Beyond production and consumption: using throughflows to untangle the virtual trade of externalities

Abstract

Understanding how countries contribute to the generation of externalities globally is important for designing sustainable policies aimed at reducing negative externalities such as carbon emissions. Commonly used approaches focus on either producers or consumers, thereby neglecting the role of intermediates. We here introduce the concept of throughflow to comprehensively quantify upstream externalities generated by the supply chains originating from, passing through or ending in a given country. We define the Throughflow Based Accounting (TBA) framework as the decomposition of the throughflow into local, imported, exported and traversing externalities. We illustrate the strength of the TBA by identifying the CO₂ emissions caused by supply chains involving the German economy. We show that Germany could use its position in global value chains to help reduce two times more CO₂ emissions than measured with usual production- or consumption-based accounting frameworks.

KEYWORDS:

• Global value chains
• environmentally extended input–output analysis
• hypothetical extraction method
• consumption based accounting

Disclosure statement

No potential conflict of interest was reported by the authors.

Data availability statement

All data and code used for this study are available on Zenodo (DOI: 10.5281/zenodo.7327470).

Notes

1 We here use the term ‘externalities' in its broadest sense such that it can denote both, different externality types as well as varying amounts of the same externality.

2 In this paper, we use the term double counting when referring to externalities allocated to the same actor more than once (Liang et al., 2016; Tokito et al., 2022). In related literature, the same term is sometimes used to denote externalities allocated simultaneously to more than one actor (Gallego & Lenzen, 2005).

3 We also propose a spatially explicit formulation of the throughflow in the Supplementary Materials (equation S.1). Element $tb{a}_{rs}^c$ of such throughflow matrix captures the externalities caused in country $r$ to supply the final users in country $s$ through country $c$. This alternative formulation is coherent with the forthcoming TBA decomposition (see equation. S.4).

4 The terms used to define the components of the TBA decomposition are to be understood in a figurative way. The mention of imported/exported/traversing externalities do not refer to externalities being physically traded between countries, but rather to externalities generated to produce traded commodities. Such externalities associated with trade flows are sometimes referred to in the literature as embodied externalities (Skelton et al., 2011; Wood et al., 2018; Zhang, Guan, et al., 2020). As this formulation has been criticised for being ambiguous (Jakob & Marschinski, 2013; Liu, 2015; Jakob et al., 2021), we refrain from using it in this manuscript.

5 In a sense, these externalities can be described as double counted (Gallego & Lenzen, 2005). As already mentioned earlier in the manuscript (footnote 2), we reserve here the term double counted to externalities allocated twice to the same agent.

Additional information

Funding

This work was supported by Volkswagen Foundation.