Embodied Carbon in Trade: Carbon Loophole

This report aims to provide a newly updated analysis of embodied carbon in global trade (carbon loophole, also known as imported consumption-based emissions). Using the latest EXIOBASE (version 3.8.2) database, along with additional data, we estimated global embodied carbon in trade by developing the Environmentally-Extended Multi-Regional Input-Output (EE MRIO) model. Our analysis investigates global trends and does a deep dive into several key countries/regions and industry sectors. This report presents the results for 2019 to avoid the abnormalities that happened in global trade in 2020 and 2021 because of the global COVID19 pandemic.

Around 22% of global CO2 emissions are embodied in imported goods, thus escaping attribution in the consuming country (the end-user) and instead being debited to the producer country (Figure 1). We found that the proportion of embodied emissions in trade from total global emissions increased until 2008 and has stabilized since then remaining between 20% and 25% of global emissions.

It is worth highlighting that overall global CO2 emissions have been increasing, even though the share of embodied emissions in trade from total global emissions has stabilized in recent years, the total volume of embodied emissions in trade has been increasing.

Since the carbon intensity of manufacturing different products vary substantially between countries, the heterogeneous climate policies across countries risk intensifying the carbon loophole as countries import more goods to satisfy their domestic consumption. It may also increase carbon leakage as production continues to shift to countries with lower climate ambition or lesser-regulated countries. Asymmetries in carbon intensity and climate policies thereby can further widen the carbon loophole.

Of the 20 largest global embodied carbon trade flows, eight are originated from China. The top three embodied carbon emissions flows are from China to Other Asia and Pacific region, China to the U.S., and Other Asia and Pacific to China. China is the largest net exporter of carbon emissions, followed by Russia, South Africa, and other developing economies. The U.S., on the other hand, is the largest net importer of emissions, followed by several high-income countries such as the UK, France, Italy, and Germany.

The imbalance in emissions among countries is shifting, with developing and middle-income countries now transferring more emissions to each other than to traditionally high-consumption countries such as the U.S. and EU. This shift is partly due to the rise of South-South trade. Emissions transfers among these countries have risen even while transfers to Global North have stabilized. There are several factors driving this change. Among the most important is the growing demand for goods and services in developing countries. Their growing middle class is increasingly seeking out the same products and services that have long been consumed in developed countries.

Our industry sectoral deep-dive studies showed significant inter-regional and extra-regional flows of carbon embodied in commodity steel, value-added steel, cement, clinker, aluminum, and chemical trade worldwide. The total embodied carbon in the international trade of commodity steel in 2021 was around 700 Mt CO2. This is equal to 19% of total CO2 emissions from the global steel industry. In addition, the embodied carbon in the trade of steel-containing goods (e.g. automotive, metal products, machinery, domestic appliances, etc.) is significant. China alone accounted for one-third of the world’s embodied carbon in exported steel-containing products. The total embodied carbon in the international trade of cement and clinker in 2019 was around 141 Mt CO2. This is equal to around 6% of total CO2 emissions from the global cement industry. The total embodied carbon in the international trade of unwrought aluminum in 2019 was around 147 Mt CO2. This is equal to around 22% of total CO2 emissions from the global aluminum industry. The total embodied carbon in the international trade of chemical products in 2019 was around 478 Mt CO2.

Unless consumption-based GHG accounting is used along with production-based accounting, countries may meet their Paris Agreement targets while being responsible for increasing emissions abroad. Policies such as border carbon adjustment that are being considered in the EU, U.S., Canada, and UK or Buy Clean/Green Public Procurement (GPP) that have already been implemented in some countries and geographies around the world can help to prevent carbon leakage and close the carbon loophole.

To read the full report and see complete results and analysis of this new study, Download the full report from the link above.

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