Should We Switch To Consumption-Based Carbon Dioxide Accounting?

A toy manufacturing plant closes in Cleveland and opens in Shenzhen. The jobs sent overseas are easy to quantify. The carbon emissions, less so. A recent paper by Steven Davis and Ken Caldeira attempts to clear up the answer, showing just how many tons of carbon are outsourced to developing countries to make our carbon footprints look a little lighter. Their answers provide a new context for the debate about how to structure a global carbon market.

Davis and Caldeira use 2004 trade data across 57 sectors and analyze 113 regions or countries. They call their approach consumption-based CO2 accounting. Their results show some countries have much bigger carbon footprints than current numbers based solely on national boundaries would indicate. For example, Iceland, which produces almost all its energy from geothermal and hydroelectric sources, also exports over half its emissions to foreign manufacturing hubs like China and India. In the case of Switzerland and some other small countries, their outsourced emissions exceed emissions within their borders.

The US has a more balanced trade deficit (and a more carbon-intensive economy) so including outsourced emissions "only" adds an extra 11% a year. That’s not to say the US deserves a pat on the back. China’s 22.5% net “loss” of carbon emissions coupled with the US’s 11% gain puts the US right back on top as the number one emitter in the world.

The results might not be very surprising to macroeconomists. Western Europe runs a large trade deficit. If you’re a net importer of goods, it stands to reason that you’re a net importer of carbon emissions. The opposite holds true for countries with large trade surpluses like China. Still, having consumption-based numbers are very important for international negotiations.

Outsourced emissions are sometimes referred to as leakage. This has been a worry for regional cap and trade programs, such as the Regional Greenhouse Gas Initiative (RGGI). Though RGGI is an agreement between 10 states to cap emissions, its feasible that a company in one of those states could import energy at a cheaper price from a state not covered by RGGI. This would weaken the value of having a cap and give that company an unfair competitive advantage.

Davis and Caldeira’s paper illustrates how big the problem of leakage would be under the current model of cap and trade used in Europe and proposed elsewhere. Companies could close a manufacturing plant in a France under the auspices of getting under the carbon cap. But they could simply reopen it abroad, negating the benefits of closing the original plant. As an added irony, developing countries usually have more lax environmental laws so moving a plant overseas could actually contribute to greater carbon emissions and local environmental problems as well.

The paper also stands in contrast to a common complaint in the US. Many conservative politicians make China out to be an emissions boogeyman. They insist that the Chinese need to institute strict carbon reforms before the US should agree to reducing its own emissions because they're such a large emitter. The problem is demand for cheap Chinese goods in the US and other developed countries is driving almost a quarter of Chinese emissions.  While asking China to reduce emissions isn't a bad idea, it also makes sense to examine our own patterns of consumption.

Davis and Caldeira’s findings show that setting emissions limits based on arbitrary national boundaries is simply not effective in our globalized economy. Spatially diverse supply and demand chains have created a very messy web of emissions. A more realistic approach would be to divvy up the responsibility of dealing with emissions at both ends of the supply chain.

Developing countries have always felt that there needs to be “common but differentiated” responsibilities. The new findings add support to this principle. Though it isn’t easy, it means developed countries need to summon the political will to take responsibility for their citizens’ patterns of consumption and shoulder some of the burden of goods produced outside their borders.

At the same time, countries on the supply side cannot simply sit there waiting for developed countries to shoulder the whole burden. They need to reform their end of the system as well. That means stronger environmental regulations, more efficient energy transmission, use of clean technology, and closer monitoring of manufacturing centers. To be truly effective on both the supply and demand side, emissions reductions need to be measured reported, and verified.

Where CO2 is emitted doesn’t matter. It all goes to the atmospheric commons, and its effects will be felt around the world. Finding a compromise that let’s consumers and producers share the burden, regardless of national boundaries, might be the key to creating a just international solution to mitigating climate change.

Photo Credits

Top: Map of emissions from trade from dominant exporting countries and regions.  Courtesy Steven J. Davis.

Bottom: Map of global shipping routes and roads.  Courtesy Kareiva, et al.