Danish companies emit less CO₂ when they relocate certain tasks abroad. At the same time, emissions rise correspondingly in those countries. However, global emissions increase when companies are under pressure from cheap imports from China. This is shown by new research from the University of Copenhagen.
When Danish companies move parts of their production abroad, this is not only linked to concerns about job losses. Another widespread concern is that such moves increase the global climate impact.
However, a new study from the University of Copenhagen provides a more nuanced picture: Offshoring reduces companies' overall CO₂ footprint in Denmark at the expense of correspondingly higher emissions abroad. Import competition from China also reduces emissions from Danish companies, but emissions in China rise significantly more, so that global emissions actually increase.
'We know quite a bit about how offshoring and import competition affect jobs and wages, but almost nothing about how they affect companies' carbon footprints. With this study, we document for the first time that Danish companies reduce their CO₂ emissions on Danish soil when they offshore, and that this leads to a roughly equivalent increase abroad. Import competition from China also reduces Danish emissions but leads to significantly higher CO₂ emissions in China,' says Jakob Roland Munch, professor at the Department of Economics.
Production becomes more efficient
The researchers combine detailed register data for Danish manufacturing companies with information on both direct and indirect CO₂ emissions for the period 1995-2017. The results show that the offshoring of intermediate goods leads to lower emissions in Denmark. These are products that are not sold directly to consumers but form part of a further production process in Danish firms, and which they previously produced in-house. According to Jakob Roland Munch, this is due to several mechanisms:
'When companies offshore parts of their production, they typically retain the most advanced and least energy-intensive processes. This means that their own production becomes more efficient and less CO₂-intensive,' he explains.
The researchers also find that offshoring shifts emissions to other countries, but to an extent that does not significantly increase global emissions. This is partly because many intermediate products are produced in European countries that are roughly as energy-efficient as Danish companies.
Import competition boosts production
The study also examines the effect of import competition from China, which has played a major role for Danish companies in recent decades. The share of Danish imports of finished goods originating from China has thus risen from around 1 per cent to 10 per cent between 1990 and the present day.
- Danish companies' total CO₂ emissions typically fall when they offshoring part of their production.
- Global emissions are not significantly affected when Danish companies move their production abroad, as this typically takes place to European countries with the same level of energy efficiency.
- Increased import competition from China also leads Danish companies to emit less CO₂.
- Global emissions rise significantly as a result of import competition from China.
- The study is based on detailed register and emissions data for Danish companies from 1995 to 2017.
'China has been a key driver of global trade since the 1990s and is now the world's largest exporter. It therefore makes perfect sense that China is the country from which Danish companies face the most competition in the form of imported finished goods,' says Jakob Roland Munch.
Whilst offshoring does not have a significant impact on the global carbon footprint, the study shows that increasing import competition from China is boosting the global carbon footprint. When Danish companies face cheaper Chinese competitors, the consequence is that turnover - and consequently emissions - fall within Denmark.
'We see a clear trend: Companies under pressure from Chinese import competition are hit by lower turnover and, consequently, lower CO₂ emissions. At the same time, however, emissions in China are rising significantly. The emission intensity is thus approximately seven times higher in China than in Denmark for the typical imported finished good,' explains Jakob Roland Munch.
The results point to a climate-related duality in globalisation. The relocation of jobs does not significantly affect the global carbon footprint, whilst import competition from China significantly increases global emissions.
Important insights for climate and trade policy
The study provides new insights into the debate on whether climate taxes should be consumption- or production-based, and on the relevance of CO₂ tariffs, which the EU has just introduced via the Carbon Border Adjustment Mechanism (CBAM).
'Our findings show that the consumption-based carbon footprint can differ significantly from the production-based carbon footprint. They also show that a carbon tariff can help create a more level playing field when, as in the EU, there is a quota system for CO₂ emissions and when, as in Denmark, there is a CO₂ tax,' says Jakob Roland Munch.
The study 'The Impact of Offshoring and Import Competition on Carbon Emissions' has been accepted for publication in the academic journal 'Journal of the Association of Environmental and Resource Economists' (JAERE). The study can be read here.
