Decomposing patterns of emission intensity in the EU and China: how much does trade matter?

Abstract

We use data from the World Input-Output Database to examine channels through which CO₂ emissions are embodied within, and imported into, the European production in 2005 and in 2009. We use an input–output price model to simulate the effect that a rise in the price of emissions trading system (ETS) allowances would have on the final price of goods. We find a reduction in emission intensity, which was greatest in those sectors regulated under ETS. Finally we examine the trade between China and the EU to study possible increases in carbon leakage. Results show that emissions embodied in imported intermediate goods have increased in all sectors.

Keywords:

• energy demand
• greenhouse gas emissions
• input-output
• price analysis

Acknowledgements

This material is based upon works supported by the Science Foundation Ireland under Grant No. 09/SRC/E1780. The opinions, findings and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the Science Foundation Ireland.

Notes

1. http://ec.europa.eu/clima/policies/ets/index_en.htm

2. All values in the World Input-Output Database are specified in US$ and thus the simulated ETS prices are converted into dollar values before conducting the price analysis. Details of the CO scenarios chosen are provided in Section 3.

3. Carbon leakage is defined by the IEA as “the increase in emissions outside a region as a direct result of the policy to cap emission in this region”, IEA (2008 http://www.iea.org/publications/freepublications/publication/Aluminium_EU_ETS.pdf)

4. Producer price deflators are missing for Portugal in all years, and thus we deflate the Portuguese I-O tables using the producer price deflator for Spain. Similarly data are missing for Slovakia in some years, and for these years we use the deflator for the Czech Republic.

5. The environmental matrix has been widely used in literature. See, among others Treloar (1997), Lenzen (1998),Machado, Schaeffer, and Worrell (2001), Ferng (2003), Alcántara and Duarte (2004), Sánchez-Chóliz and Duarte (2004), Mongelli, Tassielli, and Notarnicola (2006), Liang, Fan, and Wei (2007) and Butnar and Llop (2007).

6. The price of ETS permits reached a record high of approximately €30/tonne in early 2006, but plummeted to almost €0 per tonne in 2007 (Siikamäki, Munnings, and Ferris, 2012).

7. As all values in the WIOD are expressed in dollar terms, we convert these prices to real 2005 dollar values before running the price model.

8. We are grateful to an anonymous referee for bringing this possible explanation to our attention.

9. In this section of the paper, we focus on the ratio between sectoral emissions and sectoral GDP as this gives a measure of the impact of the ETS pricing on sectoral emissions, and is useful to show the patterns in different EU countries. As an increase in the ETS, price will also affect the final prices of the various sectors; through direct and indirect channels, we present a detailed analysis of the effects of a variation in the ETS price on the economies of EU countries in Section 4.3

10. North American Free Trade Agreement

11. Brazil, Russia, India, Indonesia, Australia and Turkey

12. An anonymous referee highlighted the fact that some of the changes in sectoral emission intensity in China, shown in the data, may be partially attributable to improved data at lower levels of aggregation. While we acknowledge that this may be the case, we have no way of verifying this and, as such, we take the data at face value.