lobal attempts to limit greenhouse gas (GHG) emissions may impact on agricultural trade and producer returns, particularly in countries such as New Zealand, where a relatively large proportion of GHG emissions originate from the agricultural sector. This study uses an extended partial equilibrium agricultural trade model to analyze the effects of trade policy liberalization on agricultural production and trade, as well as on GHG emissions. Further analysis combines trade liberalization with GHG mitigation policy in the New Zealand and European dairy sectors, and the effects on producer returns and GHG emissions are predicted. As expected, full trade liberalization in the OECD (Organization for Economic Cooperation and Development) countries enhances producer returns in New Zealand's dairy sector, but reduces returns in the European Union's dairy sector.

Key Words: partial equilibrium trade model, agricultural production system, greenhouse gas emissions

The link between trade and the environment has aroused considerable interest, both in terms of the impact of trade liberalization on the environment, and also the impact of environmental policy on production and trade. This interest is expressed at the global level, especially in the World Trade Organization (WTO) round of negotiations, but also at the micro level, where local governments and agencies are concerned about the impacts of policies on production and trade, as well as on the local environment. This paper analyzes the effects of trade liberalization on greenhouse gas (GHG) emissions from agriculture, as climate change is an increasingly important environmental concern. An extension of this analysis will simulate the combined impact of trade liberalization and a GIIG mitigation policy. This second part of the analysis will focus particularly on the impact on New Zealand, a country highly reliant on agricultural trade and which has a high percentage of its total GHG emissions originating in the agricultural sector.

The analysis in this paper simulates the removal of all European and OECD (Organization for Economic Cooperation and Development) export subsidies, import tariffs, and internal dairy quotas, focusing specifically on the impact of this on the dairy sector. Trade policy reform, such as liberalization, will significantly reduce the system of support for livestock production. Studies that analyze trade policy such as the Uruguay Round Agricultural Agreement or the CAP (Common Agricultural Policy) reform generally show that production in countries whose support is removed decreases, while other countries' production may increase (Cox et al. 1999, Shaw and Love 2001, Rae and Strutt 2001). International trade offers an important vehicle for adapting to climate change. By permitting the geographic relocation of world food supplies according to changing comparative advantage, spatial diversification of the climatic risk associated with global warming may be achieved (Randhir and Hertel 2000). By facilitating the transfer of output from regions with possible environmentally harmful production to regions where production may be less environmentally damaging, international trade can play a valuable role in mitigating the global cost of climate change. However, the potential for trade to play this buffering role is often hampered by restrictive trade policies. Furthermore, as stated by the Intergovernmental Panel on Climate Change (IPCC) (2001), there is a need to identify the extent to which the impacts of climate change mitigation policies create or exacerbate inequities across nations and regions. Changes to trade policies of trading partners and/or competitors, in particular the European Union (ELJ) and the United States, are likely to have significant effects on the GHG emissions from New Zealand agriculture. Following possible and likely liberalization of international agricultural trade policies, New Zealand producers are likely to respond by increasing production to target the newly liberalized markets, further increasing emissions from New Zealand.