This trade agreement could cut your monthly utility bill: The Environmental Goods Agreement

14 March 2017

Imagine a trade deal that could save energy, cut your monthly utility bill, and improve the environment. This is exactly what 45 countries are aiming to do in the WTO Environmental Goods Agreement (EGA).

 

The cornerstone of our analysis is the U.S. Consumer Expenditure Survey (CES). Our approach to assessing the EGA is a bottoms-up approach to household-level effects. We consider a number of everyday household items likely to be included in such an agreement. We use household data to estimate the benefits to American households when tariff cuts on household goods included in the EGA lower the price paid by consumers. In addition to a price effect, lower consumer prices can spur demand for these energy efficient goods. Lower consumer prices, in turn, can result in energy savings and reduced costs in connection with operating these goods.

For instance, eliminating the 3.6 percent tariff on LED light bulbs would save $320 million of household expenditures in the form of lower prices. Furthermore, using more energy efficient lights bulbs in the United States could cut electric bills by nearly $130 million and lower the number of kilowatt hours by 238 million each year.

Consumer survey data reveal non-trivial differences in household expenditure patterns across a number of socio-economic and demographic groups. We consider geographic region, urban versus rural, size of household, household income, and homeowner or renter status.

We calculate the consumer surplus effects for a set of products that are being considered for inclusion in the EGA. We estimate two household-level effects. First, we estimate the price effect, as declining prices bring lower acquisition costs on quantities already purchased. Second, we estimate the volume effects and corresponding energy cost savings that accrue as a result of consumers substituting energy-intensive for energy-efficient products, and benefit from lower operating or running costs. 

The socio-economic and demographic differences in household expenditures are perceptible in the household savings as well. We find the biggest savings go to households in the South, households with a mortgage, two-person households, and lower-income households.

 

Bringing the story to the household level

The CES data allows us to see how consumption of various goods and services varies across numerous household characteristics. The average US household spends $69.51 per year on LED light bulbs, but when you break it down further, you find that a household with one person spends $40.67 and a household of four spends $85.65.

People in the South would save more than those in other regions, reflecting the hot climate and widespread use of air-conditioning. As a share of household budgets, the effect of savings is twice as great for families with incomes of up to $30,000 (compared to families with incomes over $70,000), which reflects the larger share these goods and services constitute of their household budgets.

As a result of lower prices, consumers will substitute energy-intensive products for energy-efficient products. Greater use of energy efficient products yields savings in the form of lower utility bills. The benefits are not the same for every household, and this is where using the CES data allows a more granular view.

A need for microeconomic evidence  

Why focus on the household level? Trade sceptics are no longer won over by the economy-wide effects often produced by CGE models. So we tried to see if we could use the household level data to offer a different angle into trade effects. We see the household level analysis as a complement to economy-wide assessments.

Recent EU surveys indicate that most people believe trade has overall benefits, but are less clear on how it will affect them. Cernat and Jansen summarise these survey, noting “these findings suggest that the surveyed population acknowledged the potentially positive effects of globalisation on the overall economy, but that many people expected not to be in a position to share in the benefits. In other words, in today’s world a majority of individuals appear to expect the effects of globalisation on their lives to differ from those on the overall economy.”

Americans appear to feel no differently. When asked about what foreign trade means for America, those surveyed viewed foreign trade as an opportunity (as opposed to a threat). Yet when asked whether US involvement in the global economy was a bad thing because it lowers wages and costs jobs in the US, or a good thing because it creates new markets and growth, the negative sentiment was stronger. Overall, this is consistent with the notion that most people in the US and EU view trade as a good thing for their country or region overall, but as a threat to their personal economic situation.  

Researchers may find household-level analysis to be a useful complement to economy-wide CGE (computable general equilibrium) analysis, particularly when trying to inform public policy discussions and understand potential distributional effects of trade policy.

 

This article is derived from The Environmental Goods Agreement: How Would US Households fare? published by ICTSD and authored by Kornel Mahlstein and Christine McDaniel.

Kornel Mahlstein is an economist in Sidley Austin’s Geneva office. Christine McDaniel is a senior economist in Sidley’s Washington, DC office. The views expressed in this article are those of the authors and do not necessarily represent Sidley Austin, LLP, or any of the firm’s clients.