Interaction between trade liberalization and climate change policy: an application to Norwegian agriculture

We examine strategies for complying with trade liberalization and GHG emission cuts in agriculture using Norway as an empirical example. Trade liberalization implied by the Doha draft agreement on agriculture in the WTO will not have a major impact on the sector’s Trade missions, since the likely impact on production is small. Consequently, more effective trade liberalization or the imposition of carbon taxes are required if emissions are to be reduced significantly. Both of these policy options reduce agricultural activity (trade liberalization more so than carbon taxes) and increase economic welfare. The impact of a proposed emission cut of 30% depends substantially on whether credits (offsets) are allowed for carbon sequestration on land taken out of agricultural production. Aggregate production can be kept 15-20 per cent higher when carbon offsets are possible. Furthermore, the impact on factor intensity is reversed in that emissions per unit of land in agriculture increase in the offset case. The results suggest that under a continuation of high support for agriculture, when land can be used for carbon sequestration activities and when the resulting carbon offset can be credited to agriculture’s GHG emissions account, there may be a strong tendency to intensify agricultural production, leading to higher emissions from agricultural production.