Carbon Emissions Embodied in International Trade: An assessment based on the multi-region input-output model

Policy Report
Carbon Emissions Embodied in International Trade: An assessment based on the multi-region input-output model

The entry into force of the Kyoto Protocol to the United Nations Framework Convention on Climate Control (UNFCCC) divides parties into two groups by their obligations to mitigate domestic emissions. This division creates differences in the strictness of domestic climate policy, which are in favour of the conditions for creating the “heavens” of pollution. Current national GHG emissions accounting is based on territorial responsibility, or similarly producer responsibility, which contributes to make the conditions for creating the “heavens” of pollution mature. These situations lead to the concerns on global competitiveness and carbon leakage because carbon emissions embodied in international trade and associated global social costs are not taken into account. In addition, the equity of allocating full responsibility for emissions embodied in exports to the exporting countries is arguable. There is a need to consider other responsibility principles and take account of international trade.

Various policy measures have been suggested to address competitiveness and leakage concerns. Among others, the foremost policy option is to commit all emitting countries to reduce. Other measures include, e.g., border tax adjustment to level the international playing field. This report presents a policy option of national responsible emissions accounting adjusted by trade to address these issues.

The purpose of this report is (i) to assess and compare national emissions based on different principles of responsibility, including producer responsibility, consumer responsibility and shared producer and consumer responsibility based on value-added ratios; and (ii) to test the differences in the results calculated by different input-output models (the single-region input-output model and the multi-region input-output model). We conducted an empirical analysis for ten economies, including five ASEAN countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand), mainland China, Taiwan and three OECD countries (Japan, the Republic of Korea and the USA).

The empirical analysis indicates that CO2 embodied in multilateral trade among ten selected economies is significant, accounting for 13% of the total national responsible emissions of ten economies. In terms of the trade balance of embodied CO2, the USA (-464 Mt-CO2), Japan (-191 Mt-CO2) and Singapore (-13 Mt-CO2) have a deficit while other economies, in particular China (452 Mt-CO2), have a trade surplus. Our research indicates that carbon leakage occurs in a non-negligible way from developed economies to developing economies, which will undermine the efforts made in achieving the mitigation targets set by the Kyoto Protocol and should be properly considered by the UNFCCC.

This research demonstrates that a change from producer responsibility to consumer responsibility will greatly influence national emissions inventories. For example, the responsibility allocated by the two extreme methods, i.e., full producer responsibility vs. full consumer responsibility, could cause a change in the national emissions ranging from -525 to 543 Mt-CO2 for different countries. This implies that trade adjustment to current national accounting to generate national responsible emissions accounts will influence the relationships between climate policy and international trade potentially and therefore can be considered as a complementary policy option, among others, to help address the carbon leakage concern. However, how consumer responsibility will influence carbon leakage and international competitiveness needs further assessment.