News and Analysis • Volume 13 • Number 1 • March 2009

Who Should Pay for Embedded Carbon?

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China has suggested that carbon emissions incurred during the manufacture of exported goods should the shouldered by the country where they are consumed.

The proposal was made at a Washington meeting between top US climate policy-makers and their counterparts from China, the EU, Japan and Mexico on 16 March. Gao Li, who heads the climate change department of the Chinese National Development and Reform Commission, told the gathering that his country was “at the low end of the production line for the global economy. We produce products and these products are consumed by other countries, especially the developed countries. This share of emissions should be taken by the consumers, not the producers.” This, he said, would be a ‘very important item’ in reaching a fair post-Kyoto global agreement on greenhouse gas reductions.

According to a number of statistics, China has already overtaken the US as the world’s largest emitter of carbon dioxide, although its per capita emissions are thought to be just one-fifth of the amount of CO2 emitted by every American. Dr Li estimated that the carbon ‘embedded’ in Chinese exports accounted for some 15 to 25 percent of the country’s total emissions.

The EU’s chief climate negotiator Artur Runge-Metzger doubted that asking importers to handle emissions would work. In addition to the logistical difficulties involved in regulating embedded emission in the country of destination, he said that importers would “like to have jurisdiction and legislative powers in order to control and limit [emissions] and I’m not sure whether my Chinese colleague would agree on that particular point.”

Trade Implications

The debate on how to treat embedded carbon started well over a decade ago. In their study of the carbon embodied in the manufactured goods imports of the six largest OECD countries between 1984 and 1986, Andrew Wyckoff and Joseph Roop warned as early as 1994 that policies predicated on the reduction of greenhouse gas emissions at home might not be effective if imports contribute significantly to domestic consumption.

A number of academics have embraced the approach taken by China. They argue, inter alia, that importing goods manufactured in developing countries lets Western consumers have the products they need while leaving the pollution in the exporting country. Applying the ‘blame-the-buyer’ principle would also make it less attractive for companies to outsource the most polluting production processes to countries such as China to escape strict regulation at home.

Shifting the emphasis from controlling emissions in producer countries to making the consumers of embedded carbon pay for them could take the form of border tax adjustments, i.e. imposing higher tariffs on energy-intensive goods sourced in countries with less stringent standards. Such a possibility is foreseen in climate change legislation already in force in the EU - and in the pipeline in the US - for imports from countries that do not take on commitments under a successor instrument to the Kyoto Protocol. China’s Dr Li said in Washington that it would be a ‘disaster’ if developed countries set trade barriers in the name of climate change. Such measures could also face a WTO challenge, since trade rules generally forbid discrimination based on production methods. Nevertheless, just a day after the Washington meeting, US Energy Secretary Steven Chu said that if other countries did not impose a cost on carbon, “we would look at considering duties that would offset that cost.”

Heading for Copenhagen

Whether or not the ‘importer pays’ principle is adopted Copenhagen next December, it is clear that any viable Kyoto successor agreement would have to allow for a period of emissions growth - albeit slower than under a business-as-usual model - for developing countries. It is equally clear, however, that without the participation of China and the US there will be no agreement at all. In light of the latest scientific projections on the speed of climate-induced changes, such an outcome could spell catastrophe to hundreds of millions of people (see page 20).