The production of goods and services generates pollution through production processes and through the energy consumption required in production. The cumulative pollution emitted through the entire chain of production, starting from resource extraction to final sale, is said to be “embodied” in that product. If the product is further traded across national borders, then this is “pollution embodied in trade”.
The concept of pollution embodied in trade shares many characteristics with material flow analysis. In traditional material flow analysis the physical flow of the material of interest, iron for example, is traced around the globe. For pollution embodied in trade, the pollutant is not physically a part of the traded product, but rather the pollution emitted in the production of that product. Consequently, some published research refers to “hidden” or “virtual” flows of pollution.
The main method for calculating emissions embodied in trade is input-output analysis. Input-output analysis originated in economics and is a widely accepted method for analyzing the interconnections between different economic sectors. For calculations of pollution embodied in trade, the standard input-output model must be generalized into a multi-regional model to account for the different production technologies in different countries. The main methodological issue for pollution embodied in trade is linking the input-output data from different countries through trade statistics.
The calculation and analysis of the pollution embodied in trade is useful in many areas of environmental system analysis. Pollution embodied in trade gives a good measure of how consumption choices in one country effect the environment in other countries. It also can demonstrate a quantitative change if countries increasingly shift polluting production off-shore while pursuing a less polluting knowledge-based domestic economy. These applications are particularly relevant for addressing the connection between trade and the environment.
There are many avenues for incorporating pollution embodied in trade into environmental policy. Some have argued that adjusting national emission inventories, such as in the Kyoto Protocol, by the pollution embodied in trade is a fairer method of allocating responsibility for pollution. The current production-based emission inventories include all pollution emitted within national territories, while the consumption-based emission inventories take the production-based inventories, subtract the pollution embodied in exports, and add the pollution embodied in imports. Consumption-based inventories can also be used to identify environmentally preferable places to locate production. By calculating the pollution embodied in trade per unit of product produced it is possible to identify which regions have an environmental comparative advantage in production. As an example, in many cases it is possible to locate pollution-intensive production near clean energy sources. Conceptually, this approach attempts to use trade as a means of reducing global environmental impacts.
Examples of Policy Applications
A consideration of the pollution embodied in trade is useful in many areas of environmental policy. However, the policy implications may differ depending on whether the pollutant has a local or a global impact. For instance, global pollutants impact everyone on the globe, while local pollutants may affect only a region or small community. Additionally, some ecosystems might be more resilient to certain local pollutants compared to others.
Is trade good or bad for the environment?
Wherever there is international trade there will be pollution embodied in trade, though this does not mean that international trade is bad for the environment. This is easy to illustrate with an example. Consider two countries A and B, both of which can produce aluminum which in turn requires large amounts of electricity. Suppose that country A produces electricity with hydropower and country B produces electricity with coal. For global pollutants such as greenhouse gases, if country A and B produce their own aluminum then the global environmental consequences are much worse than if country A produces its aluminum using hydropower and country B acquires its aluminum through international trade. This is an example of where pollution embodied in trade is good for the environment.
Despite the relevance of the pollution embodied in trade to questions of trade and the environment it has had little impact in the research community. Generally, studies of trade and the environment have been heavily influenced by mainstream economics and essentially address how trade affects income and then how income affects environmental performance per capita. The general hypothesis is that as we get richer we pollute less, so if trade makes us richer then it is good for the environment (often referred to as the Environmental Kuznets Curve). These studies face many statistical hurdles that are rarely addressed, such as causality, per capita versus aggregate impacts, and pollution embodied in trade. Many studies have now shown that pollution embodied in trade makes it appear that trade is good for the environment since, as countries get richer, they tend to source more of their pollution-intensive products from other countries.
Pollution Haven Hypothesis
Pollution embodied in trade has significant implications in global climate policy, particularly relating to greenhouse gas emissions. Greenhouse gas emissions have a global impact irrespective of where they are emitted and if global climate policy has only limited participation then it may have little, no, or even negative effect. Under the Kyoto Protocol only some countries have obligations to limit their greenhouse gas emissions. It has been argued that with this policy regime, industry may shift production from participating to non-participating countries (sometimes referred to as the pollution haven hypothesis).
While the existence of pollution havens is still debated, most of the literature has focused on whether an industry physically moves from one country to another. A weaker but more useful hypothesis is that expanded production occurs in pollution havens. For instance, instead of an industry moving from one country to another, it builds new capacity for increased production in a pollution haven. This pollution haven hypothesis is easily tested through time-series analysis of pollution embodied in trade. In particular, one can analyze the pollution embodied in trade from non-participating to participating countries (carbon leakage) over time. Increasing carbon leakage signifies that production is increasingly occurring in non-participating countries. While not many studies have been performed, initial research suggests that the pollution embodied in trade flows from developing countries is increasing.
Global Climate Policy
Many of the key policy-relevant issues of pollution embodied in trade manifest themselves in global climate policy and, without careful monitoring, pollution embodied in trade may undermine global climate policy. This raises the issue of how global climate policy can account for pollution embodied in trade. One way to approach this issue is to construct national greenhouse gas inventories so that they account for the pollution embodied in trade. Currently, via the United Nations Framework Convention on Climate Change (UNFCCC), emission inventories are constructed based on all the emissions occurring within a national territory. This production-based allocation has three key problems. First, activities occurring in international territories are not allocated to emission inventories (such as international transportation). Second, if a country historically has a large share of its gross domestic product (GDP) dependent on pollution-intensive exports then the economic consequences of greenhouse gas mitigation may be high. Third, if environmental policy has limited participation, then the risk of carbon leakage is high.
One way to modify greenhouse gas emission inventories to account for trade is to use consumption-based inventories. Consumption-based inventories subtract the emissions embodied in exports from the production-based inventories and add the emissions embodied in imports. This also makes the emission inventory consistent with the monetary consumption that occurs in a country and is conceptually similar to the ecological footprint. The use of consumption-based inventories also places more emphasis on the linkages between consumption and production, a linkage which is lost with production-based inventories.
Environmental Comparative Advantage
The earlier example of aluminum production, using electricity generated by coal or hydropower, highlights a situation where trade is good for the environment. This example suggests that it is possible to use international trade as a means of reducing environmental impacts. Ideally, pollution-intensive production should be located in regions which can produce these products with the lowest environmental impacts, taking into account environmental impacts further down the production chain, transportation, and resource and market locations. Encouraging production to occur where environmental impacts are lowest requires modification of the traditional concept of comparative advantage.
The traditional economic rationale for international trade is to locate production so the abundant resources (usually capital and labor) are used intensively. In terms of the environment it is desirable to allocate production in a country with an “environmental” comparative advantage. From an environmental perspective production should occur where it has the lowest environmental impact. In the traditional economic setting one way to perform this is to place a price on the pollution (externality) such as through a carbon tax or an emission quota. This introduces environmental quantities into the traditional concept of comparative advantage. However, in the long run, environmental impacts and resource consumption should be minimized and this may require re-thinking the traditional notion of comparative advantage which only seeks to place production where the resource (environment in this case) is abundant.
- Ahmad, N. & Wyckoff, A. Carbon dioxide emissions embodied in international trade of goods Organisation for Economic Co-operation and Development (OECD), DSTI/DOC(2003)15, 2003
- Peters, G.P. & Hertwich, E.G. Structural analysis of international trade: Environmental impacts of Norway Economic Systems Research, 2006, 18, 155-181 * Peters, G.P. & Hertwich, E.G. Pollution embodied in trade: The Norwegian case Global Environmental Change, 2006, 16, 379-389
- Wiedmann, T.; Lenzen, M.; Turner, K. & Barrett, J. Examining the Global Environmental Impact of Regional Consumption Activities - Part 2: Review of input-output models for the assessment of environmental impacts embodied in trade Ecological Economics, 2007, 61, 15-26