December 1999 The global negotiations on whether and how to link thetwo would continue for many years to come, hopefully leading to some

“great bargain” whereby the North would agree to eliminate all its barriers

to imports from the South in exchange for the South doing more to protectthe local and global environments In the meanwhile, developing countries

in general, and those in the Mediterranean region in particular, face somerather stark choices today Pressures at home to improve the domesticenvironment by reducing pollution and conserving scarce natural resourcesare bringing about the tightening of environmental regulations and theintroduction of new ones, which – if enforced – may have significant impacts

on the main production and export sectors of these countries Such adverseeffects may manifest themselves primarily through increases in productioncost and corresponding reductions in profitability and competitiveness of thefew export commodities of these countries From a static zero-sum gameperspective, this is viewed as an environment versus competitiveness trade-off that developing countries can ill afford

A second set of pressures on developing countries to improve environmentalperformance comes from international efforts to engage them in globalenvironmental agreements to prevent climate change and protect theworld’s global commons, biodiversity, ozone layer, among others.Ratification and enforcement of such agreements may have costimplications and effects on trade and competitiveness Yet the most directand immediate set of pressures facing the export sectors of developingcountries comes from their own trading partners, who are settingincreasingly stringent product standards for safety, health andenvironmental protection Exports from developing countries that do notmeet these standards could be refused entry into traditional markets, whichmay prove catastrophic for countries such as those in the Mediterraneanregion that depend on a limited number of export commodities Whileimporting countries are allowed under WTO rules to impose such standards

as long as they are non-discriminatory (i.e., they apply equally to domesticand imported ‘like’ products regardless of origin), there is sufficientambiguity to allow importing countries to use environmental standards asnon-trade barriers to protect domestic industry

Furthermore, while border adjustments for non-product related process andproduction methods (PPMs) are not allowed under WTO rules, developingcountry exports often face consumer preference “discrimination” in theimporting countries stemming from concerns about the overall

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characteristics of products, including their source and the methods by whichthey are produced More often than not, these concerns find expressions inofficial trade policy, as exemplified by the tuna restrictions in the U.S due todolphin concerns and shrimp restrictions due to turtle concerns, or theEuropean debate regarding British beef Even when developing countryproducts are not explicitly barred by a trading partner due to negativeproduct or process characteristics, their lack of “positive” environmentalcharacteristics precludes access to increasingly lucrative markets forenvironmentally friendly or “green” products For all the above reasonsdeveloping countries can ill afford to ignore the effects of increasinglystringent and more tightly enforced environmental regulations at home andabroad.

On the other hand, compliance with foreign regulations and adjustmentresponses to foreign preferences involve costs that may alter theprofitability and competitiveness of these products, and ultimately, have thesame or even more adverse effect on exports It is ultimately an empiricalquestion whether compliance (supply shifts) or non-compliance (loss ofmarket share) would have the largest impact on exports However, in adynamic context, efforts to comply with environmental regulations may also

be offset by efficiency gains brought about through innovation (PorterHypothesis)

The non-EU Mediterranean region is an ideal testing ground of how morestringent environmental regulations might affect exports of key sectors inthe future The developing countries of North Africa and the Middle East aredependent on a few export commodities, while there are traditional markets

in the developed countries of the European Union Environmentalregulations in Europe are among the strictest in the world, while the non-EUMediterranean region has had a generally lax environmental regime Theready access of Mediterranean exports to the EU markets is thus beingendangered by the enforcement of environmental product standards in theEuropean Union, which these products may not be able to meet Theircompetitive advantage is also being challenged by the enforcement andstrengthening of environmental regulations at home

Understanding and responding to these challenges is key to maintaining andexpanding these export markets while protecting the environment in theregion To improve understanding of the links between environmentalpolicies and international competitiveness, the MedPolicies Initiative of theMediterranean Environmental Technical Assistance Program (METAP)sponsored a number of case studies that analyzed the effects of actual andpotential changes in environmental regulations on key exports from thesouthern Mediterranean region This volume brings together seven casestudies along with their common analytical framework developed by BruceLarson, the team leader for trade and environment in the MedPoliciesInitiative The analytical approach – which can best be described as supplyshift decomposition – is prospective rather than retrospective in the sensethat the case studies do not analyze past effects of environmentalregulation on trade, but rather identify the range of likely future outcomes

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based on a concrete set of technological and market parameters andbehavioral assumptions The advantage of this approach is that it isparsimonious in data requirements, transparent in its assumptions, anduser-friendly as a policy analysis tool for policy makers and private sectorstakeholders alike Each country case study uses a variant of thisframework to estimate the impact of potential change in environmentalregulations on exports from a key export sector The seven countriescovered are Cyprus, Egypt, Jordan, Morocco, Syria, Tunisia and Turkey.

Since the findings of these studies are summarized and synthesized in theoverview paper by Larson, they need not be repeated here What warrantsrepeating and highlighting is that no generalizations can be made about theeffects of environmental regulations on exports They critically depend onthe magnitude of the policy change, the share of the regulated input inproduction cost, supply response, and demand elasticities, and thepossibility for efficiency improvements Small policy changes effectingexports that account for a small portion of overall costs of products thathave relatively inelastic export demand are not likely to have significanteffect on exports The reverse is true when policy changes, affected inputcost shares, and export demand elasticities are large For example,increased irrigation costs would have a small effect on potato exports fromCyprus, but a much larger impact on citrus exports from Tunisia

The usefulness of these case studies can be seen in three dimensions: theincreased awareness of the issues that lie in the interface between the tradeand environment; the enhancement of the analytical capacity in the regionfor dealing with these issues; and the development of a versatile policyanalysis tool for assessing the effects of policy changes on exports based onrather parsimonious and easily obtainable information All thesecontributions facilitate communication and coordination amongenvironmental and trade policy makers so as to improve policy formulationand advance both trade expansion and environmental protection It ishoped that these case studies and the policy debate that they haveencouraged will stimulate further work in the emerging research and policyarea of environment and trade interactions

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THE IMPACT OF ENVIRONMENTAL REGULATIONS ON EXPORTS:

AN OVERVIEW AND SYNTHESIS OF THE MEDPOLICIES CASE

STUDIES1

Bruce A Larson MedPolicies Initiative Theme Leader for Trade and Environment

Abstract

Concern about the effects of environmental policies on trade competitiveness continues to grow in the non-EU Mediterranean regions (e.g., North Africa, the Middle East, Turkey, Cyprus) as ‘partnership’ agreements with the EU are negotiated and completed and discussions continue based on the meeting of the World Trade Organization in Seattle during December 1999 While the impacts of environmental regulations on export competitiveness are widely discussed in the region, there has been little empirical analysis of how more stringent environmental regulations might affect exports of key sectors in the future To begin to fill this gap in analysis, this paper summarizes the results of seven case studies that estimate the impact of potential changes in environmental regulations on exports from a key sector in each country (Cyprus, Egypt, Jordan, Morocco, Syria, Tunisia, and Turkey) These case studies, which are based on a theoretically consistent yet empirically tractable modeling approach, suggest that a range of outcomes is likely and depend on a fairly small set of specific information For some of the cases, expected regulatory changes would probably have little impact on exports (e.g water effluent policies and textile exports in Morocco and irrigation costs and potato exports in Cyprus), while in other cases the impacts could be substantially larger (e.g., irrigation costs and citrus exports from Tunisia, and effluent policies and leather exports from Turkey) In some countries, the range of potential outcomes is largely due to the magnitude of the policy change, the importance of the regulated input in the production process, and the lack of information on international market conditions (e.g dye restrictions and textile exports from Syria and cadmium control and fertilizer exports from Jordan).

1 INTRODUCTION

Concerns about the effects of environmental policies on exports continues togrow in non-EU Mediterranean regions (e.g., North Africa, the Middle East,Turkey, Cyprus) as ‘partnership’ agreements with the EU are negotiated andcompleted and discussions continue based on the meeting of the WorldTrade Organization in Seattle during December 1999 The Arab League heldmeetings on the topic in Cairo, Egypt during September 1999, while theUnited National Economic and Social Commission for West Asia (ESCWA)held meetings on the topic in November 1999 in Beirut, Lebanon It is not

uncommon for ad hoc ‘trade and environment’ committees to exist at the

national level (e.g., in Egypt and Morocco) and for members of

1 Address for correspondence: Bruce Larson, Department of Agricultural and Resource Economics, University of Connecticut, WBY 318, U-21, Storrs, CT 06269-4021, USA Email: blarson@canr.uconn.edu Tel: 1-860-486-1923 The analysis in this paper was initiated as part of the MedPolicies Initiative implemented by the Harvard Institute for International

Development with funding from the World Bank under METAP The author thanks the

MedPolicies Trade and Environment Case Study Teams and the METAP National Focal Point Coordinators in Cyprus, Egypt, Jordan, Morocco, Syria, Tunisia, and Turkey The author also thanks Carol Chouchani Cherfane, Jordan Kimball, Theo Panayotou, and Sherif Arif for continued guidance and support during the completion of this research The individual case study documents are listed explicitly in the references.

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environmental authorities to assign staff to be responsible for ‘trade andenvironment’ (e.g., in Lebanon, Tunisia, Egypt, and Morocco).

One fundamental question remains Do environmental regulations –whether domestic regulations or regulations in export markets – affect acountry’s exports? While a seemingly simple question, the ‘conventionalwisdom’ found in the economics literature and ‘real world’ examples seem

to be at odds For example, concerning the conventional wisdom, Jaffe et al.

conclude that: “[o]verall, there is relatively little evidence to support thehypothesis that environmental regulations have had a measurably adverse

to the impact on exports from product standards created in the name ofenvironmental protection (which includes the physical health of domesticconsumers) or as attempted non-tariff trade barriers to protect domestic

To improve awareness and understanding of the links betweenenvironmental policies and international competitiveness, the MedPoliciesInitiative of the Mediterranean Environmental Technical Assistance Program(METAP) supported the completion of case studies that analyzed the impact

of specific changes in environmental regulations (actual and proposed) onexports of specific sectors in Cyprus, Egypt, Jordan, Morocco, Syria, Tunisia,and Turkey While the main purpose of the case studies was to increaseawareness of potential “trade and environment” issues within the countriesand to build capacity to support further analysis of such issues, thecompleted case studies provide practical experience on: (1) the types ofenvironmental policy issues that are likely to impact exports in the future inthe non-EU Mediterranean region; (2) the basic information that is needed toempirically analyze such issues; and (3) the range of impacts that could beexpected in the future as proposed policies are adopted and implemented.The main purpose of this chapter is to summarize the analytical approachused in the case studies, summarize the key results of each case study, and

to synthesize key lessons for the analysis and understanding of such topics

in the future The full case study reports are then provided in the followingchapters The remainder of this chapter is thus organized as follows Sincethe case studies (except Turkey) use a common methodological approach

2 Jaffee et al (1995), p 157.

3 Besides such ‘real world’ examples noted above, there is some newer evidence based on historical data that the relationship between environmental policy and a country’s

international trade is not necessary as benign as implied by Jaffee et al (1995) for all sectors

of the economy For example Van Beers and Van den Bergh (1997) show that there is no significant relationship between environmental regulatory strictness and trade flows for

“resource based” sectors, while there is a significant and negative relationship for resource based” sectors.

“non-5

developed in Larson (2000), Section 2 provides a brief non-technicalintroduction to the theoretical and empirical approach used in the casestudies.4 Annex A subsequently provides a detailed summary of theempirical models Section 3 provides an overview of the individual casestudy topics, and Section 4 summarizes and discusses the main results InSection 4, Tables 1-6 provide the detailed assumptions and base-caseresults for each of the six case studies, while Table 7 provides a summary ofthe key results for all six case studies Section 5 concludes.

2 BRIEF METHODOLOGICAL OVERVIEW

For environmental regulations (either domestic or foreign) to affect exports

or imports, it must be the case that such regulatory changes affectproduction and/or consumption decisions (technological possibilities, inputprices, output prices, etc.), which in turn directly or indirectly affect costsand/or revenues Such potential impacts can be discussed quite easily in asimple demand and supply context For example, consider the simplemarket situation in Figure 1, where S0S0 is an initial supply schedule

commodity, D0D0 represents domestic demand, and y0 - c0 is the existinglevel of exports (the equivalent figure for imports could also be used) InFigure 1, domestic regulatory changes that affect production costs shift thedomestic market supply from the original level S0S0 to a new level S1S1.Given a fixed output price at pw, production falls from y0 to y1 and exportsfall from y0 - c0 to y1 - c0 See Krutilla (1991), Anderson (1992), and Smithand Espinosa (1996) for additional simple graphical overviews of this topic.Also see Van Beers and Van den Bergh (1996) for a more completeintroduction to the topic

While in principle it could be possible to estimate directly a reduction in past

production and/or exports due to past changes in some environmental

regulation, the data needed to estimate such relationships are difficult toobtain in many developing and transition economies As Larson (2000)shows, however, it is possible to rely on some basic microeconomicfoundations to decompose such supply shifts into separate components thatmay be easier to understand, calculate and/or estimate, and discuss This

approach can then be easily used to discuss likely impacts on future

production and exports from environmental regulatory changes underdiscussion or in the process of being adopted Thus, rather than looking atpast effects, the methodological approach used in the MedPolicies casestudies is one useful tool for applied empirical analysis to provide additionalinformation in a timely fashion to on-going environmental and trade policydebates

4 Due to the nature of the topic chosen for the Egypt case study, a detailed empirical analysis

of specific policy changes on exports was not completed.

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Figure 1 - The Base Model

with Efficiency Improvements

“X”) becomes more costly due to a new regulation, some basic economicresults that link profit and costs functions can be used to estimate the shift

in the supply schedule from S0S0 and the original output level y0 to a newschedule S1S1 and the new output level y1

The basic idea is that the shift in supply due to higher input costs (due tomore stringent regulations) can be decomposed into two effects: (1) theeffect of higher output prices on production levels (i.e., the slope of the

input is needed to produce an extra unit of output (see Larson 2000 andAnnex A for details) Following some basic algebraic manipulations, it isthen possible to transform this shift in supply into a percentage change insupply (denoted %Y) based on the product of five terms In sum, as shown

in Annex A, these five terms are:

%Y = - (wX/C) * (C/pY) * yp * c

xy * (%w)where the term - (wX/C) = the negative of the regulated input cost as ashare of total production costs; the term (C/pY) = the total production costs

needed to produce an additional percent of output; and the term %w = thepercentage increase in the cost of the regulated input due to someregulatory change This expression is provided in more detailedmathematical form in Table A, Annex A (for Case 1, Model 1) As the finalstep, the percentage change in exports (%E) from the regulatory costincrease (%w above) can be estimated as:

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be relatively easy for policy makers and industry interest groups to evaluateand discuss.5

In some situations, such as end-of-pipe pollution control technologies, it may

be difficult to attribute environmental regulatory cost changes to specificinputs In such circumstances, it may be best to think of environmentalregulations affecting average production costs rather than the costs of aspecific input Annex A, Table 1, Model 2 shows how to adjust the analysis

to include such average cost changes While Model 1 and Model 2 assumedecreasing returns to scale, Model 3 in Annex A shows how to adapt theframework to constant returns to scale

Two extensions of the basic model developed in Larson (2000) are used inthe country case studies: firm-level efficiency improvements in the use ofthe regulated input; and export price adjustments due to downward slopingexport demands In other words, if environmental regulations increase aninput price, companies may have an incentive to increase the efficiency with

offset some of the impacts on the sector of the input price increase due toenvironmental regulations Regarding export price adjustments, supplyshifts may cause export prices to adjust when export demand is notperfectly elastic (i.e., the sector faces a “downward sloping” export

5 Note that the formulation outlined here and presented in detail is slightly different from, but completely consistent with, that outlined in Larson (2000).

6 Holding all other inputs fixed, an efficiency improvement means that the firm can produce a fixed level of output for less of the regulated input.

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demand).7 Annex A shows how to include such extensions into the basicmodel.

For reference, the efficiency effect can be described as a simple shift insupply functions as outlined in Figure 1 As a first effect, the direct impact

of higher input prices on production and export is a shift back in the supplyfunction from SoSo to S1S1 As a second impact, efficiency improvementsassociated with the input price increase act to shift out the supply function

to S2S2 with new production levels y2 with exports e2 = y2 - co Thus,efficiency improvements act to mitigate some of the potentially adverseimpacts on exports of some environmental policy change The export priceeffect can be describe as simple movements along demand and supply

then output increases along the supply function S2S2 from y2 to y3, domesticdemand falls from Co to C3, and exports change from y2 - Co to y3 - C3 Based

on simply export demand and supply relationships, it is possible to thusestimate the export price change directly as shown in Annex A, Table 1,Model 1, Case 3

3 CASE STUDY TOPICS

This section summarizes the case study topic for each country and providessome additional background on the specific issues.8 The group of casestudy topics indicates the type of detailed environmental policy issues thatare likely to affect export competitiveness now and in the future

The case study for Cyprus estimates the impact of higher irrigation watercosts on production and exports of fresh potatoes As background,agriculture is an important sector in the economy of Cyprus Agriculturalcommodities and various processed food products account for 35-40% oftotal exports Potatoes are the most important export crop Since the early1990s, they have accounted for half or more of the total value of agriculturalexports The principal foreign markets are member countries of theEuropean Union (EU) Potatoes from Cyprus are high quality and command

an above-average price, but they face increasing competition from potatoesexported by lower-cost Mediterranean producers

Cyprus applied for EU membership in 1990 and negotiations began in 1998.Full accession will involve, among other things, adopting EU environmentallegislation This could be problematic, especially in the case of water pricingpolicies Cyprus has suffered chronic water shortages for decades, and

7 There are two simply reasons why export prices may adjustment as supply shifts First, by definition, changes in export levels from a ‘large country’ influence world prices for that product (Van Beers and Van den Bergh 1996) And second, it is commonly assumed in trade models that products are differentiated by country of origin (e.g., Armington 1969) In either case, the international price of a country’s exports will change as quantities exported change (see, Dervis, de Melo, and Robinson 1982, p 225).

8 Unless otherwise noted, all information contained in this section comes directly from the relevant case study reports from the relevant country, which are presented in the following chapters.

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agriculture – and potato farming in particular – has probably added to thestress on water supplies.

Essentially all of Cypriot potato farmers rely on irrigation, with irrigationaccounting for 70-75% of water use on the island Farmers receive irrigationwater at a highly subsidized rate The average charge for irrigation water

in contrast to the EU’s proposed framework directive on water policy, whichcalls for full-cost recovery for water supplied to all users, including farmers.The proposed policy also directs that the price of irrigation water should behigh enough to cover all of the following: operation and maintenance costs(O&M); repair costs; loan payments; and a fund for improvements andextensions

Higher water charges could create an incentive for more efficient water use

by potato farmers, but most farmers already employ advanced irrigationtechnologies Although irrigation charges are only one of many costsinvolved in potato farming, farmers fear that the limited scope for improvedwater use efficiency implies that higher water charges would inevitably push

up their production costs and cause them to lose customers in the Europeanmarket

The case study for Jordan estimates the impact of removing cadmium in

sector – mainly phosphate and potash – is a key sector of the Jordanianeconomy, which accounted for 7.5% of the GDP, about 7% of the industriallabor force, and about 36% of total exports as of 1996 While there arecurrently four main phosphate mines in Jordan, the large and relatively newShidiya mine has known reserves of 1.5 billion tons (annual mined output isless than 9 million tons) As of 1996, about 97% of total fertilizer output(phosphate, potash, and manufactured fertilizers using these materials)were exported with a value of about US$542 million The JordanianPhosphate Mining Company, which holds monopoly mining rights forphosphate that are renewed every 30 years, exported almost US$359million in 1996, split roughly equally between phosphate rock andmanufactured fertilizers, namely di-amonimum phosphate (DAP).9 Mainexport markets are in the EU, Asia, and eastern Africa

There are two potential environmental concerns facing Jordanian fertilizerexports in the future due to the natural characteristics of phosphatereserves, namely cadmium content and radioactivity content in the minedphosphate rock Both of these potentially hazardous materials are passed

9 Rock phosphate is used in the production of phosphoric acid (P 2 O 5 ), which in turn is a key input in the chemical fertilizer industry (DAP) By products of P 2 O 5 production include various types of air pollution in the evaporation process as well as solid waste known as phosphor gypsum, which contains some levels of radioactivity.

10 Cadmium is a rare metal that has no known separate ore deposits but is usually explored

as a byproduct of certain zinc, lead or copper ores It is basically non-essential to humans,

10

other locations have lowered the allowable cadmium content in fertilizerproducts over the past years, with the most stringent requirements found inNorway, Finland, Sweden, and Switzerland

The phosphate that is currently extracted from the Shidiya mine and to beextracted in the future has high enough cadmium levels to be of potentialconcern for the JPMC Since the current strategy of the JPMC is to focusproduction of the phosphate rock in the Shidiya mine, the removal ofcadmium will probably become a management concern in not-too-distantfuture

The total removal of cadmium from rock phosphate directly is consideredtechnically impractical and uneconomic However, there are severalprocesses being developed for the complete or total removal of cadmiumfrom phosphoric acid (P2O5), including: cocrystalization of cadmium withanhydrite (estimated cost is US$8 per ton), precipitation of cadmium withsulfides (estimated cost is US$15 per ton), ion-change resins (estimated cost

is US$35 per ton), and solvent extraction (estimated cost is US$26 per ton).These costs do not include any domestic disposal cost associated with

of US$219 per ton in 1997, these additional cadmium removal costsrepresent between 2.5-10% of P2O5 prices Given that P2O5 is a key inputinto the production of DAP, the Jordanian case study investigates the likelyimpact of a P2O5 price increase (range 2.5-10%) on the production andexports of DAP

The case study for Morocco estimates the impact on production and exports

of textile products if new water effluent standards for the sector weredeveloped and enforced As background, textiles are a key sector of theMoroccan economy, accounting for almost 30% of all industrial enterpriseslocated mainly in Casablanca, Fez, Rabat, Settat, and Marrakech The sector

of almost 1,400 facilities involves four related production segments(spinning, weaving, dying, and garment assembly) As of 1996, total textileexports were about 13 billion dirhams, with almost 70% of total exportsdestined for Europe Garments accounted for over 55% of the value of totalproduction and almost 81% of total textile exports (about 10.4 billiondirhams as of 1996)

The government of Morocco is currently in the process of developing watereffluent standards for various industries in the country, with biologicaloxygen demand (BOD) being identified as a likely pollutant to be regulated

in the textile sector (mainly due to effluents in the dying stage) Existing

26,000 - 58,000 tons per year, with the textile sector accounting for perhaps3,900-8,700 tons per year Based on existing estimates of BOD5 controlcosts per ton, the Moroccan case study considers the impact on production

animals and plants, and may present significant environmental risks Anemia, bone pain, deformities and renal failure may result from high cadmium content in the environment.

11

and exports of textiles of creating and enforcing modest BOD5 effluentstandards on the textile sector.

The case study for Syria estimates the impact of the existing Syrian ban onthe use of carcinogenic azo dyes on the production and export of textileproducts Syria produces and exports cotton, cotton yarns, cotton fabrics,and garments The dying process in the production of yarns and fabrics isone of the more pollution-intensive components of the textile industry,mainly in terms of water effluents In 1996, Syria banned the importation

(and de facto use) of carcinogenic azo dyes While the ban has been

enforced, the original motive for the ban is not clear The government couldhave taken the action to maintain continued access for the country’sexports to the German market, which banned the use of azo dyes in about

1994, although there was no EU-wide azo dye ban in either 1994 or 1996 IfSyrian policy changed to maintain market access for exports to Germany,

this case study provides a good example of how a product standard in an export market (azo free textiles products) effectively becomes a process standard in the producing country Of course, the government may also

have banned imports (and domestic production) due to concerns for thehealth of citizens in the country

While dyes can be applied to either yarn or fabric, the Syrian case studyfocused its analysis on the dying process in the production of fabrics(considered relatively more important in Syria) In this case, the azo dyeban forced domestic fabric producers to use substitute (and moreexpensive) dyes Since more domestic fabric is consumed within thecountry, mainly as an input in the garment industry, the impact of azo dyeban on garment exports is evaluated

3.5 Tunisia

The case study for Tunisia primarily estimates the impact of higher irrigationwater costs on exports of dates and citrus Agriculture in Tunisia accountsfor about 14% of total GDP As with other countries in North Africa, themanagement of critical and limited water resources remains a key issue foreconomic growth and development of the economy The cost of water tovarious sectors in the economy will surely rise in the future, either due todeterioration of supplies leading to increased access costs or policy inducedincreases in water resource costs

Not surprisingly, however, the Ministries of Economy, Finance, andCommerce, as well as different producer associations basically oppose watercost increases to industry The main concern is that any water costincreases will hurt their competitiveness, with a resulting reduction inexports and employment and an increase in imports

To evaluate this relationship between water costs and key exports, theTunisian case study focused on the impact of higher water costs on fruit

12

production and exports, and specifically, dates and citrus For reference,

about 13.2% of total agricultural and food exports Of total fruit exports,dates (fresh and dried) accounted for about 70% and citrus (mainly oranges)accounted for about 22%

Leather production is pollution intensive From raw hide and skinpreservation, to soaking, unhairing, liming, and tanning, a range of waterpollutants are generated including: total suspended solids (TSS), biological

and grease, and phenol

While Turkish has water effluent standards for tanneries on paper that weremodeled in part from German effluent standards, existing available datasuggest that actual effluent levels substantially exceed standards Thebasic implication is producers in organize industrial zones have waste watertreatment facilities, such facilities either are not used or are not capable ofhandling the effluent load form the tanneries Such a situation in principle isnot consistent with the customs agreement between the EU and Turkey

While the Egyptian case study focused on tanned leather, the complicatedsituation in the sector precluded the case study from focusing on onespecific, and relevant, environmental policy change In short, the current

state of the Egyptian tanneries is a classic example of negative

environmental impacts and the lack of incentives for modernization resultingfrom past protectionist trade In this case, it is safe to say that the lack ofmore open trade helped to cause and perpetuate environmental damages inthe country

Most tanneries in Egypt are located in a run down, densely populatedsection of Misr Al Kadima in southern Cairo, also know as the “Tanners’District.” The district supplies 85% of Egyptian tanned leather Drainagesystems in the district have mostly collapsed leaving tanning effluent to run

11 1 Tunisian dinar equals approximately US$1.1.

13

through the streets, although some tanners have built above groundchannels that carry effluents to municipal sewers Decayed infrastructuremakes it difficult to establish individual treatment units or centralized units

in the Tanners’ District Given that no Egyptian tanneries have on-site wastetreatment facilities, it can be safely said that the tanning industry is inviolation of all applicable environmental articles and laws

Rather than investing in improvements in the existing tanning district inCairo, the government has tried for the past 40 years to relocate thetanneries to Badr City, located 50 km outside of Cairo The policy wasstrengthened in 1995 when the government allocated land in Badr City for anew tannery district and pledged to provide the area with necessaryinfrastructure Since Badr City is classified as a “new urban community,”tanners that move there would enjoy a ten-year tax holiday – although this

is an incentive only for tanneries that are registered and profitable, i.e.,

While there are a multitude of environmental concerns with the sector,chemical use is one concern that effects both the domestic environment andthe competitiveness of Egyptian products in the international market place.The Egypt case study reports that switching to the use of safe chemicals(i.e., chemicals that are not banned in foreign countries) could raise the cost

of chemical inputs for each tannery by approximately 5% Given thatchemicals account for 10-15% of the total cost of production, this impliesthat the total costs would increase by 0.5-0.75%

4 CASE STUDY RESULTS

Tables 1-6 provide detailed information for each country for representativescenarios, while Table 7 summarizes the basic empirical results obtained forall the case studies Given that each case study may have had severalscenarios included in the analysis based on a range of assumption of keyparameters and policy changes, the individual country tables (Tables 1-6)and the summary table (Table 7) are intended to illustrate a range outcomesbased on available information in the case studies The individual countrytables are provided so that the interested reader can replicate the results(e.g., use a spreadsheet program) and perform sensitivity analysis of thereported results based on different assumptions and opinions on relevantpieces of information (a summary of all needed equations is provide in thetable in Annex A)

The summary results in Table 7 are organized roughly by country according

to the magnitudes of estimated impacts and the range of potentialoutcomes For Morocco, for example, the proposed increase in BOD control

12 Despite these efforts, negotiations regarding the relocation are at an impasse for three reasons First, infrastructure for the new district has yet to materialize Second, tanners are reluctant to leave a central and convenient location Third, and most importantly, the current Tanners’ District occupies government-owned land for which the tanners pay no rent since they effectively “own” the land due to their length of stay there Under the government’s plan, moving to Badr City would require tanners to purchase the new land, while giving up the current land and buildings without receiving compensation.

14

costs would have a minor impact on textile production and exports, andthere is little variation in the outcomes As shown in the country table forMorocco (Table 4) and based on the method summarized in equation (2), thelogic of this outcome is clear BOD control costs are currently almost zero,perhaps between 0.09% to 0.15% of production costs At the same time,the proposed BOD effluent standard policy would involve minor increases inBOD control costs As a result, minor increases in water control costs, due tothe initiation of modest water effluent control policies in the textile sector,would probably have minor impacts on overall production levels andexports.

Caution is needed, however, in the interpretation of the Moroccan casestudy because the study assumes that capital costs for BOD control would

be subsidized by the government, while the industry would only payoperating and maintenance costs If the relevant policy option was morestringent BOD effluent standards along with the private sector paying bothinvestment and operating costs, it would be easy to envision a future whereeffluent control costs reached 2-5% of total production costs Using theaverage cost model (see equation (3)), such cost increases could reduceexports by about 5-11% Thus, this Moroccan study emphasizes that

environmental policies per se are not the issue; rather it is necessary to be clear on both the stringency of the policy and the allocation of financial

responsibility for complying with the policy

For Cyprus, as detailed in Table 1 and reported in Table 7, the analysisfocuses on a 60% increase in irrigated water costs, which is considered to be

a reasonable policy change based on discussions with the Ministry ofAgriculture In short, such a water price change would involve relativelyminor impacts on production and exports With rather limited supplyresponse, exports would be estimated to fall by about 0.5%, while in thelonger run exports could fall by 2% due to larger supply response Note,however, that estimates in Cyprus suggest that water prices would have torise by over 200% to begin to approach ‘full-cost’ pricing levels

Table 1 for Cyprus also shows that higher fertilizer costs (due to EU nitratepolicy for groundwater protection) would have minor impacts on potatoproduction and exports The main reason is that the existing irrigationtechnology would allow for the easy adoption of fertilizer application throughthe drip irrigation systems (fertigation) This technology switch involvessubstantial efficiency improvements in the use of fertilizers, which fromTable 1 could imply almost no impact on production and exports For thiscase, it could easily be possible to observe efficiency improvements in theuse of fertilizers due to fertigation large enough to off set completely thefertilizer price increase, thereby leading to minor production increases (anempirical example that is consistent with the so-called “Porterhypothesis”13)

13 See M.E Porter, The Competitive Advantage of Nations New York, NY: Free Press,

1990.

15

For Jordan, from Table 2 and Table 7, fertilizer exports of DAP could beaffected by the additional costs of removing cadmium, depending on actual

2.5%, and if such costs are passed along to the DAP production stage, theimpact on production and exports of DAP fertilizer would be minor (perhaps

an export decline of 0.3%) If removal costs are actually higher, so that P2O5

price rises by perhaps 10%, then the fall in production and exports could beabout 1.3% There is substantially uncertainty, however, about supplyresponse in the fertilizer industry Table 2 shows that exports could fall byabout 6.5% with high-cost cadmium removal, higher supply response, anddecreasing returns to scale due to capacity constraints

Tunisia, Turkey, and Syria show that, for some countries, a rather wide range

of potentially substantial impacts could occur depending on specific pieces

of information and proposed policy changes For example, from Table 5 andTable 7, higher water costs for irrigation in Tunisia could have someimportant impact on production and exports For a 50% increase in watercosts, the analysis suggests that exports could fall between 2-4% for citrusand 14-26% for dates This difference depends on the fact that water has ahigher cost share for dates as compared to citrus and the case studysuggests that supply response is less for citrus as compared to dates

The large range of negative impacts on leather exports for Turkey is driven

by the rather large cost change associated with the proposed policy change(equivalent to 2-6% of total production costs), the minor share of productionthat is exported (25% of production exported), and the rather large supplyresponse used in the analysis based on previous studies The Turkish studyalso emphasizes the importance of being able to pass along some of theproduction cost increase through higher output prices For example, thehigh cost policy scenario (water cost equal to 6% of total costs) is estimated

to reduce exports by 45% if export price is fixed With international priceadjustments, based on elasticities reported previously in the literature, thisresult falls from 45% to 7% While 7% is still rather large in absolute terms,

it is substantially smaller than in the case with no price adjustments Withthe lower-end cost increase of 2% of total production costs, this impact withinternational price adjustments is 2.3%.14 (See Table 6 for more detail.)The Syria case study shows how to use the methodology in vertically relatedindustries The azo-dye ban in Syria raised dye costs by about 35% (pricedifferential for azo-free substitutes) With dyes accounting for about 20% offabric production costs, the case study estimates that the domestic fabricprice would rise between 4-9% depending on supply response, domesticfabric demand (as an input into garment production) and returns to scale infabric production Given that fabrics represent about 75% of garment costs

in Syria, this fabric price increase is estimated to reduce garment production

14 Note that the original Turkish case study used a somewhat different modeling approach For comparison purposes with the other case studies, the basic information from the Turkish case study was used to estimate the impacts reported in Table 7 The results are essentially the same here as reported in the Turkish study.

16

by 4-10% (see Table 3) Given that about 30% of garment production isexports, the percentage fall in exports is substantially larger (9-22%).

The impact of environmental regulations on exports depends on the details

of the situation and, as a result, it makes little sense to make sweepinggeneralizations that ‘environmental regulations have no impact oncompetitiveness’ on the one hand or that ‘more stringent regulations willhurt competitiveness.’ As the MedPolicies case studies show, the impacts ofenvironmental policy changes on exports depends on several clearlyidentified pieces of information, including: input cost changes due to theregulatory change; the share of the regulated inputs in total costs; profitrates in the sector; supply response and returns to scale in the sector;domestic and export demand elasticities; and possibilities for efficiencyimprovements It is the combination of these factors that determine theimpact of environmental policy changes on exports

Generally, however, smaller impacts on output and exports can be expectedwhen environmental policy changes:

terms of own price.15

Impacts of new policy changes on exports will be larger when the opposite istrue: policy changes lead to large cost change for inputs that are a largershare to total costs; the sector exhibits higher supply response and ‘more’decreasing returns to scale; and export demand is very elastic in terms ofown price

For all country case studies, much of the needed information on supply anddemand elasticities (with respect to output price) for various sectors isessentially missing This lack of understanding of the basic workings ofthese economies is symptomatic of the lack of data and resources andperhaps understanding of the creation of such information Even forpotatoes in Cyprus, which are the key agricultural export for the country,information on such elasticities are absent Fortunately, while preciseestimates may not be available, reasonable initial estimates of all theindividual pieces of information for the partial equilibrium approaches usedhere can be based on common sense, available information (especially forcost shares and profit rates), and existing estimates in the literature forrelated sectors or similar sectors in other countries The model shows thatsensitivity analysis can then be used to discuss how the estimated impacts

15 Of course in the extreme, if there is no supply response to output price changes (fixed output levels for some reason), then environmental policies would just raise costs and reduce profits If profits became negative, the firm would shut down.

17

can change depending on the detailed assumptions used.

While perhaps the most difficult to estimate, the ability to makeimprovements in the efficiency with which regulated inputs are used willprobably be one of the key factors that can improve internationalcompetitiveness in the future Indeed, where firms are able to innovate andbecome more efficient in low cost ways, the impacts of more stringentenvironmental policies on output and exports should be minor, whileproviding likely benefits to the natural environment

18

ANNEX A METHODOLOGICAL DETAILS

1 The Basic Model (No efficiency adjustments and fixed export prices)

While the details of this method can be found in Larson (2000), it may beuseful here to summarize first the key results on how to estimate the supplyshift as noted in Figure 1 of the previous chapter

For reference, the following notation is used:

above discussion)

inputs to output, with y=f(x,k)

The Larson (2000) approach simply assumes that firms minimize costs andmaximize profits within the context of competitive markets As a result,standard duality relationships between a profit function π = π(p,w,r) and acost function C = C(w,r,Y), and the symmetry of the Hessian π, and theenvelope theorem (Hotelling’s Lemma and Sheppard’s Lemma) can be used

to show that

Equation (1)

where Y is the profit-maximizing supply function, X is the profit-maximizing

y is a reference level of output in a cost function

The result in Equation (1) can be rewritten as:

Equation (2)

p

Y y

X -

= p

X -

= w

%

= E

%

100

* w

w

*

= Y

%

*

* pY

C C

wX -

= Y

w w

Y

=

yw

c y x p

y yw

19

where ηyp = (Y/p)(p/Y) is the output own-price elasticity, ηc

xy = ( Xc/y)(X/Y)

is the elasticity of the cost-minimizing input demand with respect to thereference output level, and %ΔY denotes the percentage change in thevariable Y, defined as ΔY/Y

The relationship in equation (2) shows that the impact of higher prices forthe regulated input on output and exports depends on four specificcomponents: the regulated inputs cost as a share of total costs, wX/C; totalcosts as a share of total revenues, C/pY (which is essentially an inverse

and the input demand elasticity (cost-minimizing) with respect to outputlevel, ηc

and 1 < ηc

xy , recalling that ηc

which case the profit function is not defined) One benefit of the simpledecomposition in (2) developed in Larson (2000) is that the assumptionsand calculations are very transparent and relatively easy for policy makers

In some situations, such as end-of-pipe pollution control technologies, it may

be difficult to attribute environmental regulatory cost changes to specificinputs In such circumstances, there may be data or information available

on how some regulatory change is likely to affect average production costs,

in which case the cost function can be written as C = C(w,r,y) + My, where

M represents an increase in average production costs due to the regulation.For example, consider the case where with initial environmental regulations

initial regulations With some regulatory change from r′ to r@, average

production costs is dM = M(r@) - M(r′) = m In this case, the supplyfunction just shifts from Y = Y(p,w,r) without the regulation to Y(p-m,w,r)with the regulation For this case, a similar process as above can be used toshow that:

Equation 3

In this increasing average cost increase case, it is just necessary to knowthe basic supply elasticity and an estimate of the existing production costincrease (m) to evaluate the impact of higher regulatory costs on productionand exports.17

16 Although not reported here, the author has also developed the equivalent framework assuming constant returns to scale production technology.

(E/Y)

1

* Y

%

= E

%

100

* pY

C

* C

mY

*

-

= Y

1.1 Extensions of the Basic Model (efficiency improvements and

export price adjustments)

Two extensions of the basic model developed in Larson (2000) are used inthe country case studies: firm-level efficiency improvements in the use ofthe regulated input; and export price adjustments due to downward slopingexport demands To include such extensions into the basic model, thefollowing additional notation is needed:

that y=f(qx,k)

If environmental regulations increase an input price, companies may have

an incentive to increase the efficiency with which the input is used Ingeneral, such efficiency improvements act to offset some of the impacts onthe sector of the input price increase due to environmental regulations.Regarding export price adjustments, supply shifts may cause export prices

to adjust when export demand is not perfectly elastic (i.e., the sector faces a

“downward sloping” export demand)

With the new form of the production function y = f(qx, k), the profit functionbecomes π = π(p,w/q,r), where the term w/q is the effective price of theregulated input Using essentially the same process as outlined with thebasic model, the final effect of any regulatory change that increases wdepends on how this effective input price changes As shown in Larson(2000), can be written simply as:

Equation 4

where the output supply elasticity with respect to the input price holding q

yw, is just the cross price elasticitydefined in equation (2) above In general, when environmental policy has a

‘good’ impact on either input quality or incentives to use the input moreefficiently, it is possible that ηqw is positive.18

17 Note that this formulation is slightly different from, but completely consistent with, that outlined in Larson (2000).

E/Y

1

* Y

%

= E

%

100

* w

w

*

= Y

%

* ) - 1 (

=p yw

qp yw qw

p yw

η

21