The Carbon Footprint of Capital

We think of capital, the assets we use in production, as heavy:  machines, buildings, infrastructure, trucks and railroads. Being  composed mostly of cement and steel, we would expect their production to  cause a lot of greenhouse gas emissions. In  a new paper, we offer a first detailed analysis of the carbon footprint  of gross fixed capital formation across countries and sectors. The picture that emerges is interesting because of some small surprises.

Share of capital formation in the final demand and carbon footprint of different countries. Source: Journal of Industrial Ecology

First of all, capital is big. Capital formation constitutes about one  quarter of gross global product in monetary terms. It causes about 30%  of global greenhouse gas emissions. Leaving it out is a pretty big  oversight.

Second, capital formation varies across countries. The country with  the highest capital formation over the past decade was China, where it  constituted 44% of GDP in 2007 and caused 57% of the carbon footprint.  In developed economies, capital formation constitutes only about 20% of  GDP.

Third, the carbon intensity of capital formation varies depending on  what capital goods countries and industries invest in. While  construction and machinery are carbon intensive, software and business  services are not and ICT hardware has an average carbon intensity.  Globally, construction accounts for half of capital formation and 60% of  its footprint. In wealthier countries, capital formation is less carbon  intensive than household consumption.

Fourth, capital formation increases with GDP across countries. This  is maybe not surprising: affluent people save more. However, despite  purchasing more software and business services, rich countries also keep  investing in buildings and roads. Across countries, the carbon  footprint of capital formation increases by 83% for each doubling in GDP  per capita, measured on a purchasing power parity basis. China is an  outlier in this picture, having a carbon footprint of capital per person  higher than France or Great Britain. This increase of the carbon  footprint of capital with wealth occurs in spite of investing in cleaner  types of capital and having cleaner technology.

Most of the capital goods are purchased domestically. We investigated  two groups of countries, those with the highest and lowest carbon  intensities of capital formation, and found that in both groups, two  thirds of the value added associated with capital formation was  domestically produced. However, the location of GHG emissions diverges:  In countries with a high carbon intensity of capital, most of the  emissions occurred domestically, while in countries with a low carbon  intensity of capital, three quarters of the carbon footprint was  associated with imports. That is quite a stunning divergence! In  economies with a clean energy mix and a high energy efficiency of  production, one would expect imports to have a disproportionate share of  the carbon footprint, but the differences observed for capital are  especially egregious.

In Prosperity without Growth,  Tim Jackson argues that investing in assets and infrastructure was an  important step in the transition to a sustainable economy (p.177 f). We  find that investments are just as or even more polluting than  consumption, so that this strategy, per se, is not one that will solve  our environmental problems. His list of suggested investments, of  course, focuses on investments that would enable a more sustainable  living, such a renewable energy, public transport, and energy-efficient  buildings. We agree that such investments are required, but would like  to point out that capital formation as such is polluting and that hence,  this pollution needs to be considered when looking at the whole  picture.

Finally, I would like to close by reflecting on my own field. When  considering the carbon footprint of products or services, the carbon  required to produce the machinery that produces the products we consume,  the carbon required to lay the roads and build the ports, warehouses  and shopping malls that deliver these products to us are usually not  considered in the assessments, independent of whether life cycle  assessment or input-output analysis is used for the quantification. We  have now provided an estimate of the potential magnitude of the  resulting error. It is too large to be ignored.

Source: Södersten, C.-J., R. Wood, and E. G. Hertwich. 2017. Environmental Impacts of Capital Formation. Journal of Industrial Ecology doi:10.1111/jiec.12532

The  carbon footprint of capital per person as a function of GDP per capita.  The figure shows a clear trend, but also some significant outliers. The  capital invested in rich countries has lower CO2 emissions, as it  consists more of software, and it is produced with cleaner technology.  Nonetheless, the sheer volume of investment is higher, leading to this  effect. Source: Journal of Industrial Ecology