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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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When we implement endogenous tax instruments to achieve the targets in Table 1, we find that the price of industry output rises by 20% and that for services falls by 25% compared to the reference case in order to achieve the targets. As shown in Figure 5, the increase in the industry price leads to significant decreases in the net exports of both energy-intensive products and also goods produced by other industries. However, the drop in the price of services stimulates exports of this sector significantly. Our simulation suggests that under the rebalancing policy China’s trade patterns have been fundamentally altered from manufacturing-oriented to serviceoriented, which is considered a desirable goal by many policymakers in China.

Figure 5. Net exports values by sectors in China’s trade in RF and ER scenarios A comparison of ER1 and ER2 suggests that the expansion of domestic demand helps to reduce net exports in all the sectors, as expected.

The net exports of energy intensive products and other industry goods decrease as the economy becomes more service oriented as a whole.

A change in the relative prices across China’s domestic products would change the input-output structure in production and affect the carbon intensities of all sectors. Therefore we recalculate the embodied carbon with the MRIO model based on the economic and environmental variables as forecasted in the CGE analysis. Changes in emissions due to economic rebalancing are outlined in Table 3.

Table 3. The forecasted impact of economic rebalancing measures on exportembodied CO2.

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By comparing results for the reference scenario with those for the ER1 scenario, we focus on the impact of domestic economic rebalancing measures alone. We find evidence that in response to policy, industry largely reduces the net CO2 exports embodied in China’s trade. However, the emissions from the services sector increases significantly in part due to the rapid growth of services exports. Emissions embodied in the services sector also includes inputs that required electricity to produce, and thus the contribution of these electricity-related emissions is included in the total. On balance a reduction in the manufacturing (secondary) industry’s exportembodied emissions is offset by an increase in embodied emissions in the service sector. Net exports of China’s trade-embodied CO2 emissions do not change significantly.

By results for the ER1 and ER2 scenarios, we find that the expansion of domestic demand will reduce total trade-embodied CO2 emissions. By importing more and exporting less of energy intensive production and other industry goods, CO2 emissions are displaced as production moves offshore from China to countries where production methods may be more or less carbon intensive. The trend in the services industry is qualitatively similar— the CO2 emissions embodied in China’s exports are reduced more significantly in ER2 than in ER1.

By examining global CO2 emissions and emissions in individual countries, we find that the economy rebalancing strategy in China affects energy use and emissions through bilateral trade linkages. By promoting services at the expense of manufacturing, China’s domestic emissions decrease by about 5%. With the reduction of manufacturing exports from China, other regions must expand production to meet global demand and thus total emissions in these regions increase. Europe, Japan and Korea experience the greatest emissions growth as a result of international trade rebalancing—these countries account for 11%, 9% and 9%, respectively, of total global emissions growth. There is also growth in trade between emerging Asian economies and developed countries. The value of exports from the Rest of Asia (ROA) region (which includes Vietnam, Cambodia, and Laos) to Europe, Japan and the US increases by around 8%. China sees a decrease in the supply of industrial products it provides to the developed countries in part because these advanced economies begin to undertake production themselves and in part because this capacity is being transferred to other emerging economies. The net effect is only a slight reduction in CO2 emissions due to the benefits of cleaner technology in advanced countries and a lower overall emissions intensity in developing countries that replace production in China (e.g., Rest of Asia (ROA) has an emissions intensity of

1.27 kilograms of CO2 per dollar compared to China’s 1.77, with the discrepancy largely due to the lower reliance on coal in electricity production in ROA).

Scenario 2: Impose export tariffs on the Energy Intensive sectors

China has acted to control the export of energy intensive products by reducing the tax rebate on exports and increasing export tariffs on production activities in these sectors. These two policies are also listed in the Comprehensive Energy-saving Reduction Program Work Notice of China section of China’s Twelfth FYP (The State Council of China, 2011). This policy program aims to limit the export of energy-intensive commodities.

Reducing tax rebates on exports and imposing an export tariff operate through essentially the same mechanism with the goal of increasing the costs of exporting industries that the government wants to discourage. In our model, we use an export tariff policy to simulate the effect of both policies on carbon emissions embodied in China’s trade and its broader global implications.

In our model, as noted in Section 3, the “energy-intensive sectors” include Paper and paper products (ppp), Chemical, rubber and plastic products (crp), Nonmetallic mineral products (nmm), Iron & steel production (i_s), Non-ferrous metals (nfm), and Fabricated metal products (fmp). Current export tariffs on these products range from 4% to 6%. As targeted export tariffs on these sectors are not set in China’s work plan and could be flexible in practice, we make a simple assumption in our scenario that the tariff rate is double the 2007 tax rate.3 We first consider how trade patterns are affected by the export tariff policy. As shown in Figure 6, an export tariff is forecast to decrease the net exports of energy-intensive products in China. The impact is not only limited to the energy-intensive sectors, but also affects the exports of all industries. As observed in Figure 6, exports of non-target industries increase, with the exception of agriculture. This effect occurs because the export tariff on energy-intensive sectors decreases the output of these sectors, resulting in a reduction in energy demand and prices. These price decreases reduce the production cost for other sectors, which result in these becoming relatively more competitive in global markets.

Defining a precise tax rate is not necessary here as we are focusing on providing a performance benchmark for a potential policy instrument rather than aiming to inform the choice of tax rate.

Figure 6. Net export values of China’s trade in reference (RF) and export tariffs (ET) scenarios Export tariffs also affect the price of domestic production in China and change sectoral carbon intensities.

As for our previous simulations, following implementation of the policy shock, we recalculate embodied emissions for all sectors and regions based on production inputs estimated by our CGE analysis. Changes in trade embodied emissions and changes in emissions by aggregated regions are reported in Table 4.

The results indicate that the emissions embodied in the exports of energy-intensive production in China decrease as the magnitude of the trade flows shrink. However, the policy also incentivizes increases in exports from non-target industries, thereby increasing CO2 emissions embodied in exports of these commodities, which partially offsets the reduction in the net exports of emissions from energy-intensive sectors. Overall, the tariff policy reduces CO2 exports from energy-intensive sectors, but there is virtually no effect on total CO2 emissions.

Table 4. Change in carbon emissions under the Export Tariff scenario.

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The export tariff policy imposed in China also influences the global economy and CO2 emissions through its impact on bilateral trade patterns. A tax policy that targets a reduction in the contribution of the energy-intensive sectors indirectly stimulates the production of non-target industries, causing little net change in China’s overall domestic CO2 emissions. By reducing the supply of energy intensive products from China, other regions have to produce (or import) these “dirty” goods themselves, which increases emissions in other regions. The growth of emissions in Europe, the US and Japan is 11%, 11% and 8%, respectively. There is also an increase in imports of energy-intensive products to the US, Europe and Japan from regions other than China. As in the case of the rebalancing scenario, a reduction in the supply of Chinese-made energy-intensive goods to the developed countries is partially compensated by production in advanced economies, and is partially transferred to their other trade partners.

Consequently, there is only a small change in global emissions, as in the rebalancing scenario.

5. Conclusions and Discussion We have analyzed carbon emissions embodied in China’s trade in 2007 by conducting a MRIO analysis using the Global Trade Analysis Project 2007 data set (GTAP 8). Insights from the MRIO analysis helped to guide our investigation of the impact of two representative CO2 reduction policies using a multi-region, multi-sector static global general equilibrium model. As the world’s largest exporting country, China’s trade-embodied emissions are also the biggest in the world. Large exports of embodied CO2 emissions in China both threaten the environment and also make it a major target for carbon tariff policies implemented overseas. China has become aware of its vulnerabilities, and has taken measures to address concerns surrounding energy and carbon emissions embodied in its trade through a range of policy approaches. This paper has provided insight into the factors influencing China’s trade-embodied emissions. It has also attempted to evaluate the effect of two policies representative of measures in China’s Twelfth FYP—one focused on economic rebalancing with and without an emphasis on stimulating domestic consumption and the other focused on reducing incentives for China to export energy-intensive products.

In the MRIO analysis, we find that the CO2 emissions embodied in China’s net exports are considerable, accounting for 22% of its total emissions. Mechanical and electronic equipment products are the major source (34%) rather than the energy intensive sectors (30%). Trade with Europe, Japan, and the US accounts for more than half of China’s total trade volume. The carbon intensities of production in China were found to be much higher than that in Europe, Japan and the US.

Neither of the two policies we investigate has a significant impact on total global CO2 emissions. The policy aimed at rebalancing China’s economic structure altered China’s trade patterns, from an industry-based to a service-based orientation, but did not significantly influence China’s tradeembodied CO2 emissions. Tariffs on energy intensive (EI) products are effective at reducing EI sector exports and its embodied emissions, but only reduce China’s total export-embodied CO2 emissions by a small amount, due to the offsetting effect caused by an increase in other production activities, including services. A policy that targets the expansion of domestic demand is observed to be more effective at reducing China’s export-embodied CO2 emissions, although it does not explicitly take into account shifts in consumption patterns that may occur as household incomes increase. In both scenarios, we find evidence that the policy-induced decrease in industrial products supplied from China to developed countries would be partially offset by relocation to the advanced economies where products are consumed, and increased production in other trade partners. As a result, climate policies implemented in China would indirectly lead to increases in emissions in other regions. Globally, CO2 emissions would fall only slightly, as regions with less CO2-intensive production produce energy-intensive products previously made in China. But this effect is very weak and hard to predict, as it is the combined result of global production redistribution and is influenced by estimates of technology costs and the economic structure characterizing each region.

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