Carbon emissions embodied in trade of Canada: drivers and implications University of Groningen Faculty of Economics and Business MSc International Economics and Business (IE&B) Master Thesis

(1)

1

University of Groningen

Faculty of Economics and Business

MSc International Economics and Business (IE&B)

Master Thesis

Carbon emissions embodied in trade of Canada:

drivers and implications

Author:

Klaas Hettinga

Student number:

S2377918

E-mail address:

n.j.hettinga@student.rug.nl

Supervisor:

Tarek M. Harchaoui, PhD

(2)

2

Abstract

While Canada’s engagement in international trade in goods and services is reasonably well-documented, the carbon emissions embodied in its trade flows is less well understood and has important implications for shaping Canada’s environmental policy now and in the future. I undertake the important task to apply Bilateral Trade Input–Output (BTIO) to quantify Canada’s emissions embodied in the trade flows with its 7 biggest trading partners between 1995 and 2009. I also provide a structural decomposition analysis to sort out which of the factors ranging from trade scale, trade structure, and carbon emissions coefficients to intermediate technology contribute to the change of embodied emissions. Also, hypothetical no-trade scenarios will be explored, in which Canada and its trading partners are assumed to produce imports domestically (i.e. with their own technology). I found out that imports from China have grown exponentially and that they are very carbon intensive. As a consequence, Canada’s imported carbon emissions have increased a lot over the years, despite the fact that all of Canada’s 7 biggest trading partners managed to reduce their carbon emissions. This study suggests that if Canada wants to combat climate change, it should not just focus on lowering its domestic carbon emissions, but should also realize that it can greatly reduce its imported carbon emissions by importing less from carbon intensive countries such as China.

(3)

3

1. Introduction

International trade has been at the core of Canada’s long-term development path. For example, trading gains—a measure of how much domestic production can afford on world markets—more than doubled over the 140 years since the creation of the Canadian federation and added annually 6% to the 1.99% advance in real income per capita. This contribution almost doubled during the second phase of globalization that started in the early 1990s when Canada’s trade intensity reached a whopping 71%. While this further advance of Canada’s engagement in the global economy represents a welcome development, it also raises the important issue of carbon dioxide (CO2) emissions embodied in Canada’s international trade during the recent decades, imports from China and exports of natural resources, both of which have a high carbon intensity (Baldwin and Macdonald, 2012).

A potential downside of (increased) international trade with respect to climate change, is the so-called carbon leakage. Carbon leakage is an avoidance strategy where developed countries that face higher relative goods prices due to environmental regulation, shift their most polluting operations to countries that are exempt from such regulation, and to import these goods instead (see e.g. Jayanthakumaran and Liu, 2016; Peters, 2008; Peters and Hertwich, 2006; Aichele and Felbermayr, 2015). This way, a country can decrease its carbon emissions to a certain extent without actually investing in cleaner production techniques. One can image that the more a country is struggling to decrease its carbon emissions, the more tempting it becomes to opt for this ‘easy’ method to make that happen, particularly for countries that have easy access to import markets. More than often, carbon leakage offsets domestic emission savings and actually increases emissions on a global scale.

Peters and Hertwich (2006) and Sato (2013), amongst others, propose there to measure carbon emissions based on consumption instead of production. Using this measure, emissions embodied in imports are included while those from exports are excluded. It has been argued that a switch to consumption based carbon emissions approach would have provided Canada the incentive to re-engage itself to the Kyoto protocol (Afionis, Sakai, Scott, Barrett and Gouldson, 2017). If emissions are allocated this way, it becomes in a countries interest to import from countries with the lowest emission intensity if it aims to decrease its allocated emissions. Moreover, it will not be penalized for the emissions of its exports since these emissions are allocated to the demanding countries.

(4)

4 2018). In particular, a structural decomposition analysis will be used to unravel the relative importance of factors that played a role in the change of embodied emissions. Hypothetical no-trade scenarios will be explored, in which Canada and its trading partners are assumed to produce imports domestically (i.e. with their own technology). This will be compared to the actual situation in order to assess whether Canada’s international trade contributes to a reduction of global carbon emissions or not. It is for example relevant to from know which country the most carbon intensive imports come, or to find out what the net effect on exported carbon emissions is when carbon emissions decrease but when at the same time trade volume increases, or whether trade with the USA results in more or less carbon emissions compared to a no-trade scenario. The rest of this paper is organized as follows. The literature review is included in section 2. Section 3 will describe the methodology and the data. The results will be discussed in section 4. Section 5 will feature the discussion and section 6 concludes

2. Literature review

Many studies have calculated carbon emissions in trade, but usually focusing on trade between two countries. Often, one of these two countries is China (see e.g. Jayanthakumuran and Liu, 2016; Yu and Chen, 2017; Wu, Geng, Dong, Fujita and Tian, 2016; and Tan, Sun and Lau, 2013). There are however not many studies that research carbon emissions embodied in trade between multiple countries. Fan, Hou, Wang, Wang and Wei (2016) calculated and compared the difference in allocated carbon emissions of 14 countries (including Canada) based on the consumption and production approach. This study is however not specifying the imported and exported carbon emissions between countries. Therefore, as a contribution to the literature, this paper will analyse the bi-lateral trade flows between Canada and its 7 biggest trading partners and in particular the embodied emissions between 1995 and 2009.

Together with Australia, Norway, and the US, Canada is one of the most resource rich developed countries. Neumayer (2001) and Friedrichs and Inderwildi (2013) argue that generally speaking, countries with major fossil fuel reserves are likely to have higher carbon emissions than countries where those reserves are scarce. Firstly, both studies give emissions generated while extracting and processing fossil fuels as an explanation, which Friedrichs and Inderwildi (2013) phrased as ‘’it takes fuel, to get fuel’’. Secondly, the studies argue that the incentive to invest is energy efficiency is much higher when a country is dependent on imports for fossil fuel compared to when a country has easy access to domestic fuel.

(5)

5 Canada has roughly the same carbon intensity as the coal rich USA, but sits below Australia, Russia and China who are coal rich but have a carbon intensity of 0.5, 0,75 and 0.85 respectively. Mexico and especially Norway, both oil rich, are doing better with a carbon intensity of 0.3 and 0.2. These countries are not the only resource rich countries in the study of Friedrichs and Inderwilde (2013), but the remaining countries are mostly developing countries and as such, would not be a fair comparison to Canada.

Lee (2017) studied Canada’s fossil fuel extraction for energy, defined as the total amount of fossil fuels removed from below ground that end up in the atmosphere. He found out that Canada extracted 1.160 million tons of carbon emissions in 2014, with roughly half of the carbon extracted representing net carbon exports (i.e. emissions embodied in exports minus imports). In spite of being a net exporter of fossil fuels, a study by Environment and Climate Change Canada (2017) found out that Canada became a net importer of carbon emissions in 2005. They contribute this mainly due to an increase in carbon intensive imports from China. In 2009, production-based and consumption-based emissions were respectively 520.4 and 548.9 million tons, resulting in net imports of 28.5 million tons.

The fact that a natural-resource abundant country is a net importer of carbon emissions is unusual. Most countries that exports large shares of natural resources, e.g. Norway and Australia, are net exporters of carbon emissions. Peters and Herwich (2006) studied Norway and found out that Norway’s exports generated 51.3 millions of tons carbon emissions, compared to just 13.3 million embodied in imports. This difference in generated emissions would have been even bigger were it not for Norway’s hydropower electricity supply, resulting in a very clean production technology. Australia has one of the highest carbon emissions per capita of all OECD countries. Australia’s net energy exports equal two-thirds of its domestic energy production. Moreover, energy exports represented 33% of Australia’s total exports in 2008-2009 (Cornwel, 1996; Asafu-Adja and Mahadevan, 2013)

Obviously, if Canada is a net importer of carbon emissions, it’s imported carbon emissions must exceed its carbon intensive exports. Perhaps this is the reason why Canada has one of the highest per-capita emissions associated with consumption. At 16.6 tons, Canada ranks only below Australia, Singapore, the US and Luxembourg, according to Davis and Caldeira (2010). It could also be that Canada’s consumption of domestic goods is relatively carbon intensive, just like we would expect its exports to be.

(6)

6 emissions in 2005, due to an increase in imports from China. Therefore I except that both Canada’s imported and exported carbon emissions are relatively large.

3. Methodology and data

In the analysis, the bi-lateral trade between Canada’s seven biggest trading partners will be analysed. These are, in order, the U.S., China, Mexico, U.K., Japan, Germany and South Korea. These countries deliver 83% of Canada’s imports and are responsible for 88% of Canada’s exports (Statistics Canada, 2018). The years 1994, 2002, and 2009 will be analysed. 1994 and 2009 is the biggest range where annual carbon emission data is available and 2002 is the year in which China became a member of the WTO and coincidentally exactly in the middle of 1994 and 2009.

To calculate the size of traded carbon emissions, the emissions embodied in bilateral trade (EEBT) approach will be used, analogue to the work of Yu and Chen (2017) and Wu, Geng, Dong, Fujita and Tian (2016). To explain this method, it should be clear that there are two types of goods. Final goods are consumed, intermediate goods are used as inputs to produce final goods. The EEBT approach calculates the emissions embodied in final goods and domestic intermediate goods of bilateral trade, but does not take into account emission embodied in intermediate products from other countries. If one wants to calculate total global emissions, the multi-regional input-output approach should be used (Gemechu, Butnar Llop, Sangwon, Castells, and Sonneman 2015), but because this paper focuses on bilateral trade relationships, the EEBT approach is more suitable and transparent.

(7)

7

Table 1. Two regions input-out table.

Output Input

Intermediate demands Final demands Total

output

Region 1 Region 2 RoW Region 1 Region 2 RoW

Intermediate inputs Region 1 Z11 Z12 … y11 y12 … x1 Region 2 Z21 Z22 … y21 y22 … x2 RoW … … … … Value added V1 V2 … Total input x1’ x2’ …

Matrix Z11 are the domestic intermediate inputs from region 1, while Z21 are the imported

intermediate inputs from region 2 to region 1. Similarly, Column vector y11 corresponds to the

final demand of region 1 for domestic goods, while vector y21 represents the final demand of

region 1 for goods from region 2. Column Vector x corresponds to total output. Row vector V will not be used, but represents value added. The basic input-output identity is presented in equation 1:

x = Ax + y (1)

where x represents total output and y represents final consumption. A represents the matrix of domestic intermediate input coefficients, i.e. the share of each domestic intermediate input in total input. Equation 1 can be rewritten as:

x = (I-A)-1_y ₍₂₎

Where I is an identity matrix and (I-A)-1 _{is the Leontief inverse matrix. With the Leontief inverse}

it is possible to compute total output for a given final demand. Vector e represents the carbon intensity of domestic industries, i.e. the carbon emissions per dollar of output. Carbon emissions, c, embodied in final demand can be calculated as follows:

c = e(I-A)-1_y ₍₃₎

Exported carbon emission from region 1 to region 2 can be expressed as:

c12 = e1(I-A11)-1y12 (4)

(8)

8 3.1 Structural decomposition analysis

The structural decomposition analysis is directly borrowed from Yu and Chen (2017) who applied it to imported and exported carbon emissions between China and South Korea. The structural decomposition analysis allocates the changes in embodied carbon emissions to four components. For this analysis, formula 3 needs to be rewritten as:

c = eMpv (5)

In this formula, y is changed to pv. The total import/export volume is represented by v. The proportion of the goods imported/exported from each industry in v is denoted with p. Moreover,

(I-A)-1_{has been simplified to M. The decomposition formula looks like this:}

Δc = Δc(Δe) + Δc(ΔM)+ Δc(Δp) +Δc(Δv) (6) where, Δc(Δe) = 1 2(ΔeM0p0v0 + ΔeM1 p1v1) (7) Δc(ΔM) = 1 2 (e1ΔMp0v0 + e0ΔMp1v1) (8) Δc(Δp) = 1 2 (e1M1Δpv0 + e0M0Δpv1) (9) Δc(Δv) = 1 2 (e1M1p1Δv + e0M0p0Δv) (10)

(9)

9

Results

In this section, the development of the trade volume and the corresponding carbon emissions between Canada and its biggest trading partners will be calculated.

3.2 Trade volume

As shown in figure 1, the USA dominates Canada’s export market. In 1995, Canada exported over 600 billion US$ to the USA, while Canada exported to the other six countries combined less than 60 billion US$. In 2002, the exports to the USA increased to over 800 billion US$, but in 2009 returned to the same volume as in 1995. In 2009, exports to the other 6 countries increased to 100 billion US$.

In 1994, Canada and Mexico, along with the USA, signed the North American Free Trade Agreement (NAFTA). This agreement substantially decreased trade barriers between the three countries. What can be seen in figure 2 is that between 1995 and 2002, exports to Mexico increased by 600%. The increase in exports from Canada to the USA was with roughly 20% much smaller though. Why is the effect of NAFTA between Canada and the USA much smaller? Most likely due to the fact that Canada and the USA signed the Canada-United States Free Trade Agreement in 1987. Therefore, trade barriers between Canada-USA trade were already low when the NAFTA commenced. In sharp contrast to the previous years, the growth in exports from Canada to Mexico stopped between 2002 and 2009. Exports to China increased with 136% between 2002 and 2009, most likely the result of China joining the WTO in late 2001.

0 100 200 300 400 500 600 700 800 900

China Germany UK Japan South

Korea Mexico USA B ill ion US $ (19 95 pric es )

Fig. 1. Exported trade volume

(10)

10 Figure 3 depicts the imported trade volume. Similar to Canada’s exports, imports from the USA are dominating. Between 1995 and 2009, USA imports increased from 448 to 553 billion US$, while imports from the other six countries grew from 145 to 381 billion US$, mainly due to the increase in imports from China. In 1995, Canada imported 32 billion US$ from the China, while in 2009 this increased to 172 billion US$.

When looking at the growth rates of imports in figure 4, it becomes clear that imports from all seven countries increased over time. Between 1995 and 2002, imports from Mexico increased with 153% and between 2002 and 2009 imports from China increased by 279%. Again, this may be due to respectively the start of the NAFTA and China joining the WTO.

-100% 0% 100% 200% 300% 400% 500% 600% 700%

Korea

Mexico USA

Fig. 2. Growth of export volume (constant prices)

1995-2002 2002-2009 0 100 200 300 400 500 600 700 800 900

Korea Mexico USA B ill ion US $ (19 95 pric es )

Fig. 3. Imported trade volume

(11)

11 3.3 Carbon Emissions

The carbon intensity of an industry is defined as carbon emissions divided by output. The average carbon intensity of a country is the average carbon intensity of all industries in a country. Obviously, imports from a country with a higher carbon intensity lead to more carbon emissions. Figure 5 presents the average carbon intensity of Canada and its main trading partners.

To highlight the highest and lowest average carbon intensity in 1995, China had an average carbon intensity of 1.69, while Germany had an average carbon intensity of 0.28. Roughly speaking, Germany, Japan and UK are the countries with the lowest average carbon intensity while China and South Korea have the highest carbon intensity. The NAFTA countries are somewhere in between. In most countries carbon intensity has decreased over time, a sign of increased energy efficiency. Moreover, the relative drop in carbon intensity is the highest in countries with the highest carbon intensity. That doesn’t necessarily imply that those countries put the most effort into decreasing its carbon intensity though, because it becomes

0% 100% 200% 300% 400% 500% 600% 700%

Korea

Mexico USA

Fig. 4. Growth of import volume (constant prices)

1995-2002 2002-2009 0,00 0,20 0,40 0,60 0,80 1,00 1,20 1,40 1,60 1,80

Canada China Germany UK Japan South

Korea Mexico USA k ilo t on s pe r m ill ion US $ of ou tpu

t Fig. 5. Average carbon intensity of all industries

(12)

12 exponentially expensive to lower carbon intensities, i.e. the first steps are much easier than the last steps. (Clayton, Spinardi and Williams, 2013). This means that the variety in carbon intensity across countries should decrease over time and indeed, the standard deviation drops from 0.44 in 1995 to 0.14 in 2009. This implies that, over time, it should matter less (in terms of carbon emissions) where a country imports from.

Figure 6 shows the exported carbon emissions of Canada. It is interesting to compare this figure with exported trade volume in figure 1. If exported carbon emissions to a country are much higher than you would expect based on exported trade volume, it means that a country is demanding a disproportional large share of carbon intensive goods. However, in this case there is no sign for that since the figures are similar. All countries aside from the USA play a very small role in exported carbon emissions and the spike in exported carbon emissions to the USA in 2002 can be seen in figure 1 as well.

Compared to exports, the potential for dissimilarity between the graphs of imported trade volume and imported carbon emissions is much higher, since the producing country is not constant anymore. Therefore the different carbon intensities across countries (figure 5) affect

0 5000 10000 15000 20000 25000 30000 35000 40000

Korea Mexico USA CO 2 (k ilo t on s )

Fig. 6. Exported carbon emissions

1995 2002 2009 0 5000 10000 15000 20000 25000 30000 35000 40000

Fig. 7. Imported carbon emissions

(13)

13 the amount of imported carbon emissions. Imported carbon emissions are plotted in figure 7. The notable finding is that China overtook the USA in 2009 in terms of imported carbon emissions, while the corresponding trade volume was only a third of that of the USA. Environment and Climate Change Canada (2017) also found that imported carbon emissions from China grew fast in this period. Because the average carbon intensity of China and USA (figure 5) are similar in 2009, this signals that Canada is importing relatively carbon intensive goods from China.

Figure 8 shows the carbon emissions per export volume. Because the producing country is constant, the differences across countries are relatively small. The most carbon intensive exports in 2009 went to Germany, while exports to Mexico and China were the least carbon intensive. Between 2002 and 2009, the carbon emissions per export volume decreased of the exports to all countries, which confirms the decrease of average carbon intensity of Canada in this period (figure 5).

Carbon emissions per import volume can be seen in figure 9. This figure confirms the suspicion that Canada is mainly importing carbon intensive goods from China (figure 7) but also

0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50

Korea Mexico USA k ilo t on s CO 2 / m ill ion US $

Fig. 8. Carbon emissions per export volume

1995 2002 2009 0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50

Korea Mexico USA k ilo t on s CO 2 / m ill ion US $

Fig. 9. Carbon emissions per import volume

(14)

14 that China is becoming more efficient (in terms of carbon emissions) over the years as seen in figure 5. Carbon emissions per import volume are the lowest in Germany and UK and despite its progress, the highest in China.

3.4 Structural decomposition analysis of carbon emissions

Figures 6 and 7 give the sheer size of carbon emissions embodied in imports and exports, but information about the changes between 1995, 2002 and 2009 is lacking. For example, why did exported carbon emissions to the USA increase between 1995 and 2002 and decrease again between 2002 and 2009? To answer those questions, a structural decomposition analysis is required that allocates changes in embodied carbon emissions to four factors.

The most obvious factor is trade scale. An increase in trade scale, ceteris paribus, will lead to an increase in embodied carbon emissions. The other factors are carbon emissions coefficients, intermediate technology and trade structure. Carbon emission coefficients represents how much carbon is emitted per output. Environmental regulations often demand industries to lower its carbon emissions coefficients. Intermediate technology means how carbon intensive intermediate inputs are. Trade structure is the last factor, which accounts for the fact that the composition of goods in trade can change over time.

(15)

15 Between 2002 and 2009, lower carbon emission coefficients significantly affected exported carbon emissions. The decrease in carbon emission coefficients mitigated the growth of exported carbon emissions to China and Germany and led to a decrease in exported carbon emissions to the UK, Japan, South Korea, Mexico and USA. Trade scale is the main reason why exported carbon emissions to China and Germany increased, while it significantly contributed to a decrease in exported carbon emissions to Japan and the USA.

The drivers of changes in imported carbon emissions between 1995 and 2002 are presented in figure 12. China is the only country where imported carbon emissions decreased between 1995 and 2002, despite an increase in trade scale (see also figure 4 and 7). Figure 12 shows that this was due to lower carbon emission coefficients. In Germany, the increase in trade scale and carbon emission coefficients contributed roughly equal to the increase in imported carbon emissions. Imported carbon emissions increased in Japan and South Korea mainly due to higher carbon emission coefficients and in the UK, Mexico and USA due to the increase in trade volume. -1 -0,5 0 0,5 1

Korea

Mexico USA

Fig. 10. Drivers of changes in exported carbon emissions

1995-2002

Carbon Emission Coefficients Intermediate Technology

Trade Structure Trade Scale

-1,0 -0,5 0,0 0,5 1,0

Korea

Mexico USA

Fig. 11. Drivers of changes in exported carbon emissions

2002-2009

(16)

16 Between 2002 and 2009, all countries were able to decrease its carbon emission coefficients as presented in figure 13. This did however not always result in a decrease in imported carbon emissions, since imported trade volume of all countries increased. China, Japan, South Korea and Mexico shifted towards more carbon intensive intermediate inputs, which contributed to an increase in imported carbon emissions. The proportion of carbon intensive goods in imports from the UK decreased significantly, which combined with lower carbon emission coefficients, led to a net decrease in imported carbon emissions.

3.5 No-trade scenario

Obviously carbon emissions are bad news for the environment, which makes it interesting to study how much carbon emissions are embodied in exports and imports. But does that mean that the environment is better off without international trade? All embodied carbon emissions would disappear, but at what cost? Suppose that Canada is not allowed to trade anymore with other countries, so no more imports and exports. What would that mean in terms of carbon

-1 -0,5 0 0,5 1

Korea

Mexico USA

Fig. 12. Drivers of changes in imported carbon emissions

1995-2002

Trade Structure Trade Scale

-1 -0,5 0 0,5 1

Korea

Mexico USA

Fig. 13. Drivers of changes in imported carbon emissions

2002-2009

(17)

17 emissions? To answer that question, I will calculate the carbon emissions of a hypothetical no-trade scenario and compare that to the actual situation. In the no-no-trade scenario, all countries will produce imports domestically and exports will be produced at the country of destination.

Figure 14 presents the reduction of carbon emissions due to Canada’s imports. This is calculated by subtracting hypothetical carbon emissions (i.e. when Canada would have to produce its imports domestically) from the actual imported carbon emissions. If the emissions in the no-trade scenario are higher than the actual situation, these imports can be considered carbon emission efficient, while if the opposite is true, these imports are carbon emission inefficient. From this figure it becomes clear that imports from China, USA and to a lesser extent, South Korea are inefficient. Moreover, the inefficient imports cannot be fully ‘compensated’ by efficient imports from Germany, UK and Japan, especially in 2009.

Imports from China and the USA are inefficient because Canada is, generally speaking, the more efficient producer, making imports from these countries inefficient. Thus, the opposite is true when considering exports. Figure 15 presents the carbon emission reduction due to

-20000,00 -15000,00 -10000,00 -5000,00 0,00 5000,00

Fig. 14. Carbon emission reduction due to imports

1995 2002 2009 -2000,00 0,00 2000,00 4000,00 6000,00 8000,00 10000,00

Fig. 15. Carbon emission reduction due to exports

(18)

18 Canada’s exports and indeed, exports to China and USA and South Korea can be considered efficient while exports to Germany, UK and Japan are inefficient. Exports of Canada as a whole are efficient, despite a declining efficiency in exports to the USA.

So far, I have concluded that as a whole, Canadian imports are inefficient, mainly due to imports from China, while exports are efficient, mainly due to exports to the USA. Figure 16 presents the combined effect of imports and exports. This figure clarifies that trade with China is inefficient, while trade with the USA is efficient. Moreover, trade with the remaining five countries has little effect compared to China and the USA. In 1995 and 2002, the inefficient trade with China is to some extent compensated with the efficient trade with the USA. Trade with all seven countries combined, led to an increase of approximately 2543 and 2067 kilo tons of carbon emissions in 1995 and 2002 respectively. In 2009 however, Canada’s international trade became much more inefficient and caused an additional 16649 kilo tons of carbon emissions compared to the no-trade scenario. This is the result of two forces. Firstly, trade with China became much more inefficient. Secondly, trade with the USA, that used to be efficient, became inefficient as well. To summarize, Canada’s trade is becoming increasingly inefficient.

3.6 Consumption/Production approach

In this last section, I will compare the carbon emissions embodied in Canada’s consumption with the carbon emissions embodied in production. Both approaches factor in the carbon emissions due to domestic consumption (i.e. domestic demand for domestic goods). The difference is that the consumption approach adds the carbon emissions of imports while the production approach includes the carbon emissions of exports. Traditionally, carbon emissions are allocated using the production approach, but due to the growth of emissions embodied in trade, the question has raised whether this consumption approach is more suitable (Peters and Herwich, 2006; Sato, 2013). -20000,00 -15000,00 -10000,00 -5000,00 0,00 5000,00

Fig. 16. Carbon emission reduction due to trade

(19)

19 Because both domestic consumption and exports are produced domestically, it is relatively straightforward to calculate the embodied carbon emissions. Imports, on the other hand, are made in foreign countries. To calculate imported carbon emissions, the emission intensity of the industries of all the countries that Canada is importing from is required. So far, I have calculated the imported carbon emissions from Canada’s 7 biggest trading partners. I will sum the imported carbon emissions from these countries and then divide this by the share of total imports they represent that will serve as a proxy for total imported carbon emissions. The share equals 77.53, 77.90 and 75.36 in 1995, 2002 and 2009 respectively. The results are presented in figure 17.

Table 2. Carbon Emissions based on consumption/production allocation

1995 2002 2009 Domestic Consumption 239.297 261.279 286.630 Imports 48.317 51.941 69.236 Exports 158.994 188.058 152.436 Consumption allocation 287.613 313.221 355.865 Production allocation 398.291 449.337 439.065

Carbon emissions measured in kilo tons

Table 2 shows that the emissions of Canada’s exports exceed those of imports. It shows that carbon emissions based on the production approach are higher than those based on the consumption approach, which is very common for resource-rich countries (Neumayer, 2001; Friedrichs and Inderwildi, 2013). This contradicts Environment and Climate Change Canada (2017) who claimed that in 2005 Canada’s emissions embodied in consumption and production were respectively 548.9 and 520.4. This study used both a different dataset and a different approach however which might explain these opposing findings. I do agree with Environment and Climate Change Canada (2017) that the rise in imported carbon emissions can largely be attributed to imports from China. Moreover, the carbon emissions embodied in exports are over 50% of domestic consumption, which confirms the hypothesis that Canada’s exported carbon emissions are large, imported carbon emissions are much smaller. Lastly, the decrease in Canada’s average carbon emission intensity found in figure 5 and 8 between 2002 and 2009 corresponds to the fact that exported carbon emissions decreased despite a growth in export volume.

4. Discussion and policy implications

(20)

20 billion US$ to the USA, while Mexico comes second at 22.60 billion US$. This demonstrates the importance of the USA for Canada’s export market. Therefore it is not surprising that the 22193 kilo tones of exported carbon emissions to the USA is the majority of Canada’s total exported carbon emissions.

With respect to imports, the USA is also Canada’s most important trade partner and it reached 552.62 billion US$ in 2009. Especially between 1994 and 2002, the import volume from other countries is almost negligible compared to the USA. After China joined the WTO in late 2001, imports from China grew between 2002 and 2009 from 45.34 to 171.74 billion US$, roughly a third of USA imports. Imported carbon emissions from the USA have remained constant a roughly 23000 kilo tons, while imported carbon emissions from China grew from 10055 to 23452 kilo tons between 1994 and 2009. This means that although the imported trade volume from China is only a third of that of the USA in 2009, imported carbon emissions from the USA and China are roughly equal. If Canada wants to lower carbon emissions, it should know that substituting imports from China for imports from the USA (or even better, Germany, UK or Japan) is an very effective method of doing so. If that isn’t possible, it should at least try to slow down the exponential growth in import volume that happened between 2002 and 2009.

According to Peters and Hertwich (2006), ‘’a common assumption in most studies is that imports are produced with the technology of the importing country.’’ This finding demonstrates that this is a weak assumption and that it is relevant to study the carbon intensity of imports and exports, defined as kilogram of CO2 per billion US$ of trade volume. The carbon intensity of Canada’s exports between 1994 and 2002 have remained stable at roughly 0.56, but fell to 0.40 in 2009. To compare the carbon intensity to other countries, I studied the carbon intensity of Canada’s imports. Not surprising, imports from China have the highest carbon intensity, although it fell from 3.1 in 1994 to 1.37 in 2009. Imports from Germany, UK, and Japan are with roughly 0.27 the least carbon intensive. Since these countries have much less natural resources than Canada, this is in accordance with the literature. Imports from Mexico, the USA and South Korea have a carbon intensity of respectively 0.34, 0.48 and 0.55. This means that with respect to carbon intensity of trade, Canada is somewhere in the middle, along with the other NAFTA countries. This means also that there is room for Canada to lower its carbon emission coefficients further by adopting production techniques from countries such as Germany, the UK or Japan.

(21)

21 Therefore, I have calculated the average carbon intensity of a country. As it name suggest, it is the average carbon intensity of all 35 industries of a country, unweighted by total production. The advantage of this indicator is that it is not directly affected by the trade structure of Canada’s imports/exports. I found out that the average carbon intensity of China and the USA are roughly the same, an interesting finding since the carbon intensity of imports of China are three times higher than those of the USA. This means that Canada is importing relatively carbon intensive goods from China, even for China standards. This is a sign of carbon leakage and this affirms why policy makers should focus on reducing allocated carbon emissions based on consumptions. Nowadays a lack of data should not be an excuse anymore to stick to the production based carbon emissions approach.

Closely related to that, how efficient is Canada’s international trade in terms of carbon emissions? How much carbon would be emitted when all countries would stop producing exports and have to produce all of their imports domestically, i.e. a no-trade scenario? I will consider trade efficient when the embodied carbon emissions in the actual situation are lower than those in the no-trade scenario.

Again, China and the USA are the countries that have to be mentioned. I found out that in 1994 and 2002, inefficient trade with China was to a large extent compensated by efficient trade with the USA. However between 2002 and 2009 there is no doubt that Canada’s international trade as a whole became very inefficient. Inefficiency in trade with China increased from 5593 to 16089 kilo tons of CO2, while at the same time, trade with the USA that used to be 3892 kilo tons of CO2 efficient in 2002, turned 335 kilo tons of CO2 inefficient in 2009. The total inefficiency of Canada’s trade increased from 2068 to 16649 kilo tons of CO2.

The inefficiency of Canada’s international resulted in an additional 16649 kilo tons of CO2 in 2009. But what are the total sizes of exported and imported carbon emissions? And also, how much carbon emissions are embodied in Canada’s consumption of domestic goods? In order to put 16649 kilo tons of CO2 into perspective, I have calculated the size of emissions embodied in Canada’s export, imports and domestic consumption. I found out that 16649 kilo tons of CO2 is relatively modest compared to Canada’s total embodied carbon emissions in trade.

To start off with exported carbon emissions, these were in 1995 and 2009 roughly 155000 kilo tons of CO2 and peaked in 2002 at 188058 kilo tons of CO2. The increase in exported carbon emissions between 1995 and 2002 can be contributed to an increase in trade volume. Despite a continued growth in trade volume between 2002 and 2009, exported carbon emissions fell due to strong decrease in carbon intensity.

(22)

22 to an increase in import volume from multiple countries. Although all of Canada’s trade partners managed to reduce its carbon emission coefficients, imported carbon emissions increased between 2002 and 2009 predominantly due to the sharp increase in imports from China.

The last part of this study compares the consumption and production based approach of carbon emission allocation. I found out that in 1994 and 2002 Canada’s emissions based on the production allocation were approximately 40% higher than those based on the consumption allocation. Due to increased trade with China in 2009, the difference fell to 20%. This contradicts the finding by Environment and Climate Change Canada (2017) who claim that Canada became a net importer of carbon emissions in 2005. Moreover, imported and exported carbon emissions are roughly equal to respectively 22% and 65% of the emissions embodied in domestic consumption

5. Conclusion

Canada’s international trade is continuing to grow and this has lots of implications in terms of embodied carbon emissions. In this paper, emissions embodied in bilateral trade between Canada and its 7 most important trade partners were estimated using the EEBT approach. Moreover, a structural decomposition analysis has been applied to the imported and exported carbon emissions. This uncovered the driving forces of the changes in embodied emissions. Furthermore, I have calculated the emissions of a no-trade scenario and compared it to the actual situation to assess how much international trade influences global carbon emissions. Lastly, the production and consumption based allocation of carbon emissions have been applied to Canada to put the imported and exported carbon emissions into perspective. The following parts are the main takeaways from this study:

1) Although the carbon intensity of the imports from China are decreasing, they are still very carbon intensive. Moreover, imports from China are growing fast. If Canada wants to decrease its consumption based carbon emissions, it should critically consider to limit (the growth of) imports from China as much as possible.

2) There is an indication that Canada is disproportionally importing carbon intensive goods from China, a sign of carbon-leakage. This avoidance strategy leads on a global scale to more carbon emissions and therefore policy makers should no longer allocate emissions based on production but on consumption instead.

(23)

23 4) Compared to its biggest trading partners, Canada is producing at an average carbon intensity. If Canada wants to lower its domestic carbon emissions, policy makers should take the production techniques of Germany, UK or Japan as an example.

A possible weakness of my study is that the EEBT approach only includes carbon emissions embodied in domestic intermediate goods. This approach has two caveats; first of all it means that the calculated carbon emissions are lower than the actual global emissions. Moreover, not all countries rely equally on imported intermediate goods which means that the EEBT approach is biased against economies that rely relatively a lot on domestic intermediate goods.

6. References

Afionis, S., Sakai, M., Scott, K., Barrett, J., & Gouldson, A. (2017). Consumption-based carbon accounting: does it have a future?. Wiley Interdisciplinary Reviews: Climate Change, 8(1), e438

Aichele, R., & Felbermayr, G. (2015). Kyoto and Carbon Leakage: An Empirical Analysis of the Carbon Content of Bilateral Trade. Review Of Economics And Statistics, 97(1), 104-115.

Asafu-Adjaye, J., & Mahadevan, R. (2013). Implications of CO2 reduction policies for a high carbon emitting economy. Energy Economics, 38, 32-41.

Baldwin, J., & Macdonald, R. (2012). Natural Resources, the Terms of Trade, and Real Income Growth in Canada: 1870 to 2010. SSRN Electronic Journal.

Afionis, S., Sakai, M., Scott, K., Barrett, J., & Gouldson, A. (2017). Consumption-based carbon accounting: does it have a future?. Wiley Interdisciplinary Reviews: Climate Change, 8(1), e438

Clayton, T., Spinardi, G., & Williams, R. (2013). Policies for cleaner technology. Abingdon, Oxon: Routledge. Cornwell, A. (1996). Reducing Carbon Dioxide Emissions in Australia: A Minimum Disruption Approach. The

Australian Economic Review, 29(1), 65-81.

Davis, S., & Caldeira, K. (2010). Consumption-based accounting of CO2 emissions. Proceedings Of The National

Academy Of Sciences, 107(12), 5687-5692.

Environment and Climate Change Canada (2017). Canadian environmental sustainability indicators : carbon dioxide emissions from a consumption perspective. Gatineau, Québec: Environment and Climate Change Canada = Environnement et changement climatique Canada

Fan, J., Hou, Y., Wang, Q., Wang, C., & Wei, Y. (2016). Exploring the characteristics of production-based and consumption-based carbon emissions of major economies: A multiple-dimension comparison. Applied

Energy, 184, 790-799.

Friedrichs, J., & Inderwildi, O. (2013). The carbon curse: Are fuel rich countries doomed to high CO2 intensities?. Energy Policy, 62, 1356-1365.

Gemechu, E., Butnar, I., Llop, M., Castells, F., & Sonnemann, G. (2015). CO2emissions flow due to international trade: multi-regional input–output approach for Spain. Greenhouse Gas Measurement And

Management, 4(2-4), 201-214.

Jayanthakumuran, K., & Liu, Y. (2016). Bi-lateral CO2 emissions embodied in Australia-China trade. Energy

Policy, 92, 205-213.

Lee, Marc. Extracted Carbon : Re-examining Canada's Contribution to Climate Change through Fossil Fuel Exports. Ottawa, ON, CA: Canadian Centre for Policy Alternatives, 2017. Print.

Neumayer, E. (2002). Can natural factors explain any cross-country differences in carbon dioxide emissions?. Energy Policy, 30(1), 7-12.

Peters, G. (2008). From production-based to consumption-based national emission inventories. Ecological

(24)

24 Peters, G., & Hertwich, E. (2006). Pollution embodied in trade: The Norwegian case. Global Environmental

Change, 16(4), 379-387. doi: 1

Sato, M. (2013). EMBODIED CARBON IN TRADE: A SURVEY OF THE EMPIRICAL LITERATURE. Journal Of Economic

Surveys, 28(5), 831-861.

Statistics Canada (2018). Table 12-10-0011-01 International merchandise trade for all countries and by Principal Trading Partners (x 1,000,000)

Tan, H., Sun, A., & Lau, H. (2013). CO2 embodiment in China–Australia trade: The drivers and implications. Energy

Policy, 61, 1212-1220.

Timmer, M., Dietzenbacher, E., Los, B., Stehrer, R., & de Vries, G. (2015). An Illustrated User Guide to the World Input-Output Database: the Case of Global Automotive Production. Review Of International Economics, 23(3), 575-605.

Wu, R., Geng, Y., Dong, H., Fujita, T., & Tian, X. (2016). Changes of CO 2 emissions embodied in China–Japan trade: drivers and implications. Journal Of Cleaner Production, 112, 4151-4158.