Carbon leakage in China's manufacturing trade: An empirical analysis based on the carbon embodied in trade

Abstract

In this paper, we use a 16 manufacturing-sector single-country linked input–output model to calculate the balance of emissions (carbon) embodied in trade (BEET) and pollution terms of trade (PTT) for China's international trade with the entire world and with its principal trade partners (Japan, the US, and the European Union) for the period from 1996–2004. Our results confirm that China is a net carbon exporter, but also reveal that China's exports are relatively less polluting than China's imports: the big carbon surplus embodied in trade is due to China's large scale of exports and its high carbon emission intensity compared to its trade partners. In a second step, we directly study the determinants of the comparative advantage of China's international trade with the purpose of verifying whether the increase of the carbon burden in China is due to the transfer of the comparative advantage of the polluting sectors from Annex I countries to China, according to the hypothesis of ‘carbon leakage’. Our analyses confirm that China's comparative advantages are more concentrated in the less polluting, labor-intensive sectors, although, dynamically speaking, this economy also experienced a tendency of comparative advantage increases in carbon-intensive sectors for its trade with European countries owing to their increase (decrease) of carbon intensity, but not for the trade with the carbon club countries such as the US and Japan. This finding seems to provide a first piece of supportive evidence for the existence of ‘carbon leakage’ phenomenon. Our conclusion also reveals that current international production division is organized with little consideration for the environmental performance of the producers in different countries; this organizational issue might be the principal reason for the current, often-observed BEET surplus in international trade of the non-Annex I country, while the transfer of a comparative advantage in the carbon-intensive sectors plays only a marginal role.

Keywords:

• single-country linked input–output model
• carbon leakage
• comparative advantage
• BEET
• pollution terms of trade
• China

JEL Classifications:

• Q56
• Q54
• F18
• C67

Acknowledgements

This research is supported by FQRSC of Quebec, Canada by China National Science Fund project (project number: 70703015) and China National Social Science Major Fund project (project number: 09&ZD021). The authors also thank Shanshan Zhang for her excellent research assistance.

Notes

1. Hayami and Nakamura (2007) used this model to check the GHG emissions embodied in trade between Canada and Japan.

2. One shortcoming of the linked single-country model is that it does not include an imported intermediate demand matrix (A ^m) for each country and thus can only capture the last stage of an international supply chain of imports. For example, the imports of goods A from China to the US can, in its turn, induce some intermediate good B's import to China from Canada. However, the linked single-country model calculates the emissions leakage from the US to China by blindly assuming that all of the production process for good A is produced in China, which will have the tendency to over-estimate the emissions leakage scale between these two countries. However, Lenzen et al. (2004) concluded with the case of Denmark that, excluding the above mentioned, trade-related ‘feedback’ loops cause a relatively small bias, at only approximately 1–4%. Facing the trade-off between the heavy load of data requirements if we include the ‘feedback’ loop into calculation of the import-related emissions and the relatively small bias of the linked single-country model, we prefer to apply the linked single-country model in this paper.

3. The details in sector mapping and the final sector classification used in the IO analysis are given in the Appendix of the paper.

4. The underlying assumption for this conversion is that the foreign trade partners have the same sector-level energy consumption structure as China. Therefore, the emissions calculated under this assumption ignore any potential energy consumption structure differences between China and its trade partner and can therefore lead to estimation bias. However, we believe that this proxy is still worthy. Until now, only Milner and Xu (2009) had calculated China's BEET with the rest of the world by supposing that the rest of world shared the Japanese economic structure and technology. Compared to their paper, we believe our analysis can provide a measurement of BEET that is closer to reality because we distinguish the production structure and the average energy efficiency between China's most important import origin countries.

5. Except for the BEET for 1996, which is a small, negative value.

6. Except for the short period between 2001 and 2002, during which we observe a slight decline in the BEET values. This decline might be explained by the largely discussed and documented ‘missing’ of statistic data about the energy consumption in China during these several years, when many very polluting, small coal mines that were shut-off and erased from the official statistics but still ran illegally to respond to the pressure of the increased demand for energy from the Chinese economy related to its entering the WTO.

7. The choice of the three variables is based on data availability.