The Guardian and industry actors call for considering Carbon Embodied in Trade as part of a climate deal at Copenhagen.

On December 7, 2009, 56 newspapers from 20 countries published  a joint editorial calling world leaders to use the 14 days of climate  negotiations in Copenhagen in order to come to an effective and fair  agreement to limit climate change.

At the time I am writing this, it is too early to see whether the  call will be heeded. The editorial points correctly to what has emerged  as the core element of the negotiations: the need to fairly distribute  the responsibility for reducing emissions. A critical passage of the  editorial, calls for recognizing the issue ofemissions embodied in trade:

Social justice demands that the industrialised world digs deep into  its pockets and pledges cash to help poorer countries adapt to climate  change, and clean technologies to enable them to grow economically  without growing their emissions. The architecture of a future treaty  must also be pinned down – with rigorous multilateral monitoring, fair  rewards for protecting forests, and the credible assessment of “exported  emissions” so that the burden can eventually be more equitably shared  between those who produce polluting products and those who consume them.

I find it personally gratifying that the issues of forests and trade are finally being recognized, as we have spend considerable effort to raise these issues.  Together with Glen Peters and Anders Stømman, I have personally worked  on quantifying and modeling the emissions embodied in trade.

We have shown that for Norwegian household consumption, most of the  carbon footprint is located abroad, where consumer goods and materials  are produced. (Our calculations are now included in the official  Norwegian climate calculator.) We have quantified the emissions embodied in trade for all major economies for 2001,  using the same data that was also used to calculate the national carbon  footprints displayed in this web page. Our results show that in 2001  more than 20% of global CO2 emission was caused by the production of  exported products. The figure shows single country results from our study.

Since then, the fraction has probably increased substantially, as  national-level studies suggest. My colleague Richard Wood has just  updated the calculations for Norway, which indicate a dramatic growth of  the emissions embodied in imports by 50% from 1999 to 2007, while  emissions embodied in exports have stayed approximately constant. The  changes in the emissions embodied in trade are much larger than  emissions reductions due to Norway’s Kyoto target. In the UK, a similar  increase in exported emissions has occurred, as results obtained by  colleagues at SEI and the University of Surrey show.
Maybe the strongest evidence for the global shift in emissions is evidence from China, unearthed by Glen Peters, Dabo Guan, Chris Weber and Klaus Hubacek (Also discussed in the Guardian).  Their modeling indicates that emissions embodied in export have  increased from 21% of the total national emissions to 33% from 2001 to  2005, at a time when total emissions increased by 40%. Growth in  emissions embodied in China’s export was the most important factor for  the exceptional global emissions growth during this period.

Why does this matter? Economists argue strongly in favor of economic  instruments to reduce global emissions. Carbon pricing provide an equal  incentive for reducing emissions both through shifts in energy  technologies, through increases in energy efficiency, and through  changes in consumption patterns. We will need all these strategies to  achieve climate stabilization. If, however, we have unequal carbon  prices in different regions of the world, the danger is that carbon  intensive production is relocated to where it is cheapest. This is, in  any case, where growth is today. If that happens, gains from efficiency  and structure are jeopardized.

What can be done? Most of the schemes to avoid carbon leakage and the  relocation of energy-intensive industries to countries without  emissions obligations are subsidy schemes: The EU Emissions Trading  System (ETS) provides free emissions quotas to energy-intensive  industry. There are plans to compensate the Aluminium industry directly  for the high electricity price produced by the ETS. (Only from 2012, and  it is not clear whether there will be any Al electrolyses left in  Europe to protect.) These schemes all result in reduced costs for  energy-intensive products also to consumers in carbon-limited  industrialized countries and do nothing to impose the true carbon costs  on imports.

The only solution that avoids these negative effects is a so-called  “border tax adjustment”. This adjustment would imply that an incremental  carbon tax is imposed at the border, reflecting the emissions embodied  in the product imported. For most products, such a tax would be small.  The global average GHG emissions per $ GDP is about 700g. A 100$/t tax  implies an average 7% tax. For other products, it would be prohibitive.  It would not make sense for Europe to import Aluminium produced with  Chinese or South African coal power – but that is precisely the point!