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«CO2 EMISSIONS EMBODIED IN CHINA’S TRADE AND REDUCTION POLICY ASSESSMENT Tianyu Qi a,b,, Niven Winchester b,Valerie J. Karplus b, Xiliang Zhang a ...»

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CO2 EMISSIONS EMBODIED IN CHINA’S TRADE AND

REDUCTION POLICY ASSESSMENT

Tianyu Qi a,b,, Niven Winchester b,Valerie J. Karplus b, Xiliang Zhang a

a

Institute of Energy, Environment and Economy, Tsinghua University. Beijing, 100084,

China.

b

Joint Program on the Science and Policy of Global Change, Massachusetts Institute of

Technology, 77 Massachusetts Avenue, Room E19-411, Cambridge, MA, 02142, USA.

Abstract China is the world’s largest emitter of carbon dioxide (CO2) and is one of the world’s largest exporters. In 2007, CO2 emissions embodied in China’s net exports totaled 1176 million metric tons (mmt), accounting for 22% of China’s CO2 emissions. We calculate CO2 emissions embodied in China’s net exports using the latest release of a multi-regional input-output database developed by the Global Trade Analysis Project (GTAP 8). We find that the majority of China’s export-embodied CO2 is associated with production of machinery and equipment rather than products traditionally classified as energy intensive, such as steel and aluminum. The largest net recipients of embodied CO2 emissions from China include the EU (360 mmt), the US (337 mmt) and Japan (109 mmt). We also develop a global general equilibrium model with energy and CO2 emissions detail. We use the model to analyze the impact of a sectoral shift from energy-intensive industry to services and a tax on energy-intensive exports, which reflect policy objectives in China’s Twelfth Five-Year Plan (2011-2015) on CO2 emissions embodied in China’s net exports and on global CO2 emissions.

We find that while both policies reduce China’s export-embodied CO2 emissions, global there is only a small change in global CO2 emissions.

Key words: embodied CO2 emissions, multi-regional input-output analysis, computable general equilibrium (CGE) analysis  Corresponding author, Tel. +86 (0)10-6279-2866. Email: apollo110110@gmail.com

1. Introduction China’s rapid growth over the last thirty years has brought great benefits but has come at a cost of massive increases in energy use and heavy environmental damage. With the rapid growth of its economy and international trade linkages, China has become the world’s largest exporter, the second largest importer and the second largest national economy in the world (World Bank 2012). In 2010, China was responsible for 20% percent of global energy demand (BP, 2011) and surpassed the US to become the largest energy consumer and CO2 emitter in the world (International Energy Agency, 2011). A large portion of the CO2 emissions in China is embodied in goods produced for export and consumed by other countries. In 2007, China’s net exports of embodied CO2 emissions totaled 1176 million metric tons (mmt), accounting for 22% of its total domestic emissions.

How to account for emissions embodied in trade is an important issue in discussions of how to allocate responsibility for greenhouse gas emissions reductions between developed countries and developing countries.

Comparative advantage has resulted in the relocation of many laborintensive industries, such as manufacturing, from developed countries to developing countries. Given that developing countries generally have less advanced production technologies and fewer environmental restrictions, the shift of manufacturing is often considered tantamount to a transfer of environmental impacts from developed countries to developing countries (Copeland & Taylor, 1994, 1995; Muradian et al., 2002). Quantitative evaluations of the environmental cost embodied in trade have been conducted by numerous studies at the global level (Chen & Chen, 2011;

Davis & Caldeira, 2010; Peters & Hertwich, 2008; Skelton et al., 2011). and at the regional level, including for the US (Weber & Matthews, 2007), Austria, (Munoz & Steininger, 2010), The Netherlands (Edens et al., 2011), India (Goldar et al., 2011), China (Liu & Ma, 2011) and Estonia (Gavrilova & Vilu, 2012).

Large total and exported quantities of embodied CO2 emissions in China cause damage to the environment and also make China a target of carbon tariff policies implemented overseas. Developed countries with strict climate policies have discussed imposing tariffs based on the carbon content embodied in trade to avoid carbon leakage and shore up the competitiveness of domestic producers. As carbon tariffs imposed in OECD (Organization for Economic Cooperation and Development) countries penalize carbon intensive exporters, non-OECD countries including China could potentially suffer substantial welfare losses. One analysis has suggested that China in particular would suffer a GDP loss of 4% as a result of imposing such tariffs (Böhringer et al., 2011). China has grown aware of the vulnerabilities associated with the high energy and emissions intensity of its exports. As a result, China has implemented policies to reduce export-embodied emissions.

Several researchers have quantified carbon emissions embodied in China’s trade. Shui and Harriss (2006) estimate that about 7% to 14% of China’s CO2 emissions were a result of producing exports for US consumers.

They found that global emissions increased by 720 mmt due to the transfer of production from 1997 to 2003, with emissions increases largely driven by the use of less efficient manufacturing technologies and coal-intensive electricity and heavy industry production in developing countries. Peters et al. (2007) found that trends in net trade flows have had a small effect on total emissions as emissions reduced by relying on imports have been offset by growth in emissions from the production of exports. Yan and Yang (2010) have estimated the amount of CO2 emissions embodied in China’s foreign trade during 1997-2007 and find that 10.03% to 26.54% of China’s annual CO2 emissions are generated from the production of exported goods destined for foreign consumers. Xu et al. (2011) examined the CO2 emissions embodied in China’s exports from 2002 to 2008 and found that the change in composition of exports was the largest driver of export-embodied emissions.





Guo et al. (2012) analyzed China’s embodied CO2 emissions in international and inter-provincial trade with a Multi-Regional Input-Output Model. They find that the eastern area accounts for a large proportion of China's traderelated embodied CO2 emissions. Since emissions from developed countries have been reduced through the relocation of domestic emissions-intensive production to developing countries, many argue that China should not be held responsible for addressing carbon emissions embodied in trade, and that developed countries should cover some, if not all, of the cost of abating trade-embodied carbon (Zhang, 2011).

Much of the research discussed above adopts the environmental InputOutput analysis within a single-region framework, which does not distinguish technology differences between imported and domestic production within the same sector (Shui & Harriss, 2006; Peters et al., 2007;

Yan & Yang, 2010; Xu et al., 2011). A Multi-region input-output MRIO model can address this challenge with a global economic dataset in which countries are distinguished, bilateral trade flows are recognized, and imported and domestically produced intermediate inputs are tracked separately (Wiedmann, 2009). In recent decades, MRIO models have been developed and adopted in many research to estimate the embodied environment impacts of international trade (see Wiedmann et al., 2007, 2009 for a review of this literature). Based on the existing research, we develop and employ a MRIO model to compare the carbon content in production across countries. For this work we use the Global Trade Analysis Project 2007 data set (GTAP 8), which was released in the spring of 2012.

Following the MRIO analysis, we also employ a multi-region, multi-sector computable general equilibrium (CGE) model to assess the impact of two representative CO2 control policies that represent policies included in China’s Twelfth Five-Year Plan (FYP) (2011-2015). The two policies we simulate are focused on 1) increasing the service sector share of China’s economic output, with and without a decrease in China’s trade surplus, and 2) increasing the export tariff on energy intensive sectors in China. By comparing the two scenarios with the reference case, we are able to evaluate the impact of the two policies on carbon emissions embodied in China’s trade as well as on global CO2 emissions.

This paper is organized as follows: Section 2 briefly introduces the background related to two representative policies intended to reduce the emissions intensity of China’s industrial production and exports. Section 3 includes a detailed discussion of the methodologies and data adopted in our analysis. Section 4 presents the results of China’s embodied carbon emissions in 2007 and an assessment of the two policies. Section 5 summarizes and discusses the findings.

2. Policy Background China implemented a number of administrative and financial policies for the energy conservation and emissions reduction in the Eleventh FYP (2006-2010). These policies set short and medium term intensity targets for energy use, CO2 emissions and other pollutants. Decision makers claim that policy approaches are intended to incentivize both technical progress and what is commonly termed “structural change” or “economic rebalancing”.1 It is estimated that over 70% of China’s energy savings reflect technical approaches in the Eleventh FYP (Xie, 2012). China has prioritized economic rebalancing in its Twelfth FYP (2011-2015) and set a target for the service industry to reach a 47% value share of GDP in 2015 from a level of 43% in 2010 (State Council of China, 2011). A series of subsidies and government investment initiatives are about to be introduced to boost the services industry. The reduction in industrial production will have a large impact on China’s trade pattern and scale, and also have an effect on the carbon emissions embodied in traded goods.

In part to address the issue of trade-embodied carbon, China has taken steps to control the export of “energy-intensive, pollution-intensive and resources-consuming” goods. Reductions in tax rebates and increases in export tariffs on energy intensive products have been implemented gradually since 2004. In 2004, for the first time, China cancelled the export tax rebate on coke to limit exports of this commodity. In 2005 and 2006, China reduced the tax rebate on exports of energy consuming sectors such as coal, iron, and chemical goods, and in 2007 China cut tax rebates on around one third of its total traded goods, including many types of energy-intensive products. Due to the impact of the global economic crisis, China reinstated the tax rebate on some energy-intensive sectors in 2009, but cancelled them The term “economic rebalancing” is used in China to refer to two policy adjustments. The first is increasing the contribution of domestic consumption at the expense of overseas investment. In this connection, the Chinese government has announced a focus on increasing domestic demand as its primary task in the 12th FYP (China Daily 2012). Second, it is used to refer to shifting the industrial structure within China from predominantly heavy-industry led to knowledge-intensive, high value added industries such as services, which mostly have a lower energy footprint.

again in 2010. Aside from the tax rebate, China has also used export tariffs to limit the export of energy-intensive production, which are included as a complementary measure in the Comprehensive Energy-saving Reduction Program Work Notice of China in China’s Twelfth FYP (The State Council of China, 2011). On separate occasions in 2008, China increased the export tariff on steel and nonferrous metals (from 5% to 10% and then from 10% to 15%)

3. Method and Data

3.1 MRIO Calculations of Embodied Carbon MRIO models have been widely applied to study the environmental impacts embodied in international trade. With the advantage of combining domestic input-output matrices with import matrices from multiple regions into one comprehensive matrix, the MRIO model tracks the contribution of different points in a sector’s supply chain and encompasses all trading partners involved (Wiedmann, 2009).



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