In our globalised economy, goods and services are frequently produced abroad. Is it the producer or the consumer that should be held responsible for greenhouse gas emissions associated with production? Together with colleagues from Berlin, Hauke Ward of the Institute of Environmental Sciences (CML) invoked economic theory to solve this question. Their study has just been published in Global Environmental Change.
Through using fossil fuels, many economic activities contribute to global warming by the emission of greenhouse gases, causing more extreme weather events that lead to social costs. To prevent dangerous levels of global warming, it is necessary to reduce emissions of greenhouse gases, notably carbon dioxide. It is often proposed to put a price on carbon to realise such a reduction.
Then the question arises how the responsibility for emissions should be shared among trade partners when goods are produced in one country and consumed in another. Hauke Ward, together with colleagues of the Mercator Research Institute on Global Commons and Climate Change (MCC) in Berlin, offers a solution.
‘Mostly, it is proposed to allocate all responsibility to either the producer country, where the emissions occur, or the consumer country, in which the product is enjoyed’, Ward says. ‘But in reality, both parties benefit from polluting the atmosphere and not being required to pay for emerging social costs. A fifty-fifty division may seem better, but that would be arbitrary, as it is not grounded on real quantification. Our starting point is that responsibility should be shared between producer and consumer in proportion to their benefits.’
So, one needs to assess these benefits. ‘We invoked standard economic theory to quantify them. We construct a what-if counterfactual, in which we put a hypothetical carbon price in place. As a consequence, the producing country would have to reduce production and export of carbon-intensive goods, so it would gain less, while the consuming country would have to pay more to import them. Production and emission as well as consumption would decrease.’
In economic terms, the reaction in production/consumption in response to a changing price can be quantified by a so-called elasticity. The lower it is, the less production/consumption will change, the more a producing/consuming country is affected by the carbon price change as a result and the more it benefits from the current situation. Ward: ‘And consequentially, the higher its share in responsibility should be.’
To demonstrate the usability of their approach, the authors applied it to the most important bilateral trade relationships worldwide and calculated how responsibility for emissions should be shared. They derived data on production, associated emissions, exports and imports from the World Input-Output Database (WIOD). Estimates of export and import elasticities were available in literature. The carbon price was set at 50 US dollars per ton of carbon dioxide, which is assumed to be in line with the Paris Agreement goals.
European Union, China, Russia
For instance, China exports high amounts of products to the European Union. If a carbon price would be introduced, China would reduce production and exports substantially, because of a high export elasticity. However, the EU would be reducing its imports from China at almost the same level. This means that China is currently benefitting slightly less by the absence of a carbon price than the EU. Hence, according to the proposed method, it has a smaller share of responsibility: 47% vs. 53%.
Russia, on the contrary, exports mainly fossil fuels to EU which have a low export elasticity. Russia, being dependent on these exports, would hardly reduce them. But it would be severely affected by a carbon price, as the EU would reduce the corresponding imports significantly (large import elasticity). In other words, Russia benefits a lot by not being required to pay for ‘polluting’ the atmosphere at the moment and is assigned a large share in responsibility: 87%.
‘Our method is the most appropriate approach at the moment’, Ward states. ‘It may be a game-changer in climate negotiations or not, but at least it is food for thought and will trigger discussions.’
Michael Jakob, Hauke Ward & Jan Steckel – Sharing Responsibility for Trade-Related Emissions Based on Economic Benefits, Global Environmental Change (January, 2021)
Text: Willy van Strien