Guest article: How to “fairly” share emissions from traded goods around the world

Each year, nearly $ 20 billion in traded goods are transported, shipped and transported around the world. The global value of merchandise trade has tripled in the 21st century alone.

But, as the world tries to reduce its greenhouse gas emissions, its growing interconnectedness can complicate matters.

A key debate is who should be held responsible for greenhouse gas emissions from internationally traded goods. In a globalized economy, should the responsibility for emissions lie with those who produce goods? Or should it rather be accounted for by those who consume final goods and services?

In a new article, published in Global Environmental Change, we suggest that an exclusive focus on producers or consumers is not a method of attributing trade-related emissions to individual countries.

Instead, we are proposing an accounting system that allocates trade-related emissions among trading partners in proportion to the economic benefits they derive from those emissions.

Where should the emissions be counted?

Traditionally, issues are attributed to the country where they are issued. This is the “production-based accounting” (PBA) method used by governments to report their greenhouse gas “inventories” to the United Nations Framework Convention on Climate Change (UNFCCC).

However, products made in one country are often consumed elsewhere. This raises the question of whether the producer or the consumer should take responsibility for the emissions associated with this product.

Take the example of a cotton t-shirt made in India and then shipped and sold in the UK. Growing and processing cotton produces greenhouse gases, as does the factory where the garment is made.

As manufacturing in many sectors has increasingly shifted from developed to developing countries, a PBA approach means that associated emissions have also changed. In the case of the T-shirt, this means India is counting emissions rather than the UK.

There is a long-standing concern that countries could use this approach to meet their emission reduction commitments by simply shifting the production of carbon-intensive goods and services elsewhere.

As production in rich countries is generally less carbon intensive, this also risks “carbon leakage” – where production is moved to countries with fewer environmental controls, thus causing increased emissions.

Rather, a “consumption-based accounting” (CBA) method counts the emissions of a product or service when it is used. In the example of the T-shirt, this would be the United Kingdom.

Under a CBA method, richer countries would typically take responsibility for many more emissions compared to PBA, while poorer countries would take a smaller share.

But would it be fair to let companies in rich countries off the hook and exempt them from climate regulations if they export their own products? And don’t companies in the poorest countries also profit, at least to some extent, from the manufacturing of the products they sell in foreign markets?

It is this debate that our new approach aims to help resolve.

Allocation of programs

The economic rationale behind our “Shared Responsibility for Economic Benefits” (EBSR) approach is simple. Both producers and consumers benefit financially by not paying an economic cost linked to the impacts their greenhouse gas emissions have on society.

If a carbon price – such as a global carbon tax – reflecting the social cost of carbon emissions were introduced, this financial “surplus” for both producers and consumers would be reduced.

In other words, both producers and consumers benefit from emissions generated below the optimal carbon price at the expense of those who bear the impacts of climate change.

But how is this profit distributed between producers and consumers? The size of the producer and consumer surplus depends on the slope of the supply and demand curves, which in economic terms is called the “elasticity” of supply and demand, respectively. In simple terms, it can be understood to describe the ease with which producers and consumers can react to price changes.

It is well known from economic theory that the burden of a tax – and, in this case, the benefit of not having it in place – is shared between producers and consumers in inverse proportion to their elasticities. That is, those who can more easily adapt to price changes are less affected by a tax.

Consider an example where a low carbon alternative for carbon intensive production technology is available at a reasonable price.

In this case, producers may respond to a carbon price by raising the price of their products less than they would have if no viable alternatives to emissions-generating activities had been available.

Likewise, consumers may substitute certain types of goods for others – for example, certain luxury goods – while this substitution is more difficult for necessities, such as food.

That is, regions with low elasticities of demand or supply, respectively, should bear the greatest impact of a price increase, while those with high elasticity may at least in a to some extent substitute and would therefore be less affected.

For this reason, regions with lower import and export elasticities benefit more from the absence of an emission price and are therefore allocated a higher share of the emissions associated with their external trade relations.

For extreme cases of totally fixed supply or demand, the benefits of no carbon pricing would fall on producers or consumers, respectively. Our EBSR scheme would then be equivalent to PBA and CBA, respectively.

Assignment of responsibility for trade-related emissions

We test our approach using a multiregional input-output database combined with elasticity estimates from previous studies and use an example of a carbon price of $ 50 per tonne of carbon dioxide (CO2 ).

To simplify the analysis here, we are only discussing the trade relationships of the top five issuing trading blocks – namely China, India, Russia, the EU, and the United States. (More detailed results are in the document.)

In the figure below, the thickness of the arrows indicates the amount of emissions generated in one country for exports to another. With PBA, these issues would be fully attributed to the exporter, while with CBA, they would be fully attributed to the importer.

Responsibility for trade-related greenhouse gas emissions under the EBSR program. The arrows indicate the responsibility for emissions attributed respectively to exporters (dark areas) and importers (light areas). Blue and pink bars indicate responsibility for imports and exports, respectively. Results are presented for the five regions with the highest trade-related emissions (sum of emissions released for the region’s imports and exports). Source: Jacob et al. (2020).

Under our EBSR program, emissions are split between importers and exporters, as indicated by the light and dark shaded arrows.

For most “pairs” of countries – an importer and an exporter – trade-related emissions are shared relatively evenly between producing and consuming countries, with exporter shares in the range of 40% to 60% . A notable exception is Russia, which is attributed more than 85% of its export-related emissions. This observation is due to the low elasticity of the country’s exports, which is most likely due to the economy’s heavy dependence on exports of raw materials – such as oil, gas, minerals, timber and agricultural products – with little potential for substitution.

The bars in each region indicate the emissions generated for the imports (blue) and exports (pink) of the respective region.

Under ACA, countries would be responsible for emissions associated with their imports (the whole blue bar), but not for emissions associated with exports. Likewise, under the PBA, countries would be responsible for emissions related to their exports (full pink bar), but not for emissions related to imports.

On the other hand, the EBSR attributes a certain share of the emissions associated with imports, as well as exports to each country (sum of the pink and dark blue bars).

National emissions accounting

The choice of accounting system has important implications for national emissions accounts. For example, under the ACB, the US and EU accounts would be adjusted upward by 15.8% and 18.6%, respectively, over the ABP, to account for of all emissions generated to produce imports from these two regions.

Under our proposed EBSR program, only a portion of these emissions would be allocated to the US and the EU, and the rest to their trading partners. For this reason, the upward adjustments for both would be more moderate, namely 8.3% for the US and 7.2% for the EU.

In general, for industrialized regions, EBSR translates into greater emissions liability than the AAP, but less than the ABC. In other words, for these countries, the EBSR would adjust the emission accounts upwards compared to the current practice of territorial accounting, but not as much as the CBA.

On the other hand, low-income countries would be responsible for part of the emissions generated by the production of exports destined for richer countries.

For example, while the CBA would adjust China’s issuance account down 12.5% ​​from PBA, the adjustment with EBSR is only 7%. Overall, for low-income regions, the EBSR tends to result in lower emissions liability than the AAP, but higher than the ABC.

Why is this important?

Our findings could help open a new perspective on how to account for trade-related emissions. This would help move the conversation away from a polarized focus on producer or consumer responsibility and towards a more nuanced and quantifiable approach that recognizes that both sides of trade are jointly responsible.

The plan we are proposing to divide emissions in proportion to the benefits of issuing without having to pay the full social costs of those shows is a plausible – but not the only – way to divide the blame.

Due to the substantial data requirements and the associated politicization of data collection, the proposed EBSR system is unlikely to be applied immediately as a basis for international negotiations. However, it could nonetheless make an important contribution to arriving at a more complete picture of responsibilities for trade-related emissions.

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