Financial Crisis, Virtual Carbon in Global Value Chains, and the

Policy Analysis pubs.acs.org/est

Financial Crisis, Virtual Carbon in Global Value Chains, and the Importance of Linkage Effects. The Spain−China Case Luis-Antonio López, Guadalupe Arce, and Jorge Zafrilla* Universidad de Castilla-La Mancha, Plaza de la Universidad, 2, 02071 Albacete, Castilla-La Mancha, Spain S Supporting Information *

ABSTRACT: Trade has a disproportionate environmental impact, while the international fragmentation of production promotes different patterns of intermediate inputs and final goods. Therefore, we split up the balance of domestic embodied emissions in trade (BDEET) to assess it. We find that Spain has a significant emissions deficit with China between 2005 and 2011. The Global Financial Crisis of 2008 reduced Spanish imports of pollution-intensive inputs from China and slightly improved the BDEET. China primarily exports indirect virtual carbon, representing 86% of the total, especially from Production of electricity, gas, and water sector. These linkages effects in China indicate that post-Kyoto agreements must focus not only on traded goods but also on the environmental efficiency of all domestic production chains. The methodology proposed allows us to identify the agents responsible for this trade in both Spain and China, namely the sectors importing intermediate inputs (Construction and Transport equipment) and industries and consumers importing final goods (Textiles, Other manufactures, Computers, and Machinery). The relevant sectors uncertainties found when we compare the results for BDEET and emissions embodied in bilateral trade (BEET) lead us to recommend the former methodology to evaluate the implications of environmental and energy policy for different industries and agents. goods. Currently, it is possible for developed countries to flout the Kyoto Protocol by not domestically producing polluting goods and instead buying such goods from foreign countries.13 However, the Global Financial Crisis (GFC) of 2008−2009 caused a decline in international trade, and in terms of virtual carbon, it implies that the trend in developed countries shifted from increasing consumption-based emissions to stabilized production/territorial-based emissions.14 The main contribution of this paper is to define a balance of domestic emissions embodied in trade (BDEET) to analyze how the international fragmentation of production promotes different environmental impact patterns for intermediate inputs and final goods. This balance only includes domestic CO2 emissions embodied in trade between the two countries, excluding all emissions generated at any other stage of production or trade round. We do so by using a biregional input-output model (BRIO), as it is the most appropriate inputoutput model for associating virtual carbon flows with bilateral trade flows.15−17 This kind of models considers only emissions embodied in production processes that occur within the

1. INTRODUCTION International trade has the potential to hamper efforts to combat global warming as production rounds moves to emerging countries that rely on the intensive use of nonrenewable energy resources and high emission factors (petroleum products and coal). In 2008, traded goods accounted for 26% of global CO2 emissions from burning fossil fuels.1 The new international trade paradigm is not carried out at the market level but is based on international competition over tasks, where countries will export production rounds in areas where they hold comparative advantages,2−4 and offshoring generates economies of scale without requiring agglomeration.5 The result is that a third of international trade is due to the exchange of final goods, while the other two-thirds are explained by the trade in intermediate inputs.6 Trade in intermediate inputs is related to global value chains (GVC) and contributed inputs up to 35.6% of total exports in China in 2008.7 The input-output methodology of accounting for trade in virtual carbon, along with consumption-based emissions, or the carbon footprint, and emissions balance methodologies have been used to reveal the differences in the environmental impact of trade between developed and developing countries.8−12 Developed countries typically show a deficit in emission balances, as they directly or indirectly import CO2 intensive goods in exchange for exporting environmentally friendly © 2013 American Chemical Society

Received: Revised: Accepted: Published: 36

January 2, 2013 December 9, 2013 December 10, 2013 December 10, 2013 dx.doi.org/10.1021/es403708m | Environ. Sci. Technol. 2014, 48, 36−44

Environmental Science & Technology

Policy Analysis

Section 2 develops the methodology we employ to calculate the trade balance and trade emissions balance using a biregional model. Section 3 presents the structure and evolution of the China-Spain trade, and we analyze the BDEET between Spain and China. In section 4, we discuss the uncertainties associated with the calculations. Finally, section 5 is devoted to discussing the environmental and trade policy implications of the study.

regions’ jurisdictions, which makes the evaluation of mitigation policies easier. Our application of this methodology allows us to evaluate trade between China and Spain for the period from 2005 to 2011, particularly the effects of the Global Financial Crisis of 2008 and the resulting Spanish recession on the trade relationships between Spain and China with respect to embodied CO2 emissions. The impact of the decline in exports from developed markets such as Spain during the crisis and government stimulus spending resulted in a shift in the demand structure such that energy consumption and CO2 emissions as a share of GDP in China declined.18 In our case, we distinguish between two sub-balances - one for intermediate inputs and the other for final goods - to evaluate how the economic crisis alters the pattern of international trade, thereby changing the GVC and altering the impact on the environment. In this sense, our paper is similar to ref 19 which analyzes the impact of the financial crisis on the trade of inputs and final goods of the United States in the period 2008−2009 but not its impact in terms of emissions. Moreover, the distinction between direct and indirect virtual carbon is useful to test the importance of direct or indirect effects on the existence of the carbon leakage phenomenon during this period, that is, carbon leakages related to environmental policies (pollution haven effect) or carbon leakages related to growth in international trade (pollution haven hypothesis).20 Previous articles analyze other aspects of the environmental impact of Chinese trade using single inputoutput models (SRIO)21−25 or multiregional input-output models (MRIO).11,26 For Spain, see refs 27−29. However, none of these works developed a methodology that permits the isolation of the importance of the GVC (trade in inputs and final goods). Past works also fail to consider a period of study that makes it possible to assess the effects of the 2008 financial crisis and do not focus on studying the different impacts of direct and indirect emissions. Most of the recent literature analyzes the impact of the GVC in China in terms of added value and the virtual carbon embodied in exports. The distinction between normal exports and processing-exports (related to the GVC) allowed7,30 for the construction of ordinary input−output tables for China, and ref 7, for example, shows that the Chinese total domestic added value from processed-exports is lower (37.3% in 2007) than the domestic added value from normal exports (84%). Moreover, ref 31 finds that each Yuan of added value generated by processing exports leads a 34% decline in virtual CO2 emissions relative to emissions from the normal exports. However, once China exports those goods to its trading partners, studies are silent with respect to the responsibility for the emissions transferred to the rest of the world because they fail to analyze the emissions balance between China and its trading partners, an important gap addressed in this paper. The contribution of this paper, despite not making a distinction between normal and processing-exports, lies in its discussion on the use of a “consumer responsibility criterion” by sectors related to trade between China and Spain.32,16,29 We evaluate the issue of assigning responsibility for virtual carbon from final goods imports from institutional agents (importing sectors and final users) in the importing country in a GVC context. According to our results the adoption of consumer or shared responsibility criteria, which would help the incorporation of emerging countries, requires accurate information about responsible agents as provided by our model.

2. THEORETICAL AND METHODOLOGICAL APPROACH The calculation of a BDEET in a biregional model is similar to the calculation of a trade balance (see section 1 of the Supporting Information) but considers the domestic emission multipliers for the countries involved (similar to refs 8, 23, and 33 in a single-region input−output (SRIO) or to refs 11, 34, and 12 in a MRIO)

where EX1 refers to embodied emissions in exports and EM 1 refers to embodied emissions in imports, ŷd1 is the diagonalized final domestic demand vector, and ŷm1 is the diagonalized imported final demand vector. Ad1 is the domestic technical coefficient matrix, Am1 is the imported coefficient matrix, [1−Ad1]−1 is the Leontief inverse, and L1m = A1m[1−A1d]−1 is the import multipliers. ε1 is the matrix of domestic emissions multiplier for country 1, calculated by multiplying the diagonalized direct emissions coefficient for country 1 (ê1 = f1̂ x−1 1 ), or a matrix of diagonalized emissions ( f1̂ ) per produced unit (x) times the Leontief inverse (ε1 = ê1 [1−Ad1]−1). The sum of row i in the matrix emissions multiplier shows seller responsible sectors, and the sum of column j considers the direct and indirect emissions associated with the production of a unit of final product in this sector, which is useful to identify the agents responsible for this virtual carbon by buyers (as in refs 20−27, 8, 29, and 35). In a similar fashion, the subscript 2 denotes country 2. The difference with previous studies is that we aim to reorganize the BDEET to obtain a final good balance (2.1) and an input balance (2.2):

The signs in the two balances are interpreted as usual. A positive sign indicates a surplus in the emissions balance and a negative one a deficit, but the results for the two balances can differ, as the countries specialize in the production of different types of goods. BDEET is similar to the balance of emissions embodied in trade (BEET) defined by ref 8, without differentiating between inputs and final goods, in the context of a single-region input-output (SRIO), and used by refs 23 and 33. Recently, Kanemoto et al.34 proposed a BEET that differentiates between intermediate and final goods but without isolating trade in the two types of goods into two sub-balances. The BDEET and BEET only consider the domestic emissions embodied in exports and imports and, therefore, generate the same aggregate results (this is not the case if one compares the balances under a BEET model and a MRIO model, as verified 37

dx.doi.org/10.1021/es403708m | Environ. Sci. Technol. 2014, 48, 36−44


Policy Analysis

National Statistical Institute,42 IPCC emissions factor data,43 and Chinese energy consumption and cement production for 2005 by productive sectors, provided by the China Energy Statistical Yearbooks prepared annually by the National Bureau of Statistics of China.44 In section 2 of the Supporting Information, we comment on the peculiarities of these statistics and the uncertainties associated with deflation, the sector aggregation, the use of different emissions statistics in the two countries, and the polluting technology remains constant as in 2005.

in refs 36, 1, and 37) but do not generate the same results with respect to the industries responsible. The result is that BEET cannot isolate the responsibility of global value chains and agents because it does not differentiate between final goods and intermediate inputs, while BDEET allows for this. Moreover, the parceling of BDEET into in final goods (2.1) and inputs (2.2) implies a different criterion for allocating responsibility among agents in different countries. The BDEET shows, for final goods, how responsibility should be shared between the final consumer and foreign producers and, for inputs, how emissions should be allocated among foreign producers, domestic importers, and final consumers (who can also be foreign if these goods are ultimately exported). In this sense, we extend the traditional approaches to shared producer-consumer responsibility38,16,29 using BDEET by identifying the agents responsible for these emissions, depending on whether those goods are final goods or inputs, before calculating the percentage distribution. References 16 and 15 argue that a balance of a bilateral trade input-output (BTIO) methodology, but without differentiating between final and intermediate imports, is more appropriate for associating virtual carbon flows with bilateral trade flows than a balance of multilateral trade input-output (MRIO) model,11,34,12 which is more complete but makes it more difficult to allocate the responsibility for emissions and hence represents a loss of transparency. References 38 and 16 indicate that the MRIO model is better for analyzing final consumption or the ecological footprint, and ref 16 indicates that the BEET model is arguably better for analyzing trade and climate policy. In the same vein, ref 11 demonstrates the need for further studies at the regional level, because the agreements are made between countries. For example, a post-Kyoto framework that considers international trade through the adoption of a responsibility criterion for the consumer or shared commitments would only apply to the signatory countries included in the BRIO model and exclude the global value chains of the other countries considered in a MRIO model which are outside of its jurisdiction.16,29 Direct emissions, or own emissions, are similar to the 1° order of Structural Path Analysis, 39 as they only consider change in the emissions coefficient and are equivalent to a sectoral producer-based criterion, and those associated with the balance of domestic emissions embodied in trade (dBDEET) in a biregional model between final goods (3.1) and inputs (3.2) become

3. CO2 EMISSIONS AND SPAIN−CHINA TRADE: BDEET The Spain−China BDEET reveals a substantially negative sign for Spain between 2005 and 2011 (Figure 1 and Table 1). The

Figure 1. Spain−China BDEET in final goods and inputs, thousands of tons of CO2.

total emissions embodied in Chinese exports to Spain are 64,462 ktCO2 in 2011, while the total emissions in Spanish exports to China are only 1,825 ktCO2, resulting in a deficit for Spain of −62,637 ktCO2. The observation of surplus in China’s bilateral trade emission balance is a commonly observed result in the literature; in 2000, for example, a deficit of −27,710 ktCO2 was obtained for the Japan−China emissions balance,23 and this deficit is explained by China’s growth model that relies export-based economic growth coupled with its energydependent growth.45,26 Spain’s negative CO2 emissions balance is explained by two main factors: first, the deficit in Spain−China trade, where Spanish exports to China only amounted to 12.8% of its imports from China in 2005, a trend that persists; second, the different emissions intensities embodied in the production of goods and services in the two countries. The virtual carbon in Spanish exports equaled 1.64% of the virtual carbon in imports in 2005 and 2.83% in 2011, and Spanish exports equaled 12.7% of its imports in 2005 and 15.3% in 2011. Spanish imports from China have grown since 1990, particularly in the 2000−2007 period. Total imports grew by approximately 70%, China’s exports to Spain explain 30% of the increase before the economic crisis. By 2011, China, was the third largest source of Spanish imports after Germany and France (7.1% of Spain’s total imports in 2011). The trade deficit grew from 4,159 million euros in 2000 to 15,093 million in 2011, and both the final and input balances reflect a deficit for the Spanish economy in 2011 (a 8,803 million euros final goods balance and a 6,291 million euro input balance). During

Differences between BDEET and dBDEET for each component measure the value of indirect emissions associated with international trade in commodities. In our opinion, this difference is useful for analyzing whether the evolution of a country’s emissions balance is due to imports being produced using technology that is less efficient in terms of emissions than that used for exports (producing a direct carbon leakage effect) or the result of linkage effects with production and emissions in the country of production/origin/destination that differ for imports and exports.17 The principal data sources used in this paper are the following: OECD 2005 input-output tables,40 Dirección General de Aduanas (Customs Department) to obtain data on Spanish-Chinese trade for 2005 to 2011,41 Atmospheric Emissions Satellite Accounts used for Spain, published by the 38



Policy Analysis

Table 1. Overview of Results at the Aggregate Level, BDEET, Trade Balance, and Environmental Efficiency in Trade, 2005− 2011a

a

BDEET and virtual carbon (VC) in ktCO2. Trade balance (TB) is presented in millions of euros, and environmental efficiency (EEft) is presented in KCO2/€.

the recession, the final goods sub-balance progressively worsened, while the intermediate input sub-balance reduced the deficit (see section 3 of the Supporting Information). China had a much higher total emissions factor (ktCO2 per million euros) than Spain in 2005. Among the most polluting sectors in both countries are Energy extraction, the Production and distribution of electrical energy, gas and water, and rubber and plastic materials and nonmineral metals (see Table SI.3 of the Supporting Information). All these sectors generate more pollution in China than in Spain, with a particularly marked difference in the Production and distribution of electrical energy, gas and water, with an emission factor of 2.41 ktCO2 per million euros in Spain compared with 12.24 ktCO2 in China. Similar differences in the aggregated emissions coefficients are reported in the literature; for instance, in 2000, CO2 emissions, as a share of GDP, were 2.99 kg/USD for China and 0.74 kg/USD for the rest of the world economy.36 This substantial difference is explained by the Chinese use of coal as the primary energy source, which produces nearly 70% of the energy used by industry, trade, and households.46 Although some authors consider that different pollution intensities could be explained by the lower wages paid in China (lower emissions coefficients per million euros), most of the emissions are produced in capital intensive sectors, rather than labor intensive, and in energy sectors, not traded between China and Spain. Nonetheless, some studies21,22,47 report an improvement in the energy-related pollution intensities in the period between 2002 and 2007, from 3.59 kgCO2/USD in 2002 to 2.69 kgCO2/USD in 2006 for the entire Chinese economy. This figure contrasts with the Spanish economy’s emphasis on renewable sources of energy since 2005, culminating in a renewable energy share of 33% in 2011.48 Finally, using the domestic technical assumption (DTA), we can calculate the impacts of different emissions coefficients,27,49,50,28,26 and the results indicate that if Spanish goods imported from China in 2011 had been produced with Spanish production technology, total embedded emissions would be only 6,511.45 ktCO2 and not 64,462 ktCO2, that is, just below one-tenth the actual figure. The 2008 global financial crisis and the consequent stagnation of the Spanish economy allowed Spain to reduce the emissions balance deficit, with a minimum figure of 55,719.58 ktCO2 in 2009. There were substantial effects on the trade in intermediate inputs. In 2011, 58.3% of the Spain− China trade balance is due to the final goods balance and the remaining 41.7%, by the trade in intermediate inputs. However, the BDEET only attributed 40.1% to the final goods sub-

balance and 59.9% to the inputs sub-balance. The pollution intensity coefficients of export inputs (4.55 and 0.74 ktCO2 per million euros for exports from China and Spain, respectively, in 2011) explain this difference, as both countries have lower coefficients for final goods exports (2.74 and 0.26 ktCO2 per million euros for exports from China and Spain, respectively). The GVC poses a greater environmental risk than the final goods trade (intra- or interindustry). The declines in the deficits from both sub-balances in 2009, which stem from the crisis, result in a final goods sub-balance that exhibits more negative values than the maximum ones in 2011, but the intermediate inputs sub-balance improves the deficit by 25% relative to 2007. 3.1. Direct and Indirect Virtual Carbon in Imports and Exports by Sectors. Only a small share of the Spanish BDEET deficit is due to the direct use of polluting production technology in China, which is consistent with data indicating that nonenergy intensive manufactured products versus energyintensive products dominate net transfers of CO2 emissions from non-Annex B to Annex B countries.1 The deficit is primarily due to the dragging effect in the Chinese economy as a whole (indirect effects). While the indirect emissions of virtual carbon in Spanish exports declined from 58.8% in 2005 to 50.9% in 2011, the indirect emissions of virtual carbon in China’s exports increased from 80.3% to 81.4%. The result in terms of the direct BDEET for Spain is a deficit of −11,068 ktCO2 in 2011, representing only of 17.7% of the total BDEET deficit. Implications in terms of carbon leakage are explained in section 4 of the Supporting Information. Regarding total emissions by rows or seller sectors, similar sectoral pollution patterns can be observed, even in two different economies such as Spain and China. In both economies, four out of the twenty-three sectors were responsible for important shares of total emissions in 2011 (see Table SI.5 of the Supporting Information): In Spain, Electrical power, gas and water, Chemicals, Rubber, plastics and nonmetallic mineral and Iron and steel represent 84.5% of total emissions, and in China they represent 82.8% of total emissions. In the Chinese economy, sectors that transfer a substantial amount of direct virtual carbon to Spain are Rubber, plastics and nonmetallic minerals products (6,537 ktCO2, or 54.6% of total direct emissions) and Iron and steel (2,035 ktCO2, 17.0% of total direct emissions). The China indirect virtual carbon transfers are Electrical power, gas and water (18,384 ktCO2, or 35% of total indirect emissions) and Iron and steel (8,769 ktCO2, or 16.7% of total indirect emissions). However, the Spanish sector transferring direct virtual carbon to China is Electric power, gas and water (538 ktCO2, 60.1% of 39



Policy Analysis

Figure 2. Indirect and direct virtual carbon in Spanish imports by buying sector (rows), 2011, in ktCO2.

Supporting Information). Only in the Textile industry do Spanish-owned multinational firms (Inditex, Mango, Camper) take responsibility for those emissions insofar as they generate added value, primarily profits, through imports, production and distribution. For the remaining industries such as computers, machinery and electronic devices, most of their products are produced by firms from other countries such as Apple, Lenovo, Nokia, Samsung, etc. These multinationals often decide to produce products or components in China that are subsequently exported to the rest of the world. Using the columns analysis for inputs in the BDEET (4.4) or a consumption-based allocation shows how a country’s industries absorb imported virtual carbon through buying inputs to satisfy the demand of other enterprises. This analysis transfers the emissions from the exporting industry in a country, China for example, to the consumer industries that incorporate those inputs in their production chains to supply final demand. In this case, in the importing country there are at least three responsible agents: firms importing inputs, firms that use inputs indirectly and agents responsible for final demand. The BDEET analysis by column for Spain reveals the importance of Construction (20.7%) and foreign multinational firms of Transport equipment (15.1%) and Other services (finance and insurance and other business services and public services) (13.1%) (see Figure SI.5. of the Supporting Information).

total direct emissions) and also indirect virtual carbon (499 ktCO2, 53.8% of total indirect emissions). As the economic crisis reduced demand for electricity in Spain, which has an oversized installed capacity, a substantial volume of energy goods in the form of liquefied gas or diesel was exported to China.51 Spanish imports from China that account for large shares of indirect virtual carbon by columns or buying sectors are Textiles, leather and footwear (20%); Construction (15.5%); the Manufacture of transport equipment (12.3%); Others services (9.8%); Machinery and equipment (8%) and Communication, computers and electronic equipment (7.3%), which account for 72.9% of the total indirect emissions related to Spain−China trade (Figure 2). The best example is the textile industry, where only the 10.7% of the 10,019.7 ktCO2 embodied in exports from China to Spain are directly produced by the sector, while the rest of the emissions (indirect emissions) are explained by dragging effect over other sectors such as Electricity, Petroleum or Chemicals. Direct pollution patterns, related to activity sectors and intermediate goods, do not match the monetary international trade patterns between the two economies. We also highlight the indirect virtual carbon related to Chinese Machinery exports to Spain, which is due to inputs produced in high pollution industries such as Iron and steel and Rubber and plastics. Regarding Spanish exports, the highest indirect virtual carbon emissions come from sectors such as Electricity, Iron and steel, and Rubber and plastics. 3.2. BDEET in Final Goods and Inputs and Consumption-Based Allocation. Distinguishing between final goods and inputs balances is useful for identifying the agents’ responsibility in terms of consumption. Regarding the final goods BDEET (4.3), summing the exports and imports in the BDEET matrix by column using the consumption-based criterion, we assign the emissions linked to the final imports of both countries to the agents that ultimately buy those goods (families, institutions, the public sector and firms buying capital goods), as these agents are capable of guiding the economy toward sustainable growth through their consumption patterns. The negative Spanish final goods BDEET with China in 2011 is centered on traditional goods (Textiles and footwear (34.5%) and Manufacturing and recycling (from toys to furniture, 9.6%)) and high technology firms (Office, accounting and computing machinery (12.6%), Machinery and equipment (10.4%)), and Communications (10%) that lead the international fragmentation processes52,53 (see Figure SI.4 of the

4. UNCERTAINTIES BY SECTOR IN BDEET AND BEET References 37 and 54 include a review of the uncertainties, understood as differences among methods in the estimations, reported in the literature on production-based emissions and consumption-based emissions and using the emissions balance obtained via BEET and MRIO conclude that there are small differences in uncertainties at the national level. Reference 55 examines the UK’s carbon footprint using Monte Carlo simulations to estimate that the UK’s carbon footprint has increased with 86% probability. However, these uncertainties could persist at the sector level, as we can see using Monte Carlo simulations, in ref 56 regarding Chinese trade, in ref 57 regarding the Dutch carbon footprint, or in ref 58 when aggregate environmental data are employed to construct an environmentally extended input-output model. However, these sectoral uncertainties are more important here than in other studies, as we allocate the imports of virtual carbon incorporated in these products (similar to ref 29 using a 40



Policy Analysis

Figure 3. Uncertainties in BDEET and BEET by sector in 2011, KtCO2. See section 2 of the SI for more information about uncertainties.

5. DISCUSSION IN TERMS OF ENVIRONMENTAL POLICIES Using the BDEET, we have shown that the pattern of trade between Spain and China obscures an environmentally harmful virtual carbon pattern. Moreover, trends in carbon trade in the two countries differ substantially and are changing due to the effects of the 2008 global financial economic crisis, specifically through the reduction of imported inputs in Spain accompanied by a recovery of final goods imports in 2009. China primarily exports indirect virtual carbon, representing 81.4% of total virtual carbon exports, primarily associated with the CO2 emissions from the electricity sector embodied in textile, machinery and other manufactures. While in Spain, only 50.9% of its virtual carbon exports was indirect in 2011, due to its highly emission efficient global value chains, particularly in its electricity sector. Whether or not direct carbon leakage occurs, Chinese import substitution generates important effects on the environment, due to the dragging effects from companies that are relocating to or importing from China. These linkage effects are the result of China’s intensive use of coal as its main energy source, which is responsible for the higher Chinese emissions coefficients relative to those of Spain. The Chinese government is attempting to increase the country’s share of alternative, cleaner technologies (China’s Twelfth Five-Year Plan (FYP) (2011−2015)), including natural gas (only 3.3% of total energy in 2009), and to close some of the smaller and less efficient thermal plants (according to U.S.59). The diffusion or adoption of cleaner technologies by Chinese manufacturing firms23 would help to solve, in part, direct carbon leakage, and the highly unbalanced BDEET figure allows us to identify firms that demand their goods from China and with which Spanish firms would have to reach technology transfer agreements, such as clean development mechanisms. Allocating production to firms in Chinese regions with a cleaner energy mix would reduce the emissions due to the dragging effects.60 The importance of the environmental impacts of international trade requires that such impacts be considered in postKyoto international agreements. Specifically, consideration should not be limited to the issue of declining employment in the developed countries due to carbon leakage, as is the case in the new regulations for the EU emissions trading system contained in the EU Energy and Climate Change Package.61 We should not only highlight those industries that sell their

uniregional model for the Spanish economy). To evaluate the responsibility for virtual carbon use, we analyze sectoral differences in the BDEET and the BEET, which only permits us to allocate the virtual carbon to the same sector in the importing and exporting countries, as the BEET does not distinguish between final goods and inputs. We observe substantial sectoral differences, although the results of the two balances are the same at the national level (Figure 3). The discrepancies are explained by, on the one hand, the distribution of each country’s exports between final demand and inputs and, on the other hand, across agents (industries) who import goods that are demanded by other industries as intermediate goods or by final demand agents. In the first case, when a product is sold to satisfy final demand to a greater degree, the discrepancy between BDEET and BEET will be smaller, as the percentage of the good that becomes part of any productive process in the destination country is lower, for example Textiles, Machinery or Office and computing machinery. In this case, the uncertainty values range from 8% to 34%. By contrast, when a product is sold as an input, the discrepancy between the two balances is larger, as is the case for Iron and steel and Rubber, plastics and nonmetallic mineral products. For these basic intermediate goods, the BEET values are larger than BDEET values, with discrepancies ranging between 57% and 87% for the industries identified. In the second case, the discrepancies result from the virtual emissions that would otherwise be allocated to these industries being substantially transferred to the industries that purchase these intermediate goods, as the latter industries would be responsible for such imports, meaning that the BDEET balance is higher than the BEET balance and the discrepancies range between 84% to 100%. This is the case in some service industries and the construction industry, where 100% of demand is in the form of intermediate goods (for example, Iron and Steel). Therefore, these industries import a large volume of inputs that are not reflected in the BEET calculation, as the goods in this industry are not directly commercialized and the balance is zero. The Transport manufacture industry can be highlighted in this respect, as very few vehicles are traded between the two countries, while the large Spanish transport sector imports a number of inputs from China to produce vehicles. 41



Policy Analysis

imported carbon tax67 and the difficulty of establishing a tax that avoids double counting linked to global value chains.

products internationally but also integrate China and other high pollution countries into international agreements that encourage efficiency improvements in production chains. For instance, the renewable energy support programs in China represent a means of reducing the share of coal in the energy mix,59 and this would ultimately reduce the dragging effects of carbon leakage. In this sense, the promotion of renewable energy in electricity production in the Spanish economy has significantly reduced the indirect effects linked to Spanish exports.62 The proposed BDEET methodology also allows us to separately study the emissions balances of inputs and final goods. The important sectoral uncertainties we find when comparing the results obtained using BDEET and emissions embodied in bilateral trade (BEET) lead us to recommend the proposed methodology for the evaluation of the implications of environmental and energy policy for different industries and agents. The column-based results of the BDEET allow us to argue that the international carbon footprint generated by the demand for those goods and inputs should be shared among exporters, final consumers and importing industries, as they, through their consumption decisions, can guide the economy toward sustainable economic growth. The acceptance by developed countries, Spain included, of a change in the assignment criterion from a production-based criterion to a consumption-based criterion (refs 8, 9, 10, or 54) or an income-based criterion (refs 55 and 63) create greater responsibility among agents in the Spanish economy by incorporating imports from China which must be deducted from exports. However, the difficulty of encouraging the acceptance of this criterion in Spain will be difficult in the context of the crisis context and its inability to meet 2012 Kyoto targets.62 A shared responsibility criterion between consumers and producers that facilitates the control of such emissions in final or intermediate goods represents a compromise that could encourage improvements by producers and consumers that participate in global value chains (refs 16, 64 or 29, 65). Given the difficulty in changing the allocation criterion, an alternative policy is to establish an eco-labeling scheme for the trade in virtual carbon that would provide final consumers and the industries importing these inputs with additional information regarding environmental responsibility, particularly high-income actors in Spain and China. The introduction of a CO2 border tax on imports to Spain and other EU members from countries that are not signatories to international agreements,10,15 such as the Kyoto Protocol, is another alternative strategy to reduce the deficit in the Spanish emissions balance. The distinction in BDEET between final goods and inputs would allow the proper identification of the institutional agents, importing industries or final goods consumers who would be more affected by the resulting price increases. The affected agents would share the costs of the price increases due to tax with local producers or multinationals with fragment production in developing countries and importer industries. Both measures (eco-labeling and a border tax) would help to control the carbon leakage effects if institutional agents and industries reduced their consumption of virtual carbon intensive imports. However, a border tax has the disadvantage of requiring WTO approval due to Article XX of the General Agreement on Tariffs and Trade (1994),66 with the potential to lead to a “trade war”, given the uncertainties generated by the need to define a direct, total, domestic or

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ASSOCIATED CONTENT

S Supporting Information *

Additional information as noted in the text. This material is available free of charge via the Internet at http://pubs.acs.org.

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AUTHOR INFORMATION

Corresponding Author

*Phone: +34 967599200 Extension: 2183. Fax: +34 967599220. E-mail: [email protected]. Notes

The authors declare no competing financial interest.

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ACKNOWLEDGMENTS We thank the reviewers whose helpful comments improved this paper considerably. We would also like to thank the Ministry of Economy and Competitiveness for funding our research project, ECO2012-33341, which led to this paper.

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REFERENCES

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Financial Crisis, Virtual Carbon in Global Value Chains, and the

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